T.C. M em o . 2 0 1 7 -2 0 1

UNITED STATES TAX COURT

J OSEPH E. BORM ET, Pet i t i o n er v . COM M ISSIONER OF INTERNAL REVENUE, Res po n d en t

Do ck etNo . 6 8 6 3-1 6. Fi l edOct o b er 1 6 , 2 0 1 7
.
Brad l ey S. M cCan n , fo r p et i t i on er. An g el a B. Reyn o ld s an dBri s ey d a Vi l l al p an d o , fo r res p o nd en t .

M EM ORANDUM OPINION GOEKE, Ju d g e: Res p on d en td et erm in eda d efi ci en cy i np et i ti o n er’ s Fed eral i n co m e t ax o f $ 7,4 9 8 1 fo r fai lu re t o rep o rtt ax ab l e i n co m e fo r t ax y ear 2 01 3 (y ear

1 Un l es s o th erwi s e i nd i cat ed , al l s ect i o nreferen ces are t o th e In t ern al Rev enu e Co de as am en d edan di neffect fo r t h e y ear i ni s s u e, an d al l Ru le (co n ti n u ed ...)- 2
-

[* 2 ] i n i ss u e). Res po n d en t al s o d et erm i n edth atp et i t i o n er i s l i ab l e fo r a 1 0 % ad d it i o n al t ax u n d er s ect i o n 7 2 (t ) an dan accu racy -rel at ed p en al ty u n d er s ect i o n 6 6 6 2 (a). Th e i s s u es fo r d eci s i o n are wh et h er p et i t i o n er: (1 ) fai l edt o rep o rt as i n co m e a t ax ab l e ret i rem en t d i s tri b u t io no f $ 2 6 ,9 5 4 fo r t h e y ear i n i s s ue; (2 ) i s l i ab l e fo r a 1 0 % ad d i t i o n al t ax u n der s ect i o n 7 2 (t ) o nearl y d i s tri b u t i o n s fro m

a qual i fi edret i rem en tp l an ; an d (3 ) i s l i ab l e fo r a s ect i o n 6 6 6 2(a) accu racy -rel at edp en al ty . W e h o l dth atp et i t i o n er fai ledt o rep o rtthe d i s tri b u ti o nas i n co m e an di s l i ab l e fo r th e 1 0 % ad d i t i o n al t ax b ecau se t h e d i s tri b u t i on was earl y an dn o ex cep t i o n ap p li es . Pet it i o n er i s al s o l i ab l e fo r t h e accu racy -rel at edp en al ty . Back gro u n d Th e p art i es s ubm it t edth i s cas e fu l l y s t ip u l at edu n d er Ru l e 1 2 2 . Th e fu l l
s t ip u l at i o n o f fact s an dth e fact s drawn fro m s t i pu l at edex hi b it s are i n co rp o rat ed h erei n b y th i s referen ce. Pet i t io n er res i d edi n Il l i n o i s wh en h e t im el y p et i t i o n ed th i s Co u rt .

1 (...co n t in u ed ) referen ces are t o th e Tax Co u rtRu l es o f Pract i ce an dPro cedu re. W e ro u n dal l m o net ary am o un t s t o th e n eares td o l l ar.- 3
-

[* 3 ] Pet i t i o ner h o l d s , an d h as h el ds i n ce 2 0 1 2 , a qu al i fi edret i rem en tacco u n t (ret i rem en tacco u n t), as d efi n edi ns ect i o n4 97 4 (c), t h ro u gh Fi d el it y In v es t m en t s . OnSep t em

b er 6 , 2 01 2 , p et i t i o ner recei v eda $ 3 0 ,2 9 0 l o an fro m h i s ret i rem en t
acco u n t . Pet it io n er d o es n o th av e a co p y o f t h e l o an ag reem en t . Aft er al l b ri efs
were s ub m it t edan dth e reco rdwas cl o s ed , th e Co u rth el d a co nferen ce cal l wi th th e p art i es t o g i v e p et i ti o n er an o p p ortu n i ty t o s up p l em en t th e reco rdwi th
n eces s ary d o cu m en t at i o n , b u t p et i t i o n er d ecl i ned
. Pet i t i o ner b eg anm ak i n g b i week ly l o anrep aym en t s o f $ 2 5 9 J an u ary 2 3 an d
co n ti n u edu n t i l Ap ri l 2 5 , 2 01 3 . Pet i t i o n er m ad e o n e ad d i t i o n al rep aym en to f $ 1 3 1
o n M ay 9 , 2 01 3. Bet ween M ay

1 0 an d Sep t em

b er 1 1 , 2 0 1 3 , p et i t i o n er d i d n o t
m ak e an y rep aym en t s . Pet i t i o ner s us t ai n edan i nju ry an das a res u l trecei v eds h o rt -t erm d is ab i l i ty b en efi t s fro m

Oct ob er 2 3 , 2 0 12 , u n t i l h is l on g -t erm d i s ab i l it y

b en efi t s b eg an o n Ap ri l 2 1 , 2 0 13 . Pet i ti o n er ret u rn ed t o wo rko nAu g u s t1 9 , 2 0 1 3 . Up o n h i s retu rn t o wo rk , p et i t i o n er res u m edau t o m at i c rep aym en twi th drawal s fro m h is b i w eek l y p ay atan i ncreas edam ou n to f $ 2 7 9
. Th es e rep aym en t s were wi th drawn fro m Sep tem b er 1 2 t o Decem

ber 1 9 , 2 0 1 3 . Des p i te p et i t io n er’ s i n creas edrep aym en t s , b y Sep t em b er 3 0 , 2 0 1 3, h is l oan was i nd efau l tb ecau se rep aym en ts were n o t recei v edi n acco rd an ce wi th th e l o an ag reem en t . Pet i ti o ner cl ai m s Fi del i ty- 4
-

[* 4 ] In v es t m en t s refi n an cedh i s l o an s , b u t wh enres p o nd en t req u es t eda co p y o f th e refi n an ci n g ag reem en t , h e h adn o wri t t en d o cu m en t at io no f th e p urp o rt ed refi n an ci n g . Fi d el it y

In v es t m en t s p ro v id eda l et t er t o th e In tern al Rev en u e Serv i ce (IRS) Offi ce o f Ap p eal s (Ap p eal s ) co n fi rm i n g a l o an d efau l to f $ 2 6,9 5 4
. OnJ an u ary

2 8 , 2 0 1 4 , p et i t i o n er t i m el y fi ledFo rm

1 0 4 0 , U.S. In d i v i du al In co m e Tax Return , rep o rt i n g a Fed eral i n co m e t ax l i ab i l i ty o f $ 1 , 6 3 1 fo r t h e y ear i n i ss u e. Pet i t i o n er m ad e t o t al p aym en t s o f $ 6 ,0 7 9 an d t h erefo re recei v eda refu n d
o f $ 4 , 4 4 8 o n Feb ru ary

2 4 , 2 0 1 4
. OnDecem

b er 1 4, 2 01 5 , res p o n d en ti s s u eda n o t ice o f d efi ci en cy wi th
res p ectt o t h e y ear i n i ss u e d et erm i n i n g th atp et i t i o n er h adfai l edt o i n cl u d e i n i n co m e $ 2 6 ,9 5 4 rep o rt ed o n o n e o f h i s th ree Fo rm s 1 0 99 -R, Di s tri b u t i o n s Fro m Pen si o n s, An n u i t i es , Ret i rem en to r Pro fi t-Sh ari n g Pl an s, IRAs , In s u ran ce Co n tract s , et c. (2 01 3 Fo rm 1 0 99 -R), fro m

Fi del i ty In v es t m en t s . Pet i t i o n er t i m el y fi led a p et i ti o n wi th th e Co urtfo r red et erm i n at i o no f t h e d efi ci en cy , ad d i t i o n al t ax , an d p en al ty .- 5
-

[* 5 ] Di s cu s s i on I. Bu rd en o f Pro o f Tax p ay ers g en eral l y b ear t h e b u rd en o f p ro v i n g th atth e Co m m i s s i o n er’ s d et erm i n at i o n i n a n o t ice o f d efi ci en cy i s i n co rrect . 2 Ru l e 1 4 2 (a); W el ch v . Hel v eri n g , 2 9 0 U.S. 1 1 1 (1 9 3 3 ). Fo r t hi s p res u m pt io n t o ad h ere i n cas es i nv o l v i n g recei p t o f u n rep ort edi n co m e, t h e Co m m is s io n er m

u s t p ro v i d e s om e reas o n ab l e fo u n dat i o n co n n ect i n g the t ax p ay er wi th th e i n co m e-p ro du ci n g act i v i ty . Pi t t m an
v . Co m m i s s i o n er, 1 0 0 F.3 d1 3 0 8 , 1 3 1 3 (7 th Ci r. 1 9 9 6), aff’ g T.C. M em o . 1 9 9 5
- 2 4 3 ; Go l dEm

p o ri u m , In c. v . Co m

m i s s i o n er, 9 1 0 F.2 d 1 37 4 , 1 3 7 8 (7 th Ci r. 1 9 9 0 ), aff’ g T.C. M em o . 1 9 8 8 -5 5 9 ; Zu h o n e v . Co m m i s s io ner, 8 8 3 F.2 d1 3 1 7 , 1 3 2 5 (7 th Ci r. 1 9 89 ), aff’ g T.C. M em o. 1 9 8 8 -1 4 2 . On ce t h e Co m m i s si on er h as p ro du ced
ev i d en ce l i n k i ng th e t ax pay er wi th an i n co m e-p ro du ci n g act i v it y , th e b u rd en o f p ro o f s h i ft s t o th e t ax p ay er t o p ro v e b y a p rep o n deran ce o f t h e ev i den ce t h atth e Co m m i s s i o n er’ s d et erm in at i o n s are arb i traryo r erro n eo u s . Hel v eri ng v . Tay l o r, 2 9 3 U.S. 5 0 7 , 5 1 5 (1 9 3 5 ); To k ars k i v . Co m m i s s i o ner, 8 7 T.C. 7 4, 7 6 -7 7 (1 9 8 6 ). Th e p art i es ag ree t h atp et i t i o n er recei v eda $ 3 0 ,2 9 0 l oan fro m h i s ret i rem en t
acco u n t in 2 0 1 2 . Fi d el i ty In v es t m en t s p ro v i deda l et t er t o Ap peal s co n fi rm i n g th at

2 If v ari o u s co n d i t i o n s are m et , th e b u rd en o f p ro of can s h i ftt o the Co m m i s s i o n er u n d er s ec. 7 4 91 (a). Pet i t i on er d o es n o t co nt en d tho s e co n d i t i o n s h av e b een m et h ere, an di ti s ap p aren tfro m th e reco rdth ey h av e n o t .- 6
-

[* 6 ] p et i t i o n er d efau l t edo n the l o an i n2 01 3 wh en $ 26 ,9 5 4 rem ai n ed o ut s t an d i n g . Res po n d en th as th erefo re s at i s fi edan y i n i t i al b u rd eno f p ro du ct i o n reg ard i n g
u n rep o rt edi n co m e. Th u s , p et it i o n er m u s t co m e fo rwardwi th p ro o f t h at
res p o n d en t’ s d et erm i n at i o n i s arb i traryo r erro neo u s o r t hatth i s i n co m e i s
n o n t ax ab l e. II. Ret i rem en tDi s tri b u t i o n If a p art ici p an t recei v es a l o an fro m a qual i fi edret i rem en tp l an , th e am o u n t
o f t h e l o an i s a t ax ab le d i st ri b u t i o ni n th e y ear recei v ed . Secs . 4 0 2(a), 7 2 (p )(1 )(A). Ho wev er, a l oan i s n o ta t ax ab l e d i s tri b u t i o ni f t h e fo l l o wi n g th ree req u i rem en t s
are m et : (1 ) t h e p ri n ci pal am ou n to f t h e l o an d o es n o tex ceed a s tatu t o ri l y d efi ned
m ax i m u m am ou nt ; (2 ) t h e l o an i s rep ay ab l e wi th i n fi ve y ears , u n les s i t i s a h o m e l o an ; an d(3 ) ex cep tas p ro v i d edi nreg u l at io n s , th e l o an req u i res s ub s t an t i al l y l ev el am o rt i zat i o n o v er t h e t erm o f the l o an wi th p aym en t s n ot l es s freq u en t l y than qu art erl y . Sec. 7 2 (p )(2 ); s ec. 1 .7 2 (p )-1 , Q&A-3 , In co m e Tax Reg s . Ad d i t io n al l y , th e l o an m

u s tb e ev i d en ced b y

a l eg al l y en fo rceab l e ag reem en t . See s ec. 1 .7 2 (p )- 1 , Q&A-3 (b ), In co m e Tax Reg s . If t h e qu al i fi edret i rem en tp l an d oes n o tn o ti fy th e p art i ci pan tth atth e l o an d i s tri b u t i o n was t ax ab l e i n th e y ear recei ved , th e Co urtm ay as s u m e t h at the l o an i n i t i al l y qu al i fi ed fo r t h e s ect io n 7 2(p ) ex cep t i o n. Ry an v . Co m m is s i o n er, T.C.- 7
-

[* 7 ] M em o . 2 0 1 1 -1 3 9 , aff’ d , 4 8 2 F. Ap p ’ x 8 8 1 (5 th Ci r. 2 0 1 2 ). Al th o ug h a l o an
m ay i n i t i al ly s at is fy s ect io n 7 2 (p ), “ [i ] f a p l an fai l s t o s at i s fy th es e req u i rem en t s , a d eem edd i st ri b u ti on wi l l o ccu r atth e fi rs tt i m e th o s e req u i rem en t s are n o t
s at i s fi ed , ei th er i n fo rm

o r i n o p erat i o n .” Owu s uv . Co m m i s si o n er, T.C. M em o . 2 0 1 0 -1 8 6 , s l i p o p . at 8 ; s ec. 1 .7 2 (p )-1 , Q&A-4 (a), In co m e Tax Reg s. Al th ou g h the Co u rt o ffered t o reo p enth e reco rd , p et i t i on er h as n ot i n tro du cedan y

ev i d en ce t o s ho w th ath e fal l s u n d er th e s ect i o n7 2 (p )(2 ) ex cep t i o n . Pet i t io n er h as n ots h o wnth ath e m etth e am o rt i zat i o n req u i rem en t . He refu s edt o p ro v id e reco rd s p ert ai ni n g t o h i s l on g -t erm d i s ab i l i ty

an dth e t o t al am o u n t o f b en efi tp aym en t s h e recei v eddu ri n g th att i m e. In ad d i ti o n , h e h as n ots h o wnth at h e wo u l drep ay

th e l oan wi th in th e o ri g i n al l oan t erm o n ce h e ret u rn edfro m

l eav e. He fai l edt o p ro v i d e a co p y o f t h e o ri g i n al l o an ag reem en t , an am ort i zat i o n
s ch edu l e, o r a co p y

o f an y refi nan ci n g ag reem en t . W i th o u t co p ies of ei th er ag reem en t o r an am ort i zat i o ns ch edu l e, t h e o n l y d o cu m en t ary

ev i d en ce av ai l ab le t o th e Co u rt i s p et i ti o n er’ s 2 0 1 3 Fo rm 1 0 9 9 -R. Co n s equ en t l y , th e Co u rtm u s tas s u m e t h at th e l ack o f co m p l i an ce i s i n d i cat i v e t h at th e reco rd s wo u l dn o tb e b en efi ci al t o p et i t i o n er. Th erefo re, we fi n dth e l o an fo r th e y ear i n i s s u e i s t ax ab l e as a d eem edd i s tri b ut i o no f $ 2 6 , 9 5 4 fro m a qu al i fi ed p l an u nd er s ect i o n 4 0 2 (a). See Ol ag u n j uv . Co m

m i s s i o n er, T.C. M em o. 2 0 1 2 -1 1 9- 8
-

[* 8 ] (h o l d i n g th ata d i s tri bu t i o n h adt o b e i n cl u d edi n g ro ss i nco m e wh en th e
reco rdco n t ai n edn o l o an d o cu m en t s o r o th er ev i d en ce s h o wi n g t h atth e d i s tri b u t i o n was ev id en cedb y a l eg al l y en fo rceab l e ag reem en t ). III. Ad d it i on al Tax Sect io n 7 2 (t )(1 ) i m

p o s es a 1 0 % ad d i t i o nal t ax o nearl y d i s tri b u t io n s fro m qu al i fi edret i rem en t p l an s . Sect i o n7 2 (t )(2 ), h o w ev er, s et s fo rth s p eci fi c
ex cep t i o n s t o th e g en eral s ect i o n7 2 (t )(1 ) ru l e t hatth e 1 0 % ad d i t i o n al t ax ap p l i es . Pet i t io n er d i dn o targ u e t h atan y o f t h e s t atu t o ry

ex cep t i o n s ap p l ies an dd o es n o t d i s p u t e t h ath e recei v ed th e d i s tri b ut i o n b efo re ag e 5 9 -1 /2 . Acco rd i n g ly , we
s u s t ai n res p o n den t ’ s d et erm i nat i o n as t o th e s ect i o n 7 2 (t ) ad d it i o n al t ax . IV. Accu racy -Rel at edPen al ty Sect io n 6 6 6 2 (a) an d(b )(2 ) i m p o s es a p en al ty

fo r an u n d erp aym en t at tri b u t ab l e t o a s ub s tan t i al u n d ers t at em en to f i n co m e t ax . Sect i o n6 6 6 2 (d )(1 )(A) p ro v id es th ata s ub s t an t ial u nd ers t at em en to f i n co m e t ax ex i s t s fo r a t ax ab l e y ear i f th e am o un to f t h e u n ders t at em en tex ceed s th e g reat er o f (1 ) 1 0% o f t h e t ax req u i redt o b e s h o wno n th e retu rn o r (2 ) $ 5 ,0 0 0 . Th e accu racy -rel at edp en al ty d o es no tap p l y

wi th res p ectt o an y

p o rt i o n o f t h e u n d erp aym en tfo r wh i ch th e t ax p ay er can s h o w th atthere was reas o nab l e cau s e. Sec. 6 6 6 4(c)(1 ). Ci rcu m s t an ces th at m ay

i n d i cat e reas o nab l e cau s e an dg o o dfai th i ncl u d e an- 9
-

[* 9 ] h o n es tm i s u n d ers tan d i n g o f fact o r l aw t h ati s reas o n ab l e i nl i g h t o f al l o f t h e fact s an dci rcu m s t an ces , i n cl u d i n g th e ex p eri en ce, kn owl ed g e, an dedu cat i o no f th e t ax p ay er. Sec. 1 .6 6 6 4 -4 (b )(1 ), In co m e Tax Reg s . Th e u n d ers t at em en to f $ 7 ,4 9 8 i s g reat er t h an $ 5,0 0 0 , wh i ch i s g reat er t h an $ 9 1 3 , wh i ch i s 1 0 % o f t h e t ax req u i redt o b e s ho wno nth e retu rn . Pet i t i o n er’ s
s ub s t an t i ve cl ai m i n vo lv eda co m p l i cat edtran s act i o n , b u th e o ffers u s n o
reas on ab l e cau s e fo r h i s fai l u re t o s up p o rt h is l eg al an dfact u al p o s i t i on . Acco rd in g ly , p et i ti o n er i s l i ab l e fo r an accu racy -rel at edp en al ty u n d er s ect i o n 6 6 6 2 (a). In reach i n g o u r h o ld in g s h erei n, we h av e co n s id eredal l arg u m en t s th e p art i es m ad e, an d , t o th e ex t en twe d i dn o t m en t i o nthem ab o v e, we co n cl u d e t h ey
are m o ot , i rrel ev an t , o r wi th ou t m eri t . To refl ectthe fo reg o i n g , Deci s i o n wi ll b e en t eredfo r
res p o nd en t .