No Income Tax Liability for IRA Withdrawals

Taxpayers are not liable for distributions from their IRAs made without their knowledge and without their consent the U.S. Tax Court ruled.

In 2008, three withdrawals were made from two IRA accounts maintained by the petitioner. Petitioner’s wife made the requested withdrawals and forged the husband’s signature on the three checks that were issued by the IRA’s. She deposited the money in a joint account with her husband, but the account was exclusively used by the wife. The petitioner first learned of the withdrawals when he received IRS Form 1099-R entitled, Distributions from IRAs. In 2009 the parties separated. During the divorce proceedings, the petitioner learned that his wife had deposited the IRA funds in the joint bank account the petitioner did not use. Furthermore, in 2009 the wife told the petitioner that she would prepare a joint tax return for the 2008 taxes. However, without the petitioner’s knowledge, the wife prepared a joint tax return for herself, an individual tax return for the petitioner and she under-reported petitioner’s income by $3,000.00, overstated a credit by $3,000.00 and omitted interest income of $74.00. In addition, the wife claimed petitioner was entitled to a refund of $3357.00 and the refund was deposited into her bank account.

The IRS issued a deficiency notice to the petitioner for the IRA distributions.

Distributions from IRA’s are taxable income and, in addition, subject to a 10% early distribution penalty if the taxpayer is under the age of 591/2. Sec. 408 (d)(1) and Sec. (+)(1).

The Tax Court stated that neither the Internal Revenue Code nor the Treasury Regulations define the terms “payee” or “distributee” and the code and applicable regulations do not provide specific guidance on when an amount is to be considered have been paid or distributed to a payee or distributee under Sec. 408 (d) (1).

 
However, the Tax Court said that “distributee” is not necessarily synonymous with recipient. In this case the distributions were unauthorized and completed without petitioner’s knowledge and the petitioner did not receive any benefit, directly or indirectly, from the withdrawal. The petitioner is not liable for the income tax liability and not liable for the 10% early withdrawal penalty

For any questions or concerns, please feel free to contact the law office of Arlington Heights attorney Robert S. Thomas. 

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