Attorney Robert Thomas

Tuesday, March 25, 2014

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.

LAW OFFICE OF ROBERT S THOMAS

1655 N Arlington Heights Rd, Suite 300West

Arlington Heights IL 60004

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info@attorneyrobertthomas.com

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Monday, March 17, 2014

Health Insurance Payments as Maintenance (k/n/a/ Alimony)

The United States Tax Court related that payments made by a spouse to a former spouse can be treated as maintenance (or alimony) if all of the following conditions are met: (1) payments are made in cash (and not property transfers); (2) payments are made pursuant to a divorce decree or separation agreement; (3) the decree or separation agreement does not designate the payment as non-deductible by the payor-spouse and nontaxable to the recipient/payee-spouse; (4) parties live apart; and, (5) there is no requirement to make the payments after the death of the recipient/payee-spouse.

If these five conditions are met, the payments are deductible by the payor-spouse and the payments are taxable to the payee-spouse.

In the case the divorce court ordered the husband to pay $2,414 per month and $1400.00 to pay the wife’s health insurance premiums. The divorce decree specifically stated that the payment of $1,400.00 to pay for the wife’s health insurance premiums “is not in the nature of spousal support and not taxable to the wife nor deductible to the husband for income purposes.”

The IRS deemed the husband’s tax deduction for the health insurance payments of $1,400.00 per month. The tax court stated that the health insurance payments are not alimony and not deductible under the Internal Revenue Code for the following reasons:

Payments are deductible as alimony only if all of the four requirements (discussed above) in Sec. 71 (b)(1) are met;
Parties may agree that the payments are or are not maintenance, but the parties do not have complete authority to define such payments in a state court matter;
A state court may simultaneously label a payment “in the nature of spousal support” in a divorce decree or separation to prevent the discharge of the payment in a bankruptcy proceeding, and also designate the same payment as “not in the nature of spousal support” for income tax purposes.