TAX COURT OPINION

Case: Clarence E. Kaye
Docket Number: 1550-20S
Judge: Leyden
Opinion Type: bench
Filed: 11/02/2020
Pages: 10

UNITED STATES TAX COURT WASHINGTON, DC 20217 CLARENCE E. KAYE, Petitioner, v. ) ) ) ) Docket No. 1550-20S. 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 petitioner and to respondent a copy of the pages of the transcript of the trial in the above case before Special Trial Judge Diana L. Leyden at Hartford, Connecticut, on October 14, 2020, containing her 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, an appropriate decision will be entered. Dated: Washington, D.C. November 2, 2020 (Signed) Diana L. Leyden Special Trial Judge SERVED Nov 02 2020 Bench Opinion by Judge Diana L. Leyden October 14, 2020 Clarence E. Kaye v. Commissioner Docket No. 1550-20S 3 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. THE ORAL FINDINGS OF FACT And OPINION SHALL NOT BE RELIED UPON AS PRECEDENT IN ANY OTHER CASE. See Rule 152(c), Tax Court Rules of Practice and Procedure. Hereinafter in this bench opinion, all Rule references are to the Tax Court Rules of Practice and 1 2 3 4 5 6 7 8 9 10 11 12 13 Procedure, and all section references are to the Internal 14 Revenue Code, as amended, in effect at all relevant times. 15 This proceeding was heard as a Small Tax Case 16 pursuant to the provisions of section 7463 and Rules 170 17 through 174. This bench opinion is made pursuant to the 18 authority granted by section 7459(b) and Rule 152. 19 The Court uses the term "Internal Revenue 20 Service" or "1RS" to refer to administrative actions taken 21 outside of these proceedings. The Court uses the term 22 "respondent" to refer to the Commissioner of Internal 23 Revenue, who is the head of the IRS and is respondent in 24 this case, and to refer to actions taken in connection 25 with this case. The trial of this case was conducted by remote 4 Proceeding on October 13, 2020, for the Trial Session for Hartford, Connecticut. Petitioner appeared on his own behalf. Mariano Beecher appeared on behalf of respondent. The Internal Revenue Service (IRS) determined that petitioner had not reported a 10% tax on a distribution from a retirement account. The IRS issued a notice of deficiency dated January 6, 2020, and proposed a deficiency in petitioner's 2017 Federal income tax 1 2 3 4 5 6 7 8 9 10 consisting of a 10% tax of $12,000 on an early 11 distribution from a qualified retirement plan and an 12 accuracy-related penalty under section 6662(a) of $2,400. 13 Respondent has conceded the accuracy-related penalty. 14 After respondent's concession the only issue for 15 decision by the Court is whether petitioner is liable for 16 the 10% tax on his distribution during 2017 of $120,000 17 18 from an Individual Retirement Account (IRA). For reasons stated in this opinion, the Court concludes that 19 Petitioner has not met his burden of proof to overcome 20 respondent's determination as to the 10% tax on an early 21 distribution. 22 Background 23 The first stipulation of facts and the attached 24 exhibits are incorporated herein by this reference. 25 Petitioner resided in Massachusetts at the time that the 5 1 2 3 4 5 6 7 8 9 Petition was filed with the Court. 2017 Tax Return Petitioner and his wife timely filed their 2017 joint Federal income tax return. The notice of deficiency was issued to both petitioner and his wife. However, petitioner's wife did not sign or ratify the petition in this case. On that return petitioner and his wife reported on line 16 "Pensions and annuities" $121,000 as the taxable amount. Petitioner and his wife did not 10 report any amount on line 59 "Additional tax on IRAs, 11 other qualified retirement plans, etc." and did not attach 12 13 14 Form 5329, which line 59 indicates is required. As is relevant here petitioner attached a Form 1099-R that listed the payer as "Fidelity Investments", in 15 box 1 labeled "Gross distribution" $120,000, and in box 7, 16 the distribution code of "2". Petitioner also filed with 17 his joint federal income tax return a Form 1099-R listing 18 the payer as "Charles Schwab", and in the box labeled 19 "Gross distribution" $1,000. The IRS did not assert a 10% 20 Penalty on that distribution. Box 2a titled "Taxable 21 amount not determined" is checked. Code 2 is used to 22 designate a distribution as "Early distribution exception 23 applies (under age 59 1/2)". This Form 1099-R did not 24 include any notation in box 11 "1st year of desig. Roth 25 contrib.". Further, the box on the top of the Form 1099-R 6 1 2 3 4 5 6 7 8 9 labeled "CORRECTED (if checked)" is not checked. Rollover of Defined Benefit Plan Funds Sometime in 2016, petitioner elected to have a lump-sum from a defined benefit plan of his then employer in connection with the termination of the defined benefit Plan. Petitioner elected to have the lump-sum amount of $494,472.86 rolled over to his Fidelity Investments (Fidelity) IRA which occurred sometime in November 2016. Respondent has not challenged that the distribution to the 10 Fidelity IRA was not a nontaxable rollover. 11 Distribution from Fidelity IRA 12 13 14 15 Petitioner contacted Fidelity sometime in early 2016, before he received the lump-sum distribution from the defined benefit plan, to inquire about his balance in the Fidelity IRA and whether he could withdraw funds. In 16 a letter dated May 2, 2016, Fidelity informed petitioner 17 18 that he had a balance in excess of $55,000 and that his "account is currently not restricted and [petitioner] may 19 withdraw any amount up to and including the full balance 20 of the account at any time, pending the settlement of any 21 applicable liquidating trade transactions." The letter 22 did not mention any tax consequences, including the 10% 23 tax on early distributions, that might apply to any 24 withdrawal. 25 On September 6, 2017, Fidelity distributed .c nes $120,000 to petitioner. On the Fidelity IRA statement 7 for the month of September 2017 the distribution is listed as "Reportable dist." and Fidelity referred to the distribution as "Early Dist No Except". Fidelity issued a Form 1099-R to petitioner for 2017 and listed in box 1 "Gross distribution" $120,000 and in box 7 "Distribution code(s)" 1 and checked the box IRA/SEP/Simple. On the back of the form Distribution code 1 is described as Early distribution, no known exception 1 2 3 4 5 6 7 8 9 10 (in most cases under age 59 1/2). At the time of the 11 distribution from Fidelity petitioner was younger than 59 12 1/2 years of age. 13 Discussion 14 Generally, the Commissioner's determination of a 15 deficiency is presumed correct, and the taxpayer bears the 16 burden of proving it incorrect. See Rule 142(a); Welch v. 17 Helvering, 290 U.S. 111, 115 (1933). 18 Under section 7491(a), the burden of proof may 19 shift to the Commissioner if the taxpayer produces 20 21 credible evidence with respect to any relevant factual issue and meets other requirements. Petitioner has not 22 argued that section 7491(a) applies nor established that 23 its requirements are met. The burden of proof remains 24 with petitioner. 25 10% Tax on Early Distribution section 72(t)(1) 8 imposes a 10% additional tax on an early distribution from a qualified retirement plan as defined in section 4974(c). A qualified retirement plan includes an IRA. sec. 4974(c). A distribution is early if it is made to an employee who has not attained age 59 1/2. Sec. 72(t)(2) (A)(i). A distribution that satisfies one of the statutory exceptions in section 72(t) will not be subject to the 10% additional tax. The most common of these exceptions include distributions that are made on or after the date on which the employee attains the age of 59 1/2, 1 2 3 4 5 6 7 8 9 10 11 12 distributions that are attributable to the employee's 13 being disabled, or distributions made to an employee after 14 separation from service after attainment of age of 55. 15 sec. 72 (t) (2) (A) (i), (iii) and (v). 16 17 18 The legislative purpose underlying the section 72(t) tax is that premature distributions from qualified retirement plans "frustrate the intention of saving for 19 retirement, and section 72(t) discourages this from 20 happening." Arnold v. Commissioner, 111 T.C. 250,255 21 22 23 24 (1998); Dwyer v. Commissioner, 106 T.C. 337, 340 (1996); see s. aept. 93-383, at 134 (1974), 1974-3 C.B. (Supp.) 80,213. Petitioner has not argued or provided evidence 25 to support any exception to the 10% tax under section 72(t)(2). Specifically, petitioner was not age 59 1/2 at 9 the time of the distribution from the IRA. The distribution from the IRA was not made in connection with a separation of service. Petitioner was not disabled at the time of the distribution. Rather petitioner has argued that he relied on the May 2, 2016, letter from Fidelity and he believed that the letter informed that a distribution from his Fidelity IRA would not be subject to the 10% tax. Petitioner agreed that he was liable for the income tax on the $120,000 distribution. Reliance on a letter from a plan 1 2 3 4 5 6 7 8 9 10 11 12 administrator does not qualify for an exception the 10% 13 tax under section 72(t). Further, the letter does not, as 14 Petitioner would have us find, indicate that any 15 distribution from the IRA would not be subject to the 10% 16 tax on an early distribution. 17 18 The Fidelity statement for the month of september 2017 indicated that the distribution was an 19 early distribution and that there was not any known 20 exception. Petitioner acknowledged that he had access to 21 that statement. This put petitioner on notice that the 22 distribution would be subject to the 10% tax unless 23 Petitioner were to provide facts that indicated it 24 qualified for one of the exceptions to the tax under 25 section 72(t). Cnners The Court is also concerned about 10 the origin of the Form 1099-R that was filed with the return. It does not indicate that it was a corrected Form 1099-R. This form had a different distribution code. When asked, Petitioner could not explain the origin of the form that he filed with his joint Federal income tax return or why the distribution code was different from the distribution code on the Form 1099-R issued by Fidelity. The Court does not find that any of the 1 2 3 4 5 6 7 8 9 10 statutory exceptions in section 72(t) apply to petitioner. 11 During the trial petitioner inquired about the exception 12 under section 72(t)(2)(F) and section 72(t)(8). While 13 Petitioner testified that he used the distribution to 14 Purchase a house, he also testified that the title of the 15 house was in he and his wife's name and that it was not 16 his first home. He testified that he hoped to leave it to 17 his disabled grandchild, but then confirmed that the house 18 was not titled in the disabled grandchild's name. 19 Accordingly, neither exception applies to the distribution 20 in issue in this case. The Court has considered all of 21 the parties' arguments and, to the extent not addressed 22 herein, the Court concludes that they are moot, 23 irrelevant, or without merit. 24 To reflect the foregoing an appropriate decision 25 will be entered. 11 THIS CONCLUDES THE COURT'S ORAL FINDINGS OF FACT AND OPINION IN THIS CASE. (Whereupon, at 4:15 p.m., the above-entitled matter was concluded.) 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