TAX COURT OPINION

Case: Stephen Daryl Royal
Docket Number: 19001-04
Judge: Chiechi
Opinion Type: memo
Filed: 04/11/2006
Pages: 7

T. C. Memo. 2006-72 UNITED STATES TAX COURT STEPHEN DARYL ROYAL, Petitioner y. COMMISSIONER OF INTERNAL REVENUE, Respondent Docket No. 19001-04. Filed April 11, 2006. Stephen Daryl Royal, pro se. Bradley C. Plovan, for respondent. MEMORANDUM OPINION CHIECHI, Judge: Respondent determined a $5,324 deficiency in, and a $1,065 accuracy-related penalty under section 6662(a)¹ on, petitioner's Federal income tax (tax) for his taxable year ¹All section references are to the Internal Revenue Code in effect Court Rules of Practice and Procedure. for the year at issue. All Rule references are to the Tax 80DiVED APR 1 1 2006 - 3 - pay will be the day your sick leave is exhausted. are asking your agency to.send us your final separation records so we can establish your final annuity rate. We We cannot start your annuity payments until we .receive confirmation that you have applied for Social Security If you have not already done so, disability benefits. Please send us a copy of . you must now apply for them. the receipt which you receive from the Social Security Administration after you file the application. (or notice of allowance or disallowance) If the Social Security Administration awards you monthly benefits, you must also notify OPM of the amount of the monthly Social Security benefit and effective date of payment eligible * immediately upon becoming . * *. During petitioner's employment with the Postal Service, he made contributions to.a retirement account (petitioner's TSP retirement account) that he maintained with the Federal Thrift Savings Plan.3 At a time or times not disclosed by the record, petitioner borrowed money from petitioner's TSP retirement account. When petitioner retired from the Postal Service in 2002, he had the following two loans from that account outstand- ing (collectively, petitioner's loans): Loan number 0130267-E in the amount of $10,477.89 (petitioner's $10,477.89 loan) and loan number 9800963-R in the amount of $15,462.60 (petitioner's $15,462.60 loan).4 3The record does not disclose the terms of the Federal Thrift Savings Plan in which petitioner participated while he was an employee of the Postal Service. 4The record does not disclose the respective terms of peti- tioner's loans. - 5 - loan was issued, you must repay your loan in that, because you separated after your Thrift Savings Plan (TSP) full by 12/03/02, or a taxable distribution would be declared. Because you forfeited your right to repay the loan in full, effective 09/16/02, a taxable distribution in the amount of $15,462.60 has been declared in connection with the unpaid principal and unpaid interest loan. [petitioner's $15,462.60] to 09/16/02, on * * * Both September 23, 2002 letters further advised petitioner: You may also be Because your Federal [of taxable distribution declared) will be This amount reported as taxable income for 2002. liable for a tax penalty on this amount due to an early withdrawal. may be affected by this distribution and/or tax penalty, you may wish to adjust your withholding amounts accordingly. all or any portion of an amount equal tion over into an Individual Retirement Arrangement (IRA) or other eligible plan and avoid current tion. cerning taxation of this distribution. taxaYou should consult with your tax advisor con- In certain circumstances, you can roll income tax liability to this distribu- You will be sent 31, 2003. notice of this distribution by February 28, 2003, as required by law. the appropriate tax form by January The Internal Revenue Service will be sent a At no time after petitioner retired from the Postal Service did he open an individual retirement account.. Petitioner filed Form 1040A, U.S. Individual Income Tax Return, for his taxable year 2002 (petitioner's 2002 return). In that return, petitioner showed his occupation as "Retired" and claimed (1) head of household filing status, (2) his two children as dependents, and (3) the earned income tax credit. In peti- tioner's 2002 return, petitioner reported wages of $12,703.22, "Pensions and annuities" of $33,118.49, of which he claimed only - 7 - we find that petitioner has failed to carry his burden of estab- lishing that he satisfied the applicable requirements of section 7491(a)(2). On that record, we conclude that petitioner has the burden of proof with respect to the issues that remain in this case.5 See Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). Petitioner's Loans The Federal Thrift Savings Plan in which petitioner partici- pated while he was an employee of the Postal Service is treated as a qualified trust described in section 401(a)6 that is exempt from taxation under section 501(a). Sec. 7701(j) (1)(A). Any contribution to, or distribution from, the Federal Thrift Savings Plan is treated in the same manner as contributions to, or distributions from, such a trust. Sec. 7701(j)(1)(B). For purposes of section 72, if during any taxable year a participant receives directly or indirectly any amount as a loan from a qualified employer plan, such amount generally is to be treated as having been received by such individual as a distribu- tion from such plan. Sec. 72(p)(1)(A). For purposes of section 72(p), the term "qualified employer plan" means, inter alia, a plan described in section 401(a) that includes a .trust exempt SSee supra note 2. 6Sec. 401(a) sets forth the requirements for a qualified stock bonus, pension, or profit-sharing plan of an employer for the exclusive benefit of his employees or their beneficiaries. (i) In general.--Subparagraph (A) shall not apply to any loan unless such loan, by its terms, years. is required to be repaid within 5 * * * * * * * (C) Requirement of level amortization.--Ex- cept as provided in regulations, shall not apply to any loan unless substantially level amortization bf such loan (with payments not less frequently than quarterly) the term of the loan. is required over this paragraph The record does not disclose when petitioner borrowed the money from petitioner's TSP retirement account that was evidenced by petitioner's loans. Nor does the record disclose the respec- tive terms of those loans or the terms of the Federal Thrift Savings Plan in which petitioner participated while he was an employee of the Postal Service. The Court is unable to determine from the instant record whether each of petitioner's loans (cid:16)042qualified for the exception under section 72(p)(2). Nonetheless, it appears that each of those loans did so qualify. In this connection, the respective September 23, 2002 letters pertaining to petitioner's $10,477.89 loan and petitioner's $15,462.60 loan that the -Federal Thrift Savings Plan sent to petitioner stated in pertinent part: loan was issued, you must repay your loan in You were sent a notice dated 09/04/02, that, because you separated after your Thrift Savings Plan (TSP) full by 12/03/02, or a taxable distribution would be declared. Because.you forfeited your right to.repay the loan in full, effective 09/16/02, bution * unpaid principal and unpaid interest to 09/16/02 * * has been declared in connection with the informing you * a taxable distri- * *. - 11 - Q-13: How does a deduction (offset) of an account balance in order to repay a plan loan differ from a deemed distribution? A-13: (a) Difference between deemed distribution and plan loan offset amount.--(1) Loans to a participant two types of taxable distributions-- from a qualified employer plan can give rise to (i) A deemed distribution pursuant to section 72(p); and (ii) A distribution of an offset amount. (2) As described in Q&A-4 of this section, a deemed distribution occurs when the requirements of Q&A-3 of this section are not satisfied, either when the loan is made or at a later time. A deemed distribution is treated as a distribution to the participant or beneficiary only for certain tax purposes and is not a distribution of of a plan loan offset amount (as defined in § 1.402(c)- 2, Q&A-9(b))l81 occurs when, under the terms governing a the accrued benefit. A distribution 8Sec. 1.402(c)-2, Q&A-9, Income Tax Regs., describes a distribution of a planned loan offset amount as follows: Q-9: What is a distribution of a plan loan offset amount * * *? * * * * * * * A-9: (b) Definition of plan loan offset amount. is a distribution that occurs the in For purposes of section 402(c), a distribution of a plan loan offset amount when, under the plan terms governing a plan loan, participant's accrued benefit is reduced (offset) order to repay the loan (including the enforcement of the plan's security interest in a participant's accrued benefit). can occur in a variety of circumstances, e.g., where the terms governing a plan loan require that, in the event of the employee's termination of employment or request ately or treated as in default. plan loan offset amount also occurs when, under the A distribution of a plan loan offset amount A distribution of a for a distribution, the loan be repaid immedi- (continued...) t - 13 - prescribes different percentages and amounts that are to be used to calculate the credit depending on whether the eligible indi- vidual has no qualifying children, one qualifying child, or two or more qualifying children. Respondent does not dispute that petitioner's daughters that he claimed as dependents in peti- tioner's 2002 return are qualifying children for purposes of the earned income tax credit. For taxable year 2002, the earned income tax credit is completely phased out if an individual who has two qualifying children and who is not married filing jointly9 has adjusted gross income that equals or exceeds $33,178. See sec. 32(b)(1)(A) änd (2);. Rev. Proc. 2001-59, 2001-2 C.B. 623, 625- 626. In petitioner's 2002 return, petitioner claimed adjusted gross income of $24,284.22. We have held that petitioner must (cid:16)042include $25,940.49 in his gross income for 2002. As a result, petitioner's adjusted gross income for that year is $50,224.71. On the record before us, we.find that petitioner has failed to carry his burden of establishing that he is entitled for.his taxable year 2002 to the earned income tax credit. To reflect the foregoing and petitioner's concession, Decision will be entered for respondent. 9Petitioner claimed head of household.filing status in petitioner's 2002 return.