T.C. Memo. 1998-407

UNITED STATES TAX COURT

STEPHEN NEAL SWIHART, Petitioner v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 2966-98. Filed November 13, 1998. 

 

Stephen Neal Swihart, pro se. 

Julie L. Payne, for respondent.

MEMORANDUM OPINION

WOLFE, Special Trial Judge: This case was heard pursuant to

the provisions of section 7443A(b)(3) and Rules 180, 181, and

182. All section references are to the Internal Revenue Code in

effect for the tax year in issue, unless otherwise indicated. 
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1 Petitioner conceded that he failed to report $15,540 of

compensation paid to him by Key Trucking, Inc. (Key). Petitioner

also conceded that $674 he received from Mac Transportation and

$1,008 he received from Atlantic and Pacific Freightways was

unreported nonemployee compensation and subject to selfemployment tax. Respondent conceded that commission income

petitioner received from Key in the amount of $15,540 was not

subject to self-employment tax.

All Rule references are to the Tax Court Rules of Practice and

Procedure.

Respondent determined a deficiency in petitioner's 1994 

Federal income tax in the amount of $6,336 and an accuracyrelated penalty under section 6662(a) in the amount of $1,267.

Following concessions made by both parties,1 the issues for

decision are: (1) Whether petitioner is subject to the 10-

percent additional tax on early distributions from qualified

retirement plans imposed by section 72(t); and (2) whether

petitioner is liable for the accuracy-related penalty under

section 6662.

Background

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

North Bend, Washington, when the petition in this case was filed.

Throughout the year in issue petitioner worked for Key

Trucking, Inc. (Key), as a salesman. At the beginning of 1994

petitioner was paid a salary by Key. In late January or early

February, Key ceased paying petitioner a salary, and, instead,
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paid him commissions on his sales. In August 1994, Key resumed

paying petitioner a salary. During 1994, Key paid petitioner

$17,468.12 of wages and $15,540 of commissions. Key issued to

petitioner a taxable income report that included all of the wage

income, but failed to disclose the commission income. Petitioner

reported on his 1994 tax return all of the wage income but failed

to report the commission income. During 1994, petitioner and

respondent entered into an agreement that concerned a previous

year. Petitioner explains that he mistakenly believed that taxes

on the commission income were resolved by that agreement. 

Prior to 1981, petitioner worked for Pay n' Save Corp., a

company engaged in retail businesses. During his employment with

Pay n' Save, petitioner contributed to Pay n' Save's pension

plan. On February 12, 1981, petitioner discontinued his

employment with Pay n' Save, but left his pension contributions

in the plan. Pay n' Save subsequently discontinued its

businesses and was liquidated. Sometime during 1993, petitioner

received notification from the Superior Court for Los Angeles

County, California, that Executive Life, the underwriter of the

Pay n' Save retirement plan, was being liquidated. This

notification provided petitioner with an opportunity to opt out

early and take a lump-sum settlement. Petitioner chose this

option, rather than awaiting the ultimate resolution of Executive

Life's affairs, and during 1994 petitioner received a

distribution in the amount of $5,126. 
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2 Sec. 72(t)(2) states:

(2) Subsection not to apply to certain

distributions.--Except as provided in paragraphs (3)

and (4), paragraph (1) shall not apply to any of the

following distributions:

(A) In general.--Distributions which are--

 (i) made on or after the date on which the

employee attains age 59 1/2,

 (ii) made to a beneficiary (or to the estate

of the employee) on or after the death of the

employee,

 (iii) attributable to the employee's being

disabled within the meaning of subsection (m)(7),

 (iv) part of a series of substantially equal

(continued...)

Petitioner included the distribution in his income tax

return for 1994. Petitioner had not attained the age of 59 1/2

years when he received the distribution with respect to his

pension from Executive Life. Respondent determined that

petitioner is liable for the 10-percent tax on early

distributions from qualified retirement plans imposed by section

72(t). Petitioner asserts that the additional tax should not

apply because the withdrawal was encouraged by the Superior Court

and was essentially involuntary.

Additional Tax on Early Withdrawals Under Section 72(t)

Under section 72(t), a 10-percent tax is imposed on any

distribution from a qualified retirement plan if the distribution

fails to satisfy one of the exceptions specifically provided in

section 72(t)(2).2 Petitioner does not assert that any statutory
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2(...continued)

periodic payments (not less frequently than

annually) made for the life (or life expectancy)

of the employee or joint lives (or joint life

expectancies) of such employee and his designated

beneficiary, or

 (v) made to an employee after separation from

service after attainment of age 55, or

 (vi) dividends paid with respect to stock of a

corporation which are described in section 404(k).

exception applies. Instead, petitioner argues that he is not

liable for the 10-percent additional tax because he did not

voluntarily withdraw the funds. 

In holding that the 10-percent penalty applies to early

distributions from the Civil Service Retirement System, the Court

of Appeals for the Ninth Circuit, to which any appeal in this

case would lie, stated in Roundy v. Commissioner, 122 F.3d 835,

837 (9th Cir. 1997), affg. T.C. Memo. 1995-298:

[Section 72(t)(1)] applies to any retirement

distribution, so long as it is not specifically

exempted and is from a "qualified retirement plan".

Petitioner has not disputed that the distribution in issue was

from a qualified retirement plan. This Court on numerous

occasions has considered circumstances in which taxpayers have

sought to avoid the 10-percent additional tax under section

72(t). We repeatedly have ruled that we are bound by the list of

statutory exceptions to section 72(t) contained in section

72(t)(2)(A). See, e.g., Clark v. Commissioner, 101 T.C. 215,

224-225 (1993); Vorwald v. Commissioner, T.C. Memo. 1997-15;
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Hobson v. Commissioner, T.C. Memo. 1996-272; Grow v.

Commissioner, T.C. Memo. 1995-594; Wheeler v. Commissioner, T.C.

Memo. 1993-561. The language of section 72(t) simply does not

differentiate between voluntary and involuntary withdrawals.

In Larotonda v. Commissioner, 89 T.C. 287 (1987), we held

that where the IRS served a levy against the taxpayer's Keogh

account for payment of an assessed deficiency and the bank

trustee paid the money directly to the IRS, the 10-percent

additional tax was not payable under former section 72(m)(5)(B). 

That section differed from current section 72(t), particularly in

that it did not include the list of specific exceptions to tax

set forth in section 72(t)(2). Moreover, in the Larotonda case,

the taxpayer never received the funds and had no opportunity to

avoid the tax by timely reinvestment of the proceeds in another

qualified plan. In Aronson v. Commissioner, 98 T.C. 283, 292

(1992), we applied former section 408(f)(1), similar to former

section 72(m)(5), where taxpayers' receipt of their funds from a

qualified plan was "involuntary" (since their financial

institution had failed and was being liquidated), but the

taxpayers had available an alternative: they could have timely

reinvested or "rolled over" the amounts into another qualified

plan and avoided tax under section 408(d)(3). Since the

taxpayers in Aronson failed to reinvest the distributions in

another qualified plan, we sustained the imposition of the 10-

percent additional tax under former section 408(f)(1). The facts
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here are more similar to those in Aronson than to those in

Larotonda, since petitioner admittedly received amounts from the

qualified retirement plan but failed to roll them over or

reinvest them in an Individual Retirement Account or other

qualified plan.

In view of the foregoing, we hold that petitioner is liable

for the 10-percent additional tax imposed under section 72(t).

Accuracy-Related Penalty

Section 6662(a) imposes a penalty of 20 percent of the

portion of the underpayment which is attributable to any

substantial understatement of income. Sec. 6662(b)(2). There is

a substantial understatement of income tax for any year if the

amount of the understatement exceeds the greater of 10 percent of

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

6662(d)(1). 

Alternatively, section 6662(a) imposes a penalty of 20

percent on the portion of the underpayment which is attributable

to negligence or disregard of rules or regulations. Sec.

6662(b)(1). Negligence is the lack of due care or failure to do

what a reasonable and ordinarily prudent person would do under

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

(1985). The term "disregard" includes any careless, reckless, or

intentional disregard. Sec. 6662(c). 

However, section 6664(c) provides that no penalty shall be

imposed with respect to any portion of an underpayment if it is
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shown that there was reasonable cause for such portion and that

the taxpayer acted in good faith with respect to such portion. 

The determination of whether a taxpayer acted with reasonable

cause and in good faith is made on a case-by-case basis, taking

into account all pertinent facts and circumstances. Sec. 1.6664-

4(b)(1), Income Tax Regs. Circumstances that may indicate

reasonable cause and good faith include an honest

misunderstanding of fact or law that is reasonable in light of

all of the facts and circumstances. Id.

With regard to the underpayment due to the underreporting of

income, we are convinced that petitioner acted with reasonable

cause and in good faith. During the year in issue, Key

repeatedly changed the method by which it compensated petitioner. 

Petitioner undoubtedly relied upon an information return,

prepared by Key, when he prepared his 1994 income tax return. 

The information return prepared by Key failed to disclose his

commission income. Reliance on an information return can

constitute reasonable cause and good faith if such reliance is

reasonable and the taxpayer acted in good faith. Id. Given the

facts and circumstances of this case, including petitioner's 

confusion about his tax obligations during the period in issue,

we find that petitioner acted with reasonable cause and good

faith when he failed to report the commission income.
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As to the underpayment due to the additional tax under

section 72(t), because of matters discussed above, we find that

petitioner acted with reasonable cause and good faith. 

Accordingly, petitioner is not liable for the accuracyrelated penalty as provided by section 6662(a).

Decision will be entered

under Rule 155.