IRA owner liable for income tax on distributions exceeding basis in IRA contributions

An individual was required to include in gross income distributions from his individual retirement account (IRA) in excess of the basis in the IRA contributions, according to the U.S. Tax Court. The taxpayer made a nondeductible IRA contribution many years ago and made no subsequent contribution to the IRA account. The rest of the account value consisted of “reinvestments to date” that included dividends, short-term and long-term gains. The taxpayer provided credible testimony that his initial IRA investment consisted of a nondeductible contribution and that the balance distributed to him consisted of reinvested dividends and capital gains that accumulated free of federal income tax inside the IRA. Therefore, the taxpayer’s basis in his IRA account was limited to his initial investment, and he was liable for tax on the balance of the distribution.

Source: Shank v. Commissioner, U.S. Tax Court, Dkt. No. 1752-17, TC Memo. 2018-33, March 20, 2018.
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