TAX COURT OPINION

Case: Peggy Ann Sears
Docket Number: 12454-08
Judge: Marvel
Opinion Type: memo
Filed: 07/06/2010
Pages: 16

;T . C . . :;Memo . 2010-14 6 PEGGY ANN SEARS, Petitioner v . COMMISSIONER OF INTERNAL REVENUE, Responden t Docket No . 12454-08, .- . . Filed July 6, 2010 . Peggy Ann Sears,- pro se . John W . Strate , for respondent . MEMORANDUM-FINDINGS OF FACT AND OPINIO N MARVEL, Judge : : Respondent determined a $6,093 .70 deficiency in petitioner's 2006 Federal income tax . Petitioner filed a timely petition contesting respondent's determination . The sole issue for decision is whether distributions from petitioner's individual retirement accounts (IRAs) qualify for the exception from the 10-percent additional tax on early distributions unde r 6 2010 . section 72 (t) (2) (A) (ii) 1 as . distributions to a beneficiary . afte r the death of an employee . We hold that the distributions ar e FINDINGS OF FAC T Some of the facts have 'been' stipulated an d The stipulations are incorporated herein by this reference . Petitioner resided in California-when ,she filed her petition . Petitioner's husband, John H ., Sears ( Mr . Sears )', die d August .28, 1998 . Before his death-he maintained an IRA at Morga n Stanley,. ., Mr . Sears' ,IRA account number ended in 7189 (account, ' No . 7189) ." Petitioner 'was the primary-beneficiary, . of,account No . .:For at least .part .of 1999 . petitioner, had an IRA rollover (account No . 9853) . As of the end of . February 1999, account No . , 9853 ,,had a -zero , balance On March 2,, '1999, $30 was deposited' i n account N No . 9853 (Marc h 'Unless otherwise indicated, al=l,section references are t o the Internal . Revenue Code (Code) for the year at issue, and al l Rule references are to the Tax Court Rules of Practice an d Procedure . On April°26, 2002, petitioner designated two primary, beneficiaries for account Nos .-9853 and 7189 . To do so, .she signed a Morgan Stanley Traditional IRA Amendment Agreement (amendment agreement) with respect to each account . 2 As of 2005 petitioner maintained an-account- .at Morgan Stanley ending-with 9860 (account No . 9860), which was a,living trust'account . On May 24, - 2005 ;. . petitioner signed two "IRA, Distribution Request Form Periodic/on-Demand Payment Request" forms (distribution request forms) directing,on-demand distributions 'from account No . 7189 to account No. . 9860 - in -- variable amounts to be determinedby'petitioner for each .. payment .3 On .June(cid:127)13, 2005, petitioner-signed a-distribution request form directing monthly distributions : of $1,370-from account No . 9853 and requesting that, the distributions be credited to account No . 9860 . In September .2005 petitioner made her-last withdrawal from account No . 7189'in the amount of $338 ..03, thereby depleting the funds in that account . Besides the March 1999 transfer, between 1999 and September 200 5 2The parties' . stipulation 18 states that Exhibit 14-J is a copy of the amendment agreement for account No.. 9853 . Because the exhibit is a copy of the amendment agreement with respect to account No . 7189, we. treat it as such . ' 3The parties' stipulation 19 states that one of the Because the relevant exhibit indicates that petitione r distribution request forms directed-a gross distribution of $5,000 . directed variable distributions in amounts to be determined by her 'for each payment, we ignore the statement in stipulation 1 9 insofar as'it is inconsistent with the terms of the exhibit . . petitioner withdrew $443,230, .92,. from# account,I.No . 7189 .4 On May, , 9853 requesting . distributions in amounts : to be' determined,,by her :for- each payment and directing Morgan . , Stanley to deposit the amounts in,.account No . ;9860: . addition' to account ,Nos . , 9853 , 9860 (the living trus t account),,, and 17189 ( Mr .',Sears' IRA : account ) , . petitioner als o maintained at Morgan :Stanley.. IRA accounts, ;with' numbers ending , i 8052 (account No . September -29, 2006 °rpetitione :r signed a distribution requestor m directing ,a, distribution of $1,'50 :0 from . account jN account,,No . 9860- . Unlike,thesother distribution request forms, , the September 29,4 .".200 .6, distribution request form indicated th e distribution . was premature and .,no .'exception appl1ied . During 200 6 4Besides the March 1999 transfer ; petitioner' s', Withdrawal s from account No . . 7189 were as follows :,. -Year Withdrawa l amount 1999 $67,800 ;,00 2000 96, 67.5:y00 p2001' '57,-981' .1 7 2002 : . 57 ;248 65 #2003 . a 59, 164, .44 2004 68 ; :233',89 2005 36,127'. .7 7 The amounts o f withholdings, . the .' withdrawals ;'. include, Federal Yand 'State" ta x .'The record .does not° disclose :;ho w accounts .;' petitioner received distributions totaling'$60,937 as follows : $24,689 from account No . 8052, $18,809 from account No . 9853,6 and $17,439 from account No . 9052 .' In 2006 petitioner was not yet 59-1/2 years old . Petitioner filed her 2006 Form 1040 ., U .S . Individual Income Tax' Return, -electronically ."' Petitioner's accountant, Don Vance (Mr . Vance), prepared petitioner's 200.6 return' . Petitione r reported $60,937 in distributions from her IRAs but did not report the 1'0-percent additional tax pursuant, to section 72(t) for an early withdrawal from an IRA . Respondent adjusted petitioner's tax by adding 10 percent-of the . total .„distribution s .on the ground that petitioner had ndt-reached age 59-1/2 in 200 6 'The parties stipulated that the distribution of $18,809 was from an account with-a number ending in 3052 (account No . 3052) . .Respondent explains on brief that Morgan Stanley uses three sets of digits for account numbers . The .last three-digit set . identifies the financial adviser handling the account . Respondent also states that account No . 3052 is the same as account No . 9853 . Petitioner does not disagree with respondent's explanation . The jointly stipulated summary of accounts for March 2009 also suggests that . account No . 3052 is the same as account .No . 9853 . Accordingly, we refer to account No . 3052 as account No . 9853 . 'According to petitioner, she had been receiving . distributions from the IRAs since Mr . Sears' death"in 1998, but respondent, Morgan Stanley, and petitioner's accountant ; Don Vance, never identified issues with the' distributions . Respondent determined additional tax for 2006 only . . 8The record does not'disclosewhether-petitioner filed the -2006 return timely . During 2006 petitioner .receive,d(cid:127)premature'distributions fro m three-, IRA accounts, -Nos . 9853' ($18, 809) .;; 8052 '($24',689) , ...and ($17,.439),,, that she owned and : maintained , at .Morgan =Stanle y Althoughpetitioner,authorized the ydistributi'~ons=, petitione r appears ' to argue ;;that -the,distributions,mshould, not be ' subj ec t the additional tax under section-72(t)-because the exception . under section 72(t) (2) ( A)(ii) aapplies .,; . As, we understan d 'petitioner' .s position, . which : petitioner clearly .explained, . petitioner is alleging in effect that the assets in .account No . 9.853 were transferred fr"om her deceased husband's IRA account No . that the 2006 distributions front account No . : '9853 .°should hav e been'treated as distributions to 'her as .the beneficiary o f 9Petitioner does not claim that the 2006 distributions-fro m .8052 and 90.52, came from asset s .her. other IRA accounts ,G, Nozs ., transferred from her deceased husband's IRA by, mistake . In ,-fact , there . is no- .credible evidence,.thatnany assets from her deceased, husband's IRA accounts No . '7189".were -ever, transferred to account Nos .' 8052 and 9052 . Consequently,, we interpret petitioner's argument for relief under sec . 72 (t) (2) .(A) 'as a request for „par-tial relief -that, :relates only to the (cid:127) 2006 :;.. distributions ° fro m her account No 9853 Generally, the-Commissioner's determination' in the notice-o f deficiency'$is presumed correct, andthe taxpayer bears the burden of proving that the determination is erroneous . Rule 142(a) ; ' Welch v . Helvering, 290 U .S . 111, 115 (1933) . Petitioner doe s not contend that 'section 7491(a) shifts the, burden-of ,proof t respondent, nor does the recordestablish-that petitioner satisfies "the requirements of section 7491(a)(2) . II . Burden of Proof and Productio n Section 7491(c) provides that the Commissioner bears .the burden 'of production with respect to 'the -liability. of any - taxpayer' for any penalty, addition to tax,' or additional amount imposed by the Code . To satisfy his burden of .production under section 7491(c), the Commissioner must produce evidence that, it is appropriate to,impose the'relevant penalty . Higbee v . Commissioner , 116 T .C .+ 438, 446 (2001) . . However, section 7491(c) does not require"the''Commissioner .to introduce evidence regarding reasonable cause . Id We do not-need to address'-whether additional tax unde r section 72(t) is an amount-to which section 7491 (c) applies . Even if the"burden of production with respect to the additional tax is on respondent, respondent-has,met it by,showing :,that the distributions iii 2006 were not -from account No ;, 7189' . Consequently, petitioner has both-'the burden of producing ., evidence to show that the 2006 distributions from account No . .,and the burden of ,proving ;that respondent " s .determinatio n 1- 1 incorrect- . See Rule 142(a)(1 ) III .. = Analysis General,ly,,amounts :distributed from an IRA are i(cid:127)ncludable°i n gross income as provided' in section 72 ; Sec . 408 (d) (1) Section 72 (t) (1), provides . Ifor aa1 .0-percent additional tax on-earl y distributions from qualified retirement plans ; distribution falls within a, 'statutory exception° . ', ,The . relevant , exception' is section 72 (t°),(2) ; (A)-(ii) ,, whic1 provides athatw ;. distributions "made to ,a beneficiary ,, .(or to the ,estate, of th e employee) on or after . the,, death Yof the employee" are no t to the .-'10-percent additional .:, tax . We„have previously-held that the 'beneficiary-loses the{ . , .ability to 'claim the exception under „ s;ection ,72 (t)'"(2) ;(A ) the -beneficiary rolls -over the .-funds# from, the adeceased spouse, s IRA into his or her IRA and-thereafter withdraws,funds fro th the IRA . See Gee v : Commissioner , 1.-127 . T . C. Commissioner ,-' supra at4-5;, we held that ...4when . a,beneficiary roll's over, . funds from the deceased .spouse's' IRA, the,. funds become the occasioned by the ,, death- of = the spouse . ., Thus, do not qualify' for the section 72 (t) (2)-(A) (i i id . 9 With respect to distributions from account No . 9853, the record contains statements for . account Nos : 7189 and'98531for March 1999 . An entry .dated March 24,1'1999, in the statement-for account No . 7189 is titled "Securities Delivered -442,863 .87" . The March l999 :account statement for account .No . 9853 shows tha t on March 24, 1999,--account No9853 received securities valuedtat $442,863 .87 ., -Because securities worth $442,863 .87 were transferred on March 24, 1999, from account No .,7l89,to account No . 9853, i .e ., from Mr . Sears' IRA .to petitioner's IRA, the funds became petitioner's funds .. See id . at 4 . Accordingly, the subsequent distributions of those funds were . not occasioned . by the death of petitioner's husband and were not made to her in her capacity as beneficiary of his .IRA . See id . Petitioner testified she=did-not remember the .March 1999 transfer and did not understand rollovers . She claimed she did not understand how .-the stock market works,or how,to,read accoun t statements . (cid:127)Instead,' .she trusted'Mr . Vance and her advise r Morgan Stanley, and none of them "picked up on it ." She contend s .that Morgan Stanley made a mistake,10 and ."they were supposed t be looking out for * : * *-[her] interest, which, . -of course,, they didn't ."' Petitioner claims that her-financial consultant at . Morgan Stanley had authority over the IRAs and she would not hav e '°We understand-:petitioner to refer to the March 1999 transfer as the' relevant mistake ., , 10 - discussed ; the asset . transfer;' with him ;:, because ' she .did not . understand'how the stock :"market .worked . :,.However, ;'petitioner ; s financial .consultant from Morgan : Stanley='did not testify at, ., trial', and , because of the pa"ssage .,of time, , the° records, tha t Morgan,Stanley, produced at- trial did not, include relevan t transfer records" and :. authorizations ,for theiMarch 1999-transfer : of securities from a .ccour t No . 7189 to account,,No , 9853.11:, The parties do not rely 'on 'and' we . have not';found any , cases : V --discussing ' the application of the 'secti o' n' 72,(t)=(2) (A ) cases ofalleged'trustee .mistakes On brief respondent . distinguishes the case at hand from,caseseinvolving truste e mistakes in another context of, .IRA rollovers Wood v . Commissioner , 93' T .C . 114, . 115 ( 1989) , „the . ..taxpayer received .a lump-sum distribution'(consiting of ..a ,check-and stoc k certificates) from his- retirement- account'and wanted to°roll ove r the distribution into -anIRA rollover account .,- The taxpayer me t with "an "account executive-at-Merrill Lynch= signed ' .the documents to es'tabl'ish his rollover account, and delivered the ,,check .and . .,stock certificatesa'to Meri1l Lynch ;,-"the-trustee Id . at 115-116 . . The-trustee records reflected the trans€er of the=distribution check 'to 'the IRA within ' the . ; 60-day period required . by' sectio n 11Despite' respondent's efforts 'att-the Court's, .direction , Morgan Stanley was not able to find .any-such,documents . 402(a) (5) (C) , as in effect for 1983 .12 -See. Wood - .v . Commissioner , . supra at 116 . However,- Merrill, Lynch mistakenly recorded the, stock certificates as having been transferred to another of the .taxpayer's accounts See id4_ at 116-117 .. „ Although the account statement showed that the trustee had not deposited stock .inthe IRA. rollover account before'the 60-day rollover period expired, the taxpayer did not realize . the rollover was untimely until the Commissioner questioned him about the failure to report the lump- sum distribution . - Id . at (cid:127)117-118 .° In Wood v .-Commissio'ner' , supra at 120,- . we rejected the Commissioner's argument that-the trustee's : records contro l "whether the stock was rolled . over.timely We stated that a mere .bookkeeping error that failed to properly reflect the transaction does not control the resolution of- .the case . Id . at .120-121 ("The substance of a transaction must be determined from the- facts surrounding the transactions' rather : than from bookkeeping entries .") . Because the taxpayer took reasonable steps t o establish an IRA rollover iaccount- and timely transfer the , distribution, we concluded-the taxpayer could claim-the rollover benefits when a trustee made a mistake in recording a 12Generally, sec . 402(a) provides that the taxable portion of a distribution from a qualified employees' trust is taxable in the year of receipt . Sec . 402(a) (5) (A) and (t), as in effect for 1983, provided for an exception from this rule if the -distribution was transferred to . an eligible retirement plan within 60 days following receipt of the distribution . --12 - transaction : Id at 122 . 'In subsequent cases we ,,have pointe d out thatw the doctrine-of substantial compliance and Wood v . . . Commissioner .,~ supra , apply- .only, .to :procedural defects is ,effecting a rollover and' not to failures of a-, fundamental elemen t .of the statutory requirements for, an IRA rollover . See Schoof v . Commi'ssion' er ,,, .110 T . C . 1, ,;10-1i (1998) ; Rodoni, v ." -Commissioner ,,-: .105 T .C . . 29,_38-39-(-1995) ;-Anderson v . Commissioner ,, T .C . . Memo". 2002--171 . Respondent points out that petitioner did nothing after'199 9 to correct the-allegedly mistaken March,1999 transfer ,, .The record supports-respondent's assertion . Petitioner testified that, she. understood that the front page . , of the account .,=statemen t showed the account'value .and value-change for record establishes that at the ;en d f February 9853 had a zero balance, nbut .at ,the end- of March,1999 the tota l asset value of.account No . 9853 was ; $451, 268 .56 . Even i f petitioner did notnotice that account No . 7189 .lost more than , half oflits,value ;because of : the, : March 1999, transfer, = at, . some, , point: between 1999 and 2006, petitioner should have . noticed tha t account No .'9853 no longer,had a zero ,balance . Nevertheless , record contains no credible evidence to show that petitione r inquired of .Morgan Stanley whether a mistake had occurred-,and , so, . that she asked Morgan Stanley to correct the allegedly .- -mistaken transfer . ti -' 1 3 We do not need to decide whether the exception from the . .10- percent additional tax under section 72(t)(2)(A)(ii) .applies when the transfer from the deceased employee's,IRA account to the beneficiary's°'IRA resulted from a trustee's .- orfrom .a lac k thereof or from a mere bookkeeping error . 'Although the record, contains no evidence of petitioner's authorization of the Marc h 1999 transfer, on this record we are unable to conclude that th e March 1999'transfer of securities to account No ; 9853,was the . result of a trustee or custodial mistake .. Petitioner's actions . after the March 1999 transfer suggest that she either . authorized the transfer or subsequently .ratified it ., In reaching our conclusion we rely-on the amendment agreements, whichsuggest that even before 2005 petitioner understood or'should have understood that account Nos .-7189 and 9853 were different IRA. . accounts .' Petitioner signed"the'two amendment, agreements on separate forms on . April 26, 2002,' and"designated . the same two persons as primary beneficiaries of each account .- Because, petitioner signed the amendment agreements on the-same day, petitioner either understood or should have understood tha t account- Nos . 7189 and 9853 were distinct accounts . In-addition, petitioner knowingly withdrew funds from her own IRAs. The record contains two'distribution .request .forms, dated May 24, 2005, directing on-demand distributions .from. . account No . 7189 in variable amounts to be'determined by - 14 - petitioner for each, p yment,and directing that the, ;4istribute d funds be ."credited to~account(cid:127)No . 9860 .- -Approximately 3 weeks- later, on June 13 . 2005, petitioner signed a distribution reques t form directing monthly account ° N 9853 and directing . that funds be credited to ;,account No . =9860 . Eren , i f +a . Morgan . Stanley °employee, filled out . the distributio n forms for petitioner to . sign, . the,short-time that elapsed betwee n they signing of the forms strongly suggests -that petitioner knew the '$l,,370 monthly distributions were from her own accoun t .not from account-No . 7189 . In. September: 2005 ,account No . 7189 was ,.depleted .g13 surprisingly, in .2006 ;petitioner',s,distribution, .request forms . focused only -.on . her' own . "IRAs,; % On May 31, 2006, .petitioner sign signe d a distribution -request .form ,with ,respect to . account No . . 9853 .a requesting distributions in ;amounts'to be determined by petitioner for each".-payment, and on September 29, :2006 ; petitioner .'signed'a distribution request .form directing . distribution . from , account No .., 8052 . .-The,-latter .form indicated, ' that(cid:127)the distributi"onwas premature and .no .except i,on,applied . ;- Petitioner asserts,~that'Morgan Stanley. prepared three , Form s 1099-R, Distributions From .Pensions,-Annuities, Retirement or, Profit-Sharing Plans, :'IRAs Insurance Contracts etc ., for 20.0 6 13From :1999 through September 2005 petitioner withdrew' distributions totaling $443,230,, .92 from"account- No . 7189 (not ~:' including the transfer of securities on : Mar . 24 , 1999) ;1 1.5 showing "Distribution Code(s)" as 1141' .14 The Forms 1099-R, however, are inconsistent' with the petition, in which petitioner contended that Morgan Stanley issued Forms1099- .R incorrectly showing the,distribution .code:as .l .% The petition also states , that petitioner contacted Morgan Stanley to request corrected . Forms 1099-R showing code 4, but without result . Petitioner' s position in the petition . is consistent with the jointly stipulated letter from a Morgan Stanley representative to(cid:127)Mr' . Vance dated August 4, 2008," which stated :' "In,2005and 2006 .. Peggy Ann Sears took distributions' from account No . 7l89, .which were all reported as premature distributions on the 1099R issued to her and .the IRS ." Because the distribution codes on the Forms' 1099-R are inconsistent with other credible evidence in the record, including Morgan Stanley's records, and contradict, petitioner's explanations in the petition, we do not give any credence to the coding on the Forms 1099-R in reaching our conclusion .15 "'The instructions to Form 1099-R for 2006 describe the distribution code "4" as "Death" and distribution code 111". as "Early distribution, no known exception" . 15The Forms 1099-R for 2006 showing . distribution code "1" that petitioner states were issued are not part of the record, and the Forms 1099-R with the distribution code "4" contained in the record do not show that they are corrected forms . The record does not explain at what point Morgan Stanley reissued these forms . 16 - 'Petitioner does . .not contend-that, any, other exceptio n section :72 (t) (2), applies, and she ,has not,,proven, tha t respondent's . . determination is in error . .,On : the, basis of~the foregoing, we,.conclude,;that the,-premature 2006' distributions rom petitioner's IRA accounts aresubj ect , to (cid:127)the~ 10 -percent . additional tax .. We have considered the remaining arguments madeby the par.ties,, .. and' to the extent not . discussed above ; we , conclude, those arguments . are:. irrelevant „l moot, , or, without ,merit = . , , To .reflect' the foregoing,, respondent .