Pro Se Taxpayer Creates Taxable Income Out of Loss on Annuity Transaction.

The petitioner and wife bought an annuity in 2003 with proceeds they received from selling securities that triggered a $158,000 capital loss.  The annuity was purchased for $228,800 and additional contributions of $346,154 were made through 2006.  In 2007, the petitioner entered into an I.R.C. Sec. 1035 exchange for a different annuity with a start date of Feb. 3, 2047.  In 2010, the petitioner and wife withdrew $525,000 from the annuity to buy their current home.  At the time of the withdrawal, the cash value of the annuity was $761,256 with accrued earnings of $186,302.  The petitioner was issued a Form 1099R showing a taxable distribution of $186,302.  The petitioner did not report the taxable amount of the distribution, claiming instead that the income on the contract arose from capital gains incurred in the annuity that offset the capital loss and also because they hadn't made any money on the contract.  The court upheld the IRS position that the petitioner had "earned" $186,302 on the invested funds.  The court also imposed a 10 percent early withdrawal penalty and a 20 percent accuracy related penalty.  Tobias v. Comr., T.C. Memo. 2015-164.