Attorney-at-Law

THE CASE OF THE SICK ANNUITANT

In Uncategorized on 09/01/2016 at 15:45

Bruce W. Peterson thought he was in good hands as a flogger of insurance and financial products for the aforesaid good-handers, until Allstate Insurance dropped him as an EE but engaged him as an IC. He took no part in the class action brought by the disgruntled ex-EEs, but he did take his Allstate pension payout and put it in a SEP-IRA.

He thereupon bought a single-payment annuity with the funds from said payout, which got properly placed in his SEP-IRA.

OK, you’ll say, so why are you blogging Bruce W. Peterson and Lisa A. Peterson, 2016 T. C. Sum. Op. 52, filed 9/1/16?

It’s not the variance between the 1099-R Bruce got when he cashed in the annuity and pocketed the proceeds and the letter he got from the issuer that stated a lesser amount, when Bruce put the greater amount on line 15a of his 1040 but left it out of line 15b. That set off bells for IRS, but not for me.

It’s about the Section 72 medical out.

Bruce claims he had heavy medical expenses. He drew down the entire annuity because, although the first medical bill was a lot less, he was told he might have further complications, as to which the trial record speaketh not.

Bruce trots out Publication 590, the IRA bible. Everyone agrees he was sick to the tune of a little less than 10% of what he took.

Judge Paris says Bruce got it wrong, and didn’t ask his accountant. Moreover, he got his authority from the wrong place.

“The flaw in petitioner’s argument is that the section on early distributions on which he relies concerns the 10% additional tax assessed on early distributions under section 72(t).  Petitioner was 60 years old when he received the [SEP-IRA] distribution; therefore, the additional tax under section 72(t) does not apply.

“Petitioner has confused an exception to the additional tax for an early distribution for unreimbursed medical expenses with the general rule that any distribution from an annuity contract will be includible in gross income.  The fact that petitioner used a portion of the distribution to pay medical expenses does not shield the distribution from taxation.” 2016 T. C. Memo. 52, at pp. 9-10. (Footnote omitted).

And he’s in for the full boat, because he paid for the annuity with pre-tax dollars from the good-handers, and put in no post-tax cash; therefore zero basis.

Finally, Bruce is in the accuracy-chop stakes. “Petitioner testified that he gave all of the pertinent documents to his accountant and that ‘it takes about 15 minutes to do his taxes’.  Petitioner did not review the return after his accountant prepared it and did not ask his accountant about the discrepancy between the amount on the Form 1099-R, which was attached to his return, and the amount in the [issuer’s] letter.  Taxpayers have a duty to review their tax returns before signing and filing them.” 2016 T. C. Sum. Op. 52, at p. 12.

Bruce also never asked his accountant about basis in his SEP-IRA annuity.

This doesn’t help Bruce. “Because of petitioner’s experience as a financial and retirement investment adviser, his failure to seek his accountant’s advice about his annuity contract and the cancellation of the contract and the distribution…, and his failure to review his…return, the Court finds that he failed to prove that he acted with reasonable cause and in good faith in his effort to assess his proper tax liability.  Therefore the Court will sustain respondent’s determination of an accuracy-related penalty for an underpayment due to a substantial understatement of income tax.” 2016 T. C. Sum. Op. 52, at p. 12-13.

It may take 15 minutes to do your taxes, but give it a few more minutes to review them once you’re done.

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