Sometimes
people pursuing a divorce do stupid things.
I am looking
this afternoon at Roberts v Commissioner.
The first
thing I am thinking is that the wife will be fortunate to not be criminally
charged. The second thing I am thinking is that the IRS could not present a
more unfriendly face if they cast polar bears adrift on ice floes.
The Roberts
in the case is the husband (H).
Roberts and
his wife (W) married in 1990. They separated in 2008, permanently separated in
2009 and divorced in 2010.
Roberts and
his wife kept joint bank accounts. After they separated, W kept the account at Washington
Mutual and he kept his account at Harborstone. He did not have a checkbook for,
write checks on or make withdrawals from Washington Mutual. In short, he had no
idea about that account, despite the fact
that his name was still on it.
In September
2009 one of his IRA custodians received a faxed withdrawal request for $9,000. The
fax came from the company for which W worked. Coincidence, surely. The request
was signed, but it was not signed the way Roberts normally signed his name.
A second IRA
custodian also received two withdrawal requests, the first for $9,000 and the
second for $18,980.
All the
monies were deposited to that Washington Mutual account.
This took
place over a two-month period. During that stretch, the wife deposited approximately
$4,000 from her paycheck. She however spent over $41,000 from the account. The
Court asked her about this discrepancy:
“We do not find credible [the wife’s] testimony that she was
unaware of the sources of the deposits made to the Washington Mutual account
when, in many instances, the deposits dwarfed the account’s balance at the time.”
Roberts let
his wife prepare the 2008 tax return. Why not? She had prepared the returns for
prior years.
She filed
her return as “married filing separately.”
She filed
his return as “single.”
She decreased
the amount of his W-2 by $3,000. She increased his withholding by $3,000.
And she had
his refund deposited to her bank account at Washington Mutual.
Roberts never
saw the tax return.
You have figured
out what was happening, of course.
Roberts
continued oblivious to all this until he receives those pesky Forms 1099-R from
the IRA custodians. Surely, they made a mistake. Alternatively he was the
victim of a theft, he reasoned.
As the
divorce grinds on he learned the truth of the matter. The divorce court considered
the withdrawals when separating the property between the spouses.
In 2010 the
IRS notified Roberts that they want almost $14,000 in tax and approximately
$3,300 in penalties.
To say that
the IRS took a strict reading of the tax law is to understate things. They
argued:
(1) The income was his because he was the
owner of the IRA accounts.
(2) The monies were deposited into
Washington Mutual, a jointly owned account.
(3) The monies were used to pay for “family”
expenses.
(4) He never attempted to return the
monies to the IRAs, even after he learned of the withdrawals.
Because of
all this, the IRS argued that Roberts had unreported income in 2008.
It is pretty
easy to tell that the Tax Court knew that the wife was lying. The Court also
was brooking little patience for the IRS’ hyper-technical reading of the law, such
as:
Roberts must include in income the amounts withdrawn from his
IRAs even though he did not consent nor was he aware the distributions occurred.
Then the IRS
trotted out two Tax Court decisions in Bunney
and Vorwald.
In Bunney the IRS argued that the recipient
of an IRA distribution was automatically the taxable party.
COMMENT: The Court did not accept that argument in that case.
Why would they do so now?
In Vorwald the Court decided that a mandatory IRA distribution pursuant to a court-ordered garnishment for child support was income to the taxpayer.
COMMENT: The IRS made more sense
with this cite.
The problem
with Vorwald is that the taxpayer had
a legal obligation, and his IRA account was drained pursuant to that legal obligation.
In the instant case Roberts was – essentially – robbed. He did not know that his
wife was taking out monies to set up her post-divorce household, with a vacation
sprinkled in.
The IRS then
brought up their (in my opinion) best argument. In Washington state (where
Roberts and his wife resided), an individual must discover and report unauthorized
signatures within one year – essentially, a one-year statute of limitations. Roberts did not do that. Granted, the
withdrawals were taken into consideration when dividing marital property, but Roberts
did not press for return of the monies.
And the Court
did something unexpected: it paused. The IRS had a valid point. However, if there
was a one-year statute of limitations, then Roberts had until 2009 to press his
case. The Court looked at the tax years the IRS was challenging: year 2008
only. No year 2009.
Oops, said
the Court. Sorry IRS. You flubbed.
The Court
dismissed any taxes and penalties attributable to the IRA mess. It did allow
taxes and penalties attributable to other minor issues on Roberts’ tax return.
We sometimes
used to include a moral when reviewing tax cases. What would be the moral for
today’s discussion? How about …
If you are divorcing, you may want to separate your finances,
including your bank account – and your tax return – from the person you are
divorcing.
Just saying.
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