By John W. Cashman, Jr., CPA
A recent Tax Court ruling led to an unfortunate end to a “feel good” story. Upon the death of his father, a man inherited a traditional IRA. The son opted to receive the proceeds of the IRA in a lump sum. Following his father’s wishes he then shared the proceeds of the IRA with his siblings, as a final gift from a loving father.
With the assurance from his attorney’s assistant (can you see where this is going?) that no tax would be due on the IRA distribution, the son did not report the IRA as income on his tax return. Not so fast, said the IRS. The distribution was, in fact, taxable, and a notice of deficiency was issued.
The son argued that he should not shoulder the tax burden alone, as he voluntarily shared the proceeds of the IRA with his brothers and sisters. The Tax Court disagreed, saying that man should have included the distribution as part of his gross income and, his generosity to his siblings notwithstanding, ordered him to pay the required tax.
This is also a gift tax issue. While the son who inherited the IRA directly must pay income tax on the distribution, sharing with siblings may be subject to gift tax.
So what is the moral of this story? Given the complexities of the tax landscape, it is important to always consult with your CPA or trusted advisor for guidance when it comes to tax issues.
If you have any questions about the gift tax or any other tax issues, please contact Gray, Gray & Gray’s Tax Department at (781) 407-0300.
John W. Cashman, Jr. is a Tax Manager at Gray, Gray & Gray, LLP, a certified public accounting and business advisory firm with headquarters in Canton, MA. (www.gggcpas.com)