TAX COURT OPINION

Case: Paul J. Aslanian
Docket Number: 5768-14
Judge: Holmes
Opinion Type: bench
Filed: 07/24/2015
Pages: 11

UNITED STATES TAX COURT WASHINGTON, DC 20217 PAUL J. ASLANIAN, Petitioner, v. ) ) ) ) ) Docket No. 5768-14. 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 herewith to petitioner and to respondent a copy of the pages of the transcript of the trial in the above case before Judge Mark V. Holmes at St. Paul, Minnesota on June 19, 2015, 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. (Signed) Mark V. Holmes Judge Dated: Washington, D.C. July 24, 2015 SERVED JUL 2 8 2015 Capital Reporting Company 3 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 Bench Opinion by Judge Mark V. Holmes June 19, 2015 Paul J. Aslanian v. Commissioner Docket No. 5768-14 THE COURT: In the case of Paul J. Aslanian v. Commissioner, Docket No. 5768-14, the Court has decided to render Oral Findings of Fact and Opinion and the following represents the Court's Oral Findings of Fact and Opinion. This bench opinion is made pursuant to the authority granted by section 7459(b) of the Internal Revenue Code of 1986, as amended and Rule 152 of the Tax Court's Rules of Practice and Procedure. This is a one issue case, did an attempted rollover of $300,000 in IRA funds from a Vanguard account to an Offit Capital account trigger the inclusion of the transferred amount into the faxwhbe 18 Pert ,*el come taxpayer? If so, was the 19 20 21 22 23 24 taxpayer's failure to report a trigger for a penalty under section 6662? The background of the case is fairly easy to state. The taxpayer is Paul Aslanian, a long time professor at Macalester College here in Minnesota. He has been a professor for many years. He has deep 25 Minnesota roots and started off life in Washington 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 4 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 State. More importantly, those roots led him to have decsdes a techy, long friendship with a man named Todd Petzel, also a lifelong Minnesotan, but one who works in New York and who suggested to him in a cabin conversation several years ago that he had a great investment opportunity in a below interest rate environmen Professor Aslanian found his retirement assets stuck in,and suggested that he Pe+¥ d invest some of his retirement money as Mr. Petzel had invested some of his retirement funds himself. This was a new fund set up seemingly as a partnership to invest in mortgages and set up in some fashion as a real estate investment trust. In any event, regardless of what this fund actually did, Professor Aslanian bit hard and pursuant to a telephone request $300,000 from one of his Vanguard IRA accounts was sent via a wire transfer to J.P. 18 Morgan Chase marked for the benefit of himself. He 19 20 21 22 23 24 25 has requested the $300,000 transfer and called Vanguard and then Offit Capital to make it work and he said that he wanted it transferred into a rollover IRA. He's done rollovers in the past and he knows what an IRA rollover is. On this point I find him completely credible. He intended this to be a non-taxable 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 5 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 rollover and the parties stipulated to that. The problem was it simply wasn't. As the parties also stipulated, Offit was not on the list of non-bank custodians or trustees who are authorized to receive rollover IRA funds, and that is just the way it is. Now, the consequence of that is that in general a distribution from a qualified retirement plan, which is where the $300,000 came from, becomes includable in the distributee's income in the year the distribution is provided, section 72. See I.R.C. section 402(a)(1), 408(d)(1). An exception, however, exists if the distribution proceeds are rolled over into an eligible retirement plan or an IRA within 60 days of the distribution. Sections 402(a)(5), 408(d)(3). Now, since we know that Offit Capital is not qualified as a custodian or trustee, that makes the distribution not a qualified rollover distribution. What are the consequences? Of course, the IRS asserts that the disqualification of the recipient trustee requires that the distribution be included in Professor Aslanian's income. Professor 23 Aslanian, like so many others might be making an 24 25 argument that he substantially complied with the statutory rollover contribution requirements and so 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 6 1 2 3 4 5 6 7 8 he should be entitled to the b.enefits of rollover status even if the custodian doesn't count. However, to the extent that he is arguing substantial compliance on his part, Schoof v. Commissioner, 110 T.C. 1 (1998), is directly against it so he might not be arguing quite that and, indeed, has argued that the issue is whether his intent is relevant at all to a finding of taxable distribution. 9 Meaning, whether there is a taxable distribution 10 11 12 13 simply where the funds are objectively moved from a non-taxable status to a taxable status without the consent of the taxpayer. This is a somewhat different question than 14 whether substantial compliance by the taxpayer is 15 enough which, of course, in Schoof we found that it 16 wasn't. But here general principles of law provide a 17 18 19 20 21 22 23 24 25 relatively clear answer as tax law goes. I think the right analysis is that in a case called Grant v. Commissioner, 69 T.C.M. 1716 (1995). In that case a trustee/custodian/bailee, what have you, of retirement funds actually made off with them. He was a completely faithless trustee. The question there is whether having your retirement assets stolen amounts to a taxable distribution since they are no longer in a qualified IRA? That would be a truly 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 7 1 2 3 4 harsh reality. But the Tax Court concluded from the fine principles of General Agency Law that "where the agent receives and misappropriates funds for his own use, where the principal had no knowledge of such 5 misappropriation and where the principal received no 6 7 8 9 economic benefit from the misappropriated funds" they are not a taxable distribution. See Grant v. Commissioner, 69 T.C.M. 1716, 1719 (1995). That is not the situation here.although I 10 certainly find that Professor Aslanian intended that 11 12 13 14 15 16 his money go into a rollover IRA, this is not the case of an agent who actually stole the funds for his own use. It is certainly not one where the principal had no knowledge of that misappropriation since no such misappropriation occurred. And, indeed, in Gran the principal received no economic benefit from 17 misappropriated funds which, of course, Professor 18 19 20 21 22 23 24 25 Aslanian has received and receives to this day. So none of these factors are present and there is nothing in the- gency aw generally that would allow a good intent to override the actual objective features of the law when it comes to rollover IRAs, custodial IRAs and these extremely formal requirements that the IRS has set up by regulation pursuant to Congress' very extensive regulations of 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 8 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 this area; to ultimately protect retirees by not allowing them to move from one custodian to somebody who hasn't been vetted in some fashion by the government as an adequate custodian in a rollover situation. There are merciful ways out of this for people who respond quickly enough and who fall within a couple of categories. As the IRS pointed out, however, Professor Aslanian neither sought nor received the waiver that would allow the government to gloss over the failure rollove pursuant to - Revenue Procedures 2003-16 or 2015-14. Revenue Procedure 2002-16 provides automatic relief é the failece rollover results from an error solely by the financial institution. In any event, that automatic relief requires the error to be corrected within one year and it is simply too late for that. Unlike automatic relief, Revenue Procedure 2015-14 requires the taxpayer to take action with Respondent by requesting a private letter ruling. Professor 21 Aslanian has done neither of these things apparently 22 23 24 25 and certainly hadn't by the time he filed his tax return on September 17, 2012. So my conclusion is that the IRS is right on the inclusion issue that the distributed amount 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 9 1 2 3 4 5 6 7 8 9 10 11 12 has to be included in the 2011 taxable income of Professor Aslanian. That means that the only remaining issue is the question of penalty. Now that's a little bit different, of course. The IRS has the burden of production with respect to penalties asserted under I.R.C. 6662(a). To meet this burden the IRS needs to produce sufficient evidence establishing that it is appropriate to impose the addition or penalty. I.R.C. 6662 provides for an addition to tax when the deficiency is due either to negligence or to a substantial understatement of income tax. 13 Negligence is defined as a lack of due care of 14 15 failure to do what a reasonable and ordinarily prudent person would do under the circumstances. 16 Neely v. Commissioner, 85 T.C. 934, 947 (1985). A 17 18 19 20 21 22 23 24 25 substantial understatement is defined in I.R.C. 6662 as an understatement exceeding the greater of 10 percent of the correct liability or $5,000. Now Professor Aslanian's understatement of $99,176 where he reported $40,898 of income tax is a substantial understatement as a matter of math. The IRS asserts that given his high intelligence and accomplishments in economics and his former holding of a CPA license means that he must have been 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 10 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 negligent as well to include the $300,000. There are defenses now that the government has established a prima fascia case. The most important defense and the one that seems to have been asserted here is in section 66649(1) which provides that etitioners may avoid the section 6662(a) penalty if it can be shown that there was reasonable cause for the understatement and that the taxpayer acted in good faith with respect to that understatement. The decision as to whether a taxpayer acted with reasonable cause and in good faith is made on a case-by-case basis taking into account all the pertinent facts and circumstances, 26 C.F.R. section 1.6664-4(b)(1), In contrast to this, the objective standards that also provide ways of getting at this, for instance, the substantial authority standard. The test as to a taxpayer's reasonable cause of good faith is a subject before one considers the taxpayer's background. And, in particular, the tax regulations provide a reasonable cause of good faith may be present where there is an honest 23 misunderstanding of fact or law that is reasonable in 24 25 light of all the facts and circumstances including the experience, knowledge and education of the 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 11 1 2 3 4 5 6 7 8 9 10 11 12 13 14 taxpayer. The taxpayer bears the burden of proving reasonable cause for their position and that they acted in good faith. Here I think timing matters a lot. As I said, Professor Aslanian filed his 2011 return on September 17th. So what I did is I tried to focus on the state of his mind on September 17th e e f led his return. He had gotten at that point a 1099 from Vanguard including the $300,000 as a distribution that should be taxable or at least reportable. That was in early 2012 and it reported the transaction as- having occurred in October of 2011. On the other hand, he was also getting paperwork for Offit Capital saying that his new account was in the name of Paul 15 Aslanian/rollover IRA. In the end I think this makes 16 17 18 19 20 21 22 23 24 25 it reasonable for him to have taken the reporting position that he did. I certainly think that he was acting in good faith when he did so. There was certainly evidence that by June 17 of 2013 when we have e-mails from Vanguard in which they explain what had happened and moreover say that Offit was not a valid custodian or trustee, that he should have known then and there are indeed e-mails that show that he was suspicious already in May of 2013; both dates before he got his notice of 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 12 deficiency, but what matter is the state of his mind back in September of 2012. It is conceivable in this case that as Respondent's counsel noted, Offit Capital is hiding something, but we don't know that I can't draw any adverse inferences from Offit's refusal to cooperate as normally financial custodians do with IRS subpoenas, so we don't know that. In the end then for the IRS on the question of including this in income for Professor Aslanian and avoiding the penalty decision will be entered under Rule 155. Thank you. (Whereupon, at 5:06 p.m., the above- entitled matter was concluded.) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 866.488.DEPO www.CapitalReportingCompany.com