QUESTION: As the executor of my husband's estate, one of the things that has been brought to my attention is the possibility of making the 1985 IRA contribution that he never got around to doing. When I first heard that, it was certainly the least of my worries and I gave it little thought. But the other day I was at a seminar where it was brought up again, in the context of the fact that the IRS hasn't yet published a formal position on this question and that if someone wanted to do it they might think of getting a private ruling from the IRS. How do I go about doing that?--C. P.
ANSWER: You start by writing to the IRS' Office of Associate Counsel/Technical, Room 6545, 1111 Constitution Ave., N.W., Washington, D.C. 20224. Make it to the attention (believe it or not) of CC:IND:S:3:3. But this request for a private letter ruling can't just take the form of a friendly, informal letter to a pen pal. It has to follows strict rules laid out in the revenue code (85-1, IRB 1985-1, Page 21 for those interested). Among the requirements is a complete set of facts of your specific case.
With that said, here's the bad news. It won't do you any good. The IRS has already made a private letter ruling in this matter. Such rulings, because they do just apply to the facts of a specific case, aren't IRS regulations or legally binding precedents. Nevertheless, the agency says its ruling on June 27, 1984, clearly sets out its thinking on the matter and leaves no doubt about how it would rule in a similar case.
In that letter ruling (84-39-066), the IRS said estates cannot make IRA contributions for a deceased individual. Since IRAs are intended as retirement vehicles rather than as tax-savings devices, the agency argued, only a living individual or employer can contribute to them.
Again, it is only a private letter ruling. And some tax lawyers argue that, as long as there is nothing in the IRS Code or regulations that specifically prohibits or permits a posthumous contribution, taxpayers who feel strongly about the propriety of the tax deduction ought to take it anyway. This camp also points to the fact that courts overrule the IRS with some regularity.
And, in fact, there is a court case on record in which a judge decided that the power of an executor to act in the same manner as the decedent included the power to make a roll-over into an IRA. Some tax lawyers have argued that it is only logical that the same thinking could then be extended to the executor making a posthumous IRA contribution.
But through the private ruling, the agency leaves no doubt that it will challenge posthumous IRA contributions. So, you would be opening yourself up to a court battle.
Even if there weren't an existing private ruling on this subject, it isn't at all clear that a private ruling request would have been a good route for you to take. Tax specialists who have helped guide clients through the process say the IRS is apt to take anywhere from four months to two years to respond decisively. And, as already indicated, the procedure just to file the request is complicated.
There is also a school of thought that a letter of this sort opens up a can of worms that an individual taxpayer like yourself doesn't bargain for: a sometimes long and frustrating series of correspondence with the IRS and a possible audit. Once the IRS has a few details of your tax situation and your plans for doing something unusual enough to merit a ruling request in the first place, this argument goes, it is bound to probe deeper and find areas to tax that it might not otherwise.
The IRS says that isn't the case. But it does reserve the right to notify its district offices when it receives a letter withdrawing the private letter ruling request from a taxpayer who has been informed by the IRS that he or she is about to get an adverse ruling on the request.
Q: My husband recently decided to make a career change and has gone back to school. For the moment at least, he isn't working at all. My earnings are more than adequate to support both of us. We have both made the maximum $2,000 contributions to our IRA accounts ever since the law was changed to allow that, and we'd like to keep doing that even though he isn't working. Couldn't an argument be made that, since California is a community property state, half of my income is his and so he is entitled to make a $2,000 contribution?--J. C.
A: Good try. In this case, however, state community property laws take a back seat to federal rules. If he has no income this year, he isn't allowed an IRA deduction. It's that simple. You, on the other hand, are entitled to contribute up to $2,250--$2,000 for yourself and $250 for your husband.
Q: If the IRS decides that someone owes it back taxes, can it dip into the joint banking account of that taxpayer, even though the joint owner bears no responsibility for the back taxes?--J. G. S.
A: As a recent Supreme Court ruling pointed out, the IRS does have that right. The court, reversing lower federal courts, decided that a joint depositor has the absolute right to withdraw all of the funds from a joint account, not just his or her half, and that this right constitutes the right to property belonging to him.
So, since the IRS has the power to seize and sell a delinquent taxpayer's interest or right in specified property, the court ruled, the agency can legally seize all of the money in a joint account--not just the half belonging to one of the two owners.
Although it may be too late for you to take steps to protect your interests, consider adding a proviso to the terms of the joint account that all co-depositors must sign before money can be withdrawn from the account. That would negate the power of either co-depositor to withdraw all of the funds and would seem to hurt the IRS' argument that the delinquent taxpayer owned the entire interest in the joint account.