Tax Court Finds Self-Dealing Where Power of Attorney Withdrew IRA Funds For Her Own Benefit
Balint v. Commissioner of Internal Revenue, T.C. Memo. 2023-118 (2023)
Petitioner Joseph Michael Balint (“Petitioner”) brought suit against the IRS, for a tax assessment related to withdrawals made from his IRA and his life insurance by his spouse, Jacqueline Grimes Balint (“Jacqueline”), acting as his agent under a power of attorney.
During the 2014 tax year, Petitioner was married to Jacqueline. Petitioner’s assets included a retirement account (the “IRA”) and a life insurance policy. At this time, Petitioner was incarcerated and his monthly Social Security payment of $1,200 was stopped.
In February 2014, Petitioner asked his wife to get a Power of Attorney (“POA”) prepared for him and instructed her to include language that would entitle her to receive $1,200 a month from Petitioner’s financial planner, to replace the loss of the Social Security payments, until he returned home.
The POA was executed by Petitioner on March 19, 2014, was governed by Florida law, and appointed his wife as his agent, granting her “[f]ull power and authority to perform any act, power, or duty that [Petitioner] may now or hereafter have and to exercise any right that [Petitioner] now or may hereafter acquire.” Id. at *3. Petitioner further authorized his wife to “withdraw … money or property deposited with or left in the custody of a financial institution” and to “withdraw benefits from” any retirement plans.’” Id. In addition, Petitioner gave his agent “the authority to make gifts of [Petitioner’s] property outright to any person, outright or in trust, or otherwise for the benefit of any person” and stating that it was his “specific intent” to authorize Jacqueline to take certain actions that might otherwise constitute self-dealing. Id. With respect to self-dealing, the POA stated that Petitioner’s designated agent is “authorized to take actions on [Petitioner’s] behalf under the terms of this instrument that may benefit the agent as well as his or her immediate family by providing for health, education, maintenance, or support; in other words, actions that might otherwise be considered prohibited as self-dealing are specifically authorized under the terms of this instrument for the purpose of tax, financial or estate planning, for [Petitioner’s] benefit, or for qualifying for public assistance such as Medicaid, Supplemental Security Income or other public assistance programs for which [Petitioner] may be eligible. Id. at *3-4.
From April to October 2014, Jacqueline, under the POA, withdrew $137,470 from Petitioner’s accounts into a joint account, shared with Petitioner, before transferring $130,909 into her own individual account. Jacqueline used this money to move from Florida to Kentucky, renovate a home in Kentucky, to care for her ailing mother, and to pay for living expenses. Further, in late September 2014, Jacqueline commenced a proceeding for divorce while Petitioner was still incarcerated.
Petitioner was released from prison in January 2015. In April of that year, he filed a federal income tax return for 2014, with gross income in the amount of $223,191, which included the withdrawals from the IRA and the life insurance.
Petitioner received a notice of intent to levy from the IRS to collect Petitioner’s unpaid tax liability. After going through the appropriate procedures with the IRS, Petitioner filed the present action in the U.S. Tax Court.
Concurrently with this filing, Petitioner filed an action for divorce in the Circuit Court of Citrus County, Florida (“State Court”). As part of this action, to which the IRS was not a party, the State Court concluded that Petitioner had authorized his wife, as agent, to withdraw a total of $10,800 from his IRA which “directly benefited” him and that he should be liable for the tax due on that income. The State Court also concluded that Jacqueline should be liable for the tax due on the additional income withdrawn from the IRA and the life insurance, as Petitioner did not receive any financial benefit from those funds and Jacqueline had obtained them without Petitioner’s knowledge or consent.
During his arguments before the Tax Court, Petitioner cited Florida statutory law, Jacqueline’s testimony at the State Court trial, and the State Court’s order purporting to determine that Jacqueline solely benefited from, and should be liable for the tax due on, certain amounts withdrawn from Petitioner’s account.
The IRS countered that the State Court’s findings were not conclusive of any issues in this case because essential elements of res judicata and collateral estoppel were absent.
The court agreed with the IRS that to the extent the State Court’s order would benefit the Petitioner, neither res judicata nor collateral estoppel should give preclusive effect to the fact finding or legal conclusions of that order in the Tax Court case.
The IRS was not a party (nor in privity with a party) in the State Court divorce proceedings, so neither res judicata or collateral estoppel could apply against the IRS on the basis of any order issued therein.
A taxpayer’s gross income encompasses “all income from whatever source derived,” including from sources such as “pensions, annuities, and proceeds from life insurance contracts.” Id. at *7 (citing I.R.C. §61(a)(9), (10), and (11)). In some circumstances, courts have concluded that funds misappropriated from a taxpayer’s financial accounts were not includible in the taxpayer’s gross income because the taxpayer was not the payee, distributee, or recipient of the misappropriated funds, including where a spouse fraudulently withdrew from a taxpayer’s IRA without the taxpayer’s knowledge. Id. (citing Roberts v. Commissioner, 141 TC 569, 582 & n.19 (2013)).
The court went further, stating that “[a]lthough a taxpayer is generally treated as the recipient of any income received by his or her agent, that rule does not apply ‘where the agent receives and misappropriates funds for his own use, where the principal had no knowledge of such misappropriations, and where the principal received no economic benefit from the misappropriated funds.’” Id. at *7 (citing Grant v. Commissioner, T.C. Memo, 1995-29, 69 T.C.M (CCH) 1716, 1719).
The pivotal question remained whether Jacqueline, as agent for the Petitioner, was authorized to make such withdrawals from Petitioner’s assets, and if so, whether the income, and the related tax liability, should be attributed to Petitioner.
Under Florida law, an agent, under a POA, must act in good faith and may not act contrary to the principal’s reasonable expectations and may only exercise authority specifically granted to the agent in the power of attorney. As the court noted, Jacqueline, as agent, was authorized to make gifts of Petitioner’s property and to take actions that could otherwise be considered prohibited self-dealing. But, in the same sentence that authorized Jacqueline to commit such “self-dealing,” the POA limited that authority by stating that such actions were authorized solely for “the purpose of tax, financial, or estate planning, for [Petitioner’s] benefit, or for qualifying for public assistance … for which [Petitioner] may be eligible.” Id. at *8
The court held that by the preponderance of the evidence, Jacqueline engaged in self-dealing for her own benefit and not as an incident to accomplishing any authorized purpose on Petitioner’s behalf. Except to the extent that Petitioner conceded that $10,800 of the total amount distributed from the IRA was properly included as he intended the proceeds to be withdrawn for Jacqueline’s benefit, he did not benefit from the withdrawn funds. Such withdrawals were considered unauthorized self-dealing and was a breach of the agent’s fiduciary duty. As a result, the court held that Jacqueline, rather than the Petitioner, was the true distributee, payee, and recipient of the distributed amounts, and those amounts were not includible in the Petitioner’s gross income for 2014.