Arias v. Comm'r , 2007 Tax Ct. Summary LEXIS 193 ( 2007 )


Menu:
  •                   T.C. Summary Opinion 2007-189
    UNITED STATES TAX COURT
    HECTOR F. ARIAS AND CAROLEE PURCELL, Petitioners v.
    COMMISSIONER OF INTERNAL REVENUE, Respondent
    Docket No. 6796-06S.              Filed November 6, 2007.
    Hector F. Arias and Carolee Purcell, pro sese.
    Neal O. Abreu, for respondent.
    PANUTHOS, Chief Special Trial Judge:   This case was heard
    pursuant to the provisions of section 7463 of the Internal
    Revenue Code in effect when the petition was filed.   Pursuant to
    section 7463(b), the decision to be entered is not reviewable by
    any other court, and this opinion shall not be treated as
    precedent for any other case.   Unless otherwise indicated,
    subsequent section references are to the Internal Revenue Code in
    - 2 -
    effect for the year in issue, and all Rule references are to the
    Tax Court Rules of Practice and Procedure.
    Respondent determined a $5,415 deficiency in petitioners’
    Federal income tax for 2003 and a $1,083 penalty under section
    6662(a).       After a concession by respondent,1 the issue for
    decision is whether petitioners must include in gross income a
    $45,033 distribution from a trust.
    Background
    The parties stipulated some of the facts, and they are so
    found.       We incorporate the stipulation of facts and attached
    exhibits herein by this reference.         At the date of filing the
    petition, petitioners resided in El Sobrante, California.
    Patrick Purcell (Mr. Purcell), petitioner Carolee Purcell’s
    father, and Sherry Purcell,2 her sister, lived in Michigan in
    2003.       Patrick Purcell died in August 2003.    Mr. Purcell named
    petitioner Carolee Purcell and Sherry Purcell (sometimes
    hereinafter referred to as the sisters) copersonal
    representatives of his estate and cotrustees of his trust, the
    1
    At trial, respondent conceded the accuracy-related penalty
    under sec. 6662(a).
    2
    Sherry Purcell is also referred to as Sherry Knorr in the
    record. The Court will refer to her as Sherry Purcell or as
    petitioner Carolee Purcell’s sister.
    - 3 -
    Patrick Purcell Trust (the trust).3    The sisters chose Sherry
    Purcell’s home address as the address of the trust.
    The trust reported on Form 1041, U.S. Income Tax Return for
    Estates and Trusts, the following taxable items for 2003:
    Interest income of $65, total ordinary dividend income of $378,
    and annuities, royalties, and other nonpassive income of $90,915.
    On the Distribution Allocation Worksheet for the 2003 Form 1041,
    the trust reported that it distributed the following taxable
    items:   Interest income of $64, total ordinary dividends income
    of $373, and annuities, royalties, and other nonpassive income of
    $89,627.   The trust reported on Schedule K-1 (Form 1041),
    Beneficiary’s Share of Income, Deductions, Credits, etc., total
    distributions for 2003 to petitioner Carolee Purcell of $45,033,
    consisting of interest income of $32, dividend income of $187,
    and business income of $44,814.4
    In addition to the items discussed above, the trust received
    and distributed:   (1) Benefits from a life insurance policy on
    3
    The record includes inconsistencies in the taxpayer
    identification number (TIN) used by the trust and in the date of
    trust formation. The items of income, deduction, and credit for
    the two TINs are identical. From the record before the Court,
    Mr. Purcell established only one living trust to benefit his
    daughters. Accordingly, we do not consider these discrepancies
    significant.
    4
    Although the declaration of trust was not introduced in
    evidence, it is clear from the record that Mr. Purcell intended
    his daughters to benefit equally from the trust. The amounts
    reported as distributed to petitioner Carolee Purcell represent
    one-half of the total distributions.
    - 4 -
    the life of Mr. Purcell; (2) proceeds from the sale of his home;
    and (3) proceeds from the liquidation of his brokerage and Roth
    individual retirement accounts (Roth IRA).     Petitioner Carolee
    Purcell received one or more checks drawn on the trust account
    and payable to her in 2003.    She received more than $170,000 from
    the trust following Mr. Purcell’s death.
    Petitioners timely filed their 2003 joint Federal income tax
    return.   Petitioners did not report any distributions from the
    trust on the 2003 return.    Respondent determined a $5,415
    deficiency in petitioners’ Federal income tax for 2003,
    attributed to petitioners’ failure to report a $45,033 trust
    distribution.   Petitioners timely petitioned for a
    redetermination.
    Discussion
    I.    Burden of Proof
    In general, the Commissioner’s determinations set forth in a
    notice of deficiency are presumed correct, and the taxpayer bears
    the burden of showing that the determinations are in error.       Rule
    142(a); Welch v. Helvering, 
    290 U.S. 111
    , 115 (1933).     Under
    certain circumstances, the burden of proof as to factual matters
    shifts to the Commissioner.    Sec. 7491(a).   However, petitioners
    have neither alleged that section 7491 applies nor established
    their compliance with the requirements of section 7491(a)(2)(A)
    - 5 -
    and (B) to substantiate items, maintain records, and cooperate
    fully with respondent’s reasonable requests.
    Respondent claims that petitioners cooperated only partially
    and that petitioners produced only some of the documentary
    evidence they possess.   At trial, petitioners admitted that they
    had not searched every location where relevant documents were
    likely stored.   We agree with respondent that petitioners have
    not fully satisfied the requirements of section 7491(a)(2)(A) and
    (B), and, therefore, petitioners bear the burden of proof.
    II.   Trust Distribution
    Petitioners received $170,000 or more in distributions from
    the trust following Mr. Purcell’s death.   Petitioners acknowledge
    receipt of funds from the trust but assert that they were not
    provided sufficient information to determine whether the
    distributions constituted gross income.    The distributions from
    the trust included but were not limited to the proceeds from Mr.
    Purcell’s life insurance policy, from the sale of his home, from
    the liquidation of his brokerage account, and from a liquidating
    distribution from his Roth IRA account.
    In an August 2003 letter to the Purcell sisters, Mr.
    Purcell’s estate planning attorney explained:   “Other than IRA,
    401k [sic], bond interest, and final pay, the amounts you inherit
    are income tax free.”    The attorney informed the Purcell sisters
    that the section 401(k) plan maintained by Mr. Purcell’s employer
    - 6 -
    did not permit “stretching” the retirement benefits and that
    “your father’s entire interest in the plan will be paid to you
    this year and you will be required to pay income tax on the full
    amount of the distribution.”
    On September 1, 2003, the sisters executed a “Lump Sum
    Election Form” for the section 401(k) account, directing that the
    entire benefit be paid to the trust and selecting the option for
    lump-sum payment with 20-percent withholding for Federal income
    tax.5
    The Form 1041 filed by the trust does not reflect any tax
    payments made by the trust, any estimated taxes paid by the
    trust, any estimated tax payments allocated to the beneficiaries,
    or any Federal income taxes withheld on payments received by the
    trust.6
    5
    Although the distribution election form submitted in
    evidence reflects a request for lump-sum distribution of the
    retirement benefits with 20-percent withholding for Federal
    income tax, petitioners have not produced any evidence, and the
    record does not reflect, that any taxes were actually withheld
    from the distribution made to the trust.
    6
    The “1099-R Detail Report - 2003” attached to the Form
    1041 lists a single 1099-R, Distributions From Pensions,
    Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance
    Contracts, etc., with payor “Alliance Benefit Gro”. It reports
    that code 4 was entered in box 7 (indicating payment on account
    of death of the retirement plan participant), that the gross
    distribution was $90,915, that the taxable amount was $90,915,
    and that Alliance did not withhold any taxes from the
    distribution.
    - 7 -
    Gross income includes all income from whatever source
    derived, including income in respect of a decedent7 and income
    from an interest in an estate or trust.8    Sec. 61(a)(14) and
    (15).    Gross income generally does not include amounts received
    under a life insurance contract, if received by reason of the
    death of the insured.    Sec. 101(a)(1).   Gross income also does
    not include the value of property acquired by gift, inheritance,
    bequest, or devise.    Sec. 102(a).   But gross income does include
    the income earned on such property.9    Sec. 102(b)(1).
    7
    Income in respect of a decedent (IRD) refers to those
    amounts to which a decedent was entitled as gross income but
    which were not properly includable in the decedent’s Federal
    income tax returns, including his final tax return. Sec. 691(a);
    sec. 1.691(a)-1(b), Income Tax Regs. Unpaid, tax-deferred
    retirement benefits, such as the instant distributions from Mr.
    Purcell’s sec. 401(k) account, are taxable under sec. 72 and are
    an example of IRD.
    8
    The trust in this case acts as a conduit, with income
    flowing through the trust to the beneficiaries. Secs. 651(a),
    661(a). The income received by a beneficiary retains the same
    character in the hands of the beneficiary as in the hands of the
    trust. Secs. 652(b), 662(b). Thus, income excludable from gross
    income by the trust is excludable by the beneficiaries, but each
    beneficiary must include in gross income all nonexcludable trust
    income that is required to be distributed to the beneficiary,
    whether actually distributed or not. Secs. 652(a), 662(a); secs.
    1.652(a)-1, 1.662(a)-1, Income Tax Regs.
    9
    Thus, the value of Mr. Purcell’s assets at the date of his
    death and the benefits under Mr. Purcell’s life insurance policy
    that flow through the trust would not be taxable to the
    beneficiaries. However, any distributions from his sec. 401(k)
    account and other items includable in the gross income of the
    trust that flow through to the beneficiaries would be taxable to
    the beneficiaries.
    - 8 -
    Petitioners testified that Carolee Purcell returned to her
    home in California a few weeks after her father died.    At that
    point, Sherry Purcell immediately took control of the estate and
    managed the estate and the trust.    At some point, relations
    between the sisters became strained.    Petitioners permitted
    Sherry Purcell to act as the sole trustee, despite the fact that
    petitioner Carolee Purcell was a copersonal representative and
    cotrustee.10
    Petitioners contend that Sherry Purcell distributed funds
    from the trust to Carolee Purcell without identifying the source
    of the funds.   Petitioners also contend that Sherry Purcell
    refused to provide specific information about the estate or the
    trust.    At trial, petitioners did not deny receiving payments
    from the trust but argued that neither the trust nor respondent
    clearly identified the distributions at issue as taxable.
    The record reflects that the trust distributions to
    petitioner Carolee Purcell result from dividends, interest, and
    retirement benefits.   Petitioners have not demonstrated that the
    $45,033 received from the trust in 2003 was not includable in
    gross income.
    10
    Carolee Purcell testified that she discussed her concerns
    about the trust with her father’s attorney, that the attorney
    characterized Sherry Purcell as belligerent and hostile, and that
    the attorney withdrew from representing the trust because he
    could not work with Sherry Purcell.
    - 9 -
    Respondent’s determination is sustained.
    Decision will be entered for
    respondent as to the deficiency and
    for petitioner as to the section
    6662(a) accuracy-related penalty.
    

Document Info

Docket Number: No. 6796-06S

Citation Numbers: 2007 T.C. Summary Opinion 189, 2007 Tax Ct. Summary LEXIS 193

Judges: \"Panuthos, Peter J.\"

Filed Date: 11/6/2007

Precedential Status: Non-Precedential

Modified Date: 4/17/2021