T.C. Mem o. 2 01 6- 18 2

UNITED STAT ES TAX COURT

DORA MARIE MAR TINEZ AND CARLOS GARCIA, Pe ti ti on ers v. COMM ISSI ONER OF INTERNAL REVENUE, Resp on de nt

Doc ke t No . 84 83 -1 5. Fi le d S ep te m be r 28 , 20 16
. St ev enRay Mathe r, fo r pe ti ti on ers . Je nn y R. Cas ey an d S eb as ti anVoth, fo r res po nd en t.

MEMORANDUM FINDINGS OF FACT AND OPINION COHEN, Ju dg e: Res po nd en t d et erm in edan$8 ,32 0 d efi ci en cy an d a$1 ,66 4 pe na lty un de r se ct io n 6 66 2( a) wi th res pe ctto pe ti ti on ers ’ Fed eral in co m e ta x fo r 20 12 . The i ss ue s fo r de ci si on are: (1) whet he r th e unp ai d b al an ces of l oa n am ou nt s tha t Do ra Ma rti ne z (p et it io ne r) b orro wedfro m he r se ct io n 4 03 (b ) qu al ifi edem

pl oyer ret ire m en t p la n (QP ) were d eem eddi strib ut io ns of t ax ab le- 2 -

[* 2] in co m e in 20 12 an d s ub ject t o a10 % ad di ti on al tax , (2) whet he r pe ti ti on ers ha d o th er u nr ep orte d i nc om e in 20 12 of $ 30 0 o f in te res t, $ 19 5 o f co stof c urren t li fe i ns ur an ce p ro te ct io n, an d $ 16 2 o f educ at io n p ro gr am pa ym en ts rece iv edas a di st rib ut io n fr om

th ei r se ct io n 5 29 qu al ifi edtu it io n p ro gr am (QTP) an d s ub

ject t o a 1 0% a dd it io na l t ax , and(3) whet he r pe ti ti on ers are l iabl e fo r th e se ct io n 6 66 2( a) pe na lty for 20 12 . Unl es s o th erwi se in di cat ed , all sec ti on refe ren ces are t o the In te rn al Rev enue Co de (Co de ) in effe ctforth e y ear i n i ss ue , andall Ru le refe ren ces are t o t he Tax C ou rt Rul es of P ract ic e an d P ro cedur e. FINDINGS OF FACT So m e o f th e fac ts ha ve be enst ip ul at ed , andth e st ip ul at edfact s ar e in co rp or at edinou r fi nd in gs by thi s re fere nc e. Pet it io ne rs res id edinCal ifo rn ia whe n the y

fil edth ei r pe ti ti on . Fo r th e p eri odrel ev an t t o t hi s ca se , pet it io ne r was em pl oyed as a te ach er b y th e Los Ang el es Uni fie d S ch oo l Di st ric t (LAUSD), an d Gar ci a, he r sp ou se , was em pl oyed as a truc k driv er b y Kell og g S al es Co . Peti ti on er d eci de d t o b orro w fro m he r LAUSD QP as a m ean s o f av oi di ng for ecl os ur e o n t he ir r es id en ce. On J ul y 29 , 20 10 , sh e reque st edtwo lo an s fr om he r LAUSD QP: a l oa n o f $2 8,8 99 fro m

anacco un t adm in is te redby N orth Am eri canCo . forLife & Heal th In su ran ce (NAM CO), an d alo anof $ 4,0 85 fro m anacco un t ad m in is te redby- 3 -

[* 3] Mi dl an d Nat io na l Li fe In suran ce Co . (Mi dl an d) . Eachlo anag reem en t in di cat edth atth e lo anwas t o b e rep ai d i n qua rte rly paym en ts ov er a fi ve -y ear pe rio d a ndals o i nd ic at ed , by a ch eck edbo x, tha t the ne w lo an“ IS NOT TO BE USED AS A RESIDENTIAL L OAN.” Peti ti on er s ig ne d b ot h l oan a gr eem en ts , rep res en ti ng th atsh e und ers to odth ei r te rm s an d a ckno wled gi ng th at“ any lo anno t in acco rd an ce wi th th e requi rem en ts of I .R.C. p ara. 7 2( p) sh al l b e co ns id eredas a de em eddi strib ut io n a ndbe rep orte d a s t ax ab le in co m e” an d a ccep ti ng “ fu ll
res po ns ib il it y

forco m pl ianc e wit h t ho se requi rem en ts .” On Au gu st12 , 20 10 , NAMCO i ss ue d ach eckto pe ti ti on er fo r $2 8,8 99 , andMi dl an d i ss ue d ach eckto he r fo r $4 ,08 5. Pet it io ne rs m ad e in it ia l p aym en ts on th e lo an s b utst op pe d a s o f May 20 12
. The y ne ve rth el es s co nt in ue d t o re cei ve lo anrep aym en t n ot ic es fro m bo th NAMCO (up t o J anua ry

20 16 ) an d M id la nd(up to Octo be r 20 12 ). As a re su ltof th e lo anpa ym en ts ha vi ng no t b eenm ad e, NAMCO an d M id la ndde te rm in edth at pe ti ti on er h adde fau lt edon th e lo an s as of No ve m be r 20 12 . NAMCO an d Mi dl an d d eem edth e lo anba la nc es , $2 0,5 81 .85 an d $ 2,9 06 .92 , res pe ct iv el y , to be ta xabl e d is tri bu ti on s i n 2 01 2. Th ey each is su edto pe ti ti on er a 2 01 2 F orm 10 99 -R, Dis tri bu ti on s Fr om

Pen si on s, An nu it ie s, Re ti rem en t o r Pro fit -Sh ari ng Plans , IRAs, In su ran ce Co nt ract s, et c., th atrep orte d e ach gro ss di st rib ut io n (i .e., $2 0,5 81 .85 for- 4 -

[* 4] NAMCO an d $ 2,9 06 .92 for Mi dl an d) as f

ul ly tax ab le an d i nd ic at eda di st rib ut io n c od e o f “ L”, de si gn at in g ade em eddi st rib ut io n. In20 12 pe ti ti on er h el d a n i ns ur an ce p ol ic y with C on se co Life I ns ur an ce Co
. (Co ns eco ) th ro ug h h er em pl oyer. Usin g s ta nd ardcal cu la ti on s, Co ns eco subs eque nt ly det erm in edth at , for20 12 , pet it io ne r rec ei ve d abe ne fitforth e co stof li fe i ns ur an ce p ro te ct io n o f $1 95 .68 . Con se co is su edto pe ti ti on er Fo rm 10 99 -R rep orti ng th e $ 19 5.6 8 a s a f ul ly tax ab le di st rib ut io n a ndin di cat in g adi st rib ut io n co de of “ 9” , des ig na ti ng th e co stof c urren t l ife in su ran ce p ro te ct io n. Pet it io ne rs m ai nt ai ne d aQTP forth ei r ch il dr en . In 2 01 2, p et it io ne r withd rew $ 16 2 fr om

th e QTP. She als o re cei ve d i nt eres t i nc om e o f $3 00 in20 12
. Pet it io ne r was 43 y ears ol d a s o f Decem be r 31 , 20 12
. On the ir jo in tl y

fil ed20 12 Fo rm

10 40 , U.S. Ind iv idua l In co m e Tax Return, pe ti ti on ers rep orte d o nl y

th ei r wag e in co m e. They didno t re po rt i nc om e fro m th e de em eddi strib ut io ns of the QP, th e earne d i nt eres t, the co stof c urren t l ife in su ran ce p ro te ct io n, o r th e wit hd rawal fro m th e QTP. OPINION Inun rep orte d i nc om e cas es , wher e th ere i s n o que st io n t ha t the tax pa y er rece iv edth e unr ep orte d i nc om e in is su e, th e ta xp ay er h as th e b ur de n o f pr ov in g b y a p rep on de ran ce o f th e ev id en ce tha t the de fic ie nc y de te rm in at io n was arb it rary or- 5 -

[* 5] erro ne ou s. See Hardy v. Co m m is si on er, 1 81 F.3d10 02 , 10 04 -1 00 5 (9 th Cir
. 19 99 ), aff’g T.C. Me m o. 1 99 7- 97 ; To ka rs ki v. Co m m is si on er, 8 7 T.C. 7 4, 7 6- 77 (1 98 6) . Peti ti on er ad m it te d dur in g h er t es ti m on y th atsh e rec ei ve d t he pro ceed s o f th e two QP lo an s an d $ 16 2 fr om th e QTP (co nt rary to the ass ert io n i n p et it io ne rs ’ po st tri al bri ef), an d p et it io ne rs st ip ul at edth atpe ti ti on er re cei ve d $ 30 0 o f in te res t in co m e. At tria l p et it io ne r arg ue d, h owe ve r, th atsh e n ev er re cei ve d m on ey fro m Co ns eco . See Hardy

v. Co m mis si on er, 1 81 F.3dat 1 00 4 (r equi rin g, wh ere r ecei pt of in co m e is no t ev id en t, tha t the Co m m is si on er i nt ro du ce s om e subs ta nt iv e ev id en ce tha t the tax pa y er re cei ve d u nr ep orte d i nc om e). Pet it io ne r ne ve rth el es s te st ifi edth atsh e h el d ali fe i ns ur an ce p ol ic y with C on se co in20 12 , andth e p art ie s st ip ul at edas a n e xh ib itFo rm 10 99 -R-- is su edby Con se co an d re po rti ng pe ti ti on er’s co stof c urren t l ife in su ran ce p ro te ct io n o f $1 95 .68 --an d s up po rti ng reco rd s s ho win g h ow Co ns eco de te rm in edth atco st . Pet it io ne r wou ldno t h av e actua ll y rece iv ed$1 95 be cau se , as d is cu ss ed be lo w, th e co stof c urren t l ife in su ran ce p ro te ct io n i s a t ax ab le eco no m ic be ne fit
an d n otanactua l p aym en t t o t he pa rti ci pa nt . The $ 19 5.6 8 s ho wn o n F orm 10 99 -R is li nk edto a li fe i ns ur an ce p ol ic y th atpe ti ti on er h el d wi th Co ns eco du rin g 2 01 2
an d i s al so supp orte d b y

Co ns eco ’s cal cu la ti on work sh eet s an d o th er re co rd s. See- 6 -

[* 6] Fed er v . Comm is si on er, T.C. Mem o. 2 01 2- 10 , sl ip op . at 7 (ru li ng th atan in it ia l b ur de n o f pr oduc ti on was m etwher e th e Co m m is si on er h adsh own th at in co m e rep orte d o n F orm 10 99 -R was li nk edto a li fe i ns ur an ce p ol ic y he ldby the ta xp ay er). Res po nd en t h as th eref

or e sa ti sf ie d a ny ini ti al bu rd enof p ro du ct io n reg ard in g t he un rep orte d i nc om e in is su e. Pet it io ne rs m us t co m e fo rwardwith pr oo f th atres po nd en t’s d et erm in at io n i s arbi trary or e rro ne ou s o r th atth is in co m e is othe rwis e n ottax ab le
. QP Deem edDis tri bu ti on s Sect io n 4 02 (a) p ro vi de s g en eral ly tha t, p ur su an t t o s ect io n 7 2, d is tri bu ti on s fro m a QP are t ax ab le to th e d is tri bu te e fo r th e ta xabl e y ear o f th e d is tri bu ti on . See M ol in a v . Comm is si on er, T.C. Mem o. 2 00 4- 25 8, s li p o p. at6. The pro ceed s of a lo anfro m

a QP to a parti ci pa ntare treat edas- -o r de em edto be --a d is tri bu ti on an d t he refo re u su al ly inc lu di bl e inth e p art ic ip an t’s i nc om e. Sec. 7 2( p) (1 )(A); see Dun canv. Co m

m is si on er, T.C. Mem o. 2 00 5- 17 1, s li p o p. at5. Sect io n 7 2( p) (2 ), ho wev er, p ro vi de s an ex cep ti onto a lo an ’s bei ng tre at ed
as a ta xabl e d is tri bu ti on wher e th e p rin ci pa l am ou ntof t he lo an(whe n a dd edto th e ou ts ta nd in g b al an ce o f al l o th er l oa ns fro m th e sa m e p la n) do es no t ex ceeda- 7 -

[* 7] sp eci fie d l im it , see sec . 72 (p )(2 )(A), an d wh ere t he lo anm eet s the requi rem en ts pro vi de d b y sec ti on 72 (p )(2 )(B) an d (C ), as fol lo ws: SEC. 7 2( p) . Loan s Tre at edas Di st rib ut io ns .-- * * * * * * * (2 ) Exc ep ti on forcert ai n l oa ns .-- * * * * * * *

(B) R equi rem en t tha t l oa n b e rep ay ab le withi n 5 y ears .-- (i) In g en eral .--Subp arag rap h (A) sh al l n otap pl y to an y lo anun le ss su chlo an , by it s t erm s, i s re qu ire d t o be rep ai d wi th in 5 years. (ii ) Exc ep ti on forho m e lo an s.-- Cl au se (i) sh al l n ot ap pl y to an y lo anus edto acqui re an y dwel li ng un it whi chwithi n areas on ab le ti m e is to be us ed(de te rm in ed atth e ti m e th e lo anis m ad e) as th e p rin ci pa l re si de nc e o f th e p art ic ip an t. (C) R equi rem en t o f le ve l am orti zat io n.-- Exc ep t as pr ov id edinreg ul at io ns , th is pa rag rap h s ha ll no t ap pl y to an y lo anun le ss subs ta nt ia ll y

lev el am orti zat io n o f su chlo an(wit h pa ym en ts no t l es s fr eque nt ly tha n qua rte rly) is requi redov er th e te rm of t he lo an . See a ls o s ec. 1 .72 (p )-1 , Q&A-3 (b ), In co m e Tax Reg s. (r equi rin g, ad di ti on al ly, th at th e lo anbe “ ev id en cedby a leg al ly enfo rceabl e ag reem en t” ). The s ub st an ti al ly le ve l am orti zat io n re qu ire m en t o f se ct io n 7 2( p) (2 )(C) ha s b eenin te rp ret edas- 8 -

[* 8] requi rin g t ha t p aym en t o f pr in ci pa l an d i nt eres t b e m ad e in subs ta nt ia ll y lev el
am ou nt s o ve r th e te rm

of t he lo an . See Pl ot ki n v . Commis si on er, T.C. Mem o. 20 01 -7 1, s li p o p. at10 (ci ti ng Est at e o f Gray v. Co m m is si on er, T.C. Mem o. 1 99 5- 42 1)
. The sec ti on72 (p )(2 ) ex cep ti on to a lo an ’s bei ng de em eda di strib ut io n ceas es to ap pl y

when th e “ lo anfro m

a qu al ifi edem

pl oyer pl anno lo ng er s at is fie s th e requi rem en t o f se ct io n 7 2( p) (2 )(C) * * * [b ecau se ] th e p art ic ip an t fa il s t o m ak e a lo anpa ym en t ei th er o n t he da te th atitis du e o r withi n t he all owe d g race pe rio d.” Dun canv. Co m

m is si on er, T.C. Mem o. 2 00 5- 17 1, s li p o p. at6; acco rdsec . 1.7 2( p) -1 , Q&A-4 (ex pl ai ni ng furth er tha t s uc h afai lu re wo ul d re su ltina de em ed di st rib ut io n) , Q&A-1 0( a) (p ro vi di ng th atpl anadmin is tra to rs m ay all ow a c ur e (g race ) pe rio d, wh ic h c an no t co nt in ue be y on d t he las t d ay of t he cal en da r qu art er fo ll owi ng th e cal en dar qu art er i n wh ic h t he requi redin st al lm en t p aym en t was du e, an d t ha t s ect io n 7 2( p) (2 )(C) wil l n otbe co ns id eredto ha ve be envi ol at edif the in st al lm en t p aym en t i s m ad e n otlat er tha n t he en d o f th e cu re p eri od ), In co m e Tax Reg s. Where th ere i s a f

ai lu re t o p ay , th e am ou ntof t he de em eddi st rib ut io n wou ldequa l the en ti re o ut st an di ng ba lanc e o f th e lo an(in cl ud in g a ccru edin te res t) atth e ti m e o f th e fai lu re. Sec . 1.7 2( p) -1 , Q&A-1 0( b) , Inc om e Tax Reg s.- 9 -

[* 9] Pet it io ne rs fai le d t o m ak e lo anpa ym en ts aft er May 20 12 , andth ey

di d n ot rep ay th es e m is se d a m ou nt s wi th in th e p erm it te d c ur e p eri od . They th eref or e d o no t m eetth e ex cep ti on of s ect io n 7 2( p) (2 ), an d t he LAUSD QP loan b al an ces are de em edtax ab le di st rib ut io ns as o f Nov em be r 20 12 , whi chis when NAMCO an d Mi dl an d d et erm in edth atth e lo an s’ gra ce p eri od s h adex pi redan d, ac co rd in gl y , th atpe ti ti on er h adde fau lt ed . See Ryan v . Comm is si on er, T.C. Mem o. 2 01 1- 13 9, sl ip op . at 1 7- 18 , aff’d, 4 82 F. App ’x 88 1 (5 th Cir . 20 12 ); Owu suv. Co m m is si on er, T.C. Mem o. 2 01 0- 18 6, s li p o p. 9 -1 0. Pet it io ne rs ’ br ie f arg ue s tha t the am ou nt s o f th e QP d eem eddi st rib ut io ns can no t b e b ot h d is tri bu ti on s an d e xi st in g l oa n o bl ig at io ns --ex is ti ng be cau se NAMCO an d M id la ndco nt in ue d t o s en d qua rte rly paym en t n ot ic es to pe ti ti on ers ev enaft er the lo an s wer e d et erm in edde fau lt edon . It co nc lu de s tha t the st atut e is cl ear, tha t the QP co m

pl ie d wi th th e st atut e, an d, ci ti ng Mayo Fo un d. fo r Med
. Edu c. & Res earc h v . Uni te d S ta te s, 5 62 U.S. 44 (20 11 ), th atth e reg ul at io n i s n ot
en ti tl edto an y

de fere nc e. W e d is ag ree. Pet it io ne rs ’ br ie f ig no res th e fi rs t fi ve word s o f th e te xtof s ect io n 72 (p )(2 )(C) : “ [e]xce ptas p ro vi de d i n re gu la ti on s” . Thes e wor ds pl ai nl y ex pr es s Co ng res s’ in te ntto ha ve subp arag rap h (C ) cl ari fie d t hr ou gh ap pr op ria te reg ul at io ns , andpe ti ti on ers off er n o a lt ern at iv e ex pl an at io n fo r th atch oi ce o f- 10 -

[* 10 ] word s. See Mayo Fo un d, 5 62 U.S. at 4 5 (“ Fi ll in g g ap s i n the Int ern al Rev enue Co de pl ai nl y

requi res th e Treas ury

Department t o m ak e in te rp ret iv e ch oi ces forst atut ory

im pl em en ta ti on [.]”). The reg ul at io ns un de r se ct io n 7 2( p)
es tabl is h t he ti m in g a ndam ou ntof ade em eddi st rib ut io n, an d t hi s C ou rt h as he ed edth e fi na l re gu la ti on s fo r th os e d et erm in at io ns . See, e.g ., Ry anv. Co m m is si on er, T.C. Mem o. 2 01 1- 13 9; Owus u v . Commis si on er, T.C. Mem o. 20 10 -1 86
. Pet it io ne r ha d c on tra ct edto rep ay he r QP lo an s u nd er b in di ng ag reem en ts --a co m pl et el y sep arat e (an d i rrel ev an t) i ss ue fro m he r ha vi ng tax du e b ecau se of de em eddi strib ut io ns fro m he r QP. Cf. Ege bjer g v . And ers on (Inre Ege bjer g) , 57 4 F.3 d 1 04 5, 1 04 9 (9 th Cir . 20 09 ) (ex pl ai ni ng , withi n aba nkrupt cy co nt ex t, tha t a ret ire m en t p la n p art ic ip an t’s l oa n fr om hi s re ti rem en t ac co un t “ is ess en ti al ly a deb t to hi m se lf- -h e h as bo rro wedhi s o wn m on ey . [He] co nt rib ut edth e m on ey to th e acco un t i n t he fir stpl ace; sh ou ldhe fai l t o re pa y hi m se lf, the adm in is tra to r ha s n o pe rs on al reco ur se ag ai ns t h im . Ins te ad , th e p lan wi ll de em th e o ut st an di ng lo an ba la nc e to be a di st rib ut io n o f fu nd s, the reb y reduc in g t he am ou ntav ai labl e to * * * [the pa rti ci pa nt ] fro m hi s ac co un t i n t he futur e.” (Ci ta ti on s o m it te d.))
. Pet it io ne rs arg ue th atth ere i s n o t ax ab le in co m e b ecau se th e lo anpro ceed s were u se d fo r a qua li fy in g p ur po se . They as se rt t ha t s ect io n 7 2( p) (2 )(B) (ii )- 11 -

[* 11 ] “ waiv es th e requi rem en t tha t the lo anbe rep ai d wi th lev el am orti zat io n i n fiv e y ears if the lo anis m ad e in co nn ect io n wi th acqui rin g apri nc ip al res id en ce.” The y rel y , so m ewh atiro ni cal ly, on sec ti on1.7 2( p) -1 , Q&A-8 , Inc om e Tax Reg s., fo r th e p rem is e th ata pl anlo ando es no t h av e to be tra cedto th e p ur ch as e o f a pr in ci pa l re si de nc e so lo ng as i t i s u se d t o re pa y a lo anth atwas o bt ai ne d t o pu rch as e a res id en ce. The y co nc lu de th atth ere was no requi rem en t fo r “ le ve l pa ym en ts ” an d t hu s n o d eem eddi st rib ut io ns co ul d h av e o ccu rredin20 12
. Pet it io ne rs m is in te rp retth e Co de . Sect io n 7 2( p) (2 )(B) (ii ), whi chad dr es se s anex cep ti on forho m e lo an s, ap pl ie s o nl y with re sp ectto claus e (i ) of
subp arag rap h (B ), whi chad dr es se s the requi rem en t tha t a l oa n b e rep ay ab le withi n fiv e y ears . Clau se (ii ) al lo ws fo r a l oa n p eri odlo ng er tha n fi ve y ears when th e lo anis us edforacqui rin g apri nc ip al res id en ce; ho wev er, i t h as no be ari ng on th e subp arag rap h (C ) requi rem en t o f le ve l am orti zat io n, wh ic h i s s ti ll m an da to ry . Mo reo ve r, pe ti ti on er s pe ci fic al ly affirm edinbo thlo anag reem en ts th atth e lo an s were n otto be us edas r es id en ti al lo an s; he nc e th ey were m ad e und er a fi ve -y ear rep aym en t p eri od
. Ult im at el y

pe ti ti on ers fai le d t o re pa y th e LAUSD QP lo an s, an d t he y m eet
no ex cep ti on s u nd er the Co de or t he rel at edreg ul at io ns . There fo re, res po nd en t’s- 12 -

[* 12 ] de te rm in at io n t o t reatth e lo anba la nc es as d eem eddi st rib ut io ns in20 12 is
su st ai ne d. Sect io n 7 2( t) Ad di ti on al Tax Pet it io ne rs ’ br ie f al le ge s tha t re sp on de nt ’s att em ptto im po se a 10 %

“pe na lt y ”, un de r se ct io n 7 2( q) , forpre m atur e d is tri bu ti on s fr om an nu it y co nt ract s is in ap pr op ria te be cau se “pe ti ti on ers di d n otrece iv e an yth in g i n 2 01 2 upo n wh ic h th e p en al ty cou ldbe ba se d.” Howev er, the no ti ce o f de fic ie nc y , up on whi chth is
cas e is ba se d, d et erm in eda 10 % ad di ti on al tax un de r se ct io n 7 2( t)- -n otsec ti on 72 (q ). A 10 % tax on “ earl y di st rib ut io ns ”, de em edor a ctua l an d o ccurri ng be fo re th e p art ic ip an t re ach es th e ag e 5 91⁄2 , gen eral ly app li es wher e a t ax pa y er re cei ve s a QP di strib ut io n tha t i s i nc lu di bl e in he r orhi s g ro ss in co m e. Sec. 7 2( t)( 1) an d (2 ). Altho ug h s ect io n 7 2( t)( 2) set s fo rth cert ai n e xc ep ti on s t o t he 10 % tax on earl y di st rib ut io ns , pet it io ne rs ne it he r arg ue th atth ey fitwithi n a ny of th es e ex cep ti on s no r pr es en t ev id en ce t o s ug ge stth atth ey m ig ht . There fo re, we fi ndth at pe ti ti on ers are l iabl e fo r th e 1 0% a dd it io na l t ax un de r se ct io n 7 2( t). Se e Ro un dy v. Co m m is si on er, 1 22 F.3d83 5, 8 37 (9t h C ir. 1 99 7) , aff’g T.C. Mem o. 1 99 5- 29 8. Altho ug h p et it io ne rs refe r to a “pe na lt y ”, se ct io n 7 2( t)( 1) pro vi de s fo r an

“ ad di ti on al tax ” an d n ota pe na lt y . See g en eral ly E l v . Comm is si on er, 1 44 T.C.- 13 -

[* 13 ] 14 0, 1 46 (20 15 ) (d et erm in in g t ha t the Co m m is si on er h as no in it ia l b ur de n o f pr oduc ti on with re sp ectto th e ad di ti on al tax un de r se ct io n 7 2( t) b ecau se itis no t a

“pe na lt y , add it io n t o t ax , or a dd it io na l am ou nt ” und er s ect io n 7 49 1( c)). In te res t In co m e Pet it io ne rs st ip ul at edth ei r rec ei ptof $ 30 0 o f in te res t i nc om e th atwas n ot rep orte d o n t he ir 2 01 2 re tu rn . See s ec. 6 1( a)(4 ). Co stof C urren t Li fe In su ran ce Pr ot ect io n The co stof c urren t l ife in su ran ce p ro te ct io n p ro vi de d b y anem pl oyer is an eco no m ic be ne fitth atis in cl ud ed , un de r se ct io n 6 1( a), i n the gro ss in co m e o f th e in su redem

pl oyee. See Ca dwe ll v. Co m mis si on er, 1 36 T.C. 38 , 62 (20 11 ), aff’d, 48 3 F . App ’x 84 7 (4 th Cir . 20 12 ). The co stis in cl ud edinth e em pl oyee’s gro ss in co m e to all ow the de ath b en efi t p ro ceed s o f th e p ol ic y to pa ss to th e em

pl oyee’s be ne fic ia rie s t ax free . See s ecs . 1.6 1- 22 (f)(3 )(i ), (ii i), 1 .72 -1 6( c)(4 ), In co m e Tax Reg s.; see als o s ec. 1 01 (a). Ba si cal ly, th e co stof c urren t l ife in su ran ce p ro te ct io n equa ls th e am ou ntof t he curren t l ife in su ran ce p ro te ct io n p ro vi de d (t y pi cal ly the di ffer en ce b etweenth e fac e am ou ntof t he po li cy an d i ts cas h s urren de r va lu e)
m ul ti pl ie d b y

a li fe i ns ur an ce p rem iu m fact oras p erm it te d b y

IRS g ui danc e. See
se c. 1.6 1- 22 (d )(3 ), In co m e Tax Reg s.- 14 -

[* 14 ] Pet it io ne rs arg ue th atCo ns eco ’s cos t o f cu rren t l ife in su ran ce p ro te ct io n co m pu ta ti on s, o n wh ic h re sp on de ntrel ie d fo r hi s d et erm in at io n, wer e “ im pr eci se ”. The y als o a rg ue th at“ res po nd en t h as no t ad equa te ly establ is he d am etho do lo gy for th e co m pu ta ti on of a ny tax ab le in co m e am ou ntwith re sp ectto th e li fe i ns ur an ce.” As s ho wn o n i ts work sh eet s, Co ns eco cal cu la te d t he co stby m ul ti pl y in g a pr em iu m rat e o f 1.2 9- -acqui redfro m “ GOV TABLE 20 01 ” an d b as edup on pe ti ti on er’s ag e o f 43 at t ha t t im e--t o t he di ffer en ce b etweenth e fac e am ou ntof th e p ol ic y (te rm ed“ Death B en efi t” on th e works he et s) an d i ts cas h s urren de r va lu e (te rm ed“ SURR VALUE”), th endi vi de d b y 1,0 00 (be cau se Tabl e 2 00 1, s ee i nf ra, is ba se d upo n i nc rem en ts of $ 1,0 00 of l ife in su ran ce p ro te ct io n) . The d e m in im is

“ im pr eci si on ” o f th e cal cu la ti on ’s res ul ti ng co stof $ 19 5.5 0- -wh enco m pa redto th e rep orte d c os t o f $1 95 .68 on th e Fo rm 10 99 -R i ss ue d b y

Co ns eco --i s ex pl ai ne d in th e works he et s as ha vi ng oc curredbe cau se th e cas h s urren de r va lu e was av ai labl e o nl y

up to Decem

be r 24 , 20 12 , at the ti m e th e works he et s wer e ge ne rat ed , andno t up t o Dec em be r 31 , 20 12 , whi chwou ldha ve be enth e en di ng pe rio d u se d wh encal cu la ti ng th e am ou ntsh own on th e 2 01 2 F orm 10 99 -R. Thi s “ m etho do lo gy” app ears to fol lo w th e p res cri be d c al cu la ti on , and pe ti ti on ers off

er n o a rg um en t as to why itdo es no t. Itap pe ars th atCo ns eco ap pr op ria te ly use d t he IRS-p ro vi de d Tab le 20 01 to arri ve at t he co rrec t p rem iu m- 15 -

[* 15 ] rat e, de sp it e th e works he et s’ refer en ces to “ PS-5 8” he ad in gs . (Prem iu m fact or s p ro vi de d b y

P.S. 58 rat es , fou ndinRev . Rul . 55 -7 47 , 19 55 -2 C.B. 2 28 , 22 9, h av e g en eral ly beensupp la nt edby T ab le 20 01 , fou ndinNot ic e 2 00 1- 10 , 20 01 -1 C.B. 4 59 , 46 3, o r by an i ns ur er’s l owe r publ is he d p rem iu m rat es th atare av ai labl e to all st an da rdris ks forin it ia l i ss ue on e-year term in su ran ce. See Not ic e 20 02 -8 , 20 02 -1 C.B. 3 98 , 39 9 (r ev ok in g R ev . Rul . 55 -7 47 , supr a, ex cep t wh ere, i n cert ai n c irc um st an ces , P.S. 58 rat es m ay be us edforli fe i ns ur an ce arran ge m en ts
en te redin to be fo re J anua ry 28 , 20 02 ); s ee al so sec . 1.6 1- 22 (d )(3 )(i i), In co m e Tax Reg s.) Th is Co urt h as fou ndth atTabl e 2 00 1 c anbe us edto pro vi de a reas on ab le
es ti m at e o f th e co stof o ne y ear o f li fe i ns ur an ce p ro te ct io n. Se e Cadwell v. Co m m is si on er, 1 36 T.C. at 6 4. Acco rd in gl y , res po nd en t’s d et erm in at io n reg ard in g t he in cl us io n i n i nc om e o f th e $ 19 5 c os t o f cu rren t l ife in su ran ce pr ot ect io n fo r 20 12 is su st ai ne d. QTP Dis tri bu ti on Pet it io ne rs ’ br ie f al le ge s tha t p et it io ne r te st ifi edth atall he r co ntrib ut io ns to th e QTP were m ad e wit h p os t-t ax do ll ars an d t hu s n o d is tri bu ti on s wo ul d b e ta xabl e. Sh e d idno t s o t es ti fy . Peti ti on ers all eg e th atth ey sp en t m or e th an$1 ,30 0 in qu al ifyin g tui ti on , as s up po rte d b y a st at em en t fr om

th ei r daug ht er’s co ll eg e, whi chth ey

pre se nt edforth e fi rs t t im e attri al . The s ta te m en t was no t re cei ve d- 16 -

[* 16 ] in to ev id en ce b ecau se pe ti ti on ers ha d fa il edto co m pl y with t he Co urt’s st an di ng pre tri al ord er co nc ern in g e xc ha ng e o f do cu m en ts . Thei r la te pro du ct io n of th e st at em en t p reju di cedres po nd en t b y pre cl ud in g h im

fro m co nf irming whe th er the $1 62 QTP di st rib ut io n a ctua ll y was s pe ntonit em s re fle ct edon th e st at em en t. Gen eral ly, a d is tri bu ti onfro m a QTP is in cl ud ib le inth e d is tri bu te e’s gr os s in co m e inth e m an ne r pr ov id edun de r se ct io n 7 2. Se c. 52 9( c)(3 )(A). A tax pa y er who rece iv es a QTP di st rib ut io n i s s ub ject t o a10 % ad di ti on al tax wher e th e di st rib ut io ns were n otus edforeduc at io na l ex pe ns es . Secs . 52 9( c)(6 ), 53 0( d) (4 )(A). Bec au se th ere i s n o re li ab le ev id en ce s ho win g t ha t the $1 62 was us edfor eli gi bl e educ at io na l ex pe ns es , res po nd en t’s d et erm in at io n re ga rd in g t he $1 62 QTP di st rib ut io n i s s us ta in ed . The ad di ti on al 10 % tax on a QTP di st rib ut io n is als o s us ta in ed
. Accu racy-Rel at edPen al ty Sect io n 6 66 2( a) an d (b )(2 ) im po se s a 2 0% a ccu racy-rela te d p en al ty on t he po rti onof a ny un de rp aym en t o f Fed eral in co m e ta x a tt rib ut ab le to a ta xp ay er’s
subs ta nt ia l u nd ers ta te m en t o f in co m e ta x. A subs ta nt ia l u nd ers ta te m en t o f in co m e ta x e xi st s i f th e und ers ta te m en t ex ceed s the gre at er o f 10 % of t he tax requi redto be sh ownon th e return o r $5 ,00 0. Se c. 66 62 (d )(1 )(A). Und er s ect io n 7 49 1( c) the- 17 -

[* 17 ] Co m

m is si on er b ears th e b ur de n o f pr oduc ti on with re ga rdto pe na lt ie s an d
m us t co m e fo rwardwith s uf fic ie ntev id en ce i nd ic at in g t ha t i t i s ap pr op ria te to im po se pe na lt ie s. See Hig be e v . Comm is si on er, 1 16 T.C. 43 8, 4 46 (20 01 ). Once th e Co m m is si on er h as m etth e b ur de n o f pr oduc ti on , th e b ur de n o f pr oo f rem ai ns with t he tax pa y er, i nc lu di ng th e b ur de n o f pr ov in g t ha t the pe na lt ie s ar e in ap pr op ria te be cau se of r eas on ab le cau se or s ub st an ti al au th or it y . See Ru le 14 2( a); Hig be e v . Comm is si on er, 1 16 T.C. at 4 46 -4 47
. Pet it io ne rs ha ve anun de rs ta te m en t o f $8 ,32 0, wh ic h i s m or e th an$5 ,00 0 (wh ic h i s g reat er tha n 1 0% o f th e $ 15 ,70 1 o f ta x tha t s ho ul d h av e b eenrep orte d o n th ei r 20 12 return) . Res po nd en t h as th eref or e m etth e b ur de n o f pr oduc ti on as t o th e p en al ty, an d p et it io ne rs m us t n ow s ho w th atth e und ers ta te m en t, o r an y pa rt th ereo f, is att rib ut ab le to anit em th atwas a de qu at el y

di sc lo se d a ndha s a reas on ab le ba si s, o r fo r whi chth ere was subs ta nt ia l au th or it y forit s t ax tre atm en t. See s ec. 6 66 2( d) (2 )(B)
. Altho ug h t he y

were i ss ue d F orm s 1 09 9- R b y NAMCO, Mi dl an d, an d Co ns eco , pet it io ne rs ne it he r di sc lo se d o n t he ir 2 01 2 t ax return the tax ab le am ou nt s rep orte d o n t he Fo rm s 1 09 9- R n orex pl ai ne d wh y th os e am ou nt s wer e n ot rep orte d. Se e se c. 66 62 (d )(2 )(B) (ii )(I); sec . 1.6 66 2- 4( e) an d (f ), In co m e Tax Reg s. Pet it io ne rs all eg e th atth ey di d n otrece iv e an y

Fo rm s 1 09 9- R an d t ha t the y ha d n o- 18 -

[* 18 ] reas on to su sp ectth atth ere was ad di ti on al in co m e to rep ort fo r 20 12
. Howev er, NAMCO, Mi dl an d, an d C on se co sen t the ir r es pe ct iv e Fo rm s 1 09 9- R to pe ti ti on ers ’ co rrec t ad dr es s. Itis im pr ob ab le th atth ey

di d n otrece iv e an y

of t he fo rm s. See Tok ars ki v. Co m m is si on er, 8 7 T.C. at77 . They al so ha ve no t s ho wn th atan y of t he types of aut ho rit y

li st edinsec ti on1.6 66 2- 4( d) (3 )(i ii ), In co m e Tax Reg s., wo ul d s up po rt t he ir f ai lu re t o re po rt t he tax ab le am ou nt s re cei ve d, as sh own on th e Fo rm s 1 09 9- R, as in co m e. W it h re ga rdto th e QTP di sb ur se m en t, p et it io ne rs kn ew th atth ey withd rew m on ey fro m a savi ng s ac co un t tha t i s n otsubjec t t o F ed eral tax on ly becau se it s fu nd s ar e to be us edfor

qu al ifi ededuc at io n e xp en se s. Whenth ey m ad e th e withd rawal in20 12 --n otsh own to be us edforeduc at io na l ex pe ns es --the y sh ou ld ha ve expe ct eda ta x c on se qu en ce fo r th aty ear, re gard le ss of wh ethe r th ey subs eque nt ly recei ve d aFo rm 10 99 -R re po rti ng th e d is tri bu ti on . Cf. Bru ns m anv. Co m m is si on er, T.C. Mem o. 2 00 3- 29 1, s li p o p. at5 (d et erm in in g t ha t the tax pa y er di d n otne edto rece iv e a Fo rm 10 99 -MI SC t o b e al ert edto th e fac t tha t h e h ad
rece iv edco m

pe ns at io n)
. Si m il arl y , with re sp ectto th e d eem eddi st rib ut io ns , pet it io ne rs kn ew th at th ey ha d s to pp edpa y in g o n t he QP lo an s fr om tax -d eferredacco un ts an d, ag ai n, sh ou ldha ve an ti ci pa te d t ax co ns eque nc es . They su gg es t tha t the ir h av in g- 19 -

[* 19 ] co nt in ue d t o re cei ve lo anrep aym en t n ot ic es sh ou ldso m eh ow ex cu se th ei r act io ns --b utth e le nd in g i ns ti tu ti on s’ furth er at te m pt s t o re co ve r th e lo anba la nc es ha d n o i m

pa ctonth e ta xa ti on of p et it io ne rs ’ de em eddi st rib ut io ns in20 12
. Ult im at el y , pet it io ne rs ha ve sh ownno reas on ab le ba si s o r subs ta nt ia l au th or it y for th ei r fai lu re t o re po rt t he in co m e fro m th es e so ur ces . The accu racy-rela te d p en al ty is n otim po se d wi th res pe ctto an y po rti on of th e und erp aym en t wh ere t he tax pa y er ac te d wi th reas on ab le cau se an d i n g oo d fai th . Sec. 6 66 4( c)(1 ); s ee Hi gb ee v . Comm is si on er, 1 16 T.C. at 4 48 . Rele va nt fact or s wi th res pe ctto whet he r a t ax pa y er ac te d wi th reas on ab le cau se an d i n g oo d fai th in cl ud e th e ta xp ay er’s kno wled ge an d e xp eri en ce an d h er o r hi s re li an ce o n th e advi ce o f a p ro fes si on al , su chas a n a cco un ta nt . See s ec. 1 .66 64 -4 (b )(1 ), In co m e Tax Reg s. Gen eral ly, ho wev er, the m os t i m po rta ntfact oris th e ex te ntof th e ta xp ay er’s eff

ort t o d et erm in e h er o r hi s p ro pe r ta x l iabi li ty. Id.; acco rd Han se n v . Comm is si on er, 4 71 F.3d10 21 , 10 29 (9t h C ir. 2 00 6) , aff’g T.C. Mem o. 20 04 -2 69
. Pet it io ne rs arg ue th atth ey su ffer edm

ul ti pl e cal am it ie s i n 2 01 2, i nc lu di ng th e d eath o f pe ti ti on er’s fat he r, po ss ib le for ecl os ur e o n the ir p ers on al res id en ce, an d, i n 2 01 4, the ir s on ’s con tra ct in g c an cer. Whil e th ei r ha rd sh ip s, fi na nc ia l an d ot he rwis e, m ay

ha ve un de rs ta nd ab ly ove rs ha do wedth ei r ta x p ro bl em s, tho se- 20 -

[* 20 ] di ffi cu lt ie s d o n otco ns ti tu te reas on ab le cau se foranun de rp aym en t o f Fed eral in co m e ta x wi th in th e m ean in g o f se ct io n 6 66 4( c). Pet it io ne r is an educ at edpe rs on , y etth e fac ts an d c irc um st an ces inth is cas e in di cat e th at pe ti ti on ers di d n otatt em

ptto ass es s the ir p ro pe r ta x l iabi li ty for 2 01 2. Pe ti ti on ers kn ew th atth ey

ha d re cei ve d n on wag e in co m e, pr im ari ly from th e o ut -o f-the
or di na ry so ur ces of t he ir QP a ndQTP, andth ey ha d ares po ns ib il it y

to de te rm in e whe th er an d h ow tho se am ou nt s s ho ul d b e rep orte d. Th ey ex ert edno effo rt t o d o so , and , acco rd in gl y , th e se ct io n 6 66 2( a) p en al ty is s us ta in ed
. W e h av e co ns id eredth e o th er ar gu m en ts of t he pa rti es . They are m oo t, imm at eri al , or o th erwi se witho utm eri t. To r efl ectth e fo reg oi ng , Deci si on wil l b e en te red fo r res po nd en t.