Has anyone been successful getting this appealed ?

[Art]

Elderly clients intended to exchange annuity contracts with Company A to Company B. They mistakenly had Company A send them a check which they cashed ($ 20,000) in March 2009 and then invested in the new annuity with Company B ($20,000 + additional cash =$ 25,000 total) also in March 2009 per discussion with their “financial advisor”.

Company A issued 1099-R code 7. Clients said they never received the 1099-R and were unaware that they had a taxable event when the annuity was cashed. Nothing was reported on their 2009 return.

IRS issued CP2000 in June 2010 for the taxes on 1099-R.

Has anyone been successful in getting the IRS to grant 1035 treatment in a case like this? Advice on how to proceed ?

[geekgirldany]

Not sure on the 1035. But you might be able to make an argument on the client's ignorance of the situation and that they were never made aware from either financial advisor on how to proceed to avoid the tax.

[New York Enrolled Agent]

Elderly clients intended to exchange annuity contracts with Company A to Company B. They mistakenly had Company A send them a check which they cashed ($ 20,000) in March 2009 and then invested in the new annuity with Company B ($20,000 + additional cash =$ 25,000 total) also in March 2009 per discussion with their “financial advisor”.

Company A issued 1099-R code 7. Clients said they never received the 1099-R and were unaware that they had a taxable event when the annuity was cashed. Nothing was reported on their 2009 return.

IRS issued CP2000 in June 2010 for the taxes on 1099-R.

Has anyone been successful in getting the IRS to grant 1035 treatment in a case like this? Advice on how to proceed ?

You MIGHT be able to use a tax court case Greene 85 TC 1024. Read it and see how close it is to your fact pattern. I don't know if the extra $5K is a problem.

Here is the headnote:
P surrendered an annuity policy with Company A, and used the proceeds to purchase an equivalent policy with Company B. There were no restrictions placed on the use of the funds which P received from Company A.Held, the transaction was a nontaxable exchange within the meaning of sec. 1035, IRC. 1954

[taxdude71]

Had the same thing happen a few years back. We got a letter from the fund company describing what happened and forwarded it to the IRS with an explination. They found in the clients favor and that was the end of it.

[Art]

Thanks for the feedback. We are contacting the insurance company to ask for their assistance. I will also look at the tax court case.