United States Tax Court

T.C. Summary Opinion 2023-13

MAGDY A. GHALY AND LAILA RYAD,

Petitioners

v.

COMMISSIONER OF INTERNAL REVENUE,

Respondent

—————

Docket No. 27901-21S. Filed April 3, 2023.

—————

Magdy A. Ghaly and Laila Ryad, pro se. 

Ryan J. Lonergan and Thomas A. Deamus, for respondent.

SUMMARY OPINION

CHOI, Special Trial Judge: This case was heard pursuant to the 

provisions of section 7463 of the Internal Revenue Code in effect when 

the Petition was filed.1 Pursuant to section 7463(b), the decision to be 

entered is not reviewable by any other court, and this Opinion shall not 

be treated as precedent for any other case.

In a notice of deficiency dated June 14, 2021, the Internal 

Revenue Service (respondent) determined a deficiency in petitioners’ 

federal income tax of $38,213 and a section 6662(a) accuracy-related 

penalty of $4,797 for taxable year 2018.

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

Revenue Code, Title 26 U.S.C., in effect at all relevant times, and all Rule references 

are to the Tax Court Rules of Practice and Procedure.

Served 04/03/23
2

After concessions,2 the issues for decision are

1. whether petitioners’ gross income includes unreported 

retirement income of $115,325 paid to Magdy Ghaly 

during 2018; and

2. whether petitioners are liable for the 10% additional tax 

on premature distributions of $11,533 from a qualified 

retirement plan.

Background

The facts have been fully stipulated and are so found. The 

stipulation of facts and the attached exhibits are incorporated by this 

reference. Petitioners were residents of New York when they timely filed 

the Petition.

In 2018 Mr. Ghaly submitted a withdrawal request for $71,147 to 

his retirement company, Great-West Trust Co., LLC (Great-West), 

which Great-West processed on May 11, 2018. Great-West, therefore,

issued a 2018 Form 1099–R, Distributions From Pensions, Annuities, 

Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., to 

Mr. Ghaly, indicating a distribution of $71,147 and withholding of

$14,229. This same year, Mr. Ghaly defaulted on a loan he had taken

from his Great-West retirement account in 2015, resulting in GreatWest’s issuing Mr. Ghaly a second 2018 Form 1099–R indicating a 

distribution of $44,178, the balance remaining on the loan. Mr. Ghaly

had not attained the age of 591⁄2 at the time of these distributions.

Mr. Ghaly withdrew funds from his retirement account in 2018 to 

provide for his family while he was laid off from work, including to pay 

for surgery for his son. He was laid off from work in 2018 and thereafter

defaulted on the loan he had taken from his retirement account in 2015. 

Mr. Ghaly did not dispute that he received the funds from his retirement 

account nor that he received the funds in the amounts respondent

alleged. Instead, in order to restore the distributions from his retirement 

account in 2018, Mr. Ghaly opened two new retirement accounts in 2020 

and made the maximum contribution allowed for each account. 

2 Respondent conceded the section 6662(a) substantial understatement penalty

in a status report filed November 9, 2022, in response to the Court’s October 13, 2022, 

Order.
3

Discussion

I. Burden of Proof

Generally, the Commissioner’s determinations in a notice of 

deficiency are presumed correct, and 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). However, in

unreported income cases, the Commissioner must establish an 

evidentiary foundation connecting the taxpayer with the incomeproducing activity or otherwise demonstrate that the taxpayer actually 

received income. See Llorente v. Commissioner, 649 F.2d 152, 156 (2d 

Cir. 1981), aff’g in part, rev’g and remanding in part 74 T.C. 260 (1980). 

The presumption of correctness for the Commissioner’s determinations 

does not apply if the notice of deficiency is unsupported by any 

significant evidence. Schaffer v. Commissioner, 779 F.2d 849, 858 (2d 

Cir. 1985), aff’g in part, remanding in part Mandina v. Commissioner, 

T.C. Memo. 1982-34. Once the Commissioner makes the required 

threshold showing, the burden shifts to the taxpayer to prove by a 

preponderance of the evidence that the Commissioner’s determination 

is arbitrary or erroneous. See Williams v. Commissioner, 999 F.2d 760, 

763 (4th Cir. 1993), aff’g T.C. Memo. 1992-153. The record shows, and 

Mr. Ghaly admitted, that in 2018 Great-West distributed funds from his 

retirement account and he defaulted on the 2015 loan, generating a 

deemed distribution. Consequently, the presumption of correctness 

attaches to respondent’s notice of deficiency, and petitioners bear the 

burden of proving that the determination is incorrect.3

II. Unreported Income

Section 61(a) provides that “gross income means all income from 

whatever source derived.” Gross income includes, but is not limited to, 

items such as compensation, annuities, income from life insurance and 

endowment contracts, and pensions. § 61(a)(1), (8), (9), (10). 

3 The parties did not address whether section 6201(d) applies to this case. 

Under section 6201(d), if a taxpayer asserts a reasonable dispute with respect to an 

item of income reported on an information return filed by a third party and the 

taxpayer meets certain other requirements, the Commissioner bears the burden of 

producing reasonable and probative evidence, in addition to the information return, 

concerning the deficiency attributable to the income item. Assuming arguendo that 

respondent bears the burden of production under section 6201(d), we find that 

respondent has satisfied it.
4

Section 402(a) provides the general rule that “any amount 

actually distributed to any distributee by any employees’ trust described 

in section 401(a) which is exempt from tax under section 501(a) shall be 

taxable to the distributee, in the taxable year of the distributee in which 

distributed, under section 72 (relating to annuities).” An amount 

distributed as a loan is not taxable when distributed if the loan meets 

certain requirements but will become taxable as soon as the loan fails to 

satisfy any of the requirements and will be deemed a distribution. See

§ 72(p); Owusu v. Commissioner, T.C. Memo. 2010-186, 2010 WL 

3322502, at *3–4. Mr. Ghaly does not dispute that his retirement plan 

trust was a qualified trust under section 401(a). Thus, subject to certain 

exceptions, see, e.g., § 402(c)(1) (excluding certain “rollover” 

distributions from income), any amount actually distributed to 

petitioners normally would be subject to federal income tax pursuant to 

section 72, see § 402(a).

Mr. Ghaly requested the withdrawal resulting in the $71,147 

distribution from his Great-West retirement account. Mr. Ghaly also 

defaulted on the outstanding loan from his Great-West retirement 

account, which resulted in a deemed distribution of $44,178. He has

neither argued nor established the applicability of an exception to the 

taxability of either the distribution or the deemed distribution. Instead, 

he asserts that in 2020 he opened two new retirement accounts and 

deposited funds in them to replace those he withdrew from his GreatWest retirement account, which is not sufficient to show that the 

distributions he received in 2018 are not included in gross income.

Respondent properly included the distributions in petitioners’ gross 

income.

III. Additional Tax Under Section 72(t)

Section 72(t)(1) imposes a 10% additional tax on the taxable 

amount of an early distribution from a qualified retirement plan (as 

defined in section 4974(c)) unless certain enumerated exceptions apply 

under section 72(t)(2). The term “qualified retirement plan” includes a 

section 401(k) plan and an ESOP. Uscinski v. Commissioner, T.C. Memo. 

2005-124, 2005 WL 1231826, at *2; see also §§ 72(t)(1), 401(a), (k)(1), 

4974(c)(1), 4975(e)(7). A distribution is early if it is made before the 

recipient attains the age of 591⁄2. § 72(t)(2)(A)(i). However, the 10% 

additional tax does not apply to certain distributions, such as those 

attributable to the taxpayer’s disability or made for the payment of 

certain medical expenses. See § 72(t)(2)(A) and (B). Generally, the 

taxpayer has the burden of proving his or her entitlement to any of these 
5

exceptions. See Rule 142(a); El v. Commissioner, 144 T.C. 140, 148–49 

(2015). 

Mr. Ghaly was not 591⁄2 years old when he received either of the 

distributions in 2018. The distribution and deemed distribution from his 

retirement plan are considered early distributions for purposes of 

section 72(t) unless an exception applies. Mr. Ghaly testified during trial 

that he used the distributions to repay loans he had taken from family

for his education expenses, medical expenses of $34,000 for his son’s 

surgery, and property taxes. During trial he produced a medical bill from 

Luis Zapaich, M.D., for $34,077, but no evidence that he had paid it.4 He 

also produced bank statements showing four payments to Columbia 

University in 2013 and 2014, each approximately $6,000, but no 

evidence that he had borrowed these funds from relatives or that he 

repaid them in 2018. Finally, Mr. Ghaly produced documents showing 

he paid $6,238 in property taxes in 2018, which is irrelevant.5 We find 

that petitioners did not use the funds from the distributions in 2018 to 

pay any expense that would allow them to avoid the 10% additional tax

on early withdrawal. The withdrawal does not fit within any of the 

statutory exceptions, and the entire distribution is subject to the 10% 

additional tax.

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

petitioners as to the accuracy-related penalty under section 6662(a).

4 The invoice is dated December 19, 2018, and shows that the entire $34,077 

balance was outstanding at that time. Mr. Ghaly did not produce receipts, bank 

statements, canceled checks, or any other proof of paying the $34,077. 

In addition to the medical bill for $34,077, Mr. Ghaly produced various other 

medical bills, some for Laila Ryad and Adam Ghaly, which show petitioners made

copayments of $10 to $25 for medical visits in 2018. He also produced a letter from a 

law firm showing that he entered into a payment plan for an outstanding Hackensack 

University Medical Center medical bill, which showed that petitioners had made a 

$195 payment toward the bill.

5 The Internal Revenue Code provides a deduction for taxes paid on real 

property, but not an exception to the 10% penalty on early withdrawal for taxes paid 

on real property. See §§ 164, 72(t).