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ASK THE EDD ATTORNEY – WHEN WILL EMOTIONAL DEPRESSION CONSTITUTE REASONABLE CAUSE FOR THE ABATEMENT OF PENALTIES? THE TRIMMER CASE – PART 1

By Robert S. Schriebman

2017

Introduction

It does not happen very often in the world of tax controversies, but when it does, it is a major event! I am talking about a tax case that is of major consequences. The case of John C. Trimmer, decided by the US Tax Court in April 2017 was such a case. In the Trimmer case, the US Tax Court ruled that emotional depression may constitute reasonable cause for the abatement of IRS penalties. John C. Trimmer and Susan Trimmer v. Commissioner 148 TC – No. 14 April 20, 2017.

Depression. It is something that we have all experienced, especially in today’s world where it seems that you cannot pick up a newspaper without reading about something very depressing. I am reminded of President Abraham Lincoln, who constantly suffered from bouts of depression, then medically diagnosed as melancholy. Between the poor beginnings of the Civil War for the North, the death of his sons, and his emotionally challenged spouse, Mr. Lincoln had good reason for being depressed.

Mr. Trimmer, as we will see in this series of articles, had his challenges. The IRS was not sympathetic, and IRS lawyers threw up many road blocks in his attempts to remove penalties assessed against him for failing to timely set up an IRA. However, a wise and understanding US Tax Court judge eventually ruled that Mr. Trimmer’s depression constituted reasonable cause for the abatement of penalties relating to his failure to rollover his Pension benefits timely into an IRA.

In this 3-Part article we will take an in-depth look at John Trimmer’s battle with depression, the facts involved in the IRS’ hard-lined position of denying a waiver of IRA-related penalties. We will also examine the many arguments that IRS attorneys used in attempting to maintain the IRS’ point of view that John Trimmer’s depression should not give him a pass from paying almost 50% of his retirement benefits to the IRS in the form of penalties. Finally, we will examine the position of the US Tax Court in affirming and establishing reasonable cause for penalty abatements based upon emotional depression.

It does not happen very often that true justice triumphs in favor of the little guy, but it happened to John Trimmer. His case may now open the door for so many people seeking relief from penalties incurred due to emotional depression. There is no telling just how far the Trimmer case will reach, but it’s a great start.

The Case of John C. Trimmer and Susan Trimmer – "Just the Facts"

John’s Battle with Depression

John Trimmer (John) was a NYPD Officer. After twenty years of service, he retired in April 2011. He was only 47 years of age at the time of retirement. Prior to retirement he had secured a job as a security guard at the NY Stock Exchange to supplement his pension from the NYPD, and to help pay his sons’ college educations. However, shortly before retirement the job fell through. NYPD policy prevented a retired police officer from returning to work there.

About three weeks after retiring John began experiencing symptoms of major depressive disorder. He felt like a lost soul who rarely left his house, and hard trouble sleeping. He neglected his hygiene and grooming. He just did not do much of anything.

John had retirement accounts with the NYPD Pension Fund. On May 27 and June 10, 2011, after his major depression had set in, John received from his retirement accounts distribution checks totaling over $100, 000. These checks lay on his dresser at home for over a month, until, July 2011 when he deposited them into his joint bank account with his wife, Susan. He did not rollover his pension into an IRA.

The Trimmers were in the habit of filing their 1040 income tax returns early in the year, way before April 15th. In the spring of 2012, however, still suffering from depression, John had to be repeatedly reminded to meet with their tax return preparer. The 2011 return was filed at the end of March 2012.

In early 2012 John received Forms 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAS, Insurance Contracts, etc., reporting the two distributions with taxable amounts of over $100,000. John showed the 1099 to his tax return preparer, who advised him to immediately open an IRA at the same bank where they had deposited the pension checks. John set up the IRA and immediately rolled the funds over to the new IRA. However, by this time it was way past 60 days allowable rollover period.

Gradually John’s depression began to dissipate and by the summer of 2012 it was in remission.

Enter the IRS

In December 2013 the IRS wrote to John and Susan asserting that they had failed to report over $100,000 of retirement taxable income and that they were liable under IRC § 72(t) for an additional 10% tax on premature distributions from a qualified plan. The IRS proposed an assessment of $40,000 in additional taxes. The IRS notice advised them if they disagreed with the proposed changes, they should complete an attached response form and send it to the IRS promptly. If they failed to do so, the proposed assessment would become final and the IRS would issue a deficiency notice.

At the end of April 2014, John sent the IRS a letter explaining that the reason he was late in setting up the IRA was due to severe depression. He pointed out in his letter that he and his wife had never had any prior problems with IRS. He also explained that he was now employed as a school bus driver so he could earn enough money to send his sons to college. The letter stated, "To pay $40,000 in taxes for money that is in an IRA would absolutely cripple my family as it would be three years of my salary. Sir, no harm was done to anyone. I went through a rough time upon separation from my job, causing me emotional hard-times that caused this situation."

In early June 2014 the operations manager of the IRS of Andover, MA Service Center wrote back to John and told him, "You don’t need to do anything else for now. We will contact you again within 60 days, to let you know what action we are taking." John did not have to wait long. Only three days later he received a second letter from Andover affirming the assessment because he failed to roll over his pension distributions within 60 days of the distribution date. The letter did not mention the IRS’ statutory authority to grant hardship waivers or any procedure for applying for a waiver, nor did it acknowledge John’s particular circumstances as described in his initial letter to the IRS.

In August 2014 the IRS issued a notice of deficiency assessing a 10% IRA penalty additional income taxes, and if this wasn’t enough, a 20% negligence penalty. By now the tax bill was almost 60% of the amount of the pension received! The Trimmers timely filed a petition in the US Tax Court to challenge the IRS.

Conclusion

In Part 2 we will take a look at the arguments that the IRS used in order to defend the IRS’ assessment and to prevent the Trimmers from being granted a waiver of penalties, as well as, the income tax assessment. The first two arguments raised by the IRS were as follows:

  • The Trimmers did not properly ask for a penalty waiver, and
  • the US Tax Court has no jurisdiction to consider penalty waiver matters.

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Robert Schriebman has a successful practice in the Rolling Hills Estates area of Los Angeles County serving clients throughout California and the United States. He has successfully dedicated more than 40 years to helping individual taxpayers, business owners, CPAs, Enrolled Agents, and tax attorneys navigate the complicated tax systems of the federal and state governments.

Robert Schriebman has written the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See "California Tax Collection Practice and Procedures" and "California Taxation Practice and Procedure," both published by Commerce Clearing House. Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, "IRS Tax Collection Procedures – A Manual for Practitioners" published by Commerce Clearing House.

Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, "IRS Tax Collection Procedures – A Manual for Practitioners" published by Commerce Clearing House in addition to the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See "California Tax Collection Practice and Procedures" and "California Taxation Practice and Procedure," both published by Commerce Clearing House.

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