TAX COURT OPINION

Case: James Way Young Chen
Docket Number: 5918-19S
Judge: Carluzzo
Opinion Type: bench
Filed: 01/21/2021
Pages: 10

Docket No.: 5918-19S Page of United States Tax Court Washington, DC 20217 James Way Young Chen Petitioner v. Commissioner of Internal Revenue Respondent Docket No. 5918-19S ORDER Pursuant to Rule 152(b), Tax Court Rules of Practice and Procedure, it is ORDERED that the Clerk of the Court shall transmit herewith to the parties a copy of the pages of the transcript of the trial in this case before Chief Special Trial Judge Lewis R. Carluzzo that contain his oral ﬁnds of fact and opinion rendered on October 30, 2020, during the trial session at which the case was heard. Decision will be entered in accordance with the oral ﬁndings of fact and opinion . (Signed) Lewis R. Carluzzo Chief Special Trial Judge Served 01/21/21 RECEIVED 11/24/20 IN THE UNITED STATES TAX COURT In the Matter of: JAMES WAY YOUNG CHEN, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. Docket No. 5918-19S ) ) ) ) ) ) ) ) ) ) ) ) Pages: 1 through 9 Place: San Diego, California (Remote Proceeding) Date: October 30, 2020 1 2 3 4 5 6 7 8 9 10 11 12 13 14 1 IN THE UNITED STATES TAX COURT In the Matter of: JAMES WAY YOUNG CHEN, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. Docket No. 5918-19S ) ) ) ) ) ) ) ) ) ) ) ) Federal Building 880 Front Street Room 4228, 4th Floor San Diego, California 92101-8828 (Remote Proceeding) October 30, 2020 The above-entitled matter came on for bench opinion, 15 pursuant to notice at 10:01 a.m. HONORABLE LEWIS R. CARLUZZO Chief Special Trial Judge BEFORE: APPEARANCES: For the Petitioner: No Appearance For the Respondent: No Appearance 16 17 18 19 20 21 22 23 24 25 2 P R O C E E D I N G S (10:01 a.m.) THE CLERK: Calling for bench opinion docket 5918-19S, James Way Young Chen. (Whereupon, a bench opinion was rendered.) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 1 2 3 4 5 6 7 8 9 10 11 12 13 3 Bench Opinion by Judge Lewis R. Carluzzo October 30, 2020 James Way Young Chen v. Commissioner Docket No. 5918-19S THE COURT: The Court has decided to render oral findings of fact and opinion in this case and the following represents the Court's oral findings of fact and opinion (bench opinion). Unless otherwise noted, section references made in this bench opinion are to the Internal Revenue Code of 1986, as amended, in effect for the relevant period, and Rule references are to the Tax Court Rules of Practice and Procedure. This bench opinion is made pursuant to the authority granted by section 7459(b) 14 and Rule 152. 15 16 17 18 19 20 21 22 23 24 25 This proceeding for the redetermination of a deficiency is a small tax case subject to the provisions of section 7463 and Rules 170 through 174. Except as provided in Rule 152(c), this bench opinion shall not be cited as authority, and pursuant to section 7463(b) the decision entered in this case shall not be treated as precedent for any other case. James Way Young Chen appeared on his own behalf. Christine A. Fukushima appeared on behalf of respondent. In a notice of deficiency dated July 23, 2018 (notice), respondent determined a $12,442 deficiency in 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 petitioner's 2016 Federal income tax and imposed a $2,488 4 section 6662(a) accuracy-related penalty. After concessions, the issue for decision is whether petitioner is liable for the Federal income tax on a deemed distribution of $23,423 from a qualified retirement account. Some of the facts have been stipulated and are so found. At the time the petition was filed petitioner lived in California. For the period relevant to this case, petitioner was employed as a professor by the University of California. By virtue of his employment with the University of California, petitioner participated in a section 403(b) plan administered by Fidelity Investments (retirement account). On September 12, 2013, petitioner received a $50,000 loan from his retirement account. Contribution statements for the retirement account show that petitioner failed to make the required monthly repayments due after June 2016. On August 18, 2016, Fidelity sent petitioner a letter informing him that his loan would be in default unless payment for the amount past due posted to his account by November 16, 2016. On November 16, 2016, Fidelity sent petitioner a letter informing him that according to the terms of the 403(b) Plan, the loan had 1 2 3 4 5 6 7 8 9 been declared in default since Fidelity did not receive 5 full payment for the delinquent amount. Fidelity deemed the loan balance, $23,423, to be taxable distribution in 2016, and issued to petitioner a 2016 Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., and reported a gross distribution of $23,423 as fully taxable. In July 2017 petitioner repaid the loan in full. In the notice, as relevant, respondent increased 10 petitioner's income by the amount of the deemed 11 distribution. 12 13 14 15 16 17 18 19 20 21 22 23 24 25 As a general rule, section 72(p)(1)(A) provides that if a participant or beneficiary receives, directly or indirectly, any amount as a loan from a qualified employer plan, then that amount shall be treated as having been received by such individual as a distribution under that plan. See generally Martinez v. Commissioner, T.C. Memo. 2016-182, at *2-*3; Plotkin v. Commissioner, T.C. Memo. 2001-71, slip op. at 6-7 (and cases cited thereat). For purposes of this rule, a "qualified employer plan" includes a section 403(b) plan. Sec. 72(p)(4)(A)(i)(III). In general, a loan from a qualified employer plan gives rise to a deemed distribution that is taxable for the year in which the loan is received. Section 72(p)(2) provides an exception to the general rule, 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 however, where the loan (when added to the outstanding 6 balance of all other loans from the same plan) does not exceed a specified limit, see sec. 72(p)(2)(A); where the loan, by its terms, must be repaid within 5 years from the date of its inception or used to finance the acquisition of a home that is the principal residence of the participant, see sec. 72(p)(2)(B); and where the loan is subject to substantially level amortization with quarterly or more frequent payments required over the term of the loan, see sec. 72(p)(2)(C). Although a loan might initially satisfy the requirements of section 72(p)(2)(A) at the time that it was made, a deemed distribution may nevertheless occur subsequently because of the failure to repay the loan consistent with the loan agreement. Sec. 72(p)(2)(C). Accordingly, if a default occurs, a distribution is deemed to occur at the time in the amount of the then-outstanding balance of the loan. That is what happened in this case. Here there is no dispute that petitioner defaulted on the loan in 2016 because of his failure to make the requisite payment within the specified period. The record demonstrates that the balance due at the time of the default was $23,423. Consequently, pursuant to section 72(p)(1)(A), a distribution is deemed to have been made at such time and 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 in such amount, and the distribution is taxable for 2016. 7 It follows that respondent's determination that petitioner is liable for the Federal income tax in respect of the deemed distribution is sustained. In closing we think it appropriate to note that petitioner does not now take the position that the loan did not give rise to a "deemed distribution", nor does he challenge the amount of that distribution. He also does not take exception to the imposition of the section 72(t) additional tax imposed on the deemed distribution. Instead, concerned that the repayment of the loan in 2017 might give rise to double taxation on future distributions from the account, he is looking for some ruling on the basis of his retirement account. We understand his concern, but the consequences to his basis in the account, if any, as a result of activities beyond the year in issue play no role in the amount of deficiency here under consideration. That being so, we decline to comment on 19 the point. 20 21 22 23 24 25 To reflect the foregoing, decision will be entered for respondent for the deficiency and for petitioner for the section 6662(a) penalty. This concludes the Court's bench opinion in this case. (Whereupon, at 10:12 a.m., the above-entitled matter was concluded.) CERTIFICATE OF TRANSCRIBER AND PROOFREADER 8 CASE NAME: James Way Young Chen v. Commissioner DOCKET NO.: 5918-19S We, the undersigned, do hereby certify that the foregoing pages, numbers 1 through 9 inclusive, are the true, accurate and complete transcript prepared from the verbal recording made by electronic recording by Roger Meyers on October 30, 2020 before the United States Tax Court at its remote session in San Diego, CA, in accordance with the applicable provisions of the current verbatim reporting contract of the Court and have verified the accuracy of the transcript by comparing the typewritten transcript against the verbal recording. _______________________________________________ Meribeth Ashley, CET-507 11/19/20 Transcriber Date _______________________________________________ Lori Rahtes, CDLT-108 11/19/20 Proofreader Date 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25