TAX COURT OPINION

Case: David Charles Norman & Rita Aelo Norman
Docket Number: 5121-16
Judge: Buch
Opinion Type: bench
Filed: 10/09/2019
Pages: 14

UNITED STATES TAX COURT WASHINGTON, DC 20217 PA DAVID CHARLES NORMAN & RITA AELO ) ) NORMAN, ) ) Petitioners, v. ) Docket No. 5121-16. COMMISSIONER OF INTERNAL REVENUE, Respondent ) ) ) ORDER Pursuant to Rule 152(b), Tax Court Rules of Practice and Procedure, it is ORDERED that the Clerk of the Court shall transmit with this Order to petitioner and respondent a copy of the pages of the transcript of the trial in this case before Judge Ronald L. Buch at Los Angeles, California, containing his oral findings of fact and opinion rendered at the trial session at which the case was heard. In accordance with the oral findings of fact and opinion, decision will be entered under Rule 155. Dated: Washington, D.C. October 9, 2019 (Signed) Ronald L. Buch Judge SERVED Oct 15 2019 3 1 2 3 4 5 6 7 8 9 Bench Opinion by Judge Ronald L. Buch september 13, 2019 David Charles Norman & Rita Aelo Norman v. Commissioner Docket No. 5121-16 THE COURT: David Norman rolled his retirement account over at the recommendation of an investment advisor. That investment advisor was, in fact, a con artist who then caused that money to be transferred to herself. In doing so, the con artist caused the money to 10 pass fleetingly through Mr. Norman's personal bank 11 account. The Commissioner argues that funds merely 12 passing through Mr. Norman's bank account is enough to 13 g1ve r1se to taxation. But the law tells us that money 14 moving fraudulently through a taxpayer's account is not 15 necessarily taxable to that taxpayer. And on these unique 16 facts, we decide this case for Mr. Norman. 17 18 FACTS David Norman was born in 1949. After high 19 school, he was drafted into the United States Army. After 20 he completed his service in the Army, he studied 21 engineering at California Polytechnic University. After 22 graduation, he had a long and successful career as a 23 satellite communications engineer. In April 2013, he 24 retired from Boeing after 36 years. Although Mr. Norman 25 was in poor health when he retired, he had his retirement to look forward to; he had accumulated at least $400,000 4 in a Morgan Stanley retirement account. Shortly before his retirement, Mr. Norman was introduced to Ida Shaghoian and her husband Mehmet "John" Biyikoglu. Mr. Norman understood them to be investment advisors operating a business called Five Star Financial, and his principal contact was with Ms. Shaghoian. She 1 2 3 4 5 6 7 8 maintained a professional looking office and she and her 9 husband held themselves out as investment advisors. Ms. 10 Shaghoian also held herself out as having a relationship 11 with ING. The record is not clear as to what role, if 12 any, Ms. Shaghoian had with ING, but transactions 13 confirmations from ING list her as "Your Financial 14 Representative". 15 Ms. Shaghoian convinced Mr. Norman to roll his 16 retirement savings over to an account at ING, a banking 17 and financial services corporation. On May 28, 2013, 18 Morgan Stanley issued a check payable to ING transferring 19 $405,734.84 from Mr. Norman's retirement account to ING 20 for the purpose of acquiring an annuity for Mr. Norman 21 with ING USA Annuity and Life Insurance Company. 22 23 After that account was opened, a series of seemingly inexplicable events occurred. The first such 24 event was on aune 26, 2013, 29 days after the transfer to 25 ING. On that date, a handwritten letter was faxed to ING asking to exercise a "free look period", asking to have $40,000 sent to Mr. Norman's personal bank account at US 5 Bank, and asking that his policy be reissued. A few things in this letter merit further explanation. The free look period was an ING account feature that allowed an account holder to back out of an investment such as an annuity contract within 30 days without incurring any penalty. Also notable, that letter is not in Mr. Norman's handwriting. 1 2 3 4 5 6 7 8 9 10 Then on July 23, 2013 (27 days after the 11 Previous letter), another letter purporting to be from Mr. 12 Norman was sent to ING. That letter again asked to 13 14 exercise the free look period, this time asking for $23,930 to be transferred to Mr. Norman's personal 15 account. But this letter is even more curious; the letter 16 is mostly typewritten, but Mr. Norman's name and account 17 18 numbers are handwritten in handwriting that is not his. On August 14, 2013 (22 days after the previous 19 letter), another letter is sent to ING requesting to 20 exercise the free look period. This letter is typewritten 21 and asks for $100,000 to be transferred to Mr. Norman's 22 personal account. That money was deposited into Mr. 23 Norman's account on August 27, 2013. The following day, a 24 counter withdrawal slip bearing Mr. Norman's name and 25 account number shows a withdrawal request, and Mr. Norman's account statement shows that the $100,000 was 6 withdrawn. On September 11, 2013, Ida Shaghoian faxed a letter to ING. That typewritten letter purports to be from Mr. Norman and asks to exercise the free look period. This letter asks that the total remaining amount, roughly $272,000, be transferred to Mr. Norman's personal bank account. ING sent a confirmation notice dated September 16, 2013 to Mr. Norman. Nowhere does that confirmation 1 2 3 4 5 6 7 8 9 10 notice state that there has been or will be a withdrawal; 11 the only transaction shown contains the description "Free 12 13 14 Look". The bank records show that the $272,000 was transferred to Mr. Norman's personal bank account on 15 September 19, 2013. At 9:49 am on that same day, a 16 counter withdrawal was made from Mr. Norman's personal 17 bank account in the amount of $264,392. 18 Mr. Norman does not recall making the 19 withdrawal, and he became suspicious that Ms. Shaghoian 20 had done something with his funds. In 2014, he contacted 21 the California Department of Insurance. The inquiry was 22 assigned to Anna Brown. Her investigation led to the 23 discovery of widespread fraud by Ms. Shaghoian and others, 24 including Mr. Biyikoglu. On May 2, 2018, the Federal 25 Bureau of Investigations filed a criminal complaint 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 against Ms. Shaghoian and others for wire fraud. On May 7 30, 2018, a grand jury returned an indictment of Ms. Shaghoian and others for wire fraud. On March 27, 2019, the grand jury returned a 12-count superseding indictment including bank fraud, wire fraud, and identity theft. Ms. Shaghoian entered into a plea agreement on May 15, 2019. That plea agreement contains the following recitation: D.N. Defendant met an investor with the initials D.N., age 69, in or around 2013. Defendant and co- defendant BIYIKOGLU assisted D.N. in investing a substantial portion of his retirement savings, approximately $420,000, into an account at Voya [successor to ING]. Defendant and co-defendant BIYIKOGLU caused D.N. to transfer this money by advising him that he would have greater liquidity at Voya. After D.N. transferred his money to Voya, defendant then withdrew approximately $396,000 through cashier's checks payable to herself. Defendant made small payments to D.N. upon his request in order to lull him into believing his money was safe at Voya. D.N. never authorized defendant to use his retirement savings for her own personal purposes. Between August 2013 and February 2015, Defendant made payments to D.N. upon e enoers request, totaling $174,300. The remainder of 8 D.N.'s investment was lost. D.N. is petitioner David Norman. When it came time to file his 2013 tax return, Mr. Norman reported non-taxable IRA distributions, but only a small amount of taxable distributions. His reporting is consistent with rolling over from one retirement account to another, such as the rollover from Morgan Stanley to ING. 1 2 3 4 5 6 7 8 9 10 On December 7, 2015, the Commissioner issued to 11 Mr. Norman a notice of deficiency determining, among other 12 things, an adjustment to "retirement income taxable" of 13 14 $379,966. The Commissioner also determined a substantial understatement penalty. Any adjustments not specifically 15 mentioned, the parties have resolved by agreement. 16 On March 3, 2016, while residing in California, 17 Mr. Norman filed his petition in this case pro se. Mr. 18 Norman's petition is clear that, at the time he filed that 19 Petition in 2016, he believed his funds were still with 20 ING. He wrote: "The rollover transaction from IRA 21 accounts to an Annuity account was, (to my understanding), 22 tax free." Factually, this description is consistent with 23 what occurred when he rolled his retirement over from 24 Morgan Stanley to ING. He continued: "I decided to 25 retire and rollover my Smith Barney IRAs to ING (now Voya) 9 through a wealth management agent at Five Star Financial, Lawndale, CA office. The rollover account type was an annuity." Again, this accurately describes the rollover from Morgan Stanley (successor to Smith Barney) to ING. At the time of filing the petition, he appeared to believe that his retirement funds were still with ING. Before turning to our analysis, we note that the parties' stipulation mischaracterizes many documents. Many of the paragraphs used to stipulate to documents 1 2 3 4 5 6 7 8 9 10 offer a narrative characterization of the document 11 followed by a reference to the document attached as an 12 exhibit. For example, regarding the September 16, 2013 13 14 transaction confirmation, the stipulation states: "On September 16, 2013, ING issued a confirmation notice to 15 Petitioner David Norman, indicating that the balance of 16 his annuity contract, $272,030.79 would be distributed to 17 him pursuant to a 'Free Look' period cancelation of the 18 19 contract. Attached as Exhibit 11-J is a copy of the confirmation notice issued by ING on September 16, 2013." 20 Nowhere on that exhibit is there an indication of a 21 distribution; the only transaction description is "Free 22 Look". Likewise, the parties' stipulation describes the 23 September 11, 2013 fax as being a fax from Mr. Norman, but 24 the face of the document makes clear that it is a fax from 25 Ms. Shaghoian. "We may disregard stipulations between 10 Parties where justice requires it if the evidence contrary to the stipulation is substantial or the stipulation is clearly contrary to facts disclosed by the record." Cal- Maine Foods, Inc. v. Commissioner, 93 T.C. 181, 195 (1989). The blatant errors or mischaracterizations in the stipulations calls into question the narrative characterizations that accompany stipulations to the documents in this case. This type of stipulation - a narrative characterization of a document followed by a 1 2 3 4 5 6 7 8 9 10 stipulation to the document - only appears in the first 11 stipulation of facts in this case. For each such 12 stipulation, we disregard the narrative description. We 13 now turn to the law. 14 15 OPINION As a general matter, the Commissioner's 16 determinations in a notice of deficiency are presumed 17 correct, and the taxpayer bears the burden of proving an 18 error. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 19 20 21 22 (1933). Where the Commissioner determines that a taxpayer received unreported income, he must "offer some substantive evidence showing that the taxpayer received income from the charged activities" before he may rely on 23 the presumption of correctness. Weimerskirch v. 24 Commissioner, 596 F.2d 358, 360 (9th Cir. 1979), rev'g 67 25 T.C. 672 (1977). F73)406-2250!operations@escribersmet!www.escribersaet 11 The Commissioner determined that Mr. Norman had unreported income from third-party reporting. SPecifically, the Commissioner received a 1099-R, Distributions from Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., from ING USA Annuity & Life Insurance Company showing taxable income to Mr. Norman of $272,030 and a 1099-R from Morgan Stanley Smith Barney LLC in the amount of $119,929. The distribution from ING is the item that remains at issue. The burden is on Mr. Norman to show that he did not receive this income. There is no real dispute that funds were 1 2 3 4 5 6 7 8 9 10 11 12 13 withdrawn from ING, deposited into Mr. Norman's personal 14 account, and then withdrawn from Mr. Norman's account. 15 But Mr. Norman alleges that he did not authorize funds to 16 be withdrawn from ING and that he was unaware that the 17 funds passed through his personal account. The 18 Commissioner doesn't believe Mr. Norman and argues that 19 Mr. Norman authorized all of these transaction. We find 20 that Mr. Norman did not authorize the September 19, 2013 21 transfer from ING to his personal bank account, did not 22 authorize the nearly simultaneous withdrawal from his 23 Personal bank account, and was not aware that either 24 transaction occurred at the time. 25 Regardless of these facts, the Commissioner 12 argues that the series of transactions Mr. Norman did not authorize or know about nonetheless are taxable because the funds passed through his personal bank account. The September 19, 2013 electronic deposit and the 9:49 am withdrawal that same morning make clear that, for at least a fleeting moment, the funds were in Mr. Norman's account. We must answer whether this is enough for him to be taxed. On these unique facts, it is not. For this purpose, the rules regarding constructive receipt are instructive. A taxpayer has constructive receipt of income when the income is not 1 2 3 4 5 6 7 8 9 10 11 12 actually in his possession, but is available for the 13 14 15 taxpayer to draw upon at his will. Sec. 1.451-2(a) Income Tax Regulations. A taxpayer does not have constructive receipt of income if the taxpayer's ability to control the 16 receipt of income is "subject to substantial limitations 17 or restrictions." Sec. 1.451- 2(a), Income Tax 18 Regulations. If the taxpayer must overcome a substantial 19 barrier to assert control of the funds, the taxpayer has 20 not constructively received that income. 21 22 23 Perhaps the leading case on constructive receipt in the Ninth Circuit is Baxter v. Commissioner, 816 F.2d 493 (9th Cir. 1987) rev'g T.C. Memo. 1985-378. The issue 24 was whether Mr. Baxter had income in 1978. On December 25 30, 1978, a commission check was available for Mr. Baxter to pick up. The pickup location was 40 miles away from where he lived. And December 30 was a Saturday. In an era before online banking and ATMs, the 80 mile round trip to pick up his check, return home, and make a bank deposit 13 or cash the check was an "effective barrier" to his receipt of that income. The Ninth Circuit acknowledged that income to which one might legally be entitled is not income if you can't actually obtain it, stating: "[T]he law has been glossed so that although money has been credited to one's account or set apart for one it is not income if some barrier exists to actual possession." 1 2 3 4 5 6 7 8 9 10 11 12 Baxter, 816 F.2d at 495. 13 14 One such barrier might be a lack of knowledge. See, e.g., Davis v. Commissioner, T.C. Memo 1978-12. 15 Beatrice Davis was owed severance pay, and she was told 16 17 she would not receive it until 1975. The payor sent it to her by certified mailM before the end of 1974. She 18 wasn't home when delivery was attempted on December 31, 19 1974. Believing the piece of certified mail to be a 20 notice increasing her rent, she did not rush to the post 21 office to pick it up. She picked it up after the new 22 23 24 25 year. We held that she did not have income in 1974 because she was unaware that the check was available to her. But Mr. Norman's case is different; in Mr. cribers ¢P73)406-2250loperations®escritesnetlwww.escribersAet Norman's case the money was actually withdrawn from his retirement account and actually went into his account. 14 The Commissioner argues that those facts put an end to our inquiry because that shows actual receipt. But an unauthorized withdrawal from a retirement account is not necessarily income to the account-holder. See Rogers v. Commissioner, 141 T.C. 569 (2013). And money going into one's bank account is not necessarily determinative of income for that person. In 1 2 3 4 5 6 7 8 9 10 Bailey v. Commissioner, 52 T.C. 115 (1969), a brother and 11 sister worked together to embezzle money from the bank 12 where the sister worked. The sister diverted money from 13 14 third-party accounts into her brother's personal account. The brother spent some of the money. Both the brother and 15 sister were convicted of theft and embezzlement. But 16 which should be taxed on the income? We held that the 17 sister was solely responsible for the tax liability. 18 Although the funds were deposited into the brother's 19 account, the sister acted "of her own volition" when she 20 Placed the money in her brother's account. As such, she 21 "exercised complete dominion and control over the 22 embezzled funds." Id. at 119. We found that the sister's 23 control meant the funds were her income for tax purposes. 24 And in that case, the brother knew of and made use of the 25 deposited funds. cnærs Now let's apply this to Mr. Norman. 15 It was Ida Shaghoian who exercised complete dominion and control over the funds she was embezzling. Mr. Norman was unaware that the money was passed through his account. And Mr. Norman had no practicable access to those funds that were electronically deposited into his account and withdrawn at 9:49 am the morning they were deposited. These unique facts require us to conclude that the ING transfer was not income to Mr. Norman. The Commissioner asserted a substantial understatement penalty, and computations will reveal 1 2 3 4 5 6 7 8 9 10 11 12 whether the threshold for such a penalty has been met on 13 14 15 the remaining adjustments. However, the Commissioner did not offer any document in satisfaction of the supervisory approval requirement of section 6751(b). And he bears the 16 burden on that issue. Sec. 7491(c). Accordingly, even if 17 computations reveal that the substantial understatement 18 threshold has been met, the Commissioner cannot sustain 19 his burden on penalties. 20 Because of concessions by the parties, decision 21 will be entered under Rule 155. (Whereupon, at 2:17 p.m., the above-entitled matter was concluded.) 22 23 24 25