Court rules tax on income from inherited IRA couldn’t be avoided

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By Pat Murphy
Dolan Newswires

An unreported retirement distribution related to an inherited individual retirement account is taxable, regardless of the taxpayer’s maneuver to obtain the funds through a trustee-to-trustee transaction, the U.S. Tax Court has ruled in upholding a $13,600 deficiency assessment.

The taxpayer was a beneficiary of his cousin’s individual retirement account. The IRA was maintained by a bank. When his cousin died, the taxpayer opened his own IRA account with the bank and had the bank deposit the funds from the inherited IRA into his own IRA account. That same day, the taxpayer directed that the bank distribute the money from his IRA. He received the funds in five separate checks totaling $45,500.

The taxpayer argued that, under the Internal Revenue Code, he could avoid being taxed on the inherited IRA because the money was transferred from one account trustee to another account trustee without him gaining control of the money.

But the court concluded that the trustee-to-trustee transfer attempted by the taxpayer did not relieve him from having to include the funds from the inherited IRA in his gross income.

“[The taxpayer] inherited funds from a nonspousal IRA, transferred the funds into an IRA, and then withdrew the funds from the IRA on the same day. The court does not have to determine whether [the taxpayer] made a valid trustee-to-trustee transfer of the IRA funds. By withdrawing the funds from his IRA, [the taxpayer] is subject to the standard income tax rules for distributions from an IRA,” the court said.

U.S. Tax Court. Nipps v. Commissioner, No. 28387-09.  Nov. 10, 2011. Lawyers USA No. 993-3349.