Decedent’s sole beneficiary pays for “honorable” choice to share distribution with siblings

A taxpayer named as sole beneficiary of his late father’s IRA was liable for federal income tax due on the entire $96,000 distribution from the IRA, in spite of his “honorable” choice to share the distribution with his two siblings, the U.S. Tax Court (TC) has ruled. In addition, the court rejected as irrelevant the taxpayer’s contention that he was disadvantaged by erroneous advice from the law firm that assisted him in settling his father’s estate.

Background

The taxpayer’s father died in 2011. At that time, his traditional IRA had a balance of more than $96,000. The taxpayer was listed as the sole beneficiary. After the taxpayer received the IRA distribution, he implemented what he believed to be his late father’s wishes. The taxpayer gave each of his siblings and himself an equal share of the IRA distribution.

The taxpayer also sought assistance from a local law firm. A paralegal at the law firm advised him that the distributions were not subject to federal estate tax or state inheritance tax. The taxpayer, however, misunderstood the advice and believed the distribution was not subject to any tax whatsoever.

Tax liability

Code Sec. 408(d) provides that in the absence of an applicable exception, any amount paid or distributed from an IRA must be included in gross income by the payee or distributee. There is no exception for distributions to a beneficiary following the death of the account owner.

The Tax Court found the taxpayer had followed the legal advice he believed he had received. However, the court explained, his reliance on legal advice, the fact that the taxpayer “acted honorably” by executing his father’s wishes and the fact that he would be unlikely to recover any portion of the distributions paid to his siblings had no bearing on the taxable status of the distributions themselves. Therefore, the taxpayer remained liable for $27,000 in federal income tax due on the total distribution from the IRA. However, the court, without elaboration, ruled in favor of the taxpayer concerning the $5,387 accuracy-related penalty originally assessed by the IRS.

Source: Morris v. Commissioner (TC).

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