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Duly Noted

‘Be Careful What You Wish For,’ Tax Court Tells Petitioner. Not much went right in the Great Recession year of 2009 for Thomas W. Alexander, an electrical contractor whose big customer fell on hard times. Short of cash, the general contractor offered Alexander an IOU secured by a house, but Alexander had to come up with $36,000 to keep the house out of foreclosure. The electrician tried to get a loan from his broker but, pressed for time, temporarily tapped his SEP-IRA for the $36,000. Then the loan was delayed, which prevented Alexander from repaying the IRA until 66 days after he had taken the money out. Because taxpayers have only 60 days to return funds to an IRA via a tax-free rollover, the Internal Revenue Service assessed about $14,000 in tax, including a 10 percent surtax for early withdrawal, plus about $2,800 in penalties. Tax Court Special Trial Judge John Dean rejected Alexander’s claim that his rollover should be considered timely because the broker was slow to process the loan request. The judge also rejected Alexander’s second argument that the IRA withdrawal should be considered a loan, noting that IRAs are prohibited from making such loans and that an actual loan would have triggered a much larger tax on the entire IRA balance. “The attempted characterization of the distribution as a loan falls into the realm of ‘[b]e careful what you wish for,’ ” the judge wrote. But Alexander finally got a break when the Tax Court canceled the penalty, noting that Alexander consulted experts to prepare his taxes and followed their advice in omitting the IRA distribution from his return. Thomas Wesley Alexander v. Commissioner, T.C. Summ. Op. 2014-18.

IRS Appeals Officers Won’t Raise New Issues. Taxpayers who take their disagreements with auditors directly to Internal Revenue Service appeals officers need not fear that the appeals process will raise new issues or reopen others that are settled, according to a new agency policy. “The Appeals process is not a continuation or an extension of the examination process,” the IRS instructs its examiners in a recently revised Policy Statement 8-2. Previously, appeals officers were allowed to raise new issues that were “material.” The new position is outlined in a memo to appeals employees from Susan Latham, the IRS director for policy, quality and case support. Control No. AP-08-0713-03.

If you enjoyed this article, be sure to check out Palisades Hudson’s books, The High Achiever’s Guide To Wealth and Looking Ahead: Life, Family, Wealth and Business After 55. Both are available in paperback and as e-books.