TAX COURT OPINION

Case: Mitchell J. & Jamey S. Wetendorf
Docket Number: 9788-11S
Judge: Carluzzo
Opinion Type: bench
Filed: 02/22/2012
Pages: 9

UNITED STATES TAX COURT 20 217 WASHINGTON, D . C . Petitioners, MITCHELL J. AND JAMEY S. WETENDORF, ) ) ) ) ) ) ) ) ) COMMISSIONER OF INTERNAL REVENUE, Respondent. v. Docket No. 9988-11S O R D E R 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 transcript of Judge Lewis R. Carluzzo at Chicago, 20i2, containing his oral at the conclusion of trial. the trial of findings of Illinois, on February 1, fact and opinion rendered the above case before Special Trial the pages of the In accordance with the oral findings of fact and opinion, decision will be entered for respondent with respect deficiency and for petitioners with respect 6662(a) accuracy-related penalty. to the section to the (Signed) Lewis R. Carluzzo Special Trial Judge Dated: Washington, D.C. February 22, 2012 2 3 2012 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 3 Bench Opinion by Special Trial Judge Lewis R. Carluzzo Wetendorf v. Commissioner Docket No. 9788-11S February 1, 2012 THE COURT: The Court has decided to render oral findings of fact and opinion (bench decision) in this case. 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) and Rule 152. This proceeding for the redetermination of a deficiency is a small tax case subject to the provisions of section 7463 and Rules 170 through 175. Pursuant to section 7463(b), the decision entered in this case shall not be treated as precedent for any other case. Mitchell J. Wetendorf appeared as a self- represented litigant. Scott W. Forbore appeared on behalf of the respondent. There was no appearance made by or on behalf of Jamey S. Wetendorf. The case will be dismissed as to her for lack of prosecution.! The decision entered as to her will reflect the resolution of the issues addressed in this bench opinion. In a notice of deficiency dated January 24, 2011, respondent determined a $17,874 deficiency in Heritage Reporting Corporation (202) 628-4888 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 petitioners' 2008 Federal income tax and imposed a $3,575 section 6662(a) penalty (notice). The issues for decision are (1) whether a portion of a distribution from Mitchell J. Wetendorf's (petitioner) qualified retirement account is excludable from petitioners' income; and (2) whether petitioners are liable for a section 6662(a) penalty. found. Some of the facts have been stipulated and are so At all times relevant, petitioners have been married to each other. They have two children, both minors during the year in issue, one of whom attended . private elementary school and the other public high school. After many years of employment with various employers, at least one of which entitled petitioner to participate in a section 401(k) retirement plan (retirement plan), he found himself unemployed at the beginning of 2008. In order to pay his family's living expenses, petitioner requested and received a $160,691.70 distribution from the retirement plan (distribution) The net proceeds of the distribution, that is $128,138.34 after income tax withholdings, was paid to him by check dated January 29, 2008, that he deposited into one of petitioners' bank accounts. As intended, some of the Heritage Reporting Corporation (202) 628-4888 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 ' proceeds from the distribution were used to pay family living expenses. On April 10, 2008, approximately 71 days after petitioner received the distribution, he deposited $47,000 into a Roth IRA account. Èee sec. 5 408A. Shortly after receiving the distribution, petitioner was offered a job, which he·acceptled. At or around the same time, both of Jamey Wetendorf's parents passed away. By the close of 2008 she had been diagnosed with a serious medical condition. Petitioners' 2008 Joint Federal income tax return (return) was timely filed. A review of that return shows that petitioners, or at least petitioner, understood to some extent the Federal income tax consequences of the distribution. Petitioner prepared the return using a computer-based software program. The distribution is disclosed on the return, but only $113,692 of the distribution is included in the income reported on the return. On their return petitioners treated the $47,000 deposit made into the Roth IRA as a "rollover" from one retirement plan to another, and therefore excludable from income. See sec. 402(c) (1). The income tax liability reported on the return takes into account the section 72(t) additional tax imposed on the portion of the distribution included in the income reported on the Heritage Reporting Corporation (202) 628-4888 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 return. In the notice respondent increased petitioners' income by $47,000. According to the notice respondent "need[ed) more information for the distributilon." Respondent also imposed a section 6662(a) penalty upon the ground that the underpayment of tax required to be shown on petitioners' return is a substantial understatement of income tax. See sec. 6662(!d). At the time the petition was filed petitioner was under the impression that respondent did not recognize the rollover of $47,000 because it was made into a Roth IRA. In paragraph five of the petition, petitioners allege that the $47,000 "was mistakenly placed into a Roth IRA instead of a traditional IRA" as petitioner intended. The nature of the account(cid:16)042,however, is not petitioners' problem; according to respondent, the rollover does not effectively exclude the $47,000 from petitioners' income because it was not timely made. Relying upon section 402(c) (3) respondent correctly points out that the portion of the distribution deposited into the Both IRA was not deposited within 60 days of the distribution. That being so, respondent argues that the provisions of section 402(c) (1) that would have otherwise allowed for the exclusion of that portion are not applicable. Under the circumstances we Heritage Reporting Corporation (202) 6·28-4888 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 7 are constrained to agree with respondent. The $47,000 deposit made into the Roth IRA is not excludable from petitioners' income, and respondent's adjustment in that regard is sustained. Petitioner was aware that a rollover of funds from one qualifying retirement account to another was subject to time constraints. He mistakenly believed he had complied with those requirements. He agree that he did not. In part he attributes the untimeliness of the rollover to the pressures of a new job, the financial strain of a period of unemployment and the deaths of close family members. In situations such as this, the Congrëss recognized that adherence to a strict time requirement e applicable to an intended rollover could result in hard Federal income tax consequences. Section 402(c) (3) (B) provides for a "hardship exception" to the 60-day period prescribed in section 402(c) (3) (A). The exception allows the Commissioner to waive the sixty-day period where the failure to do so "would be against equity 9 good conscience". The language of section 302(c) (3) (B) suggests that a waiver would be appropriate under circumstances, "including casualty, disaster,¡ or other events beyond the reasonable control of the individual subject to such requirement". Heritage Reporting Corporation (202) 628-4888 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 8 The procedures for requesting such a waiver are embodied in Rev. Proc. 2003-16, 2003-1 C.B. 359. Other grounds for granting a waiver, including grounds for an automatic waiver are set forth in that revenue procedure. Petitioners were not aware that they could have requested a waiver, and so they did not. Nothing in the record suggests that petitioners would be entitled to an automatic waiver in this case, and we express no opinion on whether a waiver should or would have been granted if petitioners had applied for one. Nor do we express any opinion as to whether the Commissioner's failure to grant a waiver, if applied for, would be reviewable in a deficiency proceeding that might ensue. We think it appropriate, however, to note that nothing in Rev. Proc. 2003-16, or the letter rulings that we have reviewed that were issued in; accordance with its provisions, suggest that there is a hard and fast time within which the request for waiver must be made. We leave it up to petitioners to. consider whether pursuing such a remedy at this time might otherwise provide administratively the relief they are seeking, but not entitled to, in this proceeding. Lastly, we turn our attention to the section 6662(a) penalty imposed in the notice. That section imposes a penalty upon an underpayment of tax required to Heritage Reporting Corporation (202) 628-4888 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 be shown on the return if, among other reasons, the underpayment of tax is computed in the same manner and is equal to the deficiency. See secs. 6211 and 6664 (a). Respondent has met his burden of production with respect to the imposition of the penalty because the underpayment of tax required to be shown on the return exceeds $5,000 and is therefore treated as a substantial understatement of income tax. See sec. 6662(a), (b) (2), (d) and sec. 7491(c). Section 6664 (c), however, provides that a section 6662(a) penalty shall not be imposed on any portion of an underpayment of tax "if it is shown that there was a reasonable cause for such portion and that the, taxpayer acted in good faith with respect to such portion". Here petitioners disclosed the entire dis'tribution on their return, showing that a portion of it was excludable as a "rollover". They included a substantial portion of the distribution in income, and unlike many other taxpayers who have come before this Court in similar situations, appropriately accounted for the section 72(t) additional tax. Petitioner made an honest mistake as to the time requirement within which the rollover has to have been made, and he was unaware that petitioners could have requested a waivèr of that requirement. We find that petitioners had reasonable cause and acted in good faith with respect to the Heritage Reporting Corporation (202) 628-4888 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 10 underpayment resulting from their failure to include the entire distribution in income, and they are not liable for a section 6662(a) penalty. To reflect the foregoing, decision will be entered for respondent with respect to the deficiency and for petitioners with respect to the section 6662(a) penalty. This concludes the Court's oral findings of fact and opinion in this case. (Whereupon, at 11:04 a.m., the bench opinion in the above-entitled matter was concluded.) // // // // // // // // // // // // // // // Heritage Reporting Corporation (202) 628-4888