In the recent Tobias decision, the Tax Court rejected a couple’s argument that they could offset the income they would otherwise have recognized on an annuity distribution by the capital loss they incurred when they sold securities in order to purchase the annuity in the first place.
In order to buy the annuity in 2003, the taxpayers sold securities for which they incurred a taxable loss of $158,000. Then in 2010, after the annuity contract had accrued substantial income, the taxpayers withdrew a portion of the annuity balance to fund the purchase of a residence, and did not report any of the annuity withdrawal as income.
They argued that the otherwise recognizable income was a capital gain and thus should be offset by their capital loss carryforward (remaining from the originally sustained $158,000 loss). The taxpayers thought much of the “income on the contract” likely resulted from capital gains realized by the insurance company that issued the contract and/or that IRS should look at the $158,000 capital loss from 2003 as part of the cost of the annuity purchase.
“No way,” concluded the Court.