UGMA (Uniform Gift To Minors Act)

[Kurly]

Going way back. A UGMA was set up in 1995. Stock from the UGMA account was bought and sold many times. Does each time it is sold, is it a taxable transaction? The beneficiary of the UGMA turned 18 A year ago, now has control of the account. The IRS seems to think that the selling and buying of the stocks within the UGMA account created a taxable event, and is sending the beneficiary collection notices for tax and penalities due for 12 years.

Thanks for any comments all are appreciated.

Kurly

[tpert]

Going way back. A UGMA was set up in 1995. Stock from the UGMA account was bought and sold many times. Does each time it is sold, is it a taxable transaction? The beneficiary of the UGMA turned 18 A year ago, now has control of the account. The IRS seems to think that the selling and buying of the stocks within the UGMA account created a taxable event, and is sending the beneficiary collection notices for tax and penalities due for 12 years.

Thanks for any comments all are appreciated.

Kurly

I would assume that each transaction is a reportable event and that depending on the income involved, the beneficiary might also be liable for the Kiddie Tax as well.

[erchess]

However,

wouldn't the tax for the years when the beneficiary was a minor be the responsibility of the adult who ran the account at that time? And if that adult is dead or insolvent isn't that just tough cookies for the IRS? I realize that at the time the returns and payments were due the normal thing would have been to pay both the prep fees and the taxes out of the minor's funds but if I were the former minor I would not feel that it is fair to come after me now.

[tpert]

wouldn't the tax for the years when the beneficiary was a minor be the responsibility of the adult who ran the account at that time? And if that adult is dead or insolvent isn't that just tough cookies for the IRS? I realize that at the time the returns and payments were due the normal thing would have been to pay both the prep fees and the taxes out of the minor's funds but if I were the former minor I would not feel that it is fair to come after me now.

Interesting point.

The income definitely belongs to the minor, and the custodian is responsible for the account, but I do not think it automatically becomes the account custodian's responsibility to pay the taxes. I would think it would have been the child's custodian (usually the parents) who would have the responsibility of filing a child's tax return. In a lot of situations it is the parents who set up the account, but that is not necessarily so.

Kurly did not indicate if the parents were even involved in this.

Did the IRS just start contacting the child for the back taxes or have they been asking for returns all along?

[erchess]

I was unclear

I meant the person or persons who were parent or guardian to the owner of the account when he was a minor. What I am saying is that back when the tax laws were violated (if at all) the person's taxes were the responsibility of someone else and it is to them that I would hope the IRS must turn to get money and I would hope that if they are dead or of limited means, the the IRS may be able to collect nothing at all or to collect some but not all of what is owed. There is a fundamental issue of fairness here. Decisions made for me when I was a child should not be able to come back and compel me, now an adult, to pay money especially to the government. I do realize that the funds may well have been in the care of a person or company whose sole tax related responsibility was to provide the parents with what they needed to see to the tax reporting requirements.

[tpert]

erchess,

I agree with you that whoever was the child's parent or guardian should have been contacted. Kurly still has not indicated whether or not the IRS has been contacting them about this all along, but I believe as you do that it was their responsibility to file and pay the taxes.

[erchess]

tpert

It is nice to have someone agree with me occasionally. You are obviously a very perceptive person.

[Kurly]

Ugma

Yes the IRS contacted the custodian many times. After the child turned 18 she started to get the letters, she is now 20. The custodian filed bankrut in 2002 owing the IRS $247,750. I am trying to get the IRS to meet with me, I have the power of attorney. The account only had a balance of less than $3,000 when she turned 18. The IRS wants $6,500. I am trying to get the penalties and interest waived. The tax liability was only $1,042 in 1997.

Kurly

[erchess]

Kurly

Your way may be the way of practicality. I might instead tilt at windmills to the point of finding a tax lawyer willing to argue in court that she owes nothing at all. I realize that my path has her spending in legal fees more than the sum of your fee plus the full amount the IRS wants which in turn is more than she will spend if you are successful. To me the goal is not to make my total payout as low as possible but to make my payout to the government as low as possible and never mind the total payout. There are of course limits to this kind of stubborn pridefulness and I don't know her total financial situation.

[BOB W]

The custodian was trustee until the child turned 18. The custodian was getting the letters because he was the rep, not the liable person. The childs funds were always at risk to the IRS. The child has an issue with the custodian but needs to pay the IRS> then get the money from the custodian for failure to handle the UGMA account properly.

The IRS has NO issue with the custodian>>>>>>>>>>>>>>>

The child may have a "Reasonal Cause" issue for penalty removal by blaming the custodian.

An UGMA account has no special tax charater> it is fully taxable annually on its earnings to the child.

[tpert]

The custodian was trustee until the child turned 18. The custodian was getting the letters because he was the rep, not the liable person. The childs funds were always at risk to the IRS. The child has an issue with the custodian but needs to pay the IRS> then get the money from the custodian for failure to handle the UGMA account properly.

The IRS has NO issue with the custodian>>>>>>>>>>>>>>>

The child may have a "Reasonal Cause" issue for penalty removal by blaming the custodian.

An UGMA account has no special tax charater> it is fully taxable annually on its earnings to the child.

I did not think that the child was not liable for the tax, but I would have expected the child's parents or guardians to be responsible for preparing a timely filed return. Not for this particular situation, but such accounts can be set up for newborns and it seems unreasonable to require such individuals to be subject to penalties and interest when they can't even talk. I know. We are not talking about something reasonable. This is taxes. (Should have been my first clue that I was wrong.)

Publication 929 seems to support your statements quite clearly:

Generally, the child is responsible for filing his or her own tax return and for paying any tax, penalties, or interest on that return. If a child cannot file his or her own return for any reason, such as age, the child’s parent or guardian is responsible for filing a return on his or her behalf.

Your comments that the child's liability is a claim against the custodian makes sense if the custodian was responsible for the child's finances. I still believe that the custodian of the account is not necessarily the one responsible for filing the child's tax return but the child's parents or guardians as stated in the publication, but in this case it appears they are one and the same

[erchess]

Food For Thought Here

I have learned several relevant points.

1. Back in the day when this child was too young to file it was the parent or guardian of the child not the custodian of the funds that was responsible for filing the taxes. However it seems that in this case those were the same. (Now how old does a child have to be to sign his or her own return without parental endorsement? I don't think I had a reason to file until I was sixteen and prepared and signed my own. I kept doing that until I went away to college when my Dad took over preparing them but he would mail them to me and only I would sign them. Then when I was in graduate school and living at home I again took over doing my returns. I was by that time over 21 so of course no one but me had any responsibility for my tax affairs.)

2. Although there could be grounds in the parents' or custodians' behavior for penalty abatement for the former child it has always been she who owed the tax and for example the parents could not have gotten her out of it based on they themselves not having the funds to pay it. So it's not as though she is losing to taxes money that should not have gone to taxes.