Respondent determined a deficiency in petitioner's 2008 Federal income tax of $13,783 and an accuracy-related penalty of $3,357 under section 6662(a).
FINDINGS OF FACT
Some of the facts have been stipulated and are so found. The stipulation of facts is incorporated herein by this reference. Petitioner resided in the State of Washington when he petitioned this Court.
In 1990 petitioner married Cristie Smith (Ms. Smith). During 2008 petitioner was an employee of the U.S. Air Force, and Ms. Smith was an employee of Bethel Transportation. Petitioner and Ms. Smith separated for a period in 2008, permanently separated in January 2009, and were divorced in March 2010.
II. Financial Accounts
Petitioner and Ms. Smith maintained joint checking accounts at Washington Mutual and Harborstone Federal Credit Union (Harborstone).
III. IRA Withdrawals
A. IRA Accounts
Petitioner owned IRA accounts at AIG SunAmerica Life Insurance Co. (SunAmerica) and ING.
B. SunAmerica IRA
In September 2008 SunAmerica received a request purportedly from petitioner to withdraw $9,000 from his SunAmerica IRA. Petitioner did not make the request, and he did not authorize anyone else to make it on his behalf. SunAmerica received the withdrawal request from a fax machine at Bethel Transportation. Petitioner did not ask Ms. Smith or anyone else at Bethel Transportation to fax the withdrawal request to SunAmerica.
The withdrawal request is signed "Andy Roberts". The signature is not petitioner's signature and was forged.
SunAmerica issued a check made payable to petitioner from his SunAmerica IRA pursuant to the faxed withdrawal request. The SunAmerica check was endorsed "Andy Roberts" and was deposited into the Washington Mutual account. Petitioner, however, did not endorse the SunAmerica check, and he did not authorize anyone to sign the check on his
C. ING IRA
Petitioner did not make any request for any distribution from his ING IRA account during 2008.
IV. Use of Misappropriated IRA Funds
Petitioner did not receive the ING and SunAmerica IRA distribution checks during 2008, and he was unaware that the checks had been issued. Petitioner also was unaware that the IRA distribution checks had been deposited into the Washington Mutual account.
We infer from the record and find that Ms. Smith or someone on her behalf forged petitioner's signature on each of the
Petitioner first learned of the unauthorized withdrawals from his IRA accounts when SunAmerica and ING issued to him Forms 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., in 2009. When he received the first Form 1099-R, petitioner thought that he had been the victim of a theft, but he had no reason to believe at the time that Ms. Smith was involved. By the time of his divorce proceeding in 2009, however, petitioner had learned that Ms. Smith had deposited the checks into the Washington Mutual account and had used the proceeds for her benefit.
V. Petitioner's Tax Reporting and Notice of Deficiency
For each year of their marriage until 2008, Ms. Smith prepared and filed a joint income tax return for petitioner and herself. Sometime before April 2009, petitioner, although separated from Ms. Smith, discussed with her the preparation and filing of a joint income tax return for 2008, and he understood from that conversation that he and Ms. Smith would still file a joint return. He gave his tax information to her so that she could prepare the 2008 joint return. However, without telling him, Ms. Smith prepared and filed separate returns for herself and petitioner. Ms. Smith prepared her return for 2008 using married filing separate filing status, but she prepared petitioner's return using single filing status. On petitioner's return Ms. Smith underreported petitioner's wage income by $3,000, claimed an overstated credit for withheld tax (the credit was overstated by $3,000), and omitted $74 of interest income. As prepared, petitioner's return claimed that he was entitled to a refund of a $3,357 overpayment, which was electronically deposited into Ms. Smith's Washington Mutual account.
Ms. Smith filed petitioner's return electronically on April 13, 2009. She did not show the return to petitioner or give him a copy of the return, despite his asking for one. Thus, petitioner did not sign or see his 2008 tax return before its filing. Ms. Smith did not report the withdrawals from the SunAmerica and ING IRAs as income on either the return she prepared for petitioner or her return.
I. Burden of Proof
Ordinarily, the Commissioner's determinations in a notice of deficiency are presumed correct, and the taxpayer bears the burden of proving that the determinations are erroneous. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). The burden of proof shifts to the Commissioner, however, if the taxpayer produces credible evidence with respect to an issue, the taxpayer complied with the substantiation requirements, and the taxpayer cooperated with the Secretary
The U.S. Court of Appeals for the Ninth Circuit, to which an appeal in this case would lie absent a stipulation to the contrary, see sec. 7482(b)(1)(A), (2), has held that for the presumption of correctness to attach to the notice of deficiency in unreported income cases, the Commissioner must establish some evidentiary foundation connecting the taxpayer with the income-producing activity, see Weimerskirch v.
The record contains copies of the Commissioner's computer records that reflect receipt of Forms 1099-R showing taxable distributions of $37,020 to petitioner, and the parties do not dispute that the distribution checks were issued and made payable to petitioner. Because respondent has introduced evidence that petitioner received unreported IRA distributions during 2008, the presumption of correctness attaches to respondent's determination in the notice of deficiency. Petitioner bears the burden of proof with respect to that determination.
Section 408(d)(1) provides that any amount paid or distributed out of an IRA is included in the gross income of the payee or distributee as provided under section 72. Generally, the payee or distributee of an IRA is the participant or beneficiary who is eligible to receive funds from the IRA. Bunney v. Commissioner, 114 T.C. 259, 262 (2000) (citing Darby v. Commissioner, 97 T.C. 51, 58 (1991)). However, this is not always the case. 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.
A. Distributions From Petitioner's IRAs
Petitioner credibly testified that he did not sign the SunAmerica withdrawal request, endorse the SunAmerica IRA distribution check, endorse the ING IRA distribution checks, or authorize any person to do so on his behalf. Indeed, petitioner credibly testified that he did not learn of either the SunAmerica or ING IRA distributions until he received the Forms 1099-R sometime in 2009. Petitioner further testified that he signs his name "Andrew W. Roberts" and dates his signature with the day first, then the month abbreviated, and finally the year. He formed the habit of signing and dating his name in this manner during his time in the military.
The IRA distribution checks were all endorsed "Andy Roberts", and the SunAmerica withdrawal request was not dated in petitioner's customary format. The SunAmerica withdrawal request was faxed from Ms. Smith's place of employment, and all of the IRA checks were deposited into the bank account used by Ms. Smith. We find that Ms. Smith or someone on her behalf, and not petitioner, signed the withdrawal requests and the checks, and that the signatures were made
Petitioner credibly testified that he did not receive the IRA checks, and the record shows that the checks were deposited into an account that was joint in name only; the account was exclusively used by Ms. Smith. Petitioner did not have a checkbook for the Washington Mutual account, did not make any withdrawals from the Washington Mutual account, and was generally unaware of the use of the Washington Mutual account. Ms. Smith, however, routinely used the Washington Mutual account for her personal expenditures, which were often excessive and which generated numerous overdraft charges. We do not find credible Ms. Smith's testimony
B. Parties' Arguments
Respondent takes a strict view of petitioner's obligation to report as income withdrawals from his IRA accounts. He
Petitioner contends that because the IRA withdrawals were made pursuant to forged withdrawal requests, the distribution checks were stolen, the signatures on the distribution checks were forged, and he did not receive an economic benefit from the distributions, we should hold that he is not a payee or distributee within the meaning of section 408(d)(1). Petitioner also contends that under Washington State law, no distribution occurred from either the SunAmerica IRA or the ING IRA because he did not authorize the IRA withdrawal requests or the endorsements on the IRA distribution checks. Therefore, petitioner contends that as a matter of State law no amount was paid or distributed within the meaning of section 408(d)(1).
We first address whether petitioner is a distributee within the meaning of section 408(d)(1) when he did not authorize the withdrawal requests, did not receive or endorse the IRA distribution checks, and did not receive an economic benefit from the distributions. We then address whether petitioner is a distributee within the meaning of section 408(d)(1) because
C. Whether Petitioner Is a Payee or Distributee Within the Meaning of Section 408(d)(1)
As an initial matter, respondent contends that petitioner must include in income the amounts withdrawn from his IRAs irrespective of State law and even though he did not consent to the distributions and was not aware that the distributions occurred. Respondent relies on our opinions in Bunney v. Commissioner, 114 T.C. at 262, and Vorwald v. Commissioner, T.C. Memo. 1997-15, to support his contentions.
In Bunney, we held that the distributee or payee of a distribution from an IRA is generally "`the participant or beneficiary who, under the plan, is entitled to receive the distribution.'" Bunney v. Commissioner, 114 T.C. at 262 (quoting Darby v. Commissioner, 97 T.C. at 58). However, we also rejected the Commissioner's argument in Bunney that the recipient of an IRA distribution is automatically the taxable distributee, noting that "in the context of a distribution from a pension plan the term `distributee' is not necessarily synonymous with `recipient.'" Id. (citing Estate of Machat v. Commissioner, T.C. Memo. 1998-154). We reject respondent's contention that petitioner, as the purported recipient of the IRA distributions, is automatically the taxable distributee under Bunney.
In Vorwald, we held that a distribution of funds from an IRA pursuant to a court-ordered garnishment resulted in a taxable distribution to the taxpayer. The garnishment was ordered to satisfy the taxpayer's child support obligation. The taxpayer in Vorwald did not consent to the distribution from his IRA and did not realize the distribution had occurred until he was notified of the distribution by the Commissioner. Nevertheless, we held that the distribution was income to the taxpayer because it discharged his legal child support obligation and was thus the equivalent of receipt by him.
The distributions from petitioner's IRAs were not court ordered and did not satisfy a legal obligation that petitioner owed to Ms. Smith or any other party. Instead, the distributions
D. Whether Petitioner Is a Distributee or Payee on the Basis of Ratification or His Failure To Assert a Claim for an Unauthorized Payment
Respondent further contends that petitioner had one year to discover and report the unauthorized signatures and that petitioner's failure to so report precludes any remedies under Washington law, thus making the distributions taxable to petitioner. In other words, according to respondent, State law would not require ING and SunAmerica to restore any amounts paid out of petitioner's IRA accounts since he did not report the unauthorized signatures within one year. Therefore, respondent contends that petitioner received a distribution within the meaning of section 408(d)(1).
Under Washington's version of the Uniform Commercial Code (U.C.C.), notwithstanding care or lack of care, for an account of an individual the individual must discover and report an unauthorized signature within one year. See Wash. Rev. Code Ann. sec. 62A.4-406(f) (West 2003). If the individual does not do so, he may not recover for the unauthorized signature. Id. But, even if Wash. Rev. Code Ann. sec. 62A.4-406(f) precludes a remedy to petitioner against ING and SunAmerica, that does not mean that as of the end of 2008 petitioner had received a taxable distribution from his IRA accounts.
On the basis of the foregoing, we hold that petitioner is not a distributee or payee within the meaning of section 408(d)(1) because the IRA distribution requests were unauthorized, the endorsements on the checks that were issued pursuant to the requests were forged, he did not receive the economic benefit
III. Section 72(t) Additional Tax
Section 72(t)(1) provides for a 10% additional tax on early distributions from qualified retirement plans, unless the distribution falls within a statutory exception. Because we hold that the withdrawals from petitioner's IRA accounts at SunAmerica and ING were not distributions taxable to him under section 408(d)(1) in 2008, he is not liable for the section 72(t) additional tax.
IV. Filing Status
Although petitioner does not discuss his filing status on brief and therefore could be deemed to have waived or abandoned that issue, see Muhich v. Commissioner, 238 F.3d 860, 864 n.10 (7th Cir. 2001), aff'g T.C. Memo. 1999-192, we briefly explain why we sustain respondent's determination of petitioner's filing status. The determination of whether an individual is married for purposes of determining filing status is made as of the close of the taxable year. Sec. 7703(a)(1). Under certain circumstances, a married taxpayer may be treated as unmarried if he or she lives apart from his or her spouse during the last six months of the taxable year. See sec. 7703(b).
The parties agree that petitioner and Ms. Smith were still married on December 31, 2008, and that they were not separated for the last six months of the year. Accordingly, the single filing status that Ms. Smith used in preparing petitioner's separately filed 2008 return was erroneous. We find that petitioner's correct filing status for 2008 under these circumstances was married filing separately.
V. Accuracy-Related Penalty
Respondent contends that petitioner is liable for the section 6662(a) penalty because petitioner's underpayment was attributable to a substantial understatement of income tax.
The Commissioner bears the initial burden of production with respect to the taxpayer's liability for the section 6662 penalty. Sec. 7491(c). At trial the Commissioner must introduce sufficient evidence "indicating that it is appropriate to impose the relevant penalty." Higbee v. Commissioner, 116 T.C. at 446. Once the Commissioner meets his burden of production, the taxpayer must come forward with persuasive evidence that the Commissioner's determination is incorrect or that the taxpayer had reasonable cause or substantial authority for the position. Id. at 446-447.
A taxpayer may avoid liability for the section 6662 penalty if the taxpayer demonstrates that the taxpayer had reasonable cause for the underpayment and that the taxpayer acted in good faith with respect to the underpayment. Sec. 6664(c)(1). Reasonable cause and good faith are determined on a case-by-case basis, taking into account all pertinent facts and circumstances. Sec. 1.6664-4(b)(1), Income Tax Regs. The most important factor is the extent of the taxpayer's efforts to assess his or her proper tax liability. Id.
We have found that petitioner is not liable for income tax in 2008 related to the payments from his SunAmerica IRA and his ING IRA. However, petitioner conceded that he failed to report certain interest income and that he underreported wage income for 2008. Additionally, we have found that petitioner's proper filing status for 2008 is married filing separately. Although petitioner did not see his tax return before Ms. Smith filed it on his behalf and he did not sign it, he did not disavow the return, nor did he file a different return for 2008. Petitioner did not introduce any evidence to
We have considered the parties' remaining arguments, and to the extent not discussed above, conclude those arguments are irrelevant, moot, or without merit.
To reflect the foregoing,
Decision will be entered under Rule 155.
Nothing in the record suggests that the IRA withdrawals were used to pay any expenses that were petitioner's responsibility. Instead, the record shows that Ms. Smith used the IRA withdrawals to make large purchases at retail stores, such as Old Cannery Furniture; Bed, Bath & Beyond; Ikea; and Target; to take a trip to Disneyland; and to set up a household separate from petitioner's. These expenditures were for the sole benefit of Ms. Smith and were made without petitioner's knowledge. We do not find credible any testimony by Ms. Smith to the contrary.