T.C. Memo. 2017-3

UNITED STATES TAX COURT

CANDACE ELAINE, Petitioner v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 5023-14. Filed January 3, 2017.

Candace Elaine, pro se.

Willis B. Douglass and Mindy S. Meigs, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

ASHFORD, Judge: Respondent determined a deficiency of $11,900 in

petitioner’s Federal income tax and an accuracy-related penalty pursuant to section

6662(a) of $2,380 for the 2011 taxable year.1

 The issues for decision are:

1Unless otherwise indicated, all section references are to the Internal

Revenue Code in effect for the year in issue, and all Rule references are to the Tax

Court Rules of Practice and Procedure. 
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[*2] (1) whether petitioner is liable for the 10% additional tax imposed by section

72(t) on early distributions from a qualified retirement plan and (2) whether

petitioner is liable for the accuracy-related penalty.

FINDINGS OF FACT

Some of the facts have been stipulated and are so found. The stipulation of

facts and the attached exhibits are incorporated herein by this reference. Petitioner

resided in California at the time the petition was filed with the Court.

In June 2009 petitioner was laid off from her job of 23 years as a call center

manager with a mutual fund company. At that time and during the year in issue

petitioner was a single mother, raising two daughters on her own without support

from anyone else. On account of the then economic downturn petitioner was

unable to find another job, and she remained unemployed until approximately

2014. Consequently, in order to provide for her own subsistence and that of her

daughters, petitioner made a series of withdrawals from her individual retirement

account (IRA), which was administered by Capital Bank & Trust Co. (Capital

Bank). During 2011 petitioner received four distributions totaling $119,000 from

that account. As of the close of that year petitioner was under 591⁄2 years of age. 

For each distribution Capital Bank issued petitioner a Form 1099-R,

Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs,
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[*3] Insurance Contracts, etc. According to respondent’s wage and income

transcript for petitioner’s 2011 taxable year, each Form 1099-R reflected that the

entire distribution was taxable and that the distribution was an early distribution

with “no known exception”.2 Each Form 1099-R also reflected Federal income tax

withheld.

3

Petitioner prepared and filed timely her Form 1040, U.S. Individual Income

Tax Return, for 2011 (2011 return). On the 2011 return petitioner reported taxable

IRA distributions of $119,675,

4

 interest of $136 (including $5 of tax-exempt

interest), a net business loss from a sole proprietorship of $39,379, and

2The Forms 1099-R that were included with petitioner’s 2011 return as a

stipulated exhibit do not reflect this. One of these forms reflects the distribution

code of “7”, i.e., a “normal distribution”, while the other three forms reflect the

distribution code of “2”, an “early distribution, exception applies”. There is no

explanation for this inconsistency in the record. The inconsistency, however, is

“much ado about nothing” and does not alter the outcome of this case because, as

discussed in the text, petitioner has the burden of proving that respondent’s

determination that the sec. 72(t) additional tax applies to the Capital Bank

distributions is incorrect. 

3The distributions petitioner received from Capital Bank were in the

following amounts: $40,000, $8,000, $16,000, and $55,000. The Forms 1099-R

reflected Federal income tax withheld of $2,000, $800, $600, and $5,500,

respectively, from these distributions, for a total amount withheld of $8,900.

4The additional reported amount of $675 reflects a distribution of death

benefits petitioner received during 2011 from Northern Trust Co. which is not

subject to the sec. 72(t) additional tax. Accordingly, this distribution is not at

issue.
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[*4] unemployment compensation of $9,000. After itemized deductions totaling

$45,148 and exemptions totaling $11,100 (for herself and her daughters),

petitioner reported taxable income of $33,184 and total tax of $4,119. Petitioner

did not report any amount for the additional tax on early distributions from IRAs

pursuant to section 72(t), nor did she attach Form 5329, Additional Taxes on

Qualified Plans (Including IRAs) and Other Tax-Favored Accounts, to the 2011

return. Finally, petitioner reported Federal income tax withheld of $8,968

5

 and

claimed an overpayment of $4,849, which was refunded to her in May 2012.

On June 3, 2013, respondent’s Automated Underreporter (AUR) function

sent petitioner a Notice CP2000 proposing changes to the 2011 return on the basis

that certain income and payment information reported by third parties to

respondent differed from the amounts shown on the return. The discrepancy was

attributable to petitioner’s not reporting any amount for the additional tax on IRAs

under section 72(t). As a result, respondent proposed that she owed an additional

$11,900 in income tax plus statutory interest and that she should be liable for a

substantial understatement of income tax penalty of $2,380. In response,

petitioner sent respondent a letter dated June 26, 2013, explaining that because her

5This amount reflects the Federal income tax of $8,900 withheld from the

Capital Bank distributions as well as the Federal income tax of $68 withheld from

the Northern Trust Co. distribution.
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[*5] IRA was her only means of income to pay bills and support herself and her

daughters, she understood that the distributions from her IRA “would fall under

the ‘exception’ rules [sic] due to * * * [her] financial hardship.” She also

contended that she “took the federal and state penalties required and the amounts

were indicated on * * * [her] tax return as income therefore disqualifying * * *

[her] from other benefits that * * * [she] normally would have been allowed.” In

later correspondence she sent to respondent in 2013, petitioner continued to plead

financial hardship.

On December 9, 2013, respondent mailed petitioner a notice of deficiency,

determining that the section 72(t) additional tax was applicable to the entire

amount of the distributions from her IRA and that she was liable for the

substantial understatement of income tax penalty under section 6662(a) and (b)(2). 

Petitioner timely petitioned this Court disputing those determinations, contending

that she believed the amounts withheld from her IRA distributions included a

“10% [F]ederal and a 10% state penalty” and asking that she not be held liable for

the tax and the penalty on the ground that during 2011 she was experiencing

financial hardship.
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[*6] OPINION

I. Additional Tax Under Section 72(t)

In general, the determinations of the Commissioner in a notice of deficiency

are presumed correct and, except for the burden of production in any court

proceeding with respect to a taxpayer’s liability for any “penalty, addition to tax,

or additional amount”, see sec. 7491(c), the taxpayer bears the burden of proving

that the Commissioner’s determinations are erroneous, see Rule 142(a); Welch v.

Helvering, 290 U.S. 111, 115 (1933). This burden of production remains on the

taxpayer even with respect to the additional tax under section 72(t) because the

section 72(t) additional tax is a “tax” and not a “penalty, addition to tax, or

additional amount” within the meaning of section 7491(c).6 See El v.

Commissioner, 144 T.C. 140, 148 (2015) (citing Ross v. Commissioner, T.C.

Memo. 1995-599, 1995 Tax Ct. Memo LEXIS 597, at *16-*20).

Section 72(t) imposes an additional 10% tax on early distributions from a

qualified retirement plan (as defined in section 4974(c)(4)). See sec. 72(t)(1). The

additional 10% tax, however, does not apply to certain enumerated distributions. 

6Petitioner also does not contend that the burden of proof should shift to

respondent under sec. 7491(a), nor has she established that the requirements for

shifting the burden of proof have been met. Accordingly, the burden of proof with

respect to the sec. 72(t) additional tax remains on petitioner.
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[*7] See sec. 72(t)(2). Relevant exceptions include distributions from an

individual retirement plan to an unemployed individual for health insurance

premiums and distributions from an individual retirement plan to an individual for

certain qualified higher education expenses. Sec. 72(t)(2)(D) and (E).

The parties do not dispute that petitioner received distributions totaling

$119,000 in 2011 from her IRA, which is a qualified retirement plan under section

4974(c)(4). Petitioner testified that the distributions were essentially her only

means of income to pay bills and to support herself and her daughters. Upon the

Court’s questioning at trial as to what specific types of expenses she paid using

any of the distributed moneys, petitioner indicated that she did use a portion of the

distributions to pay monthly medical insurance premiums and her student loan

indebtedness. However, her testimony in this regard was general, and she was

unable to produce any documentation substantiating her testimony. It is evident

that petitioner made withdrawals from her IRA because of financial hardship; but

as we have held on numerous other occasions, there is no exception under section

72(t) for financial hardship. See, e.g., Arnold v. Commissioner, 111 T.C. 250, 255

(1998) (citing Duffy v. Commissioner, T.C. Memo. 1996-556, and Pulliam v.

Commissioner, T.C. Memo. 1996-354); Milner v. Commissioner, T.C. Memo.

2004-111; Gallagher v. Commissioner, T.C. Memo. 2001-34; Robertson v.
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[*8] Commissioner, T.C. Memo. 2000-100, aff’d, 15 F. App’x 467 (9th Cir. 2001).

While we acknowledge and are sympathetic to petitioner’s financial straits, we

have no authority to disregard the express and unambiguous wording of the

statute. See Pulliam v. Commissioner, slip op. at 7-8 (citing Estate of Cowser v.

Commissioner, 736 F.2d 1168, 1171-1174 (7th Cir. 1984), aff’g, 80 T.C. 783, 787-

788 (1983)). On the record before us, we find that none of the enumerated

statutory exceptions applies to petitioner, and thus the distributions from

petitioner’s IRA in 2011 are subject to the section 72(t) additional tax.

We also reject as without merit petitioner’s apparent contention, as

manifested from certain evidence--two April 2015 letters she sent to respondent

and two 2012 notices she received from respondent--that we should conclude there

is no deficiency in this case because Internal Revenue Manual (IRM) pt. 4.10.2.8.5

(Jan. 17, 2012) prohibits repetitive examinations of the same issue. The evidence

shows that respondent’s AUR function sent petitioner a Notice CP2000 dated

April 2, 2012, informing her of a proposed income tax increase (including interest

and penalties) for the 2010 taxable year on account of the same section 72(t) issue

implicated here. This evidence also shows that respondent’s AUR function sent

petitioner a Notice CP2005 dated November 19, 2012, informing her that the

inquiry for the 2010 taxable year was closed without change. The IRM provision
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[*9] upon which petitioner relies sets forth certain actions to be taken by an

examining agent, including ultimately determining whether to close the

examination for the current taxable year, where the taxpayer, in response to the

agent’s initial contact with the taxpayer, informs the agent that an examination of

the same issue or issues in either of the two preceding taxable years resulted in no

change or a small tax change.

Petitioner’s contention is without merit for several reasons. First, it has

long been settled that there is no statutory or regulatory prohibition against

auditing a taxpayer’s returns for two consecutive years or against issuing a notice

of deficiency for two consecutive years as taxes are computed on an annual basis,

with each year being the origin of a new liability and a separate cause of action. 

See Commissioner v. Sunnen, 333 U.S. 591, 598 (1948). Second, as we have

previously held, the provision in the IRM on repetitive examinations (or any IRM

provision for that matter) is discretionary rather than mandatory, creating no

legally enforceable rights for taxpayers. See, e.g., Greene v. Commissioner, T.C.

Memo. 1992-202, 1992 Tax Ct. Memo LEXIS 239; Tucker v. Commissioner, T.C.

Memo. 1983-210, 1983 Tax Ct. Memo LEXIS 578; Chapman v. Commissioner,

T.C. Memo. 1982-68, 1982 Tax Ct. Memo LEXIS 675; see also Marks v.

Commissioner, 947 F.2d 983, 986 n.1 (D.C. Cir. 1991) (citing Pomeroy v. United
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[*10] States, 864 F.2d 1191, 1194-1195 (5th Cir. 1989)), aff’g T.C. Memo. 1989-

575. Third, there is no evidence in the record to indicate in any event that

petitioner responded to an initial contact letter from respondent regarding her 2011

taxable year by requesting that respondent close the 2011 case on the ground that

respondent had closed the 2010 case without change. In other words, there is no

evidence that petitioner raised the repetitive examinations issue before respondent

issued the notice of deficiency for 2011. Indeed, the record suggests that

petitioner did not raise the repetitive examinations issue until April 2015, after she

filed her Tax Court petition and approximately two months before trial. Thus,

there was no applicable procedure for respondent to follow.

We sustain respondent’s determination to impose the section 72(t)

additional tax on the total amount of the distributions from petitioner’s IRA in

2011.

II. Accuracy-Related Penalty Under Section 6662(a) 

We now address whether petitioner is liable under section 6662(a) and

(b)(2) for an accuracy-related penalty on an underpayment due to a substantial

understatement of income tax.

Section 6662(a) imposes a 20% accuracy-related penalty based on any

portion of an underpayment of tax required to be shown on a return if, as provided
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[*11] by section 6662(b), the underpayment is attributable to, among other things,

any substantial understatement of income tax. The term “substantial

understatement” means an understatement of income tax that exceeds the greater

of 10% of the tax required to be shown on the return or $5,000. Sec.

6662(d)(2)(A). The Commissioner bears the burden of production regarding a

taxpayer’s liability for the accuracy-related penalty and thus is required to come

forward with sufficient evidence indicating that imposition of the penalty is

appropriate. See sec. 7491(c); Higbee v. Commissioner, 116 T.C. 438, 446

(2001). Once the Commissioner meets his burden of production, the taxpayer

bears the burden of proving, through persuasive evidence, that the

Commissioner’s penalty determination is incorrect. See Rule 142(a); Welch v.

Helvering, 290 U.S. 111, 115 (1933); Higbee v. Commissioner, 116 T.C. at 447. 

Respondent has discharged his burden of production by providing sufficient

evidence showing that petitioner’s understatement of income tax for 2011 exceeds

the greater of 10% of the tax that was required to be shown on the 2011 return or

$5,000.

Application of the accuracy-related penalty may be avoided with respect to

any portion of an underpayment if it is shown that there was reasonable cause for

such portion and the taxpayer acted in good faith with respect to such portion. 
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[*12] Sec. 6664(c)(1); Higbee v. Commissioner, 116 T.C. at 446-447. The

determination of whether the taxpayer had reasonable cause and acted in good

faith depends upon the pertinent facts and circumstances of a particular case. Sec.

1.6664-4(b)(1), Income Tax Regs. We consider, among other factors, the

experience, education, and sophistication of the taxpayer; however, the principal

consideration is the extent of the taxpayer’s efforts to assess the proper tax

liability. Id.; see also Higbee v. Commissioner, 116 T.C. at 448. Taking into

consideration the taxpayer’s experience, education, and sophistication, an honest

misunderstanding of fact or law may indicate reasonable cause and good faith. 

Higbee v. Commissioner, 116 T.C. at 449 (citing Remy v. Commissioner, T.C.

Memo. 1997-72).

The many section 72(t) cases, just some of which have been cited supra pp.

7-8, strongly indicate a common misunderstanding among taxpayers that financial

hardship is an exception to the section 72(t) additional tax. Bolstered by the fact

that, for whatever reason, respondent closed her 2010 case without change,

petitioner proceeded under that misunderstanding not only with respect to 2011

but apparently with respect to 2012 as well. On the basis of the record before us,

we find that petitioner had reasonable cause and acted in good faith. 
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[*13] Consequently, petitioner is not liable for the substantial understatement of

income tax penalty under section 6662(a) and (b)(2).

We have considered all of the arguments made by the parties and, to the

extent they are not addressed herein, we find them to be moot, irrelevant, or

without merit.

To reflect the foregoing,

Decision will be entered for

respondent as to the deficiency and for

petitioner as to the accuracy-related penalty

under section 6662(a).