Deceased taxpayer continued receiving pension payments

Technical topics regarding tax preparation.
#21
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You’re reporting ideas also seem a bit strained. We don’t have all the details, but let’s assume the guy died in 2019 and a 1099R was issued for that year, in the guy’s SSN, which included some post-death pension payments.

You’d have us remove those post-death payments from the guy’s final 1040 (2019). Fair enough.

But then you’d have us add them to the 1041 for 2019. At which point, you make the simple statement:

The deadman’s estate/beneficiaries would get a credit/deduction if and when it applies ie.. as the owner of the income.

Unfortunately, it’s not that simple. You’d have to walk us through the subsequent reporting that would take place, for each possible scenario. One scenario is that all the income (including the erroneous income) for 2019 is trapped on the Form 1041 and all tax is paid by the estate. So what happens in the year of repayment? I suppose the estate would take a deduction. What kind of deduction is it? Would it pass through the beneficiaries? If so, would they get any benefit from it? Assume the year of repayment is also the final year of the estate. Now assume we take a credit in the final year of the estate. But then we wonder if we can close the estate, because if the refund is made, it will come to the estate, and it will then have to be distributed to the beneficiaries. Further, you might have a final year 1041 with nothing on it except the credit. I’m not sure I love that position. If the IRS denies the credit, now we have a bunch of back-and-forth with the IRS. Similarly, what if all the income in 2019 (including the erroneous income) passed through on K1’s. What would you suggest there? Seems the estate wouldn’t be able to take a credit, because it paid no tax in 2019. Would you advise each beneficiary to take a direct credit on his or her 1040? Seems like trouble brewing. Or, would we be back to the deduction route, with the hopes that it passes through as something meaningful? Then there’s the scenario of some 2019 income passing through on K1’s and some being taxed to the estate.

These gets even more complicated if you are proposing that the estate pick up erroneous income for years after the decedent died. If extra pension payments were made in those post-death years, the 1099’s would have been issued in the decedent’s SSN. So why one would propose this “just report it on the 1041” route is highly suspect.

Granted, we don’t know all the facts. We don’t know if this estate (really a trust) will continue on or not. We don’t know if there have been any distributions to beneficiaries. And we don’t know if Sec 645 is at play.

But even not knowing that stuff, in addition to it being the wrong reporting route, it is likely an administrative nightmare and an anti-beneficiary position.
 

#22
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unconditional obligation to repay - what about the condition that requires a claim to be filed with the probate court

That “statute of limitations” type of condition isn’t a condition that impacts the “unconditional obligation to repay” concept. Conditions, for purposes of that concept, are examined at the time payment is made.

Your argument goes like this: $1m shows up in Joe’s bank account today from some unknown source. Joe doesn’t have an unconditional obligation to repay because, it might turn out, the bank never asks for the money back.
 

#23
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That “statute of limitations” type of condition isn’t a condition that impacts the “unconditional obligation to repay” concept. Conditions, for purposes of that concept, are examined at the time payment is made.


Yes, that difference came to me after I already posted typed that.. you must have captured before I edited..

You’re reporting ideas also seem a bit strained.

Agree. Suspect it happens.

Unfortunately, it’s not that simple.

Agree with your flow. Hopefully but not a guarantee the notice to creditors would shorten the period of time that could occur.

How would the correct reporting flow work and any statements provided?
 

#24
marknyc  
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I tend to agree with Jeff's position. To me, the situation seems analogous to an individual receiving SS payments who dies and the SS payments mistakenly continue for a month or two after the month of death. The post-death payments must be re-paid to the government and should not be taxable income on the decedent's final 1040. And I'm confident the IRS would not assert that the post-death SS payments should be reported as income on the estate income tax return.
 

#25
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I’m still having a problem with Jeff’s theory that the pension payments aren’t taxable because they aren’t really pension payments.

The facts are simple --- an employer continues to make pension payments to a former employee for a few years after the employee’s death. The question is whether such payments are taxable to his estate.

On the one hand, I see sec. 61(a)(10) that says that gross income includes pension payments. This is further supported by U.S. Supreme Court language stating that when a taxpayer mistakenly receives income in one year, which is discovered as invalid in a subsequent year, the taxpayer must nonetheless report the income in the year received. This is even further supported by a line of embezzlement cases that hold that income embezzled in one year, which had to be repaid in a later year, is taxable as income in the year embezzled.

On the other hand, all Jeff has is a theory. I haven’t seen any authority that says that when an employer mistakenly makes pension payments to a former employee who died, that the payments aren’t income. Jeff's theory is that the erroneous pension payments create an unconditional obligation on the part of the employee to repay. But when an individual embezzles from his employer, this creates an unconditional obligation to repay the embezzled funds. Under Jeff's theory, the embezzlement shouldn't be taxable. But it is. Why hasn’t the situation involving an employer's erroneous pension payments arisen before so that we would have a ruling or a court decision?
 

#26
jon  
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The only time this has happened to me they source ALWAYS has demanded payback and we did. It has been years since social security has been a problem, but paid it back then also.
 

#27
Nilodop  
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I'd like to address the thinking in the last paragraph of # 25, the one about the unconditional obligation to repay an embezzlement. I also thought about that. I have not read all of what Jeff-Ohio wrote (kind of a lot) but his stuff is almost always well thought out, and I did scan it.

One of his arguments is that it was clear that there was an unconditional obligation to repay the pension, so it was not income to start with. And yes, there is an unconditional etc etc for an embezzler. But the difference may be that the pension error is almost 100% likely to be found and corrected, whereas that may be a lot less likely to happen for the embezzlement.

And remember, the item must first be income before we even consider 1341. The recipient of the erroneous pension payment not only knows it should be repaid, but also knows it will be repaid. The embezzler most likely also knows the theft should be repaid, but frequently hopes, even expects, to get away with it and for any of several reasons (no money left, no report to the authotities, whatever. So its return is contingent, and it's income. So the embezzler fails under 1341 (because he knows it's supposed to be repaid), even though it's included in income, but the pension recipient knows that it WILL be repaid, so it's a liabiity, not income.
 

#28
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The embezzlement angle, which is what you (NoCal) have continuously focused on, has already been resolved by the Supreme Court. We are not dealing with an embezzlement in this case, so making correlations to an embezzlement situation is off point.

But the difference may be that the pension error is almost 100% likely to be found and corrected, whereas that may be a lot less likely to happen for the embezzlement.

Exactly. An embezzler is not a good credit risk. Putting him on the same footing as a bona fide borrower would be inappropriate. The public policy issue is built into this idea.

I’m still having a problem with Jeff’s theory that the pension payments aren’t taxable because they aren’t really pension payments.


Well then, if NoCalCPA85 received the OP’s post-death pension payments accidentally, then NoCal would agree that NoCal would have to pay tax on them. After all, pension payments are income according to NoCal’s logic.

This is further supported by U.S. Supreme Court language stating that when a taxpayer mistakenly receives income in one year, which is discovered as invalid in a subsequent year, the taxpayer must nonetheless report the income in the year received.


I’ve already dispatched with that argument. The Supreme Court “language” you cite was pulled from other cases, which involved mutual mistake.

This is even further supported by a line of embezzlement cases

No, it’s not. The embezzlement cases stand alone. The Supreme Court has spoken on the embezzlement issue. Conclusions drawn in embezzlement cases don’t support any other type of case.

I haven’t seen any authority that says that when an employer mistakenly makes pension payments to a former employee who died, that the payments aren’t income.


Probably because the IRS wouldn’t be so foolish to litigate one.
 

#29
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Jeff-Ohio wrote:Probably because the IRS wouldn’t be so foolish to litigate one.

Equally plausible is that a taxpayer wouldn't be so foolish to litigate that pension payments aren't income.

I will agree that the pension payments were loans at the time that they were made, but when the checks were cashed, they became taxable. This point was made by the Tax Court in Bichan, T.C. Memo. 1969-27.

https://scholar.google.com/scholar_case?case=12449444368373118972&hl=en&as_sdt=6&as_vis=1&oi=scholarr
 

#30
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Equally plausible is that a taxpayer wouldn't be so foolish to litigate that pension payments aren't income

Seriously? So NoCal accidentally gets $1m randomly deposited into his bank account and he’s fine paying tax on it? Don’t think so. Please address this hypothetical in light of your arguments. This is now the second time I’ve brought up this hypothetical since you didn’t address it the first time around.

I will agree that the pension payments were loans at the time that they were made, but when the checks were cashed, they became taxable.

No, they weren’t. Now you cite a case where the lawyer (Bichan) says to the client (Wood): “Pay me $10,000 up front for services to be rendered.” Wood doesn’t have the money, so Wood goes to Wood’s in-law’s to borrow it. The $10k is borrowed and makes its way to the attorney Bichan. Wood gives his in-laws a promissory note. Bichan agrees to guarantee that payment obligation (the promissory note) flowing between Wood and Wood’s in-laws.

This case doesn’t support, at all, your position. First of all, Bichan has a claim of right. He’s the one that asked for money and stipulated it was for services to be rendered. It makes little sense that someone would say, “Pay me upfront for services rendered” and then argue that they had no claim to that sum. Second of all, Bichan didn’t have an unconditional obligation to repay Wood’s in-laws. Bichan would only repay if and when Wood failed to repay the promissory note flowing to his in-laws.

In short, this case you cite involves a valid claim of a right to the sum and it doesn’t involve an unconditional obligation to repay that sum. As such, it fails, all the way around.

Now go find us a case where the guy receives an amount, by mistake, that he didn’t ask for and that he never claimed an entitlement to.
 

#31
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Seriously? So NoCal accidentally gets $1m randomly deposited into his bank account and he’s fine paying tax on it? Don’t think so. Please address this hypothetical in light of your arguments. This is now the second time I’ve brought up this hypothetical since you didn’t address it the first time around.


Do you think if NoCal got notice that the $1m was reported he would pay the tax?
 

#32
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Do you think if NoCal got notice that the $1m was reported he would pay the tax?

Not sure who gave this hypothetical notice. And I’m not sure what you mean by “reported.”

But none of this should matter under NoCal’s logic. By his own admission in Post #29, if the money gets credited, that’s that.
 

#33
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One could give all kinds scenarios. Just playing off your hypothetical. Reported To IRS as income which is inline with a pension payment after death that was not corrected.
 

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