Taxpayer is an employee. He and his wife own 100% of C Corp. C Corp employer contributes to SEP-IRA on behalf of 100% (constructive) owner employee. Employee is older than 72. Thus, SEP-IRA is considered an “ongoing” SEP-IRA. Employee would like to make QCD from SEP-IRA. One author says the QCD will be taxable because IRS takes the position that QCDs are NOT permitted from an “ongoing” SEP-IRA.

Another author suggests that this QCD can be made from an “ongoing” SEP-IRA because the employee did not receive a tax benefit form the SEP-IRA contribution, the C Corp did. This author acknowledges that if the taxpayer’s sole proprietorship had made the SEP-IRA contribution on his behalf, the QCD would be taxable because the taxpayer received a tax benefit from the contribution on his Form 1040. Which author is correct?

The first author suggests that the taxpayer can avoid the problem (taxable QCD) by first transferring the SEP-IRA to a traditional IRA and after that, make the QCD from the traditional IRA. That has a bad smell to it. What about the “step transaction” doctrine? Does anyone agree that you can avoid the taxation of the QCD by first transferring from the SEP-IRA to the traditional IRA and then making the QCD?