TAX COURT OPINION

Case: Mark F. Heilbron & Lettina M. Heilbron
Docket Number: 7564-14S
Judge: Halpern
Opinion Type: bench
Filed: 07/15/2015
Pages: 8

UNITED STATES TAX COURT WASHINGTON, DC 20217 Petitioners v. MARK F. HEILBRON AND LETTINA M. ) ) HEILBRON, ) ) ) ) Docket No. 7564-14S. ) ) ) ) ) COMMISSIONER OF INTERNAL REVENUE, Respondent 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 petitioners and to respondent a copy of the pages of the transcript of the trial in the above case before Judge James S. Halpern at Honolulu, Hawaii, containing his oral findings of fact and opinion rendered at the trial session at which the case was heard. In accordance with the oral findings of fact and opinion, a decision will be entered under Rule 155. (Signed) James S. Halpern Judge Dated: Washington, D.C. July 15, 2015 ggPtVED JUL 1 7 2015 Capital Reporting Company 3 1 Bench opinion by Judge James S. Halpern 2 June 17, 2015 3 Mark F. Heilbron and Lettina M. Heilbron v. 4 Commissioner 5 Docket No. 7564-14S 6 7 8 9 10 11 12 THE COURT HAS DECIDED TO RENDER ORAL FINDINGS OF FACT AND OPINION IN THIS CASE AND THE FOLLOWING REPRESENTS HE COURT'S ORAL FINDINGS OF FACT AND OPINION. Unless otherwise indicated, section references are to the Internal Revenue Code, as 13 amended and in effect for 2010, and Rule references 14 are to the Tax Court Rules of Practice and Procedure. 15 Monetary amounts are rounded to the nearest dollar. 16 This bench opinion is made pursuant to the authority 17 granted by section 7459(b) of the Internal Revenue 18 Code of 1986, as amended, and Rule 152 of the Tax 19 Court Rules of Practice and Procedure. Also, this 20 case was heard pursuant to the provisions of section 21 7463. Pursuant to section 7463(b), the decision to be 22 entered is not reviewable by any other court, and 23 this opinion shall not be treat as precedent for any 24 other case. 25 Petitioner wife did not appear when this (866) 448 - DEPO www.CapitalReportingCompany.com 2015 Capital Reporting Company 4 1 2 3 4 5 case was called for trial, and respondent moved that we dismiss the case with respect to her for failure to prosecute. We granted the motion. Petitioners resided in Hawaii when the petition was filed. Respondent determined a deficiency in 6 petitionedMS 2010 Federal income tax of $8,191 and an T.5H 7 accuracy-related penalty of $1,638. Petitioner 8 9 husband (Mr. Heilbron) and respondent have entered into a stipulation of settled issues, which disposes 10 of all of the issues in the case other than (1) 11 respondent's disallowance of an advertising expense 12 of $5,590, (2) the portion of the dection 72 tax 13 applicable to $47,729 of the $68,623 individual 14 retirement account, IRA, distribution received by 15 petitioner's wife, and (3) the accuracy-related 16 penalty. 17 The parties have stipulated certain facts 18 and the authenticity of certain documents. The facts 19 stipulated are so found, and the documents stipulated 20 are accepted as authentic 21 22 23 Petitioners are calendar year.cash method taxpayers. They claimed an advertising expense of $5,590 on their 2010 Federal income tax return. Mr. 24 Heilbron testified at trial that he did not, until 25 2011, pay that expense. Therefore, respondent (866) 448 - DEPO www CapitalReportingCompany.com 2015 Capital Reporting Company 1 correctly disallowed the 2010 deduction, and we shall 5 2 3 sustain respondent's disallowance. Petitioners received in 2010 an IRA 4 distribution of $68,623 from Hartford Life and 5 Annuity, Insurance Company. They expended $20,894 of 6 7 that amount in 2010 on qualified higher education expenses of their younger son. The remaining $47,729 8 of the distribution was used to repay loans incurred 9 by petitioners in prior years to pay, in those years, 10 education expenses. Petitioners argue that, as cash 11 method taxpayers, their repayment in 2010 of loans 12 incurred in prior years to pay, in those prior years, 13 education expenses should be counted as qualified 14 education xpenses in 2010. 15 In general, a distribution from an IRA to a 16 taxpayer prior to the taxpayer attaining age 59-1/2 17 18 19 is subject to a 10-percent addition tax on the taxable amount of the early a Sec. 72 (t) (1) . Among other exceptions, a taxpayer may be 20 able to reduce the amount of an early distribution 21 from an IRA that is subject to the 10-percent 22 additional tax by the amount of a taxpayer's 23 qualified higher education expenses paid in the year 24 of the early distribution. Sec. 72 (t) (2) (E) . 25 Generally, tuition, fees, books, supplie (866) 448 - DEPO www.CapitalReportingCompany.com 2015 Capital Reporting Company 6 1 equipment, computer technology qualify as 2 educational expenses. Sec. 72(t)(7); sec. 529(e)(3). 3 4 5 6 In , T. C. Memo . .TS/é 2007-90, we said that "qualified higher education81 expenses paid in a year other than ear of an early IRA distribution do not reduce the amount of the 7 early distribution subject to the 10-percent 8 additional tax. " See also, Beckert v. Commissioner. 9 T.C. Memo 2005-162. The repayment in one year of the 10 loan of money received in a prior year and used in 11 that prior year to pay tuition, fees, books and the 12 like is not the payment of educational expenses in 13 the year of loan repayment. It is not the repayment 14 of the loan that counts; it is the payment to the 15 school or other person providing books, equipment or 16 the like that counts. Mr. Heilbron has failed to show 17 that, in 2010, petitioner paid more in qualified 18 education expenses than the$20,894 determined by SS 19 20 respondent. Mr. Heilbron argues that petitioners were 21 advised by an IRS agent as to what is a qualified 22 withdrawal from an IRA and that they relied on that 23 advice in excluding a major portion of that 24 withdrawal from their return. We need not concern 25 ourselves with that advice in determining Mr. (866) 448 - DEPO www.CapitalReportingCompany.com 2015 Capital Reporting Company 7 1 Heilbron's exposure to the section 72(t) additional 2 3 tax. Even if respondent's agent gave petitioners erroneous advice, we agree with respondent that it is 4 well settled that the IRS is not bound by an 5 6 7 8 erroneous interpretation of the law by his agent or employees and that taxpayers must follow the statute, regulations, and case law. g Dixon v. United , 381 U.S. 68, 72- 3 (1965) . Zimmerman L. 9 Commissioner, 71 T.C. 367, 371 (1978), affirmed 10 without published opinion, 614, F.2d 1294 (2 d Cir. 1979) . 11 12 We shall sustain the section 7 additional 13 tax on $47,729 of the IRA deduction. 14 Section 6662 (a) and (b) (1) impose a 20 15 percent penalty on any portion of an underpayment due 16 to negligence or disregard of rules or regulations. 17 Negligence means "lack of due care or failure to do 18 what a reasonable and ordina prudent person would 19 do under the circumstances. " Brockhouse v. United 20 States, 749 F.2d 1248, 1251, (7th Cir. 1984); Swart 21 v. United States, 568 F. Supp. 763, 765 C.D. Cal. 22 1 ) . "Mere carelessness, however innocent, [also] 23 constitutes negligence." 568 F. Supp. 765. 24 Petitioners reported an IRA distribution of $70,594 25 but omitted from the calculation of their income all (866) 448 - DEPO www.Capita1ReportingCompany.com 2015 Capital Reporting Company 8 1 but $1,970, labeling the excluded amount "rollover," 2 which Mr. Heilbron's accountant conceded at trial it 3 was not. Petitioners' accountant blamed the 4 mislabeling on a computer glitch in the software she 5 used to prepare etitioners' return. A careful 6 examination of the return by her or by petitioners 7 would have shown the mistake and petitioners could 8 9 have n some way erhaps by covering it over avoided mislabeling the IRA distribution. 10 Petitioners were careless in reporting the IRA 11 withdrawal. 12 Mr. Heilbron testified that he received 13 advice from an IR agent on which petitioners relied 14 in excluding most of the IRA distribution from 15 income. We accept that Mr. Heilbron did speak with 16 an IRS agent to try and get advice, and that is to 17 his credit. Mr. Heilbron did not, however, convince 18 us that he communicated to the IRS agent sufficient 19 information about the particulars of petitioners' 20 situation, i.e., the use of IRA proceeds to repay 21 loans received and used in prior years to pay 22 educational expenses, so that, on the basis of that 23 advice, we may excuse petitioners' failure to 24 correctly report their omission from income of the 25 omitted amounts. Mr. Heilbron offered no excuse for (866) 448 - DEPO www.CapitalReportingCompany.com 2015 Capital Reporting Company 9 1 the misreporting of the advertising expense 2 deduction. We shall sustain the accuracy-related 3 penalty. 4 That concludes this bench opinion. 5 Decision will be entered under Rule 155. And I have for the reporter a copy of what I just read. Anybody have anything else for us? We are adjourned. Thank you. (Whereupon, at 10:42 a.m., above- entitled matter was concluded.) 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 2 4 25 (866) 448 - DEPO www.CapitalReportingCompany.com 2015