8 Unfair 2011 Tax Decisions

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Â*Sometimes the IRS and the Courts are wrong even when they are right.Â* The taxpayers in these cases might have had the law against them, but I still think they had right on their side.Â* I realize my sympathy is not worth anything to them, but they have it anyway as a Christmas present.Â* I decided to leave it at 8 so as not to be compulsive about lists of 10. 1.Wholly Screwed by Whole Life – John M. Sanders v. Commissioner, TC Memo 2010-279 Mr. Sanders took out a whole life policy in 1979.Â* He paid 31 per month for 27 years.Â* Over the years he borrowed against the policy.Â*Total borrowing was 7,136.Â* New York Life informed him in 2006 <a href="http://www.louisvuittonoutletsale2u.com"><strong>Louis Vuitton Official Website</strong></a> that his debt on the policy including interest was 17,203 which was 517 more than the surrender value of the policy.Â* If he did not pay 517, the policy would terminate.Â* That is what happened. He received a 1099-R from New York Life showing a distribution of 17,292.Â* The taxable amount was 7,175.Â* That is the gross distribution of 17,292 less premiums of 10,117.Â* Mr. Sanders did not understand: Petitioner testified that he disagrees with the taxable amount shown on the Form 1099-R because he "just did the math basically in my head" and he thinks New York Life’s "mathematics are way off." The Tax Court had no sympathy: These vague contentions do not rise to the level of a "reasonable dispute" so as to impose any burden of production on respondent pursuant to section 6201(d). In any event, stipulated documentation of petitioner’s premium and loan history with New York Life corroborates the information reported on the Form 1099-R. So what happened ?Â* The mathematics that Mr. Sanders did in his head indicated that he <a href="http://www.louisvuittonoutletstoresonlines.com"><strong>L ouis Vuitton</strong></a> received about 3,000 less than he put into the policy.Â* The problem was that the interestÂ*that accumulated on the loan was non-deductible while the dividends on the policy, accumulating at a much lower rate, were taxable income when “paid”. 2.Â* Even a Tax Attorney has Trouble Believing it - Bruce A. Brown, et ux. v. Com. TC Memo 2011-83 The Browns had basically the same story as Mr. Sanders except for larger numbers and the company being Northwestern.Â* The Browns are both attorneys and Mrs. Brown has an LLM in taxation.Â* They thought Northwestern analyzed the transaction incorrectly and ended up with an accuracy related penalty. There were a couple of other cases like this.Â* My friend, Perry Smith, thinks it is a fair deal, but I think it stinks.Â* These policies were sold as a kind of one stop financial solution to all your problems.Â* If, God forbid, you die young your heirs get a pile of money. If, God willing, you live to an old age you have a pile of money.Â* And if you should have needs in <a href="http://www.louisvuittonoutletstoresonlines.com"><strong>L ouis Vuitton Outlet</strong></a> between you can borrow something from the pile.Â* They did not explain that option 3 allows you to generate phantom income from a tax favored vehicle. 3. Being a Landlord is not a Passive Activity Except in the Tax Law – Todd D. Bailey, Jr., et ux. v. Commissioner, TC Summary Opinion 2011-22