The first Friday after Labor Day appears to be a new Tax Court festival, as we have appearances by Alvin Sheldon Kanofsky (see my blogposts “Two Old Rounders,” 7/31/14, “Ten’ll Get Ya Twenty,” 2/26/15, and “Footnotes,” 6/10/16); Alfred Joe Izen, Jr., (see my blogposts “The $2000 Misunderstanding,” 6/12/12, and  “Try, Try Again,” 1/16/13);  and Carol Diane Gray (see my blogposts “Too Late But Still Timely,” 3/28/12, “Too Late and Not Timely,” 4/25/13, and “Fan Mail? – Not Exactly,” 6/27/14).

But here’s that Obliging Jurist, Judge David Gustafson, who watches, like Keats’s astronomer, new rounders swim into his (and my) ken.

Stand by for some “somber reasoning and copious citation of precedent” as Frances M. Scott and Galen L. Amerson, Docket No. 26717-14, filed 9/9/16, debut in a designated hitter.

Fran and Galen want a jury trial in Tax Court. Wrong, the US Constitution says only at common law, and suits against the sovereign, i.e., the U.S. of A., were barred at common law, and the Supremes so held in 1855. Nobody told you to sue in Tax Court, guys. If you want a jury trial, you can get a jury trial in USDC if you pay up, apply for a refund, don’t get it and sue timely.

Fran and Galen claim all judges have a conflict of interest, because the US pays them. Well, then, the Rule of Necessity says Judge Gustafson keeps the case.  Otherwise, both parties would have no place to try their case.

Next is the old Bill Benson number that Sixteenth Amendment wasn’t ratified.

Judge Gustafson: “Petitioners must have noticed that in the intervening 30 years, income tax returns have continued to be required and filed, and income taxes have continued to be paid by taxpayers, collected by the IRS, and enforced by the courts. In fact, litigation involving Mr. Benson himself has shown his theory to be without merit.” Order, at pp. 2-3.

Seventh Circuit bounced Bill’s criminal appeal, when he argued this one, back in 1991.

Fran and Galen aren’t done yet. They want their petition dismissed.

The problem with that, of course, is Section 7459(d) says OK, then you owe IRS whatever they demanded. Obliging Judge Gustafson isn’t that obliging. But he has some good advice for Fran and Galen.

“Petitioners are urged to forego the frivolous arguments advanced in their motion to dismiss and, instead, to prepare to litigate valid issues at the trial of this case.” Order, at p. 3.

Go try the case, guys.

Oh yes, don’t forget the Section 6673 $25K frivolity chop.

Judge Gustafson isn’t through for the day. He still has Rodney W. Gattie, Docket No. 7077-15, filed 9/9/16, which isn’t designated but still fits today’s bill. Rod did answer IRS’ Rule 91(f) motion, and Judge Gustafson lets Rod off the hook. “We use Rule 91(f) procedures not to adjudicate the reasonableness of the parties’ positions nor to prejudge their competing contentions, so we will discharge our order to show cause.” Order, at p. 1. Asked and answered, as I said in my blogpost of that name back on 12/24/13.

But Rod may be gameplaying. “However, we observe that Mr. Gattie seems to be contending that amounts he received as reported on Forms 1099 are not income to him because they were not received by him in connection with ‘the function of a public office’. His contention appears to rely on section 7701(a)(6) (providing that ‘[t]he term “trade or business” includes the performance of the functions of a public office’), and appears to assume that ‘includes’ means ‘includes only’–an assumption flatly contradicted by section 7701(c) (‘The terms “includes” and ”including” when used in a definition contained in this title shall not be deemed to exclude other things otherwise within the meaning of the term defined’). This contention is frivolous. If Mr. Gattie makes such a contention at trial in this case, he should not expect to receive from the Court a lengthy opinion refuting it.” Order, at pp. 2-3.

Expressio unius exclusio alterius, as those of us who attended high-priced law schools say, is off the table here.

Rod, Judge Morrison warned you a year ago in an off-the-bencher not to try this stuff.

Judge James S. (“Big Jim”) Halpern takes as his text for today’s designated hitter the words of Bert Bacharach’s 1964 hit, but Judge Big Jim leaves me puzzled. Let’s see if you’re the same.

Rhonda T. Jones, Docket No. 14933-15, filed 9/8/16, looks like a routine summary J for IRS, as Rhonda didn’t respond to the motion, despite being given thirty days to do so.

But IRS’ counsel throws a curveball in her declaration in support.

“We recognize that the notice of deficiency reflects a deficiency of $2,043.00…. Please note that this amount does not take into account the withholding $1,530.00 that will be treated as a payment toward the balance due…. Accordingly, the balance due…is actually $513.00, plus interest.” Order, at p. 1.

OK, so the SNOD was wrong on the numbers. And IRS counsel admits it was. That’s a concession, no? Or did I miss something?

Now what does Judge Big Jim do?

He orders and decides a deficiency of $2,043.00.

And he adds a pious hope. “We assume that the facts stated in that paragraph will be taken into account in any collection action.” Order, at p. 1.

How the collections people are supposed to understand this, and take it into account, when the decision says $2,043.00, is nowhere stated. Telepathy?

And why burden collections with this?

Didn’t IRS concede that the actual tax due was $513.00, plus interest? So why not state that amount in the decision directly?

I’m confused.

I cannot, in a blog meant for family reading, repeat the old joke about those who forfeit the earnest money, contract deposit or downpayment (known to the trade as “the down”) in a real estate transaction and do not sue for its return.

Judge Laro has some discouraging words for the fortunate parties who get to keep a dropped down in CRI-Leslie, LLC, Donald W. Wallace, Tax Matters Partner, 147 T. C. 8, filed 9/7/16.

It was Florida in 2008, and CRI was selling a hotel for $39.2 million, with $9.7 down. That’s all you need to know.

So $9.7 million wound up with CRI, and they claimed capital gain, as the property as to which the down was dropped was a hotel and restaurant. Using Section 1234(a), CRI argues that, as the hotel and restaurant are clearly Section 1231 depreciable property used in a trade or business, and as such property gets capital gains on sale at a gain pursuant to Section 1231(b)(1), what’s the beef?

Well, says IRS, Section 1234(a) doesn’t apply to Section 1231 property. The relevant law is Section 1234A. Section 1234A certainly takes in capital assets (see Section 1221(a)), but Section 1221(a)(2) expressly excludes Section 1231 property.

Everyone agrees that if CRI had sold the property itself, that would have been taxed as a capital gain per Section 1231. So why different treatment to the dropped down? CRI claims that when 1234A was enacted, Congress was concerned that some transactions were taxed differently from others. So the statute may be ambiguous, but Congressional intent is not. All capital gains are the same.

IRS’ counter? “Capital asset” means capital asset. Plain meaning. Section 1221 defines capital asset, which excludes Section 1231 property, and, although gains on the sales of Section 1231 property are taxed as capital gains, Section 1231 property isn’t a capital asset.

Judge Laro: “Since section 1234A expressly refers to property that is ‘a capital asset in the hands of the taxpayer’ and no other type of property, and since property described in section 1231 is excluded explicitly from the definition of ‘capital asset’ in section 1221, we must conclude that the plain meaning of ‘capital asset’ as used in section 1234A does not extend to section 1231 property.  We therefore are not convinced by petitioner’s argument that the statute is inherently ambiguous.” 147 T. C. 8, at pp. 16-17.

Now I guess you’re expecting a reference to Pilgrim’s Pride, more particularly as bounded and described in my blogpost “Just Walk Away? – Part Deux,” 3/10/14, as amended.

Judge Laro canvasses the Pilgrims, as well as a bunch of other cases, but finds nothing to change the result.

“Although in Pilgrim’s Pride we dealt with an issue different from that with which we deal here, our analysis of the statute’s purpose remains unchanged:  Congress originally enacted section 1234A to combat ‘straddles and other transactions exploited by tax shelter promoters’ and in 1997 extended the statute’s application “to all types of property that are (or on acquisition would be) capital assets in the hands of the taxpayer.” The Court of Appeals for the Fifth Circuit reversed our ultimate decision in Pilgrim’s Pride and held that section 1234A applies to the abandonment of rights or obligations with respect to capital assets but not to the abandonment of the assets themselves.  However, the Court of Appeals did not dispute our interpretation of the legislative purpose underlying the enactment of section 1234A.  The Court of Appeals further reiterated the understanding, underlying the entire body of section 1234A jurisprudence, that ‘[b]y its plain terms, § 1234A(1) applies to the termination of rights or obligations with respect to capital assets (e.g. derivative or contractual rights to buy or sell capital assets).’”  147 T. C. 8, at p. 21. (Citations omitted).

The Virgin Islands, that is, as we come to what seems to be the end of the wannabe Virgins, the daughters of la famille Vento, in Renee Vento, et al, 147 T. C. 7, filed 9/7/16, with Judge James S. (“Big Jim”) Halpern bidding a none-too-fond farewell to the Vento daughters (Renee, Nicolle and Gail). Mom and Dad slid under the IRS tag and got VI residency for the year at issue, courtesy of the USCA Third Cir. and the loosey-goosey rules then in effect.

You’ll remember la famille Vento, surely? No? See my blogposts “The Non-Virgin Islanders,” 3/13/11, “Catching Up,” 9/30/13, and “Competent Authority,” 6/15/15.

Now that you’re caught up, the Ventos, having been stripped of their VI residency, want a foreign tax credit for the money they gave the VIBIR (Virgin Island Bureau of Internal Revenue), wherewith to apply against their US hits. I’m going to give their attorneys a Taishoff “Good Try, Second Class,” for that move.

The Ventos paid US estimateds, but these were sent to the VI when the Ventos claimed VI residency for the year at issue.

Then, when their claims to VI residency unraveled,  one of them filed a 1040X with the VIBIR, asking for her money back, but the VIBIR marked the file “closed” and gave her nothing.

The principle here is the “equality principle.” The idea is to treat VI tax as equivalent to US tax, but for the mirror image rule, which makes VI tax treatment equal to US tax treatment. Thus, a tax paid to VI is equivalent to a tax paid to a US State, so it could get Section 164 deductibility, but not Section 901 credit.

Anyway, what the Ventos paid VIBIR wasn’t a tax, because they weren’t obligated by law to pay VIBIR; they admit they had no VI-sourced income for the year at issue. And whatever their states of mind as regards the uncertainty of the law at that time (pre-2004, when residence rules clamped down on phony Virgins), the USDCVI and Third Cir. had no problem blowing off their claims.

“Petitioners claim that, because ‘there was no clear authority on determining residency in the Virgin Islands for [year at issue]’, the position that they were bona fide residents of the Virgin Islands and thus required to pay Virgin Islands income tax for that year was a ‘reasonable interpretation’ of applicable law.  The absence of clear authority in regard to an issue, however, does not establish the reasonableness of all possible means of resolving it.  The record includes no evidence that petitioners relied on the advice of competent advisers in taking the position that they were bona fide residents of the Virgin Islands….  Neither the U.S. District Court for the District of the Virgin Islands nor the Court of Appeals for the Third Circuit had any apparent difficulty concluding that petitioners were not bona fide residents of the Virgin Islands for [year at issue].  Of course, the courts’ decisions against petitioners do not, by themselves, establish that petitioners’ claims to bona fide Virgin Islands residence for 2001 were not based on reasonable interpretations of the applicable law.  But, as we read their opinions, the courts did not seem to find the decision a close one.” 147 T. C. 7, at 18. (Citations omitted).

And before the SOL ran on the Ventos’ chance to get back the payments they made to VIBIR, the 2004 rules were moving along, giving them a chance to beat the clock. But they didn’t. And Mom and Dad had much better cases than the Ventos, so Mom and Dad getting by proves nothing.

There’s no need to take a foreign tax credit, as whatever is paid to VIBIR for VI-sourced income is applied to the VI tax, and the remainder applied to US tax, so the VI-sourced income is taxed only once.

“A section 932(a) taxpayer (non-Virgin Islands resident) similarly has no need to credit Virgin Islands taxes paid under section 901 to reduce her U.S. tax liability.  Section 932(a) taxpayers, again, compute a single U.S. tax and allocate part of that tax to the Virgin Islands.  Sec. 932(a) and (b).  As a result of the required allocation, a section 932(a) taxpayer effectively pays tax to the Virgin Islands on her Virgin Islands income and pays tax to the United States on her remaining income.  In short, the coordination scheme implemented by section 932 provides sufficient means to prevent the same income from being subject to both U.S. and Virgin Islands tax.” 147 T. C. 7, at pp. 24-25.

Here’s how the Ventos’ lawyers earned their “good try, second class.”

“Petitioners’ rather unusual situation might have given them an opportunity to slip through a crack in the statutory framework.  The literal terms of section 932(a)(3) do not deny petitioners the credits in issue because no petitioner earned as much as a dollar of Virgin Islands income.  We cannot imagine, however, that, while Congress did not intend to allow a foreign tax credit for Virgin Islands taxes paid by bona fide residents of the Virgin Islands or by non-Virgin Islands residents with Virgin Islands income, it nonetheless intended to allow a credit under section 901 for amounts paid as tax to the Virgin Islands by a taxpayer who is not a bona fide resident of the Virgin Islands, has no Virgin Islands income for the year in question, and thus did not actually owe tax to the Virgin Islands for that year.” 147 T. C. 7, at p. 28.

VIBIR should have disgorged, but didn’t. So, while Judge Big Jim has some sympathies that the Ventos are paying twice, their purported move to the VI would have saved them $9 million in taxes if it worked.

Many years ago that phrase was used to describe a Super Bowl loss, but Judge Gerber is stuck with the result in Eric L. Cox, 2016 T. C. Sum. Op. 53, filed 9/6/16. Though I remember a colleague claiming Judge Gerber was pro-IRS, he wasn’t so here.

He was confronted with “…(1) an anomalous circumstance where petitioner might have been able to successfully contest the underlying liabilities and (2) the resulting question of whether it was an abuse of respondent’s discretion not to permit him to attempt to do so.” 2016 T. C. Sum. Op. 53, at p. 5.

IRS hit Eric with TFRPs for an outfit Eric claimed he’d sold before the quarters at issue, and he showed documentary proof thereof at the Tax Court trial, but his notice of appeal from the Letter 1153 was delivered and mailed one (count it one) day late.

Letters 1153 are notices sufficient to trigger the right of appeal, and sixty days means sixty days. Eric was a day late and a lot more than dollar short. Of course, Eric can pay one quarter and sue in USDC or USCFC.

Still, says Judge Gerber “It seems curious that respondent [IRS] would not consider petitioner’s evidence because it could have saved the Government and parties time, effort, and expense if petitioner had been able to easily show that he was not liable for the TFRP liabilities.  We understand that respondent was precluded from considering petitioner’s appeal of the proposed assessment because it was untimely, but respondent is not otherwise statutorily prohibited from considering petitioner’s arguments during the CDP hearing (after an assessment has already been made). Nevertheless, this Court’s role is to review what has transpired and to decide whether there has been an abuse of discretion.  Because respondent was not required to consider petitioner’s underlying liabilities as part of the CDP hearing, respondent’s failure to do was not an abuse of discretion.” 2016 T. C. Sum. Op. 53, at pp. 6-7.

And the SO filled in all the blanks on the checklist, so no abuse of discretion.

But Not Here

Ex-Ch J Michael B (“Iron Mike”) Thornton welcomes us back from the three-day end-of-summer layoff with Elliot Herskowitz, Docket No. 21233-15L, filed 9/6/16. And no, he didn’t designate it. Apparently ex-Ch J Iron Mike feels I should work harder.

IRS liened on Elliot for some back taxes. Elliot told Appeals “…he has a ‘history of making excessive estimated payments, the liability…should be reversed, or, at a minimum, the interest and penalties should be reversed.’” Order, at p. 1.

He had a phone-a-thon CDP, and the liens got sustained.

Then IRS grabbed the “excessive payment” Elliot made for a subsequent tax year, applied it to the liabilities that gave rise to the NFTLs plus penalties, and gave Elliot a NOD.

The NOD said, “nothing due, no further action.”

Elliot petitions. “The sole assignment of error in the petition was: ‘Due to exigent circumstances the penalties and interest should be waived.’” Order, at p. 2.

Of course waiving interest is a nonstarter.

IRS answers: “(1) this case is moot because there remains no unpaid Federal income tax liabilities for the years at issue and the liens underlying the NFTLs have been released; and (2) the Court lacks jurisdiction to determine an overpayment or to order a refund or credit of taxes.” Order, at p. 2.

Elliot comes to the point. IRS consented to jurisdiction when they issued the NOD, which says I should go to Tax Court timely, which I did. Oh, and check out my prior liabilities and the penalties.

Ex-Ch J Iron Mike: “The Tax Court is a court of limited jurisdiction; we may exercise jurisdiction only to the extent expressly provided by statute, see, e.g., Henry Randolph Consulting v. Commissioner, 112 T.C. 1, 4 (1999), and the parties’ consent does not confer on this Court’s [sic] jurisdiction not otherwise so provided. High Adventure Ministries, Inc. v. Commissioner, 80 T.C. 292, 297 (1983).” Order, at p 2.

Judge, didn’t you mean “the parties’ consent does not confer on this Court jurisdiction not otherwise so provided”?

Howbeit, from a CDP all Tax Court can do is sustain or deny the lien or levy. If there is neither lien nor levy, game over at 400 Second Street, NW. And all of IRS’ piety and wit don’t mean a thing.

“Whatever other advice or instructions respondent might have given petitioner does not make it otherwise. If petitioner seeks a refund or overpayment credit, then any legal remedy would lie in the United States District Court or the United States Court of Federal Claims rather than in this Court.” Order, at p. 3.

And the offset per Section 6402 is not a levy per Section 6330. See my blogpost “An Offset Isn’t a Levy,” 2/21/12.

When IRS tries this Scriptural gambit, it doesn’t fly with The Great Dissenter, a/k/a The Judge Who Writes Like a Human Being, s/a/k/a The Incomparable, Incontrovertible, Irrefragable, Indomitable, Ineluctable, Ineffable, Illustrious and Indefatigable Foe of the Partitive Genitive, and Old China Hand, Judge Mark V. Holmes, in his second designated hitter of the day, Michael V. Shannon & Hope W. Shannon, Docket No. 16441-12, filed 9/2/16.

I’m ready for a dark rum and cola with a big chunk of lime just about now, but Judge Holmes has “a couple pretrial motions pending”, Order, p. 1 [sic], before sending IRS and Mike & Hope off to try their troubles in Birmingham.

Mike’s & Hope’s trusty lawyer, whom I’ll call Chris, hits IRS with some discovery demands, which Judge Holmes doesn’t even itemize as he grants them.

Then Chris throws a couple requests (hi, Judge Holmes) for admissions (RFAs) at IRS, which here in NY State we call notices to admit, and I love them. Very useful tool, cheap and easy.

IRS ripostes with the title of this blogpost.

“For RFAs 1, 6, and 7 respondent objected on the basis that the burden of proof is on petitioners. The Court agrees with petitioners that this is not a good ground for objection. These RFAs seek to show that respondent doesn’t know of facts to justify its litigating position on the issues described. Petitioners are not, by seeking this information, trying to shift the burden of proof; they are trying to find out if respondent has relevant information. We’ve said for forty years that this sort of simplification of pretrial preparation is one of the aims of the request-for-admissions tool. See Estate of Allensworth, 66 T.C. 33, 39 (1976).” Order, at p. 1.

But IRS may have a save. “In his answers to RFAs 9 and 10 respondent made the same objection but coupled it with a cross-reference to earlier denials that were sufficient. The Court will overrule the objection and require a better response to these, but recognizes that a denial-with-cross-reference might well suffice.” Order, at p. 2.

Chris wasn’t wrong to try those RFAs. The previous answers might not fly, when explicated.

Next, maybe Chris and Judge Holmes both read my blogpost “Stipulated but Irrelevant,” 8/30/16.

“Respondent also objected to RFA 11 on the additional ground that it concerned how respondent made a determination that was reflected in the notice of deficiency. This is generally a good objection…, but it is an objection as to relevance. Our Rule 90(c) is clear that such an objection should be noted but ‘is not to be regarded as just cause for refusal to admit or deny.’” Order, at p. 2.

It’s the old “past isn’t even prologue, never look behind the SNOD” defense, but that’s only relevance, not fact.

Chris gets a Taishoff “Good Job, First Class.”

The highly exalted source from which the title is taken once again proves how apposite that source can be.

This time the story proving the point is told by The Great Dissenter, a/k/a The Judge Who Writes Like a Human Being, s/a/k/a The Incomparable, Incontrovertible, Irrefragable, Indomitable, Ineluctable, Ineffable, Illustrious and Indefatigable Foe of the Partitive Genitive, and Old China Hand, Judge Mark V. Holmes.

Sir W. S. Gilbert to the contrary notwithstanding,  the Merriman is the maid, Merriman R. Mathewson, Docket No. 12087-10, filed 9/2/16.

As the old wedding ceremony had it, Merri’s husband endowed Merri with his worldly goods, but they included a pre-marital thwacking great deficiency from a listed transaction that he carried over onto their MFJ return, plus, at no extra charge, a 40% valuation chop.

Merri wants innocent spousery, but her problem is what she knew.

She tries the Lennon-McCartney 1966 gambit: “I said, even though you know what you know, I know that I’m ready to leave.”

That doesn’t get it with Judge Holmes. “Mathewson argues that whether she knew or had reason to know of her husband’s understatement is irrelevant because the loss carryforward was attributable to the …tax year, before they were married. We can assume that’s true — but the standard in section 6015(b) is whether the spouse requesting relief knew or had reason to know of an understatement of tax. I.R.C. § 6015(b)(1)(C).” Order, at p. 2 (Footnote omitted, but it says it doesn’t matter that Merri didn’t know about the chop; all she needed to know was the understatement of tax.)

Now generally (I love that word), innocent spousery is a question of facts and factors, with much marching and counter-marching around the Section 6015 prickly pear.

But Merri lets the feline poke its wee nose out of the cliché, and that’s the point of this blogpost (and I can hear my readers say, “There is one?”).

“Mathewson has not provided any facts necessary for a determination of her knowledge. Indeed, she concedes that she ‘might not be able to establish that she had no reason to know that Respondent might not assert a deficiency in tax . . . against [her husband]… based on the carryforward … of unused capital loss of[his] from his participation in… the…Tax Shelter.’” Order, at p. 2.

Tell it not in Gath.

See my blogpost “Take the Hint,” 11/25/15. I don’t know if Harjit Bhambra, Docket No. 1395-16L, filed 9/2/16, read it when it came out (or thereafter), but Judge James S. (“Big Jim”) Halpern echoes the words he spoke back then in this latest designated hitter.

IRS wants a remand, Harj objects, so Judge Big Jim runs a phone-a-thon.

He adjures Harj: “The Court pointed out to petitioner that, in general, the taxpayer bears the burden of proof, see Rule 142(a), Tax Court Rules of Practice and Procedure, and that he might benefit by a remand to clarify facts. We also pointed out that if defects in respondent’s determination procedures are proved at trial, the Court might at that time remand the case.” Order, at p. 1. (Emphasis by the Court).

Harj continues to object. So Judge Big Jim ships him and IRS off to trial, with a savings clause: “We believe that the case can proceed to trial without a remand.” Order, at p. 1.

So I’ll echo my words from last November:  “But when a Judge suggests you might think about a remand, do think, and think twice. You might reject the suggestion if you don’t want to give Appeals a second chance to sink your client. But you might take the hint if you think you have enough good stuff to win at Appeals.” Blogpost op. cit.

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.