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Tax Court Exercises Equity to Allow Late Rollover of IRA

Posted on Aug. 21, 2017

At procedurallytaxing we generally discuss things that happened a week or two or three ago.  Sometimes, we take even longer.  The case of Trimmer v. Commissioner, 148 T.C. No. 14 (April 20, 2017) came out four months ago.  It deserves attention if you have not yet seen it.

When the case came out, I was very excited not just for the Trimmers but because this case was tried by the Fordham Tax Clinic.  The students, Amanda Katlowitz, Ravi Patel, and Regina Yoon, together with their director, Elizabeth Maresca, did an outstanding job in winning an equitably compelling case but a difficult one which resulted in a precedential opinion from the Tax Court.  The Court declares by making the case precedential that it breaks new ground.  It provides good news for taxpayers who fail to timely roll over their IRAs and perhaps good news for taxpayers in other circumstances who have a good equitable argument.  Because of changes in the way that individuals who fail to timely roll over their IRA may remedy the problem as we discussed here, I hope that most of these cases get resolved administratively going forward, but that does not diminish the importance of this victory.

The IRS determined that the Trimmers had a deficiency of $37,918 in 2011 for pulling funds out of an IRA and failing to timely roll it over to another qualifying account.  Mrs. Trimmer is a school teacher and Mr. Trimmer, age 47, was a recently retired police officer.  They have two sons who were not too far from college.  A tax hit of this amount would have been devastating to their financial well-being.

When Mr. Trimmer retired from the New York police force he anticipated continuing to work and had lined up a job at the New York Stock Exchange as a security guard.  After he retired and just before he was to begin work, the NYSE job fell through.  The loss of this job and his inability to quickly find another one sent him into a tailspin and he “began experiencing symptoms of a major depressive disorder.”  The Court details other symptoms but the one that relates to this case involves the receipt of distributions from his New York City retirement accounts.  He received checks for $99,990 and $1,680 and these checks sat on his dresser for a month before he deposited them in the family joint bank account – but not a retirement account.  Mrs. Trimmer thought/hoped that Mr. Trimmer was properly dealing with the retirement funds.

Mr. Trimmer was also the person who normally took care of getting the family tax return prepared.  Unfortunately, his depression caused him to delay the task.  Eventually, he went to their preparer who took note of the 1099-R detailing the distribution and told him to put the money into an IRA.  Mr. Trimmer did so the following month but by that time more than 60 days had elapsed.  The funds simply sat on his dresser or in the joint bank account until moved to the IRA.  The preparer filled out the return as if a proper rollover had occurred and may not have known of the timing issues.  The IRS did notice the timing of the rollover eventually, however, and sent the Trimmers a notice of proposed changes.

Mr. Trimmer wrote to the IRS and explained what had happened and how his post NYPD depression had impacted the timing of the rollover.  The IRS summarily denied the request for relief and did not mention the ability of the IRS to grant hardship waivers.  A notice of deficiency and Tax Court petition followed.  The Trimmers argued that they qualified for a hardship waiver under IRC 402(c)(3)(B) because “his failure to make timely rollovers was caused by his major depressive disorder during the relevant period.”  The IRS argued that the Trimmers did not qualify because they failed to “apply for relief pursuant to the terms of Rev. Proc. 2003-16.”  The IRS next argued that “there has been no final administrative determination denying petitioners relief, and that even if there had been, it would not be subject to judicial review.”  The IRS also argued that its refusal to grant him relief during the audit process was not an abuse of discretion.

The Court pointed out that the IRS had supplemented Rev. Proc. 2003-16 with Rev. Proc. 2016-47 discussed in our prior blog post.  The 2016 Rev. Proc. provides that the IRS “may determine that the taxpayer qualifies for a waiver of the 60-day rollover requirement under section 402.”  The 2016 Rev. Proc. has an effective date of August 24, 2016.  The IRS argued that the 2016 Rev. Proc. was not issued when the IRS examined the Trimmers’ 2011 return and the examiners had no authority to make a determination.

The Court does not buy this argument pointing out that nothing in Rev. Proc. 2003-16 or IRC 402(c)(3)(B) limits or constrains an examiners ability to find hardship during an examination whereas IRM in effect during the examination of the Trimmers’ return stated: Examiners are given the authority to recommend the proper disposition of all identified issues, as well as an issues raised by the taxpayer.”  The Court found that the 2016 Rev. Proc. did not create new authority but made clear the existence of that authority.  The Court looked at the way the IRS behaved during the examination and found that it did not deny relief because it could not make a determination but rather denied relief summarily without pointing to the statute or the then applicable Rev. Proc.

The IRS pointed to several earlier memorandum decisions of the Tax Court declining to consider equitable relief.  The Court responds that these cases did not involve any administrative request for hardship waiver through a private letter ruling or during the examination.  Mr. Trimmer did request administrative relief during the examination.  So, the Court finds the IRS did have the authority to consider the hardship request made during the examination and made a final determination to deny relief.

Having made that determination, the Court then moved on to its own review of the denial.  The IRS argued that the Tax Court did not have the authority to review the waiver denial as a part of a deficiency case.  The Court finds that the claim for a waiver here goes to the heart of the proposed deficiency.  It points to the “strong presumption that an act of administrative discretion is subject to judicial review” and that “agency action is only exempt from judicial review where the governing statues expressly preclude review or where the action is committed to agency discretion by law.”  Nothing in the applicable statute expressly precludes judicial review and the procedures for judicial review logically apply here.  So, the Court finds that it has jurisdiction to review the denial of the hardship waiver.  The appropriate standard for review is abuse of discretion.

The Court next addressed the IRS motion in limine objecting to the expert witness offered by the Trimmers.  A motion in limine is usually filed by a party to obtain a ruling in advance of trial so that the party might know how to proceed during the trial.  Having the decision on the motion appear in the opinion limits some of its usefulness and makes the determination more like the ordinary determination of the value of an expert witnesses testimony.  Nonetheless, the IRS seeks here before, during or after the trial to limit the value of the Trimmers’ expert witness. In deciding what to do with this testimony, the Court goes through the usual rules applied to allowing expert testimony.  The Court finds the expert’s testimony relevant, that she is qualified as an expert and reliable.  On the issue of reliability, the IRS argued that she did not observe Mr. Trimmer while he was going through the period of alleged depression.  This issue of timing comes up regularly when parties seek an expert in IRC 6511(h) cases.  It would be convenient if people experience life problems would go to a qualified expert at the start of their problems but all too often the problems also prevent the person from seeking timely treatment.  Here, the Court became comfortable that the expert used the proper technique to put the pieces together after the fact and it found that her expert testimony was supported by the credible testimony of the other three family witnesses who, although not experts, observed and lived through Mr. Trimmer’s period of incapacity.

The IRS had other problems with the expert including her alleged violation of state law because of her licensure (she was not treating him), the late submission of the expert report 22 days before trial instead of 30 (the Court cut the academic clinic a break), the use of an assistant in preparing the report (permitted under Court rules),  the lack of a statement of compensation (she did it pro bono), the failure to list her publications (these were on an attached CV) and the failure to list other cases in which she testified as an expert (there were none to list.)  So, the Court denied the motion in limine and admitted the expert’s testimony leaving still the determination of whether the IRS abused its discretion in denying the waiver.

The Court carefully examined the phrase equity and good conscience.  It found that the applicable statute giving the IRS authority to grant a waiver where taxpayers had missed the statutory time period for rollovers reflected “a broad and flexible concept of fairness, by providing a non-exhaustive list of situations that might satisfy the general standard.”  The Court listed the four objective factors to be used in making this evaluation.  Looking at those factors it determined that the one did not apply (a failure by a financial institution which frequently occurs in rollover cases), two were favorable to the Trimmers (their lack of use of the funds and the prompt rollover after the return preparer pointed out the problem) which left the factor of the inability to complete the timely rollover.  On this point the Court found that Mr. Trimmer’s failure resulted from a disability which materially impacted his ability to function.  The Court noted that it reviewed a number of private letter rulings and determined that its decision here was consistent with the rulings made by the IRS.

The case represents a great victory for the Trimmers and others who might seek equity in the Tax Court.  I must confess I am jealous of the success of the Fordham clinic since my clinic’s efforts at equitable results have not met with the same success.  The case is cause for continuing to try as well as for celebrating a victory of justice.

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