In Uncategorized on 04/27/2015 at 17:23

No, this is not a retelling of the tale of one who wastes his substance in riotous living. This son wastes his substance on his siblings, because his lawyer’s paralegal was a trifle imprecise in the advice the son was given.

Having, I trust, whetted your appetite, I give you Elroy Earl Morris and Darlene Morris, 2015 T. C. Memo. 82, filed 4/27/15, hot from the rollers of Judge Lauber’s word processor.

Elroy was a good son. When Papa George went to a better place, Elroy got Papa George’s IRA, as Elroy was the sole beneficiary thereof. And as we all know, the named beneficiary of an IRA trumps wills, intestacy, deathbed declarations and you-name-it.

Settling Papa George’s estate, Elroy interfaced with his lawyer’s para, who told him that no tax was due. What the para meant was that no Federal estate tax or State inheritance tax was due, and that was true enough.

But since Elroy took a lump-sum distribution so he could split Papa George’s cash with his siblings, as he thought Papa George would have wanted, rather than a five-year payout or a retitling of the account,  there was income tax. Plenty of income tax. And Elroy gets nailed.

Elroy claims he relied on the para, and IRS drops the 20% chop post-trial. But the $27K in tax is there.

“Petitioner at trial did not seriously dispute that the IRA distributions he received were subject to Federal income tax. Nor did he assert that he was required to transmit the IRA distributions to someone else as a trustee or a mere conduit. But he contends that it would be inequitable to hold him solely liable for this tax because he voluntarily shared the proceeds with his siblings, from whom he is unlikely to recover anything. He further contends that he was disadvantaged by what he believes to have been erroneous advice from the law firm that assisted him in settling his father’s estate.” 2015 T. C. Memo. 82, at p. 5.

OK, so post-trial IRS caved, and the erroneous advice saved Elroy from the penalty as aforesaid.

Judge Lauber is less overtly sympathetic than Judge Goeke (as to whom see my blogpost “Good Luck, And Sorry ‘Bout That”, 4/24/15), but he does feel for poor Elroy, the prodigal son.

“Although petitioner acted honorably in executing what he believed to be his father’s wishes, his good conduct has no bearing on whether the IRA distributions were includible in his gross income under the Internal Revenue Code. And whereas the advice he thought he received from the law firm might have affected his liability for the accuracy-related penalty, it is irrelevant in determining the taxable status of the distributions themselves. “ 2015 T. C. Memo. 82, at p. 6.

If you’re getting an IRA and taking a lump-sum, as far as IRS and Tax Court are concerned, you might as well go for the riotous living. Because if you split with your relatives, you know what will happen.


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