Tax Court Unimpressed with Good Deed
So here comes another taxpayer tale of woe from our “no good deed goes unpunished” department.
Seems Elroy Earl Morris was the primary and sole beneficiary of a traditional IRA owned by his Dad, and when the old guy passed on, Elroy got the dough from the Farm Bureau Life Insurance Co. of Michigan, which reported the payments to him on a Form 1099R, as usual. Elroy also sought some advice from a local law firm, relative to the settlement of the estate, and was told by a paralegal that there would be no tax due – referring to Federal and state estate taxes, which seems to have slipped by Elroy’s understanding which is what may have led him to omit the distributions from his income tax return.
Further, implementing what he believed to be his father’s wishes, he passed some of the IRA money along to two of his siblings in the aggregate amount of $37,000.
Now the Internal Revenue Code says that a bloke’s gross income “means all income from whatever source derived,” and further specifically states that any amount paid or distributed out of an IRA shall be included in gross income by the payee or distributee unless one of several exceptions may apply. None of the exceptions pertain to distributions on account of the IRA owner’s death.
Inevitably, the Revenooers caught up with Elroy and slapped him with the tax. But he pled mercy on the theory that it would be inequitable to hold him solely liable for the tax because he voluntarily shared the proceeds with his siblings. (And for good measure, he threw in the argument that he had received bum tax advice.)
“Tough beans,” said the Court. Although Elroy acted “honorably” in executing what he believed to be his Dad’s wishes, his good conduct “has no bearing on whether the IRA distributions were includible in his gross income.”
And to add insult to injury, the Court noted that while the bad tax advice might have affected his liability for the accuracy-related penalty associated with all of this, it is irrelevant in determining the tax status of the distributions themselves.
Moral? Nice guys finish last.
And in another recent decision of the Tax Court (Darrel W. Wyatt v. Commissioner), the good Dr. Wyatt was recruited by a local hospital to practice in its area, and as an inducement, the hospital agreed to essentially “loan” funds to the doc as subsidy of his practice, with the expressed and agreed intent to eventually forgive the loans if certain conditions of practice by Dr. Wyatt were fulfilled. Not an uncommon practice, we hear.
Though “loans” are not income to the borrower, the rub, here, was the “forgiveness” part of the deal. In tax lingo, “forgiveness” equates to taxable income – even if, pursuant to the agreement in this case, there was no personal liability required of the doc, and even if he didn’t actually sign a promissory note at the outset!
CONSULT YOUR TAX ADVISOR – This article contains general information about various tax matters. You should consult your CPA regarding the implications to your own particular situation.
Jeff Quinn, the author of this article, is a shareholder in Ashley Quinn, CPAs and Consultants, Ltd. with offices in Incline Village and Reno. He can be reached at 831-7288, and welcomes comments at firstname.lastname@example.org.