Paul A Thomas wrote:

- quote -

You might look at Revenue Ruling 61-201, where the IRS held
the loss was an *ordinary* rather than capital loss,
governed by Section 72. Note that, at least to me, the
logic of why the treatment should be ordinary isn't
clear--the ruling just states "It is likewise clear that,
where the transaction results in a loss, the same treatment
should be afforded the taxpayer as is afforded where the
transaction results in a gain."

But if we accept that answer, it's still not clear whether
this ordinary loss goes above or below the line. The IRS
has unofficially indicated that it is a miscellaneous
itemized deduction, as the loss is not from the sale or
exchange but rather just the remaining basis after Section
72 has been used to exclude the payments previously received
as recoveries of basis.

Note that the logic, and relevant IRC sections, are
essentially identical to those that would govern loss on an
IRA account (Code Section 72 governs that as well) that had
basis due to deductible contributions--and, on that matter,
the IRS has indicated clearly they believe it's a
miscellaneous itemized deduction and not a capital loss.

--
Ed Zollars, CPA
Phoenix, Arizona.

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KSB wrote:

- quote -

There's not a good answer to that one <grin> . It appears
the "official" IRS position is that the loss is a
miscellaneous itemized deduction reported on Schedule A,
subject to the 2% of AGI limit on miscellaneous itemized
deductions and not deductible for alternative minimum tax
reporting purposes.

Some individuals, making use of some old revenue rulings on
refund annuities that predate the 2% limitation and the AMT,
have attempted to argue that it is deductible in computing
adjusted gross income and, therefore, is not subject to the
2% limit and is deductible in computing AMT. There is some
merit to the position, but I would note that there are a few
glitches:

1. The ruling did not describe *where* this amount would be
deducted. At the time the ruling was written, that answer
most likely would not have been terribly important, as there
was no AMT and miscellaneous itemized deductions were
allowed in full. But clearly that *is* important today.

2. When the ruling was written, there was no AMT. Thus, it
was not considered in the ruling and the ruling is silent on
that point.

3. As noted, there was also no miscellaneous itemized
deduction limitation so, again, the ruling didn't address
whether that limitation applied to this loss.

4. The ruling, as I recall, dealt with a very specific type
of annuity--and not the types that we are generally worried
about today.

If the amount is substantial, I would strongly suggest
seeking competent paid local professional help on this one.

--
Ed Zollars, CPA
Phoenix, Arizona

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"KSB" <nospam[at]nospam.net> wrote

- quote -

Schedule D, capital loss.

--
Snowmen fall from heaven unassembled.
-------------
Paul A. Thomas, CPA
taxman at negia.net

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Having surrendered a deferred annuity with a loss, how and
where do I record the loss on the tax forms.

KSB

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