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When the insurance company sends you mail, open it!

November 04, 2009

A taxpayer failed to pay tax on a life insurance policy surrender. He tried the venerable "play dumb" defense when he got to Tax Court:

Despite being the owner and beneficiary of the policy and receiving numerous letters and statements informing him of the tax consequences of the policy in general and upon surrender, petitioner argues that he was unaware that the gain on the policy upon surrender was taxable to him. He claims he immediately forwarded all mail related to the policy, including Form 1099-R, to Ms. Barr [his mother] and that he has no recollection of ever seeing Form 1099-R.

But the Judge gave him more credit for smarts than he wanted to claim:

Petitioner is an experienced attorney admitted to practice before the Tax Court. Petitioner's testimony that he called Ms. Barr to discuss letters and statements he received in 2005 is contradictory to his testimony that he automatically forwarded all mail to Ms. Barr without opening it. He received a check for $11,648.33, which he did not forward to Ms. Barr but deposited into a bank account. Even if petitioner forwarded Form 1099-R to his mother without viewing it, he is not excused. Negligence does not require a bad intent or a willful act. Petitioner knew, or should have known, that because he was the owner and beneficiary of the policy, any proceeds paid out or gain recognized would be taxable to him. Petitioner's failure to report income shown on Form 1099-R was not on account of reasonable cause and good faith.

Bottom line: Tax and penalties.

The Moral: Tax lawyers don't get to play dumb about tax rules.

Cite: Barr, T.C. Memo. 2009-250