Reno accountants Archives - Page 12 of 18

The Tax Court agreed with the IRS in a recent case that the one-rollover-per-year rule applies to all of a person’s IRAs, not to each of his IRAs separately. What is curious is that the IRS’s position in this case and the court’s holding are contrary to an IRS publication and at least one private letter ruling.

During 2008, Alvan Bobrow requested and received a distribution from his traditional IRA. Later, he received a distribution from his rollover IRA. Within 60 days of each distribution, Alvan replaced the funds in the IRA accounts.

The Tax Court ruled in favor of the IRS, saying that the distribution from the rollover IRA was taxable because Alvan failed the one-rollover-per-year rule. The court said that the plain language of the tax code limits the frequency of nontaxable rollovers a taxpayer may elect. By its terms, the one-year limitation is not specific to any single IRA maintained by an individual but instead applies to all IRAs maintained by a taxpayer. The court also upheld the IRS’s assessment of the accuracy-related penalty (Alvan J. and Elisa Bobrow v. Commissioner, TC Memo 2014-21, Jan. 28, 2014).

The IRS position and the court’s holding are at odds with the IRS position in IRS Publication 590, Individual Retirement Arrangements, and in Private Letter Ruling 8731041.

“Generally, if you make a tax-free rollover of any part of a distribution from a traditional IRA, you cannot, within a 1-year period, make a tax-free rollover of any later distribution from that same IRA. You also cannot make a tax-free rollover of any amount distributed, within the same 1-year period, from the IRA into which you made the tax-free rollover,” according to Publication 590.

Publication 590 contains the following example:

Illustration: A taxpayer we’ll call Chris has two traditional IRAs (IRA-1 and IRA-2). On Date 1, Chris makes a tax-free rollover of a distribution from IRA-1 into a new traditional IRA (IRA-3). Chris cannot, within one year of Date 1, make a tax-free rollover of any distribution from either IRA-1 or IRA-3 into another traditional IRA. However, Chris can make a tax-free rollover from IRA-2 into any other traditional IRA because Chris has not, within the last year, rolled over, tax free, any distribution from or made a tax-free rollover to IRA-2.

Neither the courts nor the IRS are bound by positions stated in IRS publications or tax form instructions. And only the taxpayer who receives a private letter ruling may rely on the conclusions expressed in it. The court in Bobrow did not address IRS Publication 590 or the private letter ruling.

The IRS must follow a corporation’s designation of voluntary payments toward the income tax liabilities of its owner/employees, according to a recent Tax Court ruling.

However, because the payments did not represent taxes withheld at the source, the IRS was allowed to levy on the assets of the owner/employees to collect applicable interest and penalties. Likewise, the corporation remained liable for interest and penalties attributable to its failure to remit taxes on a timely basis (James R. Dixon, et. ux. v. Commissioner, 141 TC No. 3, Sept. 3, 2013 and James R. Dixon, et. ux. v. Commissioner, TC Memo 2013-207, Sept. 3, 2013).

James and Sharon Dixon served as officers and employees of Tryco. After a number of successful years, Tryco stopped filing and remitting employment taxes, and the Dixons stopped filing individual income tax returns.

Later, the Dixons were criminally prosecuted for failure to file individual income tax returns. As part of a settlement, they agreed to make restitution to the IRS for taxes in the amount of $61,021.

The Dixons contributed this amount to Tryco, and Tryco submitted it to the IRS, accompanied by a letter stating that the payment represented Tryco’s withholding taxes to be applied to the withheld income taxes of the Dixons.

When accountants prepared the individual income tax returns for the Dixons’ missing years, they determined that the couple owed an additional $30,202 in taxes. The Dixons contributed this additional amount to Tryco, and the corporation in turn submitted it to the IRS with a letter similar to the earlier one.

On the advice of legal counsel, the Dixons chose not to pay their individual income tax liabilities directly, believing that the indirect payments through Tryco would reduce both the portion of the company’s withholding tax liability attributable to themselves and their own income tax liabilities. They also hoped to avoid interest and penalties because the tax law treats withholding at the source as paid in the year of the withholding irrespective of the employer’s date of remittance.

The IRS initially credited Tryco’s payments to the Dixons’ income tax liabilities, which settled their tax obligations but not the related interest and penalties. Later, the IRS reversed itself and applied the payments to Tryco’s general unpaid employment tax liabilities.

The IRS then issued a notice to the Dixons of intent to levy on their assets in satisfaction of their now unpaid income tax liabilities. The Dixons petitioned the Tax Court.

The Dixons contended first that they were entitled to a withholding credit for the amounts submitted by Tryco on their behalf. Second, they asserted that the IRS was obligated to honor Tryco’s designation of the payments as withheld income taxes and to credit the amounts toward the Dixons’ income tax liabilities.

The IRS argued that its policy of honoring designations of voluntary payments does not extend to designations of delinquent employment tax by one party toward the income tax liability of another.

The Tax Court concluded that the funds submitted by Tryco to the IRS were not withheld at the source and, accordingly, the Dixons were not entitled to a credit against their individual income tax liabilities. Regarding the Dixons’ second argument, the majority determined that the IRS was obligated to follow its published administrative position regarding designations of voluntary payments.

The IRS was therefore directed to credit the $91,223 payments to the Dixons’ account, discharging their income tax obligations. The IRS was allowed, however, to levy on the Dixons’ assets to collect applicable interest and penalties. Tryco likewise remained liable for interest and penalties.

Qualified estates get automatic extension for portability election

“Most relatively simple estates … do not require the filing of an estate tax return,” according to the IRS. For decedents dying in 2013 or 2014, estates valued at less than $5,250,000 (2013) or $5,340,000 (2014) are excluded from estate tax.

When a person dies owning assets less than the applicable exclusion amount, the executor of the estate can elect to transfer the unused portion to the surviving spouse. This so-called “portability election” has been available since 2011.

However, the election must be made on a timely filed estate tax return. Therefore, the election would not be effective for an estate that did not file a return because the value of the assets in the estate was below the filing threshold.

Now, if estates of decedents who died before Jan. 1, 2014, and fall below the dollar threshold for having to file an estate tax return want to elect to take the portability exclusion, they can get an automatic extension to make that election, according to a recent IRS revenue procedure.

Under Revenue Procedure 2014-18, the estate of a decedent who is survived by a spouse is permitted to make a portability election, allowing the surviving spouse to apply the decedent’s unused exclusion amount to the surviving spouse’s own transfers during life and at death. The amount received by the surviving spouse is called the deceased spousal unused exclusion, or DSUE, amount.

The executor of the estate of the deceased spouse must elect portability of the DSUE amount on a Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, which must include a computation of the unused exclusion amount. A portability election is effective only if made on a Form 706 filed no later than nine months after the decedent’s date of death or by the last day of the period covered by an extension – if an extension for filing has been obtained.

When an estate is filing an estate tax return only to make a portability election, the new revenue procedure provides an automatic extension of the Form 706 filing deadline.

To qualify for the automatic extension, the following requirements must be met:

1. The taxpayer must be the executor of the estate of a decedent who:

Has a surviving spouse
Died after Dec. 31, 2010, and on or before Dec. 31, 2013
Was a citizen or resident of the United States on the date of death

2. The taxpayer must not be required to file an estate tax return as determined based on the value of the gross estate and adjusted taxable gifts.

3. The taxpayer must not have timely filed an estate tax return.

4. A person permitted to make the election on behalf of a decedent must file a complete and properly prepared Form 706 on or before Dec. 31, 2014.

5. The person filing the Form 706 on behalf of the decedent’s estate must state at the top of the form that the return is “FILED PURSUANT TO REV. PROC. 2014-18 TO ELECT PORTABILITY UNDER Code Sec. 2010(c)(5)(A).

If you listened to the State of the Union address last month, you heard President Obama unveil a new type of retirement savings plan called “myRA.”

MyRA is a savings vehicle designed to serve people whose employers do not provide access to a retirement plan. The best estimate is that about half of all workers and

75 percent of all part-time workers are in this category.

Here are the details released to date:

➜ MyRAs will be backed by a security that looks and feels like a savings bond.

➜ The government will back them with the same variable-interest-rate return offered by the G Fund, the Government Securities Investment Fund in the federalemployees’ Thrift Savings Plan.

➜ Savers will be guaranteed that the value of their accounts will never go down.

➜ Savers will pay no fees on the accounts.

➜ Savers can open the accounts for as little as $25 and can make additionalcontributions in amounts as small as $5.

The myRA will use after-tax dollars, like a Roth IRA, and withdrawals under most circumstances will not be taxed. While it is funded by paycheck deductions, savers will be able to keep their accounts when they change jobs.

Although the program can begin without legislative approval, employers will not be required to participate. Congressional approval is required to force employers who do not have retirement accounts to set up payroll withholding procedures for myRA.

The myRA program has a $15,000 limit. After reaching that mark, savers will have to move their dollars to a Roth IRA.

Even if you qualify for myRA, you may wish to consider a Roth IRA as an alternative. Both Roth IRAs and myRAs are expected to have the same income limits on contributions.

If you decide to open a Roth IRA, you should shop for a custodian that charges no fees. You will not be subject to the savings limits, and you will not have to wait for your employer to agree to participate.

With a Roth IRA, you may not be able to set up an account with contributionthresholds as low as the $25/$5 amounts available with myRA. However, you can probably approximate the “safety of principal” aspect of myRA by investing exclusively in government bonds.

The Tax Court has concluded that three individuals incorrectly characterized ordinary partnership income from the sale of real estate as long-term capital gain.

In this case, Concinnity, LLC, which elected to be taxed as a partnership, was organized by Cordell Pool, Justin Buchanan and Thomas Kallenbach. These three individuals also incorporated Elk Grove Development Company (Cordell D. Pool, et. al. v. Commissioner, TC Memo, 2014-3, Jan. 8, 2014).

Concinnity purchased 300 acres of undeveloped land. At the time of purchase, the land was already divided into four sections (phases 1-4). This property later became the Elk Grove Planned Unit Development (PUD).

Concinnity entered into an agreement that gave Elk Grove Development Company the exclusive right to purchase phases 1-3, consisting of 300 lots. This agreement required Elk Grove to complete all infrastructure improvements necessary to obtain the final plat of each phase of the PUD. Concinnity also entered into an improvements agreement with the county agreeing that it, as subdivider, would pay for the improvements to the land in phase 1.

On its income tax returns, Concinnity consistently reported that it sold land resulting in long-term capital gain. The three partners reported their shares of the partnership’s gain from the sale of real property as long-term capital gain.

The IRS claimed that Concinnity’s land sales produced ordinary income. The three partners claimed that the sale produced capital gain because the land was held for investment.

The Tax Court agreed with the IRS that the proceeds of the land sale should be reported as ordinary income. In reaching its conclusion, the court reviewed several factors:

➤ Nature of acquisition. The Tax Court found that the record did not clearly show Concinnity’s purpose in acquiring the land. However, the evidence suggested that it acquired it for development and sale. While the court noted that the operative inquiry was the purpose for which the property was held – not the purpose of its acquisition – the court determined that there was no evidence showing that Concinnity’s intentions changed during the course of holding the property. The court concluded that the taxpayers failed to show that the property was held for investment purposes.

➤ Frequency and continuity of sales. The court observed that frequent and substantial sales of real property more likely indicate sales in the ordinary course of business, whereas infrequent sales for significant profits are more indicative of real property held as an investment. In this case, the record was not clear as to the frequency and substantiality of Concinnity’s sales. The court found that the record was insufficient to establish Concinnity’s role in the business or overall level of activity with regard to the property. In the end, the court concluded that the taxpayers failed to show that their sales were not frequent and substantial.

➤ Nature and extent of business. The IRS argued that the only documents in the record indicated that Concinnity brokered the deals, found additional investors for the development project, secured water and wastewater systems, and guaranteed performance on the improvements agreement. While it did not wholly accept the IRS contentions, the court found that there was evidence that Concinnity obligated itself to make certain water and wastewater improvements to the PUD and paid for those improvements. The court reasoned that this level of activity was more akin to a real estate developer’s involvement in a development project than to an investor’s increasing the value of his holdings.

➤ Activity of seller about the property. The record was unclear as to whether Concinnity sold lots only to Elk Grove or also sold lots to others. The court found that the taxpayers failed to show that Concinnity did not spend large portions of its time actively participating in the sales of the PUD lots. The court said that this factor weighed in favor of the IRS.

➤ Extent and substantiality of the transaction. While the IRS argued that Elk Grove should be ignored as an entity because the taxpayers incorporated it principally to evade or defeat tax, the court found that the “identical ownership” of Concinnity and Elk Grove did not necessarily mean that Elk Grove should be disregarded. However, the court concluded that the taxpayers failed to produce sufficient evidence demonstrating that they engaged in a bona fide, arm’s-length transaction. ■

The Tax Court has held that payments made by a parent corporation’s wholly owned subsidiaries to another wholly owned subsidiary were deductible as insurance expenses.

The court abandoned its previous position that there could not be risk shifting in brother-sister corporate arrangements (Rent-A-Center and Affiliated Subsidiaries v Commissioner, 142 TC No. 1, Jan. 14, 2014).

Rent-A-Center, Inc. (RAC) is the parent of a group of approximately 15 affiliated subsidiaries. RAC and its subsidiaries rented, sold and delivered home electronics, furniture and appliances. RAC’s wholly owned subsidiary, Legacy Insurance Co., Ltd., is a Bermuda corporation.

Legacy and RAC’s other wholly owned subsidiaries entered into contracts under which each subsidiary paid Legacy an amount – determined by actuarial calculations and an allocation formula – relating to workers’ compensation, automobile and general liability risks. In turn, Legacy reimbursed a portion of each subsidiary’s claims relating to these risks.

On their consolidated returns, RAC’s subsidiaries deducted the payments to Legacy as insurance expenses. On audit, the IRS determined that the payments were not deductible. In its majority opinion, the Tax Court concluded that the payments by RAC’s subsidiaries to Legacy were deductible as insurance expenses.

In making this determination, the court found that RAC presented convincing evidence that:

➤ Legacy was a bona fide insurance company.

➤ RAC faced actual and insurable risk.

➤ Comparable coverage with other insurance companies would have been more expensive.

➤ Some insurance companies would not underwrite the coverage provided by Legacy.

➤ RAC established Legacy for legitimate business reasons, including increasing the accountability and transparency of its insurance operations, accessing new insurance markets and reducing risk management costs.

The court concluded that Legacy was not a sham. It reasoned that, while federal income tax consequences were considered, the formation of Legacy was not a tax-driven transaction.

Legacy entered into bona fide arm’s-length contracts with RAC, charged actuarially determined premiums, was subject to the regulatory control of the Bermuda Monetary Authority and met Bermuda’s minimum statutory requirements. It also paid claims from its separately maintained account and was adequately capitalized.

The court noted that, to be deductible, an arrangement must involve insurance risk and meet commonly accepted notions of insurance. And, there must be risk shifting and risk distribution.

The court then determined that the arrangement in this case satisfied the following requirements:

➤ Insurance risk policies. RAC faced insurable risk relating to all three types of insured risk – workers’ compensation, automobile and general liability. RAC entered into contracts with Legacy and an independent insurance company to address these risks.

➤ Risk shifting. The court repudiated its 1987 Humana Inc. decision with regard to brother-sister arrangements and concluded that a balance sheet and net worth analysis, looking at the arrangement’s economic impact on the insured entities, were the proper analytical framework to determine risk shifting in brother-sister arrangements. It found that the policies shifted risk from RAC’s insured subsidiaries to Legacy, and that Legacy:

❋ Was formed for a valid business purpose

❋ Was a separate, independent and viable entity

❋ Was financially capable of meeting its obligations

❋ Reimbursed RAC’s subsidiaries when they suffered an insurable loss

A payment from Legacy to RAC’s subsidiaries did not reduce the net worth of RAC’s subsidiaries because, unlike RAC, the subsidiaries did not own stock in Legacy.

➤ Distributed risk. RAC’s subsidiaries owned more than 2,500 stores, had more than 14,000 employees and operated more than 7,000 insured vehicles. RAC’s subsidiaries had a sufficient number of statistically independent risks. Thus, by insuring RAC’s subsidiaries, Legacy achieved adequate risk distribution.

➤ Insurance in the commonly accepted sense. Legacy was adequately capitalized, regulated by the Bermuda Monetary Authority, and organized and operated as an insurance company. It issued valid and binding policies, charged and received actuarially determined premiums, and paid claims.

A business that is forced to move does not have to include move-related reimbursements in income, but the business cannot deduct relocation expenses to the extent it is reimbursed, according to a private letter ruling by the IRS.

The business lessee also does not have basis for acquired replacement property to the extent the cost does not exceed reimbursements, according to the ruling (PLR 201401001).

Title II of the Uniform Relocation Assistance and Real Property Acquisitions Policies Act, 42 USC Sections 4621-4638, was enacted to establish a uniform policy for the fair and equitable treatment of all affected persons displaced as a result of federal and federally assisted programs and projects. Whenever a program or project undertaken by a displacing agency will result in displacing any persons, Section 4622(a) provides that the displaced persons will be paid:

➤ Actual reasonable expenses in moving themselves, their business or other personal property;

➤ Actual direct losses of tangible personal property as a result of moving or discontinuing their business, but not to exceed an amount equal to the reasonable expenses that would have been required to relocate the property, as determined by the head of the agency; and

➤ Actual reasonable expenses in searching for a replacement business.

No payment received under Sections 4621-4638 is treated as income for purposes of the Internal Revenue Code.

The IRS cited Revenue Ruling 78-388 for the proposition that a taxpayer cannot claim a deduction for an expense for which there is a right or expectation of payment. The IRS also concluded that basis cannot be assigned to substitute equipment acquired to replace non-movable equipment and leasehold improvements at the new location, to the extent such costs are reimbursed with the relocation payments and the additional payments. Because these payments reimburse the taxpayer for the cost of such property, the taxpayer does not incur a cost to acquire that property.

If you had work-related education costs during 2013 or expect to incur such costs during 2014, you may be entitled to a tax deduction.

If you are an employee and can itemize your deductions, your deduction will be the amount by which your qualifying work-related education expenses – plus other job and certain miscellaneous expenses – are greater than 2 percent of your adjusted gross income.

If you are self-employed, you deduct your expenses for qualifying work-related education directly from your self-employment income, reducing your income subject to both income tax and self-employment tax.

Your work-related education expenses may also qualify you for other tax benefits, such as the American Opportunity and Lifetime Learning Credits. These credits may be more valuable to you than the deduction.

To qualify for the deduction, your education must meet one of the following tests:

➤ The education is required by your employer or the law to keep your present salary, status or job.

➤ The education maintains or improves skills needed in your present work.

Even if the education meets one or both of the above tests, it is not qualifying work-related education if it:

➤ Is needed to meet the minimum educational requirements of your present trade or business;

➤ Is part of a program of study that will qualify you for a new trade or business; or

➤ Does not serve your employer’s bona fide business purpose.

If your education is not required by your employer or the law, it can still be qualifying work-related education if it maintains or improves skills needed in your present work. However, education that is part of a program of study that will qualify you for a new trade or business is not qualifying work-related education. This is true even if you do not plan to enter that trade or business.

If your education meets the requirements described above, the following education expenses can be deducted:

➤ Tuition, books, supplies, lab fees and similar items

➤ Certain transportation and travel costs

➤ Other education expenses, such as costs of research and typing when writing a paper as part of an educational program

If you use your car for transportation to school, you can deduct your actual expenses or use the standard mileage rate to figure the amount you can deduct. Whichever method you use, you can also deduct parking fees and tolls.

You can deduct expenses for travel, meals (limited to 50 percent of the cost) and lodging if you travel overnight mainly to obtain qualifying work-related education. Travel expenses for education are treated the same as travel expenses for other employee business purposes.

Certain cruises and conventions offer seminars or courses as part of their itinerary. Even if the seminars or courses are work related, your deduction for travel may be limited. This applies to:

➤ Travel by ocean liner, cruise ship or other forms of luxury water transportation

➤ Conventions outside the North American area

Adam Hart may have seen himself as an established pharmaceutical salesman, but the Tax Court didn’t agree.

Hart graduated from college in 2007. In 2009, he enrolled in an M.B.A. program with a concentration in finance.

Hart deducted $18,600 as an unreimbursed employee business expense for his education costs paid during 2009. The IRS denied the deduction.

Hart’s employment history during 2009 was as follows:

➜ Jan. 1 to April 30, 2009 – employed by Priority Healthcare Distribution as a cancer pharmaceutical salesman

➜ May 1 to Aug. 10, 2009 – unemployed

➜ Aug. 11 to Oct. 1, 2009 – employed by ADP Totalsource as a cancer pharmaceutical sales account manager

➜ Oct. 2 to Oct. 11, 2009 – unemployed

➜ Oct. 12 to Dec. 31, 2009 – employed as entry-level professional for Walgreen Co.

None of his 2009 employers required Hart to attend M.B.A. courses. Hart contended that he was in the business of selling pharmaceuticals and that the M.B.A. classes he took enabled him to obtain employment in 2009.

The IRS contended that Hart was not established in a trade or business during 2009 and that his employers did not require him to enroll in an M.B.A. program.

Implicit in claiming a business expense deduction for education expenses is the notion that the taxpayer must be established in a trade or business before any expenses are deductible. The IRS contended that Hart was not established in a trade or business before entering the M.B.A. program.

Hart contended that he was engaged in a trade or business because he focused on the selling of cancer pharmaceuticals, which is a specialized field.

The Tax Court sided with the IRS and denied the deduction. The court’s reasoning included the following:

➜ Hart graduated from college only two years before starting his M.B.A. program.

➜ Carrying on a trade or business has been defined as entailing continuous and regular activity.

➜ Hart’s employment in the cancer pharmaceutical sales field was not continuous.

➜ There is no evidence that Hart was carrying on a trade or business before he enrolled in the M.B.A. program.

Because the court ruled that Hart was not engaged in a trade or business, it had no reason to decide whether the M.B.A. program would qualify Hart for a new trade or business (Adam E. Hart et. ux. v. Commissioner, T.C. Memo 2013-289, Dec. 23, 2013).

The Tax Court ruled on a case in December that involved falsified documents, deception and forgery – perpetrated by the wife.

The wife’s tangled web included:

➜ Submitting falsified requests to withdraw funds from her husband’s IRAs

➜ Forging her husband’s signature to endorse the distribution checks

➜ Depositing the funds into a joint account that only she used

➜ Using the proceeds for her personal benefit

The husband did not find out until the next year. The Tax Court said the husband was not required to include the distributions in his gross income and was not liable for the additional tax on early distributions.

Andrew Roberts and his wife, Cristie Smith, maintained two joint checking accounts. Although the accounts were titled in joint name, Roberts exclusively used one account, and Smith exclusively used the other account.

Roberts did not have a checkbook for, write checks on or make withdrawals from Smith’s account, and he didn’t receive or review the bank statements. He didn’t know about, authorize or benefit from any deposits into, or withdrawals from, Smith’s account.

The custodians of Roberts’s two IRAs received requests with his forged signature, faxed from Smith’s workplace, to withdraw approximately $37,000 from his IRAs. Roberts did not make or authorize the requests.

Checks were sent pursuant to the withdrawal request, the endorsement was forged, and the checks were deposited into Smith’s joint account that she maintained separately from Roberts. The court inferred that Smith (or someone on her behalf) forged Roberts’s signature on the distribution requests and endorsements.

Roberts first learned of the unauthorized withdrawals when he received Forms 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., early in the following year. By the time Roberts had determined Smith’s involvement, the couple was already involved in a divorce proceeding.

Roberts advised the trial court of what had happened, and the court’s decree of dissolution took into account that Smith had withdrawn the funds.

Throughout their marriage, Smith prepared and filed a joint income tax return with Roberts. In early 2009, Roberts, although separated from Smith, discussed with her the preparation and filing of a joint income tax return for 2008. He understood from that conversation that he and Smith would still file a joint return.

Roberts gave his tax information to Smith so that she could prepare the 2008 joint return. However, Smith prepared and filed separate returns, using married filing separate filing status for herself and single filing status for Roberts.

On Roberts’s return, Smith made several errors, including not reporting the IRA withdrawals as income. Roberts’s return showed a refund that had been electronically deposited into the joint account controlled by Smith. She did not show Roberts the return or give him a copy, despite his asking for one.

Upon examination, the IRS argued that Roberts should have reported the withdrawals as taxable distributions because he was the owner of the IRAs and the person entitled to receive distributions, the distributions were deposited into a joint account, and they went toward “family living expenses.” The IRS also found it significant that Roberts never attempted to return the funds to the IRAs or contest the distributions once he discovered the payments.

Roberts claimed that he was not a payee or distributee of the funds because the IRA withdrawals were made pursuant to forged requests, the checks were stolen, the endorsement signatures were forged, and he had received no economic benefit.

The Tax Court concluded, based on common sense as well as its finding of fact and analysis, that Roberts was not a payee or distributee of the funds. The court noted that, although it has held that the distributee or payee of an IRA distribution is “generally” the participant or beneficiary entitled to receive the distribution, it has rejected the claim that the recipient is “automatically” the distributee.

The court also found that Roberts’s failure to timely pursue a state law remedy did not necessarily mean that he had received a taxable distribution from his IRA accounts. Thus, on the basis of the overall facts, the court concluded that Roberts did not fail to report any income attributable to the IRA distributions. Because the withdrawals were not distributions taxable to Roberts, he was not liable for the additional tax on early withdrawals.

However, the court ruled against Roberts on the issue of filing status. It reasoned that, because Roberts and Smith were still married on Dec. 31, 2008, and were not separated for the last six months of the year, the proper filing status was married filing separately.

The court also held that, to the extent that the final computations showed that his understatement of tax exceeded the greater of 10 percent of the tax required to be shown on the return or $5,000, Roberts would be liable for a substantial underpayment penalty (Andrew W. Roberts v. Commissioner, 141 TC No. 19, Dec. 30, 2013).