1 Unless otherwise indicated, subsequent section

references are to the Internal Revenue Code in effect for the

year at issue. All Rule references are to the Tax Court Rules of

Practice and Procedure.

T.C. Summary Opinion 2002-33

UNITED STATES TAX COURT

WALLACE F. AND MI-JA H. SMITH, Petitioners v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 10017-00S. Filed April 3, 2002.

Wallace F. and Mi-Ja H. Smith, pro se.

Daniel J. Parent, for respondent.

COUVILLION, Special Trial Judge: This case was heard

pursuant to section 7463 of the Internal Revenue Code in effect

at the time the petition was filed.1 The decision to be entered

is not reviewable by any other court, and this opinion should not

be cited as authority.
- 2 -

Respondent determined a deficiency of $20,453 in

petitioners' Federal income tax for 1997 and an accuracy-related

penalty under section 6662(a) of $3,211.20.

The issues for decision are: (1) Whether petitioners failed

to include in income distributions from various employee

retirement plans of Wallace F. Smith (petitioner) during the year

at issue; (2) whether petitioners are entitled to a deduction for

a casualty or theft loss of $300,000; and (3) whether petitioners

are liable for the accuracy-related penalty under section

6662(a).

Some of the facts were stipulated, and those facts, with the

annexed exhibits, are so found and are incorporated herein by

reference. At the time the petition was filed, petitioners'

legal residence was Walnut Creek, California.

Petitioner has a bachelor's degree in economics from Yale

University, a master's degree in economics from the University of

Connecticut, and a Ph.D. in economics from the University of

Washington. He began teaching economics at the University of

California at Berkeley (Berkeley) in 1959 and continued teaching

there, in the Haas School of Business, until January 1997. At

that time, petitioner was dismissed from Berkeley after declining

the opportunity to resign or retire voluntarily. Although the

circumstances surrounding petitioner's dismissal from Berkeley
- 3 -

2 Berkeley contends petitioner was dismissed for

"intentionally and without justification, failing to teach two

assigned courses during the 1995-96 academic year." Petitioner

contends he was dismissed for exposing various acts of fraud by

faculty members and administrators within the university.

are unclear, the fact of his dismissal in January 1997 is not in

dispute.2

Following his dismissal from Berkeley, through the end of

the year at issue, petitioner received the following

distributions from various retirement plans held for his benefit

at Berkeley:

U. of California Benefits Program Distribution

Pension Plan $61,378.13

Defined Contribution Plan 12,623.61

Capital Accumulation Provision Account 14,207.14

 Total $88,208.88

Petitioner also received a distribution of $11,281 from an IRA at

Bank of America during 1997.

On their Federal income tax return for 1997, petitioners

reported, in pertinent part, total pension and annuity income of

$61,378.13, with $41,917 being taxable; total IRA distributions

of $11,281.35, with zero being taxable; and other income as

liquidated savings of $44,569.82, with zero being taxable. 

Petitioners also reported wages of $6,911.81, taxable interest of

$929.78, a taxable State income tax refund of $746.92, and

taxable Social Security benefits of $18,808. Thus, petitioners
- 4 -

reported adjusted gross income of $69,313.51 for 1997. Among

other itemized deductions not at issue herein, petitioners

claimed a deduction for a casualty or theft loss of $300,000 in

connection with the loss, at the time of petitioner's dismissal

from Berkeley, of his employer-sponsored term life insurance

policy having a face value of $300,000. Thus, petitioners

reported a zero tax liability for 1997, a withholding credit of

$14,019.67, and an overpayment of $14,019.67.

In the notice of deficiency, respondent determined that

petitioners failed to include in income $45,955 in taxable

retirement distributions from Berkeley and that the $11,281

distribution from petitioner's Bank of America IRA was taxable. 

Respondent determined further that petitioners were not entitled

to a deduction for the $300,000 casualty or theft loss claimed on

their return and that petitioners were liable for the accuracyrelated penalty under section 6662(a) for a substantial

understatement in tax or for negligence or disregard of rules or

regulations in the amount of $3,211.20.

The first issue is whether petitioners failed to include in

income $45,955 in taxable retirement plan distributions for the

year at issue identified above as the U. of California Benefits

Program. Beginning in February 1997, petitioner began receiving

monthly pension checks of $5,579.83 from the University of

California totaling $61,378.13 for the year (the pension
- 5 -

distribution). Of the total pension distribution for 1997,

$335.39 of this amount, i.e., $30.49 per month for 11 months, was

attributable to after-tax employee contributions and, thus, was

nontaxable. The portion of petitioner's total pension

distribution that was includable in petitioners' 1997 income was

$61,042.74.

In April 1997, the Defined Contribution Retirement Plan of

the University of California Benefits Program distributed

$12,623.61 to petitioner (the defined contribution plan

distribution). Of this amount, petitioner actually received

$9,846.42, with $2,524.72 withheld for Federal income taxes and

$252.47 withheld for State income taxes. Also in April 1997, the

University of California Benefits Program distributed to

petitioner $14,207.14 from his Capital Accumulation Provision

(CAP) Retirement Account (the CAP distribution). Of this amount,

petitioner received $11,081.57, with $2,841.43 withheld for

Federal income taxes and $284.14 withheld for State income taxes.

As stated previously, petitioners reported on their return

total pension and annuity income of $61,378.13, with $41,917

being taxable, and other income as liquidated savings of

$44,569.82 with zero being taxable. Thus, in connection with the

three distributions from Berkeley, i.e., the pension

distribution, the defined contribution plan distribution, and the

CAP distribution, petitioners included $41,917 in gross income. 
- 6 -

3 The $1.49 difference between the $45,956.49 petitioner

received but failed to include in income and the $45,955

determined by respondent is not explained in the record.

Petitioner actually received total distributions from Berkeley

during 1997, that were not attributable to after tax employee

contributions, of $87,873.49, which exceeds the amount

petitioners included in income by $45,956.49. In the notice of

deficiency, respondent determined that petitioners failed to

report $45,955 in "U C Berkeley 1099R (3)" income. In other

words, petitioners failed to include in income a total of $45,955

from the three separate retirement distributions from Berkeley.3

Section 61(a) provides that gross income includes "all

income from whatever source derived," unless otherwise provided. 

More specifically, section 61(a)(1), (9), and (11), respectively,

provides that gross income includes "compensation for services,

including fees, commissions, fringe benefits, and similar items";

"annuities"; and "pensions". A fundamental principle of tax law

is that income is taxed to the person who earns it, when he earns

it or derives it from property he owns. Commissioner v.

Culbertson, 337 U.S. 733, 739-740 (1949); Lucas v. Earl, 281 U.S.

111 (1930). Moreover, determining the ownership of property is a

question of fact, on which the taxpayer generally has the burden

of proof. Rule 142(a); Hang v. Commissioner, 95 T.C. 74, 80
- 7 -

4 The Internal Revenue Service Restructuring & Reform Act

of 1998, Pub. L. 105-206, sec. 3001, 112 Stat. 726, added

sec. 7491, which, under certain circumstances, places the burden

of proof on the Secretary with respect to factual issues relevant

to a taxpayer's liability for taxes and the burden of production

on the Secretary with respect to a taxpayer’s liability for

penalties and additions to tax in court proceedings arising in

connection with examinations commencing after July 22, 1998. The

examination of petitioners' return commenced after July 22, 1998. 

Nevertheless, the burden of proof with respect to the items of

deficiency did not shift to respondent because petitioner did not

provide substantiation and credible evidence in connection

therewith. Higbee v. Commissioner, 116 T.C. 438 (2001). 

Moreover, respondent has satisfied the burden of production with

respect to the accuracy-related penalty under sec. 6662(a). 

(1990).4 The actual control over the property and the enjoyment

of profits from such property are of paramount importance in

establishing ownership. Taylor v. Commissioner, 27 T.C. 361, 368

(1956), affd. 258 F.2d 89 (2d Cir. 1958).

Petitioners admitted receiving the stated distributions from

Berkeley; however, petitioners object to the pension

distribution, the defined contribution plan distribution, and the

CAP distribution being characterized as "retirement pensions" or

"retirement distributions". Petitioners contend that the

distributed amounts (over those that were included in income)

should not be included in their 1997 income for various reasons,

such as, "In 1997 the University of California -- illegally --

cancelled our life insurance (including irreplaceable term life),

cancelled my lifetime employment contract, said our savings (held
- 8 -

by UC) would be lost", and "savings were liquidated for safety as

'involuntary conversion'", and so forth.

Petitioners further contend that petitioner's dismissal from

Berkeley was an illegal retaliatory act carried out by officials

at Berkeley to punish petitioner for reporting various fraudulent

acts of Berkeley officials. Petitioners also claim that

administrative officials at Berkeley, along with generous

benefactors of Berkeley, plotted to have petitioner killed for

reporting fraudulent activity. Finally, petitioners contend that

the issuance of the notice of deficiency resulted from a

conspiracy between Berkeley and the Internal Revenue Service to

harass petitioner for his whistle-blowing.

Petitioners did not assert a valid position or present any

evidence or authority to support their contention that the

$45,955 in retirement distributions from Berkeley was not

includable in gross income. The arguments they advanced are

completely lacking in factual and legal foundation and, in

essence, constitute a protest of the Federal tax laws. Similar

types of arguments have been heard on numerous occasions by this

Court, as well as other courts, and have been consistently and

vehemently rejected. The Court, here, sees no need to further

respond to such arguments with somber reasoning and copious

citations of precedent, as to do so might suggest that

petitioners' arguments possess some measure of colorable merit. 
- 9 -

See Crain v. Commissioner, 737 F.2d 1417 (5th Cir. 1984). In

short, petitioners are taxpayers subject to the income tax laws

and to the jurisdiction of this Court. See Abrams v.

Commissioner, 82 T.C. 403, 406-407 (1984).

On this record, the Court holds that petitioners failed to

include in income $45,955 in retirement plan distributions from

Berkeley for 1997. Respondent is, therefore, sustained on this

issue.

With respect to the $11,281 IRA distribution from Bank of

America to petitioner during 1997, petitioners reported the

distribution on their 1997 return but reported the taxable amount

as zero. Petitioners appear to argue that the distribution

should not be included in income for the year at issue because

the liquidation of the IRA constituted an involuntary conversion

forced upon them by petitioner's dismissal from employment with

Berkeley in that, due to the fact that petitioner was no longer

employed after January 1997, petitioners were forced to use

accumulated savings to pay their living expenses, including the

subject IRA.

In general, any amount paid or distributed out of an

individual retirement account is includable in gross income of

the payee or distributee in accordance with section 72. Sec.

408(d)(1); sec. 1.408-4(a)(1), Income Tax Regs; Arnold v.

Commissioner, 111 T.C. 250, 253 (1998). Section 408(d)(3)
- 10 -

provides an exception to the general rule where the entire amount

received is rolled over into an IRA or individual retirement

annuity for the benefit of the distributee within 60 days after

the receipt of the distribution. Additionally, distributions are

not includable in a distributee's income to the extent that any

distribution, or any portion of any distribution, is allocable to

the distributee's "investment in the contract." Sec. 72(e)(2). 

Generally, however, the basis of an IRA is zero. Sec. 1.408-

4(a)(2), Income Tax Regs.; Costanza v. Commissioner, T.C. Memo.

1985-317.

Petitioners admitted receipt of the $11,281 distribution

from petitioner's Bank of America IRA in 1997 and reported the

distribution on their return for that year, even though they

failed to include the distribution in gross income. Petitioners

do not qualify for the rollover exception provided in section

408(d)(3) because petitioners did not roll over any portion of

the distribution into another IRA or other retirement account. 

Moreover, petitioners failed to show that they made any

nondeductible or excess contributions to the IRA that would have

increased their basis therein, and, thus, petitioners' tax basis

in the IRA was zero. Patrick v. Commissioner, T.C. Memo. 1998-

30, affd. 181 F.3d 103 (6th Cir. 1999). Petitioners do not

claim, and nothing in the record suggests, that petitioners

should otherwise be given credit for any investment in the IRA
- 11 -

within the meaning of section 72(e)(3)(A)(ii) and (e)(6). 

Consequently, the entire amount of the IRA distribution of

$11,281 is includable in petitioners' 1997 income. Sec.

72(e)(3)(A). The Court rejects petitioners' involuntary

conversion argument. Respondent is sustained on this issue.

The next issue is whether petitioners are entitled to a

deduction for a $300,000 casualty or theft loss for 1997. On

their Federal income tax return for 1997, petitioners, on Form

4684, Casualties and Thefts, reported a casualty or theft loss of

personal use property in the amount of $300,000. After

application of the $100 limitation and the 10 percent adjusted

gross income floor, as required by statute, the remaining amount

of the loss, $292,968.65, was claimed on Schedule A, Itemized

Deductions, as a casualty or theft loss deduction.

Petitioners contend they sustained the casualty or theft

loss as a result of the cancellation of petitioner's employersponsored term life insurance policy, when his employment with

Berkeley was terminated in 1997. Petitioners claimed the

$300,000 loss because the face value of the life insurance policy

at the time of cancellation was estimated at $300,000. On Form

4686, petitioners described the lost property as "Insurance

Coverage Wrongfully Cancelled". Respondent determined that

petitioners were not entitled to a casualty or theft loss
- 12 -

deduction because petitioners had no basis in the relevant term

life insurance policy. 

Section 165(a) allows a taxpayer to deduct any loss

sustained during the taxable year and not compensated for by

insurance or otherwise. In particular, section 165(c)(3) allows

a deduction to an individual for loss of property not connected

with a trade or business or a transaction entered into for

profit, if such loss arises from fire, storm, shipwreck, or other

casualty, or from theft. Personal casualty or theft losses are

deductible only to the extent that the loss exceeds $100 and 10

percent of adjusted gross income. Sec. 165(h)(1) and (2). 

Moreover, such losses are deductible as itemized deductions on

Schedule A of a taxpayer's return.

The measure of a casualty or theft loss is determined by

section 1.165-7(b)(1), Income Tax Regs. Generally, the loss

shall be the lesser of (1) the fair market value of the property

immediately before the casualty reduced by the fair market value

of the property immediately after the casualty, or (2) the amount

of the adjusted basis prescribed in section 1.1011-1, Income Tax

Regs., for determining loss from the sale or other disposition of

the property. Under section 1.1011-1, Income Tax Regs., adjusted

basis is the cost or other basis of property under section 1012,

adjusted to reflect allowable deductions for depreciation under

section 1016.
- 13 -

5 Accordingly, the Court need not address the question of

whether petitioners actually suffered a casualty or theft within

the meaning of sec. 165(c)(3).

6 The notice of deficiency stated that $16,056 of the

understatement of tax required to be shown on the return for 1997

constituted a substantial understatement of income tax (within

the meaning of sec. 6662(b)(2)) or was due to negligence or

disregard of rules or regulations (within the meaning of sec.

6662(b)(1)). Additionally, respondent's trial memorandum asserts

that the underpayment was both substantial and due to negligence

or disregard of rules or regulations. Neither the notice of

deficiency nor the trial memorandum explains why the sec. 6662(a)

penalty was applied to an underpayment of only $16,056, rather

than to the entire deficiency of $20,453.

The maximum accuracy-related penalty imposed on an

(continued...)

The claimed loss was a term life insurance policy that had

no cash surrender value upon termination, as distinguished from a

whole life insurance policy that generally has a cash surrender

value over time as premiums are paid. Petitioners admit that

their term insurance policy had no cash surrender value, and that

any obligations under the policy simply terminated upon the

cessation of premium payments.

Petitioners produced no evidence of a basis in the subject

term insurance policy.5 Thus, petitioners are not entitled to a

deduction for a casualty or theft loss in 1997. Respondent is

sustained on this issue.

The final issue is whether petitioners are liable for the

accuracy-related penalty under section 6662(a) for a substantial

understatement in tax or for negligence or disregard of rules or

regulations.6 Section 6662(a) provides that, if it is applicable
- 14 -

6(...continued)

underpayment of tax may not exceed 20 percent of the

underpayment, notwithstanding that the portion is attributable to

more than one of the types of misconduct described in sec.

6662(a). Sec. 1.6662-2(c), Income Tax Regs. Therefore, although

the underpayment of tax required to be shown on petitioners' 1997

income tax return may have been attributable to both a

substantial understatement of income tax and negligence, the

maximum accuracy-related penalty petitioners would be liable for

is 20 percent. Thus, the Court considers the sec. 6662(a)

penalty only as to the substantial understatement allegation and

not as to the negligence or disregard of rules or regulations

allegation.

to any portion of an underpayment in taxes, there shall be added

to the tax an amount equal to 20 percent of the portion of the

underpayment to which section 6662 applies. Under section

6664(c), however, no penalty shall be imposed under section

6662(a) with respect to any portion of an underpayment if it is

shown that there was a reasonable cause for the portion, and that

the taxpayer acted in good faith with respect to the portion of

the underpayment.

Under section 6662(b)(2), there is a substantial

understatement of income tax if the amount of the understatement

exceeds the greater of (1) 10 percent of the tax required to be

shown on the return, or (2) $5,000. Sec. 6662(d)(1)(A). For

purposes of section 6662(d)(1), "understatement" is defined as

the excess of tax required to be shown on the return over the

amount of tax that is shown on the return, reduced by any

rebates. Sec. 6662(d)(2)(A).
- 15 -

Section 6662(d)(2)(B) provides that the amount of the

understatement shall be reduced by that portion of the

understatement that is attributable to the tax treatment of any

item by the taxpayer if there is or was substantial authority for

the treatment, or any item with respect to which the relevant

facts affecting the item's tax treatment are adequately disclosed

in the return or in a statement attached to the return, and there

is reasonable basis for such treatment.

The tax that was required to be shown on petitioners' 1997

return, based on respondent's adjustments, was $20,453. 

Petitioners' return showed a tax of zero. Despite respondent's

lack of explanation, the Court surmises that respondent

determined $4,397 of this difference to have been adequately

disclosed, and, therefore, $16,056 was considered the

understatement of tax for purposes of section 6662(d)(2)(A). In

any event, the $16,056 clearly exceeds the greater of $5,000 or

10 percent of the tax required to be shown on the return (i.e.,

$2,045.30). It follows that petitioners' understatement of tax

was substantial for purposes of section 6662(d)(1)(A).

The determination of whether a taxpayer acted with

reasonable cause and in good faith depends upon the facts and

circumstances of each particular case. Sec. 1.6664-4(b)(1),

Income Tax Regs. Relevant factors include the taxpayer's efforts

to assess his or her proper tax liability, the knowledge and

experience of the taxpayer, and reliance on the advice of a
- 16 -

professional, such as an accountant. Drummond v. Commissioner,

T.C. Memo. 1997-71. The most important factor is the extent of

the taxpayer's effort to determine the taxpayer's proper tax

liability. Sec. 1.6664-4(b)(1), Income Tax Regs. An honest

misunderstanding of fact or law that is reasonable in light of

the experience, knowledge, and education of the taxpayer may

indicate reasonable cause and good faith. Remy v. Commissioner,

T.C. Memo. 1997-72. 

While the Court sympathizes with petitioners and understands

the difficulties, financial and otherwise, they encountered from

the termination of petitioner's employment with Berkeley, such

difficulties do not constitute reasonable cause for an

understatement of Federal income tax within the meaning of

section 6664(c). The record reflects that petitioners failed to

make a sufficient effort to determine their proper tax liability

for 1997. They failed to include several retirement account

distributions in their 1997 income and claimed a $300,000

casualty or theft loss for termination of an employer-sponsored

term life insurance policy, despite the fact that there existed

no precedent for any such tax treatment. Even assuming that

petitioners acted in good faith, the requirements of the Internal

Revenue Code have not been met in this case because petitioners

failed to make a showing that there was a reasonable cause for

their understatement of income as required by section 6664(c).
- 17 -

Although petitioners may perceive the accuracy-related

penalty under section 6662(a) to be unfair, the applicable

statutory language is clear and unambiguous, and this Court has

no power to expand the explicit terminology of the statute. 

Donigan v. Commissioner, 68 T.C. 632, 636 (1977). The Court must

apply the law as written. Accordingly, respondent is sustained

on the imposition of the accuracy-related penalty under section

6662(a).

Reviewed and adopted as the report of the Small Tax Case

Division.

Decision will be entered

for respondent.