February, 2001 FAQs: Stock trade date; Sham trusts; IRS deficiency defined; and State educational fund rules.

Copyright © 2001  Robert L. Sommers, all rights reserved.

Question:   During 2000 I incurred some capital gains which I wanted to offset with capital losses from selling several stocks.  On the trade confirmation sheets from my on-line broker the trade dates of those transactions are 12/27/2000; the settlement dates are 1/02/2001.  Can (should) those transactions be used in conjunction with tax year 2000?

 Answer:   Yes.  Stock gains and losses are determined on the trade date, the date the seller enters into a contract to sell, not the settlement date, the date in which payment is made (usually five business days after the trade date).  If the trade date for your losses was 12/27/00, then you can use those losses to offset gains during the year.  The trade date also is the date used to determine the holding period for long-term capital gains or loss treatment.

Question:   If one was the grantor/creator of an irrevocable trust and the spouse and an independent trustee such as a bank, trust company, or law firm was the other trustee then after the grantor/creator disappears....he steps back on as a third trustee (the bylaws of the trust say that the board of trustees must be unanimous.)  Will the trust be respected as legitimate for tax purposes?

 Answer: No.  If the settlor is also the trustee, then there must be an independent trustee functioning as such and under the actual facts; not a paper trustee who is controlled by the settlor.  Since by-laws are not part of a legitimate trust, this arrangement sounds similar to the trust scams I describe on my Tax and Trust Scam Bulletin Board.  Also, legal trusts do not call the settlor the “creator.” This jargon is typical of the fraudulent trusts being promoted as pure trusts or constitutional trusts.

Question:   How does the Internal Revenue Code of 1986 define a deficiency?

 Answer:   In general, it is the amount IRS claims you owe over and above what you've reported on your tax return.  A "deficiency" is defined under §6211 as the amount by which the tax imposed exceeds the tax on the taxpayer's return, plus any amounts previously assessed, less any credits.  Usually, IRS must assess a deficiency within three years after the tax return was filed.

  Question:  Are there any savings for children/grandchildren education other than the IRA which allows a deduction of $500 per child yearly?  On the radio, I heard something about being able to defer up to $50,000 for education.

 Answer:   This might have to do with a state educational fund provision.  My understanding is that after-tax money is placed in the fund which grows tax-free and then is used for education, with the income being taxed at the child's rate.  There would be no deduction for placing money in the fund.  Also, the educational IRA is non-deductible.

   According to IRS, A qualified state tuition program (QSTP) means a program established and maintained by a state under which a person may: (1) prepay tuition benefits on behalf of a beneficiary so that the beneficiary is entitled to a waiver or a payment of qualified higher education expenses, or (2) contribute to an account that is established for paying qualified higher education expenses of the beneficiary. The tax on earnings attributable to prepayments or contributions is deferred until the earnings are distributed from the QSTP. The beneficiary pays tax on the earnings at the time of distribution. If amounts saved through a QSTP are used to pay for college, the student or the student's parents still may be eligible to claim either the Hope Scholarship Credit or the Lifetime Learning Credit.