In the tax world, we often say that rules matter. A Florida couple found this out in a most unfortunate way after a judge ruled that they were liable for taxes on $1.2 million in retirement income, much of which was fraudulently taken from them—by their own daughter.
U.S. District Court Judge Tom Barber notes that the facts of the case are “undisputed and disturbing.”
Background
Dennis and Suzanne Gomas are a retired couple who live in Florida. Just before their retirement in 2016, they were business owners—they inherited Feline’s Pride, LLC, an online business that sold raw pet food.
The business was located in New York. Not being able to supervise the business directly resulted in problems—Dennis lived in Florida at the time he inherited the business and relied on a business manager who he said stole inventory, sold customer lists to competitors, and failed to supervise other employees adequately. In 2014, he fired his business manager and moved the business to Florida, registering the company under My Pets Pride, LLC.
Dennis’ stepdaughter, Suzanne Anderson, helped with the business at the new location. But after a year, he thought he was ready to close the company. Anderson convinced him to keep it open. She began to oversee the day-to-day operations.
By 2016, Dennis was finally ready to close the business. He took all the official steps to wind down operations: he dissolved the corporation and closed its bank accounts. Then, he turned over the remaining assets to Anderson.
In March 2017, Anderson moved the business and its assets to her home. Two months later, she delivered some concerning news: former employees of Feline’s Pride had opened merchant service sub-accounts under the merchant service account using Dennis’ personal information, including his Social Security number and birthdate. Those employees, she claimed, were using the sub-accounts to defraud internet customers. As a result, she said, Merchant Services intended to hold Feline’s Pride and Dennis liable for the missing funds.
But, according to court documents, she had a plan. She convinced her parents to hire an attorney to prevent Dennis from being arrested. She even had an attorney in mind—Anthony Rickman. Anderson told the Gomases that Rickman needed $125,000 to prevent Dennis from immediate arrest. They turned it over. Shortly after, they gave Anderson an additional $13,000 for the same purpose.
Over time, Anderson asked for more money, warning that if they did not immediately comply, Dennis would be arrested. So, they turned over the money. In 2017 alone, the Gomases withdrew about $1,133,250 from their retirement accounts, turning over at least $726,152.44 to Anderson .
Heartbreak
On August 30, 2019, the Gomases found out from friends that Anderson had been scamming them. And while there really was an attorney named Anthony Rickman, he had never represented the Gomases, nor Anderson. Messages that allegedly came from him were fraudulent, originating from Anderson.
Anderson was eventually arrested. On June 2, 2022, Anderson entered an open guilty plea to seven counts, including four first-degree felonies and three second-degree felonies. With an open plea, the defendant and the prosecution agree on the charges, but the judge determines the sentence. Anderson was sentenced to 25 years in Florida State Prison, followed by probation.
Taxes
In 2018, the Gomases filed their 2017 tax return, showing taxable income of $1,175,799, which included $1,174,020 in pension and IRA distributions. Ultimately, they reported the entire amount and paid $411,599.14 in income tax for the 2017 tax year.
In 2020—after the fraud was discovered—the Gomases filed an amended tax return for the 2017 tax year. They were seeking a refund of income tax and a penalty of $412,259, plus interest, after deducting the $1,174,020 they received from their IRA and pension accounts. The Gomases also sent a copy of a Form 1096 showing that they issued Anderson a 1099-MISC for $1,174,020, along with a statement that indicated the distributions were used to pay expenses, such as “fictitious invoices, fake attorneys’ fees, and other fraudulent mechanisms used by…Anderson.”
The IRS disallowed the deduction and denied the claim for refund. In response, the Gomases filed a formal action in court seeking a refund of $412,259. Unfortunately, the facts were not on the Gomases’ side.
Ruling
The court found that “[i]t is undisputed that Plaintiffs were the victims of a theft.” And it used to be the case that victims were entitled to a theft deduction in the year the loss was discovered. In this case, that was 2019. Unfortunately for the Gomases, Congress eliminated the theft loss deduction for the tax years 2018 through 2025—that would include 2019.
Since they couldn’t claim the 2019 deduction, the Gomases tried two other workarounds. First, they claimed that the 2017 IRA distributions and pension benefits should be excluded from income because they did not enjoy the use of those funds—Anderson did. The court ruled, however, that the Gomases “freely exercised their discretion” over the expenses paid from those accounts, including personal expenses and distributions to Anderson. However, if Anderson had forged signatures or pretended to be the Gomases, the outcome would have been different.
The Gomases next argued that the money would be deductible as ordinary and necessary business expenses since they had believed Anderson was using the funds to pay for legal services to resolve issues related to their closed business. The fact that the business was closed mattered here—they weren’t carrying on a trade or business in 2017, nor had they alleged they were by claiming expenses on their original tax return. And even if they could make that argument work—despite not having a bona fide business at the time—none of the money given to Anderson was used to pay actual business expenses.
The court was sympathetic to the Gomases, finding that they were the “undisputed victims” of a scheme that resulted in the loss of nearly $2 million. And the court found that the resulting tax “seems unjust.” Judge Barber also wrote, “it is unfortunate that the IRS is unwilling – or believes it lacks the authority – to exercise its discretion and excuse payment of taxes on the stolen funds.”
But, all that said, he ruled that “the law is clear here and it favors the IRS.” With that, he dismissed the claim for refund.
Lessons
There are a few takeaways here for taxpayers.
- Consult with a professional. I’m a mom. I’m not going to tell you not to trust your kids. You can’t assume what happened to the Gomases will happen to you—it isn’t common. That said, when it comes to legal and business issues, I would encourage you to reach out to a professional who can, without emotion, ask the right questions. The key: it can feel painful to shell out money for a tax professional, but they will ask the questions that can be difficult for individuals to ask—and those questions can save you money.
- Try not to touch your retirement accounts. The hit you can take from dipping into your IRA is significant—the tax is equivalent to ordinary income, plus an additional 10% surtax if you take a distribution before age 59 ½. Sure, there are emergencies. But you might have better options—the average credit card rate right now is 22.45% for new accounts and 20.68% for existing accounts—that works out better than paying your tax rate + 10%. Even if you think your situation is desperate, take a moment to consider other options before raiding retirement accounts.
- Stop the bleeding. The taxpayers in this case had paid the tax—they were suing for refund. If they had not paid the tax, they likely would have been subject to penalty and interest on the tax due—from 2017. That’s not insignificant. Paying in advance and then making the argument later can save you money. When you have the opportunity to mitigate your damages, consider the benefits—they can add up.
- Tax laws are always changing. The 2017 tax reform laws shook up many norms, including those deductions on Schedule A. For example, for the tax years 2018 through 2025, you cannot claim casualty and theft losses on personal property as itemized deductions unless your claim is caused by a federally declared disaster (there are different rules for business property). It’s important to understand the rules as they change and what they mean for your situation.
- Think outside of the box. While the taxpayers were ultimately not successful with respect to their alternative arguments, the idea to consider multiple reasons to support their position was sound. But the better plan? Introduce your arguments promptly (and document them like crazy—see again #1).
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