As many of you know a Roth IRA is different than a traditional IRA in that (1) only after tax contributions are made (2) distributions from Roth IRAs are nontaxable and (3) no minimum distributions are required. Unfortunately to convert an IRA to a Roth IRA in 2009 a taxpayer may not have income in excess of $100,000. The good news is that beginning in 2010 and subsequent years the $100,000 limitation is eliminated. Further, if you convert a traditional IRA to a Roth IRA in 2010 you have two years 2011 and 2012 in which to pay the income tax on the 2010 conversion and the income will be included ratably over the two year period. The other requirements for contributions to Roth IRAs have not been changed so there are still limits as to how much you can contribute and income limits as to who can contribute. All clients and attorneys should be aware of this change in law so they can consult with their tax attorney and/or CPA to determine whether if it is in their best interest to convert their traditional IRAs into Roth IRAs. Also partial conversions can occur. Obviously there is an income tax hit upon conversion but if the values are depressed this may be a good time to convert. However in 2010 if you convert you will not know the rates for 2011 and 2012 so tread cautiously. Fla. Stat. 222.12 protects plans as defined in Section 408 (IRAs) and 408(A) – (Roth IRAs) however see the last discussion in this tax tips. Further will this exemption apply to “rollover” Roth IRAs?

As most people know the attorney-client privilege as to communications between an attorney and the attorney’s client is sacrosanct and subject to only a few exceptions. What about the tax practitioner’s privilege? As for practitioners, such as CPAs, the law is unclear. In Valero Energy Corp. v. U.S., 103 AFTR 2d 2009-1054 the Court of Appeals for the Seventh Circuit refused to bar disclosure of documents sought by the Internal Revenue Service (the “Service”). The court rejected the claim that the accountant was protected by the “federally authorized tax practitioner” (FATP) privilege. The taxpayer argued that the privilege was absolute the exception to the privilege requiring disclosure when there is a “tax shelter” only applied to marketed prepackaged tax shelters. The court determined differently.

The FATP includes attorneys, CPAs, enrolled agents and enrolled actuaries. The privilege does not apply if the communication is in connection with the promotion of a person’s direct or indirect participation in any “tax shelter.” The taxpayer argued that Arthur Anderson was not trying to “sell or peddle” a corporate tax shelter and therefore the privilege applied. The Service showed that Arthur Anderson “promoted by providing input and helping to organize a multi-step plan, a significant purpose of which was to avoid federal income taxes.” The court found that there was no privilege and accounting advice, even if given by an attorney, was not privileged. Accounting documentation such as worksheets concerning financial data, deductions, calculation of gains and losses, inventory methods, compensation packages were part and parcel of accounting advice and not covered by the privilege. Note that the Service has very broad powers in disclosure of documents. The language regarding tax shelters is broad and encompasses any plan or arrangement whose significant purpose was to avoid or evade federal estate taxes. The taxpayer argued that that exception would swallow the whole section and the Service could be given access to any documents.

The judge in a recent bankruptcy case, Baker v. Tardif, Jr., United States District Court, Middle District of Florida, Case No. 2-09-CV238, affirmed an order of the bankruptcy court denying the exemption of a participant’s interest in her Keogh Plan (the “Plan”). The debtor argued that the Plan was prototype which had been approved by the Service and thus was an exempt plan under Section 222.21 of the Florida Statutes. The debtor was the only participant. The bankruptcy court cited the US Supreme Court in Yates, 541 U.S.1 (2004), which held that a sole shareholder of a professional corporation could qualify as a participant in a qualified ERISA plan (in this case the Keogh plan) only if the plan covered one of more employees other than the shareholder. As the debtor was the only participant, the Keogh Plan would not be exempted under Florida law as Yates controlled. As a member of the committee who drafted the statute 222.21 this author recalls that the intent was to exempt all plans from creditors’ claims. However, the United States Supreme Court has rendered its opinion so this case should be discussed with your clients. Also note that Yates addressed ERISA plans and not IRAs. The committee is reviewing this case. In the meantime carefully review this case if you have single member plans.