Who’d’a thunk we’d ever see a sentence like this in a full-dress T.C.: “Common sense dictates that the answer must be no, and our findings of fact and analysis support that answer.” 141 T. C. 19, at p. 14.
That sentence made Andrew Wayne Roberts a happy camper. He’s the star of the eponymous 141 T. C. 19, filed 12/30/13, with Judge Marvel as the exponent of common sense.
Andy Wayne loved not wisely but too well; Mrs. Andy Wayne, hereinafter referred to as “Ms. Smith”, as the high-priced lawyers say, was a master of penmanship. She forged Andy’s name to a bunch of withdrawal orders from his IRAs, forged his signature on the checks the custodians of said IRAs trustingly issued (notwithstanding the forged signatures bore no resemblance to Andy Wayne’s true signature) and mailed to her job, whereupon she deposited them in a joint account (of which she alone possessed checks, and she alone got the bank statements), and finally used the cash to take their kids to Disneyland and set up a separate dwelling for herself.
And then she prepared phony tax returns for herself and Andy, and e-filed them. She’d done all their joint returns in past years, but this time Andy never got a copy, although he asked.
Andy claims he never got wind of Ms. Smith’s shenanigans until the next year, when the 1099-Rs hit the fan, and he never got any benefit from the cash she stole.
IRS says Section 408(d)(1) says IRA distributions are taxable to the “distributee” or “payee”, and that was Andy.
No, says Judge Marvel, Section 408(d)(1) doesn’t define those terms. “The taxable distributee under section 408(d)(1) may be someone other than the recipient or purported recipient eligible to receive funds from the IRA. Indeed, we have previously rejected the contention that the recipient of an IRA distribution is automatically the taxable distributee. See Bunney v. Commissioner, 114 T.C. at 262.” 2013 T. C. Memo. 19, at p. 13.
So now we have a case of first impression (which is why this is a T. C. and not a Memo.): is payment based on forged documents, of which the true owner was unaware and from which he got no benefit, a taxable distribution?
No, of course not.
Andy testified he signed nothing, got nothing and knew nothing until he got the 1099-Rs, showing he’d been robbed. No economic benefit, no participation, and no legal obligation to make payment. This last point distinguishes Andy’s case from Vorwald, 1995 T. C. Memo. 15, because Vorwald’s IRA was grabbed to pay court-ordered child support, so did serve to discharge a legal obligation and was thus like writing Vorwald a check and having Vorwald write his spouse a check. Andy didn’t owe Ms. Smith nuthin’, at that point.
Andy is off the hook, right?
Not yet, says IRS. Under State law, Andy had a year to go back to the custodians of his IRAs, make a claim they paid on a forged instrument, get back the money, and treat it as a rollover contribution (and thus not taxable), per PLR Priv. Ltr. Rul. 201119040 (May 13, 2011). How a PLR is authority for anything is another story, but Judge Marvel lets it pass.
Even if Andy could have done (which he didn’t), he had a year to do it, and that throws the question of his ratifying the distribution by his non-action into a year not before the Court.
One last try. IRS claims Andy got the benefit of the cash Ms. Smith grabbed by way of a credit in the divorce decree two years later. But that was also after the year at issue, so no constructive or ratified distribution to Andy in that year.
Judge Marvel makes this clear: “We express no opinion as to whether petitioner’s failure to exercise available remedies under [State] law resulted in a constructive distribution from the IRA accounts in a later tax year.” 141 T. C. 19, at p. 22, footnote 18.
My comment: And they’re all probably closed years by now, anyway.
Andy’s on the hook for Ms. Smith’s erroneous 2008 tax return, because he took no steps to correct (amend) it, and he concedes he didn’t report some interest income, and underreported some wages. So he may get the Section 6662(d)(1)(A) 20% substantial underpayment based on substantial understatement chop on that money, but not on the IRA theft.
Of course, he can’t rely on Ms. Smith as preparer, even if the criminal charges against her were dismissed.