Court Opinion

ID: 4336827
Source: CourtListenerOpinion
Date Created: 2018-11-14 03:01:50.986966+00
Date Added: 2024-06-11T09:38:20.036838
License: Public Domain

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.