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Despite Being Victim of Fraud That Led Taxpayer to Believe He Had to Pay Cash to Avoid Jail, Was Still Subject to Tax on Funds Withdrawn from IRA

In this specific case (Gomas v. United States)[1], the judge proposed that the IRS should have considered overlooking the tax issue at hand and granting leniency. Surprisingly, the judge himself refrained from exercising such discretion and instead ruled against the taxpayer, most likely due to the same constraints the IRS faced. This is because the applicable law mandated that the taxpayers were obligated to pay taxes in this particular scenario, despite the unfortunate circumstances wherein they were deceived into withdrawing substantial sums from their retirement account and delivering them to a fraudster. Notably, the fraudster happened to be the daughter of one taxpayer and the stepdaughter of the other.

The opinion begins with an overall summary of the case:

The facts of this case are undisputed and disturbing. Plaintiffs Dennis and Suzanne Gomas are elderly individuals that worked their entire lives to build sufficient savings to comfortably retire. They were finally able to do so in June 2016. However, their peaceful retirement ended when Ms. Gomas's daughter, Suzanne Anderson, engaged in a complex scheme to defraud Plaintiffs, stealing their savings. The web of never-ending lies spun by Anderson over the course of two years left her family in disbelief and nearly destitute. In fact, she stole nearly $2 million dollars from Plaintiffs, including more than $600,000 in 2017 alone. Anderson is now in prison for 25 years, right where she belongs. But this case is not about Anderson's criminal fraud — it is about whether the victims of her fraud are required to pay federal income tax on the money she stole from them. Astonishingly, for the reasons explained below, they are.[2]

The Long and Messy Road for the Daughter to Obtain Funds

The convoluted narrative unfolds with the taxpayers falling victim to fraudulent activities orchestrated by an individual (who was not the daughter) responsible for overseeing a business inherited by Mr. Gomas from his brother.

In December 2010, Plaintiffs became the owners and operators of Feline’s Pride, LLC, which was inherited from Mr. Gomas’s brother after his brother’s death. Feline’s Pride, LLC, operating online and shipping directly to customers, sold raw pet food. The principal place of business was New York, and Mr. Gomas lived in Florida. Because he could not supervise the day-to-day operations, he relied on a business manager, Jennifer Taylor. According to Plaintiffs, Ms. Taylor began stealing inventory, sold customer lists to competitors, and failed to adequately supervise other employees. In October 2014, Mr. Gomas fired Ms. Taylor and moved the business to Florida, registering the business under the name My Pets Pride, LLC. Mr. Gomas’s stepdaughter, Anderson, began assisting him with the business.[3]

Although Mr. Gomas successfully resolved one issue, unbeknownst to him, he inadvertently placed an even less trustworthy individual in a position that Ms. Anderson would exploit, leading to dire consequences that ultimately left the couple destitute.

Nearly a year later, Mr. Gomas came close to taking actions that would have, at the very least, compelled Ms. Anderson to resort to alternative methods of defrauding her mother and stepfather, distinct from the scheme she eventually exploited. However, she skillfully convinced Mr. Gomas to grant her even greater authority over the business, further exacerbating the situation.

In October 2015, Mr. Gomas decided to close My Pets Pride. However, Anderson convinced him to continue operating the business, and he entrusted her to oversee the day-to-day operations. In June 2016, Plaintiffs decided to retire and turned the business over to Anderson. Plaintiffs stopped its operations, dissolved the corporation with Florida’s Secretary of State, closed its bank accounts, and gave its remaining assets to Anderson.

In March 2017, Anderson told Plaintiffs that she thought she could run My Pets Pride more efficiently from a home she rented in New Port Richey. After Plaintiffs agreed, Anderson moved the business and its assets to her home. She also convinced Plaintiffs to give her $20,000 to build a fence and shed at her home to assist with the business, although during numerous visits to her home over the following months, Plaintiffs never physically observed the fence or shed she had sought to build.[4]

Ms. Anderson had a larger goal in mind, surpassing the acquisition of a mere $20,000, which may or may not have been utilized for a fence construction at her residence. Her plan involved securing considerably larger sums from her mother and stepfather by manipulating them into believing that Mr. Gomas faced imminent incarceration and that this threat would persist in the future.

On May 5, 2017, Anderson convinced Plaintiffs that Ms. Taylor and other former employees of Feline’s Pride had opened merchant service sub-accounts under the main merchant service account using Mr. Gomas’s personal information (including his social security number and date of birth). Anderson stated that the former employees were using the sub-accounts to defraud internet customers, and this fraud caused Merchant Services to hold the main account holder — Feline’s Pride and Mr. Gomas — liable for the missing funds. She convinced Plaintiffs that they needed to hire an attorney to prevent Mr. Gomas from being arrested for the fraudulent transactions. Anderson suggested and Plaintiffs agreed to hire Anthony Rickman to represent Mr. Gomas and prevent his arrest. Anderson told Plaintiffs that Rickman needed $125,000 to prevent immediate arrest, and they provided her with that money. On May 7, 2017, Plaintiffs provided Anderson with an additional $13,000 for the same purpose.

After receipt of these payments, Rickman supposedly represented Plaintiffs, although Plaintiffs never met Rickman. The only person who communicated with Rickman was Anderson, who relayed messages to Plaintiffs that allegedly came from Rickman. Anderson often told Plaintiffs that Rickman discovered additional sub-accounts with outstanding balances, and that if they did not immediately send additional funds to Rickman to settle the accounts, Mr. Gomas would be arrested. Each time, Plaintiffs would immediately provide Anderson with the requested amounts.[5]

Ms. Anderson employed numerous additional tactics to convincingly portray the fabricated scenario she had concocted, in order to persuade the couple of its authenticity.

The scheme ran deep, and Anderson forged numerous legal and business documents to perpetuate her fraud. For instance, on November 6, 2018, Plaintiffs received purported settlements from TD Bank and Bank of America in the amounts of $7,200,00 and $17,200,000, payable to Plaintiffs. Anderson even created a fake email address in Rickman’s name to begin direct communications with Plaintiffs. Plaintiffs would often request appointments to meet with Rickman, but Anderson would convince them that she was handling everything, and that the case was going well. When pushed, Anderson would tell them that Rickman was in court or too busy to meet or communicate personally with them. Plaintiffs believed everything Anderson told them.[6]

Under immense pressure, the distressed couple found themselves in a desperate situation, compelled to swiftly generate cash to fulfill mounting payments to their attorney and prevent Mr. Gomas from facing imprisonment. In 2017, they resorted to tapping into an IRA account, resulting in a substantial taxable distribution from the account for that year.

To fund the fake case and prevent Mr. Gomas’s arrest, Plaintiffs heavily withdrew funds from their retirement accounts. From January 3, 2017, to December 28, 2017, Plaintiffs personally authorized and completed numerous transactions from an IRA to SunTrust, totaling $1,133,250, handing about $600,000-$700,000 of these proceeds to Anderson. Plaintiffs entrusted Anderson with tens, and sometimes hundreds, of thousands of dollars at a time. At most, Plaintiffs handed Anderson $726,152.44 throughout 2017. The remaining expenses from the SunTrust account — whether with funds received from the IRA distributions or pensions benefits — were personal expenses of Plaintiffs. Anderson never accessed the accounts herself in 2017. She simply accepted the funds Plaintiffs gave to her on more than 100 occasions throughout the year.[7]

As indicated in a footnote to the opinion, it is worth noting that Ms. Anderson's fraudulent activities extended beyond deceiving her mother and stepfather. She managed to acquire over $200,000 from additional acquaintances and relatives of the taxpayers. However, her scheme eventually unraveled as suspicions arose among these friends, leading to the exposure of Ms. Anderson's fraudulent acts.

On August 30, 2019, Plaintiffs met with six friends who informed them of Anderson’s scam. Two of these friends reached out to Attorney Anthony Rickman who confirmed that neither Plaintiffs nor Anderson were clients of his, and he was not associated with the email address that Anderson created.

Plaintiffs met with officers of the Hernando County Police Department, which began investigating Anderson and subsequently arrested her on multiple theft and fraud charges. On June 2, 2022, Anderson entered an open plea of guilty to seven counts, including four first-degree felonies and three second-degree felonies. See State of Florida v. Suzanne Eileen Anderson, 2021-CF-001005 (Fla. 5th Jud. Cir. 2021). On September 22, 2022, she was sentenced to a total of twenty-five years imprisonment in Florida State Prison, followed by five years of probation, on her first-degree felony counts, and to fifteen years imprisonment on her second-degree felony counts, to run concurrently. Her requests to reduce her sentences have been denied.[8]

The Tax Problem

Although the couple was no longer vulnerable to further loss of their significantly diminished assets due to Ms. Anderson's actions, a substantial amount of funds had already been paid in taxes on the significant distribution from their retirement plans in 2017.

On May 14, 2018, Plaintiffs filed their federal individual income tax return for the 2017 tax year with the Internal Revenue Service (“IRS”). This return showed taxable income of $1,175,799, which included $1,174,020 in pension and IRA distribution, a tax liability of $410,841, and payments totaling $412,259. The IRS assessed a penalty for not pre-paying the tax in the amount of $758.14. After this penalty, the IRS issued Plaintiffs a refund for their overpayment of tax in the amount of $659.86. Plaintiffs ended up reporting and paying $411,599.14 in income tax for the 2017 tax year.[9]

It is important to note that the friends did not disclose Ms. Anderson's actions to the couple until 2019. Consequently, the couple had already withdrawn over $1,000,000 from their retirement plans, and they had paid the taxes they believed were owed on this amount at the time of withdrawal from their IRA account over a year prior to uncovering the fraud.

In 2020, the taxpayers took the step of filing a claim for a refund of the taxes they had previously paid on the 2017 distribution.

On February 24, 2020, Plaintiffs filed an amended individual income tax return for the 2017 tax year. On the amended tax return, Plaintiffs sought a refund of income tax and a penalty of $412,259, plus interest. They sought to deduct from income the $1,174,020 they received from their IRA and pension accounts. Along with the amended return, Plaintiffs sent a copy of a form 1096 that showed Plaintiffs issued Anderson a 1099-MISC in the amount of $1,174,020, and 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.”[10]

Regrettably, the IRS rejected the taxpayer’s claim for a refund, determining that the distributions had to be included as taxable income. Furthermore, the IRS determined that there were no eligible deductions for business expenses related to the funds paid based on Ms. Anderson’s fabricated narrative concerning the potential prosecution of Mr. Gomas.

On February 17, 2021, the IRS fully disallowed Plaintiffs' claim for refund, stating in a letter that these distributions were not deductible and must be included in income. On March 19, 2021, Plaintiffs filed a formal protest and request for appeals consideration, which “further detailed the business nature” of these expenses. On March 9, 2022, the IRS rejected the appeal. Plaintiffs bring this action against the United States, seeking a refund of $412,259 that they paid to the IRS related to their 2017 tax return.[11]

The Court Case

The analysis commences by addressing the perplexing situation where, despite the evident nature of the theft, the taxpayers found themselves compelled to argue for alternative theories for relief. Their motivation stemmed from seeking relief from the tax liability on the distributions, despite not deriving any personal benefit from those funds.

“Deductions are a matter of legislative grace, and a taxpayer must prove his or her entitlement to a deduction.” Baum v. Comm’r of Internal Revenue, 121 T.C.M. (CCH) 1315, 2021 WL 1627188, at *2 (T.C. 2021). It is undisputed that Plaintiffs were the victims of a theft. Historically, victims of theft were entitled to deduct a theft loss in the year the theft was discovered. See 26 U.S.C. §165(e). However, Congress suspended the theft loss deduction for the 2018 through 2025 tax years. See Tax Cuts and Jobs Act of 2017, Pub. L. 115-97, 131 Stat. 2054, 2087 (2017) (codified at 26 U.S.C. §165(h)(5)).4 Because they cannot claim a theft deduction for 2019 tax year — the year the loss was discovered — Plaintiffs attempt to salvage a tax benefit from their immense losses by seeking a refund of their 2017 income taxes under two other theories involving IRA distributions and business expenses.[12]

The taxpayers initially made an argument that they should be exempt from paying taxes on the funds they received, given that they did not personally benefit from those funds. The opinion acknowledges the existence of certain case law that permits, in exceptional circumstances, the taxation of such distributions to be assigned to someone other than the intended beneficiary of the retirement account.

First, Plaintiffs claim that the IRA distributions and pension benefits they received in 2017 should be excluded from their income because they did not enjoy the benefit of those funds — Anderson enjoyed the benefit of those funds through her fraudulent scheme. The applicable statute, 26 U.S.C. §408(d)(1), provides that “any amount paid or distributed out of an individual retirement plan shall be included in gross income, by the payee or distributee, as the case may be, in the manner provided under section 72.” Generally, the taxable distributee or payee of a distribution from an IRA is “the participant or beneficiary who, under the plan, is entitled to receive the distribution.” Roberts v. Commissioner, 141 T.C. 569 (2013) (quoting Bunney v. Commissioner, 114 T.C. at 262). Yet, some courts have recognized an exception that the “taxable distributee” under the statute may be someone other than the recipient or purported recipient eligible to receive funds from the IRA. Id.[13]

However, in this particular case, the circumstances did not meet the criteria of those exceptional situations where the distribution would be taxed to someone other than the beneficiary of the IRA from which the distribution originated.

In this case, Plaintiffs are the taxable distributees despite their attempts to characterize Anderson as such. Plaintiffs authorized and directed each stock sale from Mr. Gomas’s IRA account and each wire transfer to their personal SunTrust account. They freely exercised their discretion over the expenses paid from those accounts, including their personal expenses and handouts to Anderson. Plaintiffs’ case is readily distinguishable from Roberts, where the taxpayer’s ex-wife signed withdrawal requests and received and endorsed the IRA checks without the taxpayer’s authorization, forging his signatures.[14]

The opinion acknowledges that if Ms. Anderson had fraudulently obtained the funds without the taxpayer's consent through forgery or unauthorized means, the taxpayers might have been able to avoid taxation on the distributions. However, in the present case, this was not the factual scenario, and as a result, the taxpayers were not able to escape taxation on the distributions.

Had Anderson forged Plaintiffs’ signatures and collected the money herself, there would be a very different outcome here. Unfortunately for Plaintiffs, because they were the ones who requested and received the IRA distributions, they are the payees or distributees within the meaning of §408(d)(1). Anderson’s subsequent theft does not change Plaintiffs’ status as distributees. See Nice v. United States, No. CV 18-7362, 2019 WL 5212281, at *4 (E.D. La. Oct. 16, 2019) (finding elderly woman with dementia was the taxable distributee of IRA disbursements even though son used and spent mother’s IRA funds for personal enjoyment). The IRA distributions and pension funds are not deductible.[15]

The taxpayers also put forth another theory in their pursuit of a refund, claiming that the payments made to Ms. Anderson should be considered as business expenses.

Alternatively, Plaintiffs argue that they are entitled to deduct the funds as ordinary and necessary business expenses because they were led to believe that Anderson was using the funds to pay for legal services to resolve fictitious legal matters related to their closed business. Taxpayers may deduct “ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business.” 26 U.S.C. §162(a). To be deductible, a business expense requires a taxpayer to have a “dominant hope and intent of realizing a profit,” and there must exist “a minimal relationship between the expense and the advancement of the taxpayer’s business.” Brannen v. Comm’r, 722 F.2d 695, 704 (11th Cir. 1984). Ordinary and necessary business expenses may include legal fees paid for legal services. McKenny v. United States, 973 F.3d 1291, 1297 (11th Cir. 2020).[16]

However, the Court rejected this theory as it was based on the fundamental fact that no actual business expenses were incurred, regardless of the couple's personal beliefs or assertions.

Regardless of how Plaintiffs believed the funds would be used, none of the money given to Anderson was used to pay any actual business expenses. It is important to note that in 2017, Plaintiffs were not engaged in any for-profit business activity — they had retired. Consequently, it is impossible to claim a relationship between the funds that Plaintiffs gave Anderson and the advancement of a businesses they had permanently closed.

Plaintiffs argue that their payments to Anderson were related to business because they believed Anderson used the money to pay “legal fees” to Rickman related to their past operation of My Pets Pride. However, Plaintiffs’ subjective belief based on Anderson’s fraudulent conduct does not establish that legal fees were ever paid.[17]

Indeed, the legal claims for which the fees were purportedly being paid did not originate from a business context. Therefore, even if there had been a genuine legal matter, as Ms. Anderson had convinced the taxpayers, it would have been purely personal in nature. Consequently, the Court could not accept the argument that the payments constituted deductible business expenses.

In addition, any purported legal fees did not have any business “origin and character.” See id. The purported legal expenses did not arise in connection with any income-producing activities — the businesses were closed and Plaintiffs retired at the time these expenses were allegedly incurred and paid. Rather, the purported legal fees appear to be personal in character and origin because the purpose of the fake legal fees was to shield Mr. Gomas from personal liability and arrest, not to protect or promote any businesses. See id. at 1297-98 (taxpayer’s legal fees were personal in character, and therefore nondeductible, because the lawsuit concerned personal tax liability, the parties were individuals, and the complaint alleged individual injuries). The purported litigation expenses are therefore not deductible.[18]

The opinion concludes with the judge expressing their view on the unjust nature of the case, implying that the IRS should have exercised leniency and excused the taxpayers from paying the taxes in question.  While it is debatable whether the IRS had more discretion than the judge to arrive at a different outcome, there is agreement that the resulting decision appears undeniably unjust.

Plaintiffs were the undisputed victims of a complicated theft spanning around two years, resulting in the loss of nearly $2 million dollars. The thief — Mrs. Gomas’s own daughter and Mr. Gomas’s stepdaughter — was rightly convicted and is serving a lengthy prison sentence. The fact that these elderly Plaintiffs are now required to pay tax on monies that were stolen from them seems unjust.

In view of the egregious and undisputed facts presented here, 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. It is highly unlikely that Congress, when it eliminated the theft loss deduction beginning in 2018, envisioned injustices like the case before this Court. Be that as it may, the law is clear here and it favors the IRS. Seeking to avoid an unjust outcome, Plaintiffs have attempted to recharacterize the facts from what they really are — a theft loss — to something else. Established law does not support this effort. The Court is bound to follow the law, even where, as here, the outcome seems unjust.[19]

The judge’s statement, whether interpreted as generosity or an implication about Congress’s lack of foresight, suggests that the consequences experienced in this case were not foreseen or anticipated when the deduction for personal theft losses was eliminated. These or very similar consequences should have been seen as an inevitable outcome of such a change in the tax law.

An intriguing consideration is whether, had the taxpayers not initially paid the taxes themselves, the IRS and courts would have had the authority, under the offer in compromise provisions of the law, to potentially reduce or eliminate the couple's tax liability. However, since the taxes had already been paid in full by the couple before they realized they had fallen victim to fraud, their course of action necessitated filing for a refund of the taxes already paid, rather than seeking relief from a pending tax bill.

[1] Gomas v. United States, US District Court for the Middle District of Florida, Case No. 8:22-CV-01271, July 17, 2023, https://www.taxnotes.com/research/federal/court-documents/court-opinions-and-orders/elderly-fraud-victims-denied-refund-of-taxes-paid-on-stolen/7gzl1 (retrieved July 19, 2023)

[2] Gomas v. United States, US District Court for the Middle District of Florida, Case No. 8:22-CV-01271, July 17, 2023

[3] Gomas v. United States, US District Court for the Middle District of Florida, Case No. 8:22-CV-01271, July 17, 2023

[4] Gomas v. United States, US District Court for the Middle District of Florida, Case No. 8:22-CV-01271, July 17, 2023

[5] Gomas v. United States, US District Court for the Middle District of Florida, Case No. 8:22-CV-01271, July 17, 2023

[6] Gomas v. United States, US District Court for the Middle District of Florida, Case No. 8:22-CV-01271, July 17, 2023

[7] Gomas v. United States, US District Court for the Middle District of Florida, Case No. 8:22-CV-01271, July 17, 2023

[8] Gomas v. United States, US District Court for the Middle District of Florida, Case No. 8:22-CV-01271, July 17, 2023

[9] Gomas v. United States, US District Court for the Middle District of Florida, Case No. 8:22-CV-01271, July 17, 2023

[10] Gomas v. United States, US District Court for the Middle District of Florida, Case No. 8:22-CV-01271, July 17, 2023

[11] Gomas v. United States, US District Court for the Middle District of Florida, Case No. 8:22-CV-01271, July 17, 2023

[12] Gomas v. United States, US District Court for the Middle District of Florida, Case No. 8:22-CV-01271, July 17, 2023

[13] Gomas v. United States, US District Court for the Middle District of Florida, Case No. 8:22-CV-01271, July 17, 2023

[14] Gomas v. United States, US District Court for the Middle District of Florida, Case No. 8:22-CV-01271, July 17, 2023

[15] Gomas v. United States, US District Court for the Middle District of Florida, Case No. 8:22-CV-01271, July 17, 2023

[16] Gomas v. United States, US District Court for the Middle District of Florida, Case No. 8:22-CV-01271, July 17, 2023

[17] Gomas v. United States, US District Court for the Middle District of Florida, Case No. 8:22-CV-01271, July 17, 2023

[18] Gomas v. United States, US District Court for the Middle District of Florida, Case No. 8:22-CV-01271, July 17, 2023

[19] Gomas v. United States, US District Court for the Middle District of Florida, Case No. 8:22-CV-01271, July 17, 2023