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Q: My mother is 88 years old and has arranged for an automatic receipt of her required minimum distribution (RMD) from her IRA. She has a paper check sent to her home. She received a call from the IRA custodian telling her that the check had not been cashed and asking if they should issue a new check. She said yes, and they sent a new check in February. I help with her taxes and my concern is that she will be considered to have not received her RMD for 2012 and will be penalized. We have requested forms to have her RMD automatically deposited beginning this year, but that doesn’t fix the 2012 issue. Was it necessary for her to cash the check?
A: I do not believe so. The tax law equates actual receipt of income with “constructive” receipt of income. Both are taxed the same.
Constructive receipt means that the taxpayer had control over the receipt of the income and merely had to carry out reasonable actions to receive the income. A taxpayer should not be able to artificially delay the timing of income recognition.
The general rule is that receipt of a check is the same as receipt of money, because the check is subject to the “will and control” of the taxpayer. An exception to this rule is when the check is presented for payment and is denied for insufficient funds.
An example of constructive receipt similar to your mother’s situation was the Walter case, in which Mr. Walter sold some cattle in March 1986 and received a check for $77,442 in that month. He lost the check.
Walter later contacted the buyer, who realized the original check had never been presented for payment, and a new check was issued in January 1988. Mr. Walter argued that he had no income until 1988.
Both a District Court and an Appeals Court held that Walter had income in 1986, the year that he had “will and control” over the funds represented by the check. The same logic should apply to your mother.
You did not say, but hopefully the custodian issues a 1099-R for the 2012 year. I suggest that you confirm this with the custodian if you have not received the form yet.
Q: I was divorced in 2012 and my ex-wife and I hired one attorney because we have some complicated business and investment property to divide. We each paid our own legal fees. My question is whether I am allowed to deduct the legal fees because the reason for hiring the attorney was to protect my interest in business and investment property.
A: An old saying in tax law is, “deductions are a matter of legislative grace.” This means that no deductions are allowed unless the law specifically says they are allowed.
The general rule is that attorney fees connected with a divorce proceeding are not deductible because they relate to a personal action. However, there are two statutory provisions that may support a deduction for some of the fees.
Business expenses, which are allowed whether you itemize or not, must be both “ordinary” and “necessary.” Divorce fees would not meet this standard.
Deductions are allowed for fees paid for the production or collection of income, or the determination of any tax due. If allowed, these items are deducted as itemized deductions that must, with other such expenses, exceed 2 percent of your adjusted gross income to create a benefit. They also are not allowed for the alternative minimum tax (AMT).
If alimony is part of your agreement, the spouse receiving alimony could deduct legal fees associated with the alimony determination using the “production or collection of income” standard. Alimony is taxable income to the recipient.
Either spouse may deduct legal fees that relate to advice related to the determination of the tax consequences of the divorce under the “determination” of tax liability provision.
A divorce may have many tax issues, so it is possible to seek an allocation of total legal fees between the tax-related and the strictly personal items. It is important to have the attorney allocate the fees in this manner to generate proof of the deductible amount.
James R. Hamill is the director of Tax Practice at Reynolds, Hix & Co. in Albuquerque. He can be reached at jimhamill@rhcocpa.com.<br>
