1 William D. Hartsock entered his appearance after trial for

involvement in posttrial briefing.

2 Section references are to the Internal Revenue Code in

(continued...)

T.C. Memo. 1995-575

UNITED STATES TAX COURT

WINTHROP B. AND SALLY L. ORGERA, Petitioners v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 17414-93. Filed December 4, 1995.

William D. Hartsock,

1 for petitioners.

Sherri S. Wilder, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

GERBER, Judge: Respondent determined a $99,344 deficiency 

in petitioners' 1990 income tax. Respondent also determined a

$19,869 penalty under section 6662(a).2 The deficiency includes
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2(...continued)

effect for the tax year under consideration. Rule references are

to this Court's Rules of Practice and Procedure. 

a 10-percent tax for premature distribution from a qualified

plan. After concessions by the parties, the issues remaining for

our consideration are: (1) Whether petitioners successfully

rolled over a 1990 plan distribution of $246,647 or whether it

was taxable; (2) if the distribution was taxable, whether it was

subject to the 10-percent additional tax for premature

distribution under section 72(t); (3) whether the distribution is

a lump-sum distribution that meets the requirements for income

averaging under section 402(e); and (4) whether petitioners are

liable for a $19,869 accuracy-related penalty for negligence or

disregard of rules and regulations for failing to report the

pension distribution and other income.

FINDINGS OF FACT

Petitioners resided in San Juan Capistrano, California, at

the time their petition was filed. As of July 18, 1990, each of

petitioners was less than 54 years of age. Winthrop Orgera

(petitioner) was employed as a pilot by Western Air Lines, Inc.

(Western), prior to July 18, 1990. Petitioner participated in

Western's Pilots' Variable Pension Plan (Plan), of which Sumitomo

Bank was the trustee. Petitioner made voluntary contributions to

the fund, and, on July 18, 1990, he received a $246,647.68 cash

distribution from the Plan. The Plan's assets were distributed
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because Delta Airlines had bought out Western and did not wish to

continue Western's pilots' Plan.

Petitioner met with Thomas Supinski of the Western Federal

Credit Union (credit union) regarding the rollover of his Plan

distribution. Mr. Supinski and the credit union were attempting

to assist Western's employees to roll over their distributions

into individual retirement accounts (IRA). The credit union had

been connected with Western, petitioner's former employer. Mr.

Supinski recommended the use of the First National Bank of Onaga,

Kansas (Kansas bank), to open an IRA. As of August 17, 1990,

petitioner had completed an IRA application and a rollover

certification with the Kansas bank. Petitioner also executed a

trading authorization that appointed Thomas Supinski as the IRA

account representative of account No. 41003212, which was applied

for at the Kansas bank.

In addition to the cash distribution, petitioner expected

that he would receive a distribution, in kind, of illiquid assets

and that the Kansas Bank would be trustee for the assets that

might be received by the IRA account. The illiquid assets

represented about 9 or 10 percent of the total amount to be

distributed from the Plan to Western pilots, including

petitioner. It was Mr. Supinski's understanding that

petitioner's Kansas bank IRA was exclusively for the illiquid

assets. Petitioner did not understand that the Kansas bank IRA

did not cover the cash portion of the Plan distribution. Mr.
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Supinski tried to persuade petitioner to invest the $246,647.68

cash distribution in certain financial products and to include

them in the IRA. Petitioner advised Mr. Supinski that he was

going to handle the cash distribution himself and set up his own

IRA.

On August 17, 1990, petitioner deposited $239,641.91 in

money market account No. 9 at the credit union, and he retained

the $7,005.77 difference (between the distribution and the

deposit). On February 20, 1992, petitioners withdrew $139,126

from account No. 9 and deposited it into a qualified IRA with

Charles Schwab & Co., Inc. Prior to the February 20, 1992,

transaction, petitioners had withdrawn a total of $196,919.68

from account No. 9. Of the $196,919.68, $101,475.21 was

redeposited into petitioners' regular share account with the

credit union, account No. 1. In addition, $50,000 of the

$196,919.68 was withdrawn on August 21, 1990, and used by

petitioners in connection with the building of their home. 

Petitioners did not report any portion of the Plan distribution

or credit union withdrawals as income on their 1990 Federal

income tax return. Petitioners, for 1990, also failed to report

$1,971 of income from Prudential Insurance Co. and $18 of

interest income from Great American Bank.

By a letter dated June 27, 1991, the Kansas bank

acknowledged receiving petitioner's documents with which to open

an IRA, but advised that "Liquidating Trust Certificates" had not
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3 Sec. 402 as used in this opinion refers to the section in

effect for distributions made prior to Dec. 31, 1992. The

Unemployment Compensation Amendments of 1992, Pub. L. 102-318,

sec. 521(a), 106 Stat. 290, 300, restructured and reconfigured

sec. 402 for years after the 1992 calendar year. 

been received from Western, and, accordingly, it became the

bank's understanding that the IRA accounts were not to have been

opened. By a letter dated July 19, 1991, the Kansas bank advised

petitioner of the return of a $27 custodial fee, which had been

paid by the credit union with respect to petitioner's IRA

account. The fee was returned because the IRA had not been

funded and the IRA accounts had been closed.

OPINION

Section 402(a)(1)3 provides the general rule that amounts

distributed by a qualified plan are taxable in the year of

distribution in accordance with the provisions of section 72. 

Section 402(a)(5) provides that taxation of a current

distribution may be deferred if it is rolled over into an

eligible retirement plan within 60 days of the distribution. 

Petitioners bear the burden of proving that respondent's

determination is in error. Rule 142(a); Welch v. Helvering, 290

U.S. 111 (1933). Accordingly, petitioners must show that the

cash distribution in question was rolled over into an eligible

retirement plan within 60 days. 

Petitioner concedes that the $7,005.77 of the Plan

distribution that was not deposited and the $50,000 that was
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withdrawn during 1990 are taxable in that year. With respect to

the balance, petitioner argues that his credit union deposit was

sufficient to meet the requirements of section 402(a)(5). It was

petitioner's understanding that an IRA account had been opened

with the Kansas bank and that he was covered for purposes of the

rollover. Petitioner also believed that the credit union and Mr.

Supinski were connected with petitioner's former employer,

Western, and that they were trying to assist in the rollover

process. Although Mr. Supinski attempted to make it clear to

petitioner that his IRA with the Kansas bank was only for

illiquid assets distributed in kind, petitioner believed that

somehow the credit union, the Kansas bank, and his IRA were

connected.

During the trial, petitioner demonstrated an unfamiliarity

with the role of the Kansas bank, the nature or mechanics of an

IRA account, and Mr. Supinski's role in the entire process. 

Petitioner believed that maintaining the plan distributions in

his Western credit union accounts was part of his IRA. Mr.

Supinski was attempting to profit from selling investments to be

included in petitioner's IRA. Petitioner did not make a

distinction between depositing the distribution in the credit

union and the investments recommended by Mr. Supinski for

placement in the IRA. 

Petitioner applied for an IRA, which was opened in his name,

albeit in a Kansas bank. Petitioner followed Mr. Supinski's
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instructions as to opening the IRA at the Kansas bank, but that

account was never funded. After petitioner learned his approach

was inadequate, he put the remaining funds into a valid IRA. 

Even though a part of the plan distribution was ultimately placed

into a valid IRA, petitioners failed to roll over any part of the

$246,647.68 cash distribution within 60 days in a manner that

would meet the requirements for deferral under section 402(a)(5).

Petitioner contends that the holding in Wood v.

Commissioner, 93 T.C. 114 (1989), is applicable here. That case

involved a distribution of a profit-sharing plan followed by the

taxpayer's establishment of an IRA. Due to a bookkeeping error

by the IRA trustee, certain of the trustee's records indicated

that part of the distribution had not been transferred to the IRA

account within the required 60 days. In Wood, we held that the

trustee's bookkeeping error did not preclude the taxpayer's

rollover treatment because, in substance, the taxpayer had met

the statutory requirements. 

Here, petitioner had established an IRA, yet, due to

petitioner's lack of understanding, he failed to make a timely

transfer of the distribution to an IRA that met the statutory

requirements. Hence, the distribution made in 1990 is taxable as

determined by respondent.

Respondent also determined that petitioners were liable for

the 10-percent additional tax for early distribution under

section 72(t). That section provides for an additional tax for
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any amount received from a qualified plan, unless it is: Made

after the employee becomes 59-1/2 years old; made to a

beneficiary after the employee's death; attributable to the

employee's being disabled; part of a series of substantially

equal payments made no less than annually for the life of

designated persons; made to an employee who is separated from

service after attaining age 55; a dividend paid with respect to a

stock described in section 404(k); made to an employee for

medical expenses in accordance with section 72(t)(2)(B); or a

payment in connection with a qualified domestic relations order

in accordance with section 72(t)(2)(C). 

Because petitioner was 54 years of age as of 1990 and none

of the other exceptions set forth in the provisions of section

72(t)(2) is satisfied, petitioners are liable for an additional

10-percent tax on the early distribution.

Under section 402(e), a lump-sum distribution made after the

employee attained the age of 59-1/2 was, in certain

circumstances, eligible for income-averaging treatment. 

Petitioner was just 54 years old at the time of the distribution,

which renders him ineligible for income averaging under the

express terms of section 402(e)(4)(B)(i). See Cebula v.

Commissioner, 101 T.C. 70 (1993). Moreover, as explained infra,

the distribution was not a lump sum because less than the full

balance of the account was distributed during the year. 
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Moreover, the record reflects that petitioner received cash

amounts representing about 90 percent of his Plan interest and

that about 10 percent of his Plan account was tied up in illiquid

assets that were supposedly to be placed in the Kansas bank IRA. 

For reasons that are not explained in our record, as of 1991, the

illiquid assets had not been trusteed or placed in petitioner's

IRA account, and the $27 custodial fee was returned to

petitioner. These illiquid assets were not distributed during

1990. Consequently, the distribution of cash to petitioner in

that year did not represent the full balance standing to his

account in the Plan and failed to qualify as a lump-sum

distribution.

Petitioner also argues that Congress did not intend that

taxpayers be subject to the full impact of the tax in these

situations. It is true that petitioner's distribution was made

due to circumstances beyond his control. The statute, however,

requires that the distribution of a taxpayer's entire account

during the year be made in specific circumstances, which did not

occur here. In addition, Congress provided a method for

deferral, yet petitioner failed to comply with the statutory

requirements to obtain such deferral. Accordingly, petitioners

are not entitled to section 402 relief, in the form of a tax-free

rollover or income averaging, for 1990, the year of the

distribution.
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Finally, we consider whether petitioners are liable for an

accuracy-related penalty for negligence under section 6662(a) and

(b)(1). Section 6662(a) provides for a 20-percent penalty for

the portion of the underpayment of tax attributable to one of the

categories listed in section 6662(b). Section 6662(b)(1)

provides that negligence or disregard of rules or regulations is

a reason for imposition of the 20-percent addition. 

Negligence includes a lack of due care or a failure to do

what a reasonable and ordinarily prudent person would do under

the circumstances. Neely v. Commissioner, 85 T.C. 934, 947

(1985). Petitioners bear the burden of proving that respondent's

determination of negligence is erroneous. Rule 142(a); Bixby v.

Commissioner, 58 T.C. 757, 791-792 (1972).

Petitioner, at least with respect to 1990, was erroneously

under the impression that his credit union accounts were covered

under the IRA account that he opened. During the confusion of

the takeover by Delta Airlines and the closing of the pilots'

pension Plan that had operated while petitioner worked for

Western, petitioner executed IRA papers, and, for the most part,

deposited his funds in the credit union that was affiliated with

the organization and the individual (Mr. Supinski) who assisted

petitioner in the opening of petitioner's IRA account. Taking

into consideration petitioner's lack of specialized knowledge

about IRA's and tax law involving pension plans, and, considering

the circumstances in this case, it was reasonable for petitioner
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to believe that he had rolled over his pension distribution into

an IRA. Mr. Supinski had attempted to direct petitioner to

financial products on which Mr. Supinski would have earned

commissions. Petitioner believed that he could individually

place his funds in an investment of his choice because he had

already opened an IRA account. While this did not win the day as

to petitioners' tax liability argument, we hold that petitioners

are not liable for the negligence addition for the portion of the

funds that remained deposited in petitioner's credit union

accounts as of the end of 1990.

With respect to the $7,005.77 initially withheld from

deposit, the $50,000 withdrawn by petitioners to build a home,

and the unreported income in the amounts of $1,971 and $18,

petitioners did not provide any explanation that would mitigate

respondent's determination of negligence under section 6662(a). 

Accordingly, we hold that petitioners are liable for the 20-

percent penalty as to that part of the underpayment which is

attributable to the $50,000, $7,005.77, $1,971, and $18 omitted

amounts. 

To reflect the foregoing,

Decision will be entered under

Rule 155.