127 T.C. No. 1

UNITED STATES TAX COURT

CHARLOTTE AND CHARLES T. GEE, Petitioners v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 8755-05. Filed July 24, 2006.

P rolled over a distribution from her deceased

husband’s individual retirement account (IRA) into her

separate IRA upon her husband’s death. Four years

later, P received a distribution from her IRA. She

claims that the distribution was an amount received

from her deceased husband’s IRA and therefore exempt

from the 10-percent additional tax on early

distributions under sec. 72(t)(2)(A)(ii), I.R.C., as a

distribution to a beneficiary upon a decedent’s death. 

1. Held: P received an early distribution from

her own IRA subject to the sec. 72(t), I.R.C.,

additional tax. The amount received from P’s deceased

husband’s IRA lost its character as a distribution made

to a beneficiary upon a decedent’s death once P

transferred the funds to her separately owned IRA.

2. Held, further, Ps are not liable for the

accuracy-related penalty under sec. 6662(a), I.R.C.

 
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1All section references are to the Internal Revenue Code

(Code) in effect for the year at issue, unless otherwise

indicated, and all Rule references are to the Tax Court Rules of

Practice and Procedure. 

2We decide this case without regard to the burden-shifting

rule of sec. 7491(a)(1) because the parties stipulated all the

facts in dispute under Rule 122. 

Ed Daniel IV, for petitioners.

Caroline R. Krivacka, for respondent.

OPINION

KROUPA, Judge: Respondent determined a $97,789 deficiency

in petitioners’ Federal income tax for 2002 and determined that

petitioners are liable for the accuracy-related penalty under

section 6662(a)1 for 2002. 

There are two issues for decision. The first issue is

whether a $977,888 distribution petitioner Charlotte Gee

(petitioner) received in 2002 from an individual retirement

account (IRA) she maintained only in her name, and which had been

funded in part with a rollover from her deceased husband’s IRA,

is subject to the 10-percent additional tax on early

distributions under section 72(t). We hold that the distribution

is subject to the additional tax under section 72(t).

The second issue is whether petitioners are liable for the

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

understatement of income tax. We hold that they are not.

Background

This case was submitted to the Court fully stipulated under

Rule 122.2 The stipulation of facts and the accompanying
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exhibits are incorporated by this reference, and the facts are so

found. Petitioners resided in Bolivar, Tennessee, when they

filed the petition.

Petitioner opened an IRA with PaineWebber in 1993. Her 

husband at the time, Ray A. Campbell, Jr. (Mr. Campbell), also

opened an IRA with PaineWebber in 1993. Petitioner was married

to Mr. Campbell when the IRAs were established and remained

married until Mr. Campbell’s death on June 21, 1998, at age 73.

Mr. Campbell was the sole owner of his IRA, account number

MN 21719 17, and petitioner was the primary beneficiary. 

Petitioner was the sole owner of her IRA, account number MN 21712

17, when Mr. Campbell died.

Petitioner requested PaineWebber to distribute the entire

balance in Mr. Campbell’s IRA to her IRA at PaineWebber. 

PaineWebber distributed $1,010,988.38 to petitioner’s separately

owned IRA in July 1998 in the form of a direct rollover. 

Petitioner was age 51 at the time of the rollover. 

Petitioner transferred her IRA funds in November 2000, then

totaling $2,646,797.89, to SEI Private Trust Co. (SEI). In 2002,

petitioner requested and received a $977,887.79 distribution from

her IRA at SEI. Petitioner was under age 591⁄2 in 2002 when she

received the distribution.

Petitioners reported the IRA distribution on their joint 

Federal income tax return for 2002 but did not report or remit

the 10-percent additional tax on early distributions. 

Petitioners attached a statement to their return stating that SEI

had entered the wrong distribution code on the information
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3The parties agree that petitioner received the distribution

in 2002 from her IRA, which was a qualified retirement plan under

sec. 4974(c)(4). 

return. The correct distribution code should have been for “a

distribution of IRA for her deceased husband.” 

Respondent determined that, although the distribution would

have been exempt from the 10-percent additional tax when it was

made to petitioner’s IRA upon Mr. Campbell’s death, the funds

became subject to the 10-percent additional tax when distributed

to her from her own IRA. Respondent also determined that

petitioners are liable for the accuracy-related penalty for

substantial understatement of income tax.

Petitioners timely filed a petition with this Court

contesting respondent’s determinations in the deficiency notice.

Discussion

I. Whether the IRA Distribution Was Subject to the 10-Percent 

Additional Tax on Early Distributions

We are asked to decide whether petitioner is liable for the

10-percent additional tax on early distributions under section

72(t). Section 72(t) imposes a 10-percent additional tax on the

amount of an early distribution from a qualified retirement

account (as defined in section 4974(c)).3 See sec. 72(t)(1). 

Section 72(t)(2) provides for certain exceptions to the

imposition of this 10-percent additional tax.

The parties agree that the only relevant exception is

section 72(t)(2)(A)(ii), which provides that distributions “made

to a beneficiary (or to the estate of the employee) on or after

the death of the employee” are not subject to the 10-percent
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4Petitioner specifically argues that the distribution was of

funds she inherited from her deceased husband’s IRA. We use the

statutory language rather than the vernacular petitioner uses.

additional tax. Petitioner argues that the entire distribution

she received from her IRA was an amount received on or after the

death of Mr. Campbell.4 We note that this Court has not

previously decided whether an IRA distribution retains its

character as a distribution to a beneficiary “on or after the

death of an employee” if the distribution is of funds that were

rolled over to the IRA upon the employee’s death.

Respondent argues that once petitioner as surviving spouse

decided to maintain the funds in an account in her own name as

owner of the IRA, she became the owner of the IRA “for all

purposes of the Code,” relying upon section 1.408-8, Q&A-5 and 7,

Income Tax Regs. Petitioner counters that the funds from her

deceased husband’s IRA did not lose their character as funds from

her deceased husband’s IRA. Even though petitioner rolled over

the funds from her deceased husband’s IRA into her separate IRA,

petitioner did not make any additional contributions after her

husband died and also did not “redesignate” the account as her

own. See sec. 1.408-8, A-5(b), Income Tax Regs. We agree with

respondent.

We find that petitioner received the distribution from her

own IRA, not from an IRA of which she was a beneficiary on or

after the death of an employee. We further find that the source

of the amount received, whether originating from her deceased

husband’s IRA or petitioner’s own contributions, is irrelevant. 

We recognize that petitioner may not have technically
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redesignated the IRA as her own. She did not need to

“redesignate” the IRA. The IRA was her previously existing

account. We therefore find no merit to petitioner’s argument

that the rolled over funds retain their character because she did

not redesignate her IRA.

Petitioner rolled over the entire amount received from her

deceased husband’s IRA into her own IRA. Petitioner is and was

the sole owner of her separately created IRA. The distribution

petitioner received was not occasioned by the death of her

deceased husband nor made to her in her capacity as beneficiary

of his IRA.

Petitioner cannot have it both ways. She cannot choose to

roll the funds over into her own IRA and then later withdraw

funds from her IRA without additional tax liability because the

funds were originally from her deceased husband’s IRA. 

Accordingly, once petitioner chose to roll the funds over into

her own IRA, she lost the ability to qualify for the exception

from the 10-percent additional tax on early distributions. The

funds became petitioner’s own and were no longer from her

deceased husband’s IRA once petitioner rolled them over into her

own IRA. The funds therefore no longer qualify for the

exception. 

The section 72(t) tax discourages premature IRA

distributions that frustrate the intention of saving for

retirement. Dwyer v. Commissioner, 106 T.C. 337, 340 (1996); see

also S. Rept. 93-383, at 134 (1974), 1974-3 C.B. (Supp.) 80, 213. 

To avoid the section 72(t) additional tax, petitioner must show

that the IRA distribution falls within one of the exceptions
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5The difference between the required tax of $364,125 and the

$266,336 tax reported on the return is $97,789.

provided under section 72(t)(2). She has not done so. Thus, the

10-percent additional tax under section 72(t) applies to the

distribution petitioner received from her IRA in 2002.

We accordingly sustain respondent’s determination in the

deficiency notice that petitioners are liable for the $97,789

additional tax under section 72(t) for 2002.

II. Accuracy-Related Penalty

We turn now to respondent’s determination that petitioners

are liable for the accuracy-related penalty under section

6662(a). Respondent has the burden of production under section

7491(c) and must come forward with sufficient evidence that it is

appropriate to impose the penalty. See Higbee v. Commissioner,

116 T.C. 438, 446-447 (2001). 

Respondent determined that petitioners are liable for the

accuracy-related penalty for a substantial understatement of

income tax under section 6662(b)(2) for 2002. There is a

substantial understatement of income tax if the amount of the

understatement exceeds the greater of either 10 percent of the

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

6662(d)(1)(A); sec. 1.6662-4(b), Income Tax Regs. 

Petitioners understated their income tax for 2002 by

$97,789,5 which is greater than $5,000 or 10 percent of the tax

required to be shown on their return. Respondent has therefore

met his burden of production with respect to petitioners’

substantial understatement of income tax. 
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The accuracy-related penalty under section 6662(a) does not

apply to any portion of an underpayment, however, if it is shown

that there was reasonable cause for the taxpayer’s position and

that the taxpayer acted in good faith with respect to that

portion. Sec. 6664(c)(1); sec. 1.6664-4(a), Income Tax Regs.

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 the pertinent facts and circumstances, the most

important of which is the extent of the taxpayer’s effort to

assess his or her proper tax liability for the year. Sec.

1.6664-4(b)(1), Income Tax Regs. Circumstances that may indicate

reasonable cause and good faith include an honest

misunderstanding of law that is reasonable in light of all of the

facts and circumstances. Sec. 1.6664-4(b)(1), Income Tax Regs. 

While the Commissioner bears the burden of production under

section 7491(c), the taxpayer bears the burden of proof with

respect to reasonable cause. Higbee v. Commissioner, supra at

446. The mere fact that we have held against petitioners on the

substantive issue does not, in and of itself, require holding for

respondent on the penalty. See Hitchins v. Commissioner, 103

T.C. 711, 719-720 (1994) (“Indeed, we have specifically refused

to impose * * * [a penalty] where it appeared that the issue was

one not previously considered by the Court and the statutory

language was not entirely clear.”).

We agree with petitioners that they made a reasonable

attempt to comply with the Code in circumstances involving an

issue of first impression. We note that respondent has not
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referred us to nor have we found any cases that have previously

answered the question before us. Accordingly, in light of all

the facts and circumstances, we find petitioners acted reasonably

and in good faith with respect to the underpayment for 2002 and

are not liable for the accuracy-related penalty under section

6662(a).

We have considered the other arguments of the parties and,

to the extent not discussed, we conclude that the arguments are

irrelevant, moot, or meritless.

To reflect the foregoing, 

Decision will be entered

for respondent with respect to

the deficiency and for

petitioners with respect to

the penalty under section

6662(a).