Thursday, April 30, 2015
In a recent Tax Court Memo, the IRS determined that petitioners Elroy and Darlene Morris failed to report taxable distributions in 2011 from an individual retirement account. Morris v. Commissioner, T.C. Memo. 2015-82 (April 27, 2015).
Elroy became the sole beneficiary of his father’s IRA, and elected a lump sum option to settle the IRA upon his father’s death. In accordance with what he believed would be his father’s wishes, Elroy issued checks to both his siblings, totaling $37,000. The payments came out of the distribution Elroy received in the month prior. Although a paralegal told him there would be not tax due on the IRA distribution, she meant no state inheritance or federal estate tax would be due.
Elroy and Darlene filed a timely federal income tax return for 2011, and did not report the IRA distributions as gross income. Two years later, the IRS sent them a notice of deficiency for $27,037 in addition to a $5,387 penalty. The couple petitioned the Tax Court, arguing they do not “solely owe this debt” and should not be “solely responsible.” However, the Tax Court held that Elroy and Darlene failed to include the IRA distribution in their gross income and were in fact liable for the deficiency.
See Dawn S. Markowitz, IRA Distributions Includible in Gross Income, Wealth Management, Apr. 29, 2015.
Special thanks to Jim Hillhouse for bringing this article to my attention.