On April 20, 2017, the United States Tax Court (Court) held in favor the petitioners, John C. Trimmer and Susan Trimmer (together, the Trimmers) against the Commissioner of Internal Revenue, regarding the Internal Revenue Service’s (IRS’s) authority to consider a hardship waiver and the notion that the IRS’s authority on the hardship waiver is not subject to judicial review. See John C. Trimmer and Susan Trimmer v. Commissioner, 148 T.C. No. 14 (Apr. 20, 2017). In Tax Court, the Commissioner of Revenue contended that the IRS’s Examination Division lacked the authority to consider a hardship waiver under IRC § 402(c)(3)(B). The Court held that not only did the Examination Division have the authority to consider a hardship waiver pursuant to IRC § 402(c)(3)(B) but also that it would be “against equity or good conscience” not to do so, given the specific facts of the case. See Rev. Proc. 2003-16, 2003-1 C.B. 359, as modified retrospectively by Rev. Proc. 2016-47, 2016-37 I.R.B. 346, which was modified and superceded by Rev. Proc. 2020-46.
John Trimmer retired from the New York Police Department (NYPD) on April 30, 2011 at 47 years old. Mr. Trimmer had initially planned to work as a security guard for the New York Stock Exchange after leaving the NYPD, but that job fell through. NYPD policy prevented him from returning to work there again. Approximately 3 weeks after retiring from the NYPD, Mr. Trimmer started to experience symptoms of major depression. These symptoms included loss of sleep, irritability, neglecting hygiene, and having trouble doing things that he previously did without fail, such as attending his sons’ school events. Ms. Trimmer testified that she felt like she could not rely on her husband during this period for things that he had previously reliably done.
On May 27, 2011 and June 10, 2011, Mr. Trimmer received two checks, totaling approximately $102,000, from his two retirement accounts. Mr. Trimmer left those checks on his dresser until July 5, 2011, when he eventually deposited them into the Trimmers’ joint bank account. Ms. Trimmer had previously relied on Mr. Trimmer to handle the family’s bill paying and financial paperwork. She assumed that Mr. Trimmer was handling the money in an appropriate manner, as he had previously done. Mr. Trimmer had regularly prepared the Trimmers’ taxes for filing early, for example, but in the spring of 2012, Ms. Trimmer had to remind Mr. Trimmer repeatedly to have their 2011 tax return prepared.
In the spring of 2012, the Trimmers received two Forms 1099-R, Distributions from Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., reporting the two distributions with taxable income of $99,990 and $710. Mr. Trimmer brought these Forms 1099-R to their tax preparer, who noticed that the Forms 1099-R indicated “early distribution, no known exception.” The Trimmers’ tax preparer advised them that they needed to rollover the two distributions into an IRA and do so promptly to ensure that those distributions were not taxable.
The Trimmers filed their 2011 taxes on March 29, 2012, reporting the two distributions as nontaxable. On April 16, 2012, following their tax preparer’s advice, Mr. Trimmer opened an IRA at the same bank that he had deposited the two distributions, and he immediately rolled over the funds into the new IRA. Since receiving the distributions, the Trimmers had not made any use of the funds or moved the funds to a different account.
In December of 2013, after Mr. Trimmer’s depression had gone into remission, the Trimmers received Notice CP2000, Proposed Changes to Your 2011 Form 1040. The Notice CP2000 asserted that the Trimmers had failed to report $100,700 of taxable retirement income from the two distributions and that they were liable, pursuant to IRC § 72(t), to an additional 10% tax on premature distributions from a qualified plan. Because of the proposed adjustments, the Trimmers owed $39,963 in additional taxes.
Mr. Trimmer sent a letter to the IRS on April 30, 2014. Mr. Trimmer explained his retirement and depression, and that he deposited the checks and rolled the amounts over to an IRA without spending any of the money. He also explained that the Trimmers had always been current and compliant on their taxes, and that to have to pay $40,000.00 would be financially devastating to them. That amount would be the equivalent of 3 years’ salary for Mr. Trimmer, who had taken up school bus driving to help pay for his sons’ college.
The operations manager of the IRS Andover, Massachusetts, Service Center responded to Mr. Trimmer’s letter on June 3, 2014, saying “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.” Three days later, on June 6, 2014, the Trimmers received another letter from the operations manager, who denied the Trimmers’ request for relief, saying that the “law required you to roll over your distribution within 60 days of the distribution date. If the rollover exceeds the time frame it becomes fully taxable.” The operations manager did not mention the statutory authority to grant a hardship waiver or any procedure for applying for one. They did not even acknowledge Mr. Trimmer’s particular circumstances. On August 18, 2014, the IRS issued its notice of deficiency reflecting changes proposed in the Notice CP2000. The Trimmers timely petitioned the Court.
Regarding the issue of judicial review on the IRS’s authority to consider a hardship waiver, the Court held that “there is a strong presumption that an act of administrative discretion is subject to judicial review.” See Corbalis v. Commissioner, 142 T.C. 46, 56 (2014); Mailman v. Commissioner, 91 T.C. 68 (1988); Estate of Gardner v. Commissioner, 82, T.C. 74 (1984); New York Racing Ass’n v. NLRB, 708 F.2nd 46, 51 (2d Cir 1983). IRC § 402(c)(3) does not preclude judicial review nor does legislative history suggest such an intent. As such, the Court held that it can review not only the terms of IRC § 402(c)(3)(B) but also related provisions and the legislative purpose for evaluating whether hardship waiver should be granted.
In determining the issue of the hardship waiver itself, the Trimmers did not deny that they missed the 60-day rollover window as defined pursuant to IRC § 402(c)(3)(A). The Trimmers contended that they qualified for a hardship waiver pursuant to IRC § 402(c)(3)(B) and, more specifically, as a result of Mr. Trimmer’s period of major depression. Since the Trimmers did not specifically apply for a hardship waiver, the Commissioner of Revenue contended that the hardship waiver provision of IRC § 402(c)(3)(B) was “inapplicable.” The Court disagreed.
IRC § 402(c)(3)(B) states that “[t]he Secretary may waive the 60-day requirement under subparagraph (A) where the failure to waive such requirement would be against equity or good conscience, including casualty, disaster, or other events beyond the reasonable control of the individual subject to such requirement.” While “equity or good conscience” is not defined, and rarely used elsewhere in the Code, section 3.02 of Rev. Proc. 2003-16, 2003-1 C.B. provides the following objective factors for determining whether to grant a hardship waiver:
“(1) errors committed by a financial institution, other than as described in Section 3.03
below; (2) inability to complete a rollover due to death, disability, hospitalization,
incarceration, restrictions imposed by a foreign country or postal error; (3) the use of the
amount distributed (for example, in the case of payment by check, whether the check
was cashed); and (4) the time elapsed since the distribution occurred.”
The first factor is inapplicable in the Trimmers’ case, since no error was made by a financial institution. The third and fourth factors favor the Trimmers. The couple made no use of the two distributions, other than to deposit them into a joint bank account before rolling them over to an IRA. Furthermore, as soon as the Trimmers’ tax preparer alerted them to the importance of the rollover, Mr. Trimmer completed the rollover shortly thereafter. Regarding the second factor, the Court determined that, due to Mr. Trimmer’s major depression, which it identified as a disability (cf. Meyer v. Commissioner, T.C. Memo 2003-12), he was unable to complete the rollover in a timely manner.
The fact that the Trimmers did not specifically apply for a hardship waiver did not mean that they were not qualified. Furthermore, the operations manager did not request substantiation for Mr. Trimmer’s depression, nor were the Trimmers offered the opportunity to present evidence supporting their case. Nevertheless, despite not citing IRC § 402(c)(3)(B), Mr. Trimmer’s letter clearly requested a hardship waiver, requesting a “fair decision” in response to the “emotional hard times that caused this situation.” As a result, the Trimmers qualified for a hardship waiver and it was against equity or good conscience to deny them the waiver of the 60-day rollover requirement.
The evolution of the Court’s recognition of depression and related ailments as a basis for favorable decisions is a positive development. The IRS’s skepticism as it relates to these same determinations is unfortunate and not consistent with developments in medicine and society at large. It is easy to see why the IRS’s antiquated position has a negative effect on the taxpaying public and should be addressed to conform to the Court’s recent precedent.