TAX COURT OPINION

Case: Herman D. & Emma J. Baker
Docket Number: 9265-08
Judge: Colvin
Opinion Type: bench
Filed: 02/20/2009
Pages: 9

UNITED STATES TAX COURT WASHINGTON , D .C . 2021 7 HERMAN D . & EMMA J . BAKER , Petitioners, v . COMMISSIONER OF INTERNAL REVENUE , Respondent . Docket No . 9265-0 8 O R D E R Pursuant to Rule 152(b), Tax Court Rules of Practice and Procedure, it i s 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 of the above case before Judge Diane L . Kroupa at Atlanta, Georgia on January 27, 2009, containing her oral findings of fact and opinion rendered at the conclusion of trial . In accordance with the oral findings of fact and opinion, decision will be entered under Rule 155 . (Signed ) Diane L. Kroupa Judg e Dated : Washington, D .C . February 20, 200 9 SERVED Feb 20 2009 3 1 Bench Opinion by Judge Diane L . Kroup a 2 Baker v . Commissioner Docket No . 9265-08 3 January 27, 200 9 4 THE COURT : The Court has decided to render 5 oral findings of fact and opinion in this case, and 6 the following represents the Court's oral findings of 7 fact and opinion . The oral findings of fact and 8 opinion shall not be relied upon as precedent in any 9 other case . 10 This bench opinion is made pursuant to the 11 authority granted in section 7459(b) and Rule 152 . 12 All section references are to the Internal Revenue 13 Code as amended and in effect for 2005 and 2006, and 14 all Rule references are to the Tax Court Rules o f 15 Practice and Procedure . 16 Herman and Emma Baker appeared on their own 17 behalf . John Arthur appeared on behalf of Respondent . 18 Respondent determined a $7,158 income tax 19 deficiency against Petitioners for 2005 and a $7,259 20 deficiency for 2006 . In addition, Responden t 21 determined that Petitioners were liable for a 22 $1,431 .60 accuracy-related penalty under section 6662 23 for 2005 and a $1,451 .80 accuracy-related penalty for 24 2006 . 25 There are only two issues for decision after Heritage Reporting Corporatio n (202) 628-4888 4 1 the parties' concessions . First, were distributions 2 from Petitioner Emma Baker's retirement accoun t 3 subject to the 10-percent additional tax under section 4 72(t) . We hold that they were subject to the 10- 5 percent additional tax . The second issue is whether 6 Petitioners are liable for the accuracy-relate d 7 penalty under section 6662 for the two years at issue . 8 We hold that they are not . 9 FINDINGS OF FAC T 10 Some of the facts have been stipulated and 11 they are so found . The stipulation of facts an d 12 accompanying exhibits are incorporated by this 13 reference . 14 Petitioners resided in Georgia at the time 15 they filed the petition with the Court . 16 Petitioners admit that they receive d 17 distributions from Petitioner Emma Baker's retirement 18 account with Wachovia to pay living expenses in 2005 19 and 2006 . Petitioners further admit that Petitioner 20 Emma Baker was not 59-1/2 at the time th e 21 distributions were received . Petitioners did no t 22 report the distributions in income because Petitioner 23 Emma Baker was unemployed during the years at issue 24 and was being treated for medical conditions . 25 Petitioner Emma Baker was not determined to be Heritage Reporting Corporation (202) 628-4888 5 1 "disable" for section 72(t) purposes and neve r 2 received disability income during either of the years 3 at issue . Petitioners were unable to substantiat e 4 most of the medial expenses and other miscellaneous 5 expenses Petitioners claimed on Schedule A, Itemized 6 Deductions, for either of the years at issue . 7 Petitioners owned rental property that they 8 were unable to lease in 2005 because of crime-related 9 issues . Petitioners were able to lease their renta l 10 property starting in the middle of 2006 and received 11 $4,043 of rent income, which amount Petitioner s 12 concede they received over the $1,298 they reported 13 for 2006 . Respondent allowed Petitioners to deduct 14 the mortgage interest expense and other expenses 15 Petitioners were able to substantiate but Petitioners 16 were unable to substantiate most expenses regarding 17 the rental property for either of the years at issue . 18 Petitioners paid Ms . Rosalie Thomas,' a 19 return preparer, to prepare the Federal income tax 20 returns Petitioners filed for 2005 and 2006 . 21 OPINION 22 The parties have conceded and resolved all 23 issues other than the 10-percent additional tax under 24 section 72(t) regarding the distributions from th e 25 qualified retirement plan and the accuracy-related Heritage Reporting Corporation (202) 628-4888 6 1 penalty under section 6662 for both of the years at 2 issue . Petitioners concede that they received the 3 unreported income Respondent determined in th e 4 deficiency notice . Respondent also concedes all the 5 medical expenses, miscellaneous expenses, and rental 6 property expenses that Petitioners were able t o 7 substantiate and prove that they paid, all as set 8 forth in the stipulation of facts, specificall y 9 Exhibit 5-J . We now turn to the two issues still in 10 dispute . 11 First, we decide whether the unreporte d 12 distributions from Petitioner Emma Baker's retirement 13 account are subject to a 10-percent additional ta x 14 under section 72(t) . Section 72(5) imposes an 15 additional 10-percent tax on the amount of an early 16 distribution from a qualified retirement account (as 17 defined in section 4974(c)) . See sec . 72(t) . Section 18 72(t)(2) provides for certain exceptions to th e 19 imposition of this 10-percent tax . 20 Petitioner Emma Baker received th e 21 distributions in 2005 and 2006 from her retirement 22 plan at Wachovia, which was a qualified retirement 23 plan under section 4974(c)(4) . Petitioner-husband 24 testified that the money was withdrawn to pay their 25 family's personal living expenses . Howeve r Heritage Reporting Corporation (202) 628-4888 e 1 unfortunate Petitioners' situation may be, there is no 2 exception under section 72(t) for financial hardship . 3 This principle has been applied consistently in cases 4 dealing with premature distributions from retiremen t 5 accounts . See Arnold v . Commissioner , 111 T .C . 250, 6 2.55 (1998) ; Milner v . Commissioner , T .C . Memo . 2004- 7 111 ; Gallagher v . Commissioner , T .C . Memo . 2001-34 ; 8 9 Deal v . Commissioner , T .C . Memo . 1999-352 ; Pulliam v . Commissioner , T .C . Memo 1996-354 . 10 The legislative purpose underlying the 11 section 72(t) tax is that "premature distributions 12 from retirement accounts frustrate the intention of 13 saving for retirement, and section 72(t) discourages 14 this from happening ." Dwyer v . Commissioner , 106 T .C . 15 337, 340 (1996) ; see also S . Rept . 93-383, at 13 4 16 (1973), 1974-3 C .B . (Supp .) 80, 213 . To avoid the 17 section 72(t) tax, Petitioners-must show that the 18 distributions fall within one of the exception s 19 provided under section 72(t)(2)(A) . ,They have not 20 done so . Thus, the 10-percent tax under section 72(t) 21 applies to the distributions Petitioner Emma Bake r 22 received from her retirement plan during the years at 23 issue . We accordingly sustain Respondent' s 24 determination in the deficiency notice tha t 25 Petitioners are liable for the early withdrawal ta x Heritage Reporting Corporation (202) 628-4888 7 8 1 under section 72(t) for 2005 and 2006 . .2 We next address whether Petitioners ar e 3 liable for the accuracy-related penalty under section 4 6662 . Section 6662(a) imposes an accuracy-relate d 5 penalty equal to 20 percent of the underpayment of tax 6 resulting from, among other things, negligence or 7 disregard of rules or regulations . Sec . 6662(b)(1) . 8 The term "negligence" includes any failure to make a 9 reasonable attempt to comply with the Code, and th e 10 term "disregard" includes any careless, reckless, or 11 intentional disregard . Sec . 6662(c) . Negligence has 12 also been defined as a lack of due care or failure to 13 do what a reasonable person would do under th e 14 circumstances . Leuhsler v . Commissioner , 963 F .2d 15 907, 910 (6th Cir . 1992), affg . T .C . Memo . 1991-179 . 16 Petitioners admit they failed to report all 17 income for 2005 and 2006 . Petitioners failed t o 18 report the $3,611 retirement plan distribution in 2005 19 and failed to report the $18,886 distribution in 2006 20 as well as over $3,000 of rental income in 2006 . 21 Negligence often takes the form of an understatement 22 of income . See Healey v . Commissioner , T .C . Memo . 23 1996-260 and cases cited therein . Respondent ha s 24 therefore met his burden of production that 25 Petitioners were negligent . . Heritage Reporting Corporation (202) 628-4888 9 1 The accuracy-related penalty under section 2 6662(a) does not apply, however, to any portion of an 3. underpayment if it is shown that there was reasonable 4 cause for, and . that the taxpayer acted in good faith 5 with respect to, such portion . Sec . 6664(c)(1) . The 6 determination of whether the taxpayer acted wit h 7 reasonable cause and in good faith depends on the 8 pertinent facts and circumstances, including th e 9 taxpayer's efforts to assess his or her proper tax 10 liability, the knowledge and experience of th e .11 taxpayer, and the reliance on the advice of a 12 professional, such as an accountant . Sec . 1 .6664- 13 4(b)(1), Income Tax Regs . 14 We .found Petitioners to be credible . We 15 believe that they tried to access their proper tax 16, liability for 200 5 and 2006 . Petitioner Emma Bake r 17 was unemployed during the years at issue and was being 18 treated for medical conditions . They sought to have 19 her qualify as "disabled" but were unable to do so . 20 We find Petitioners acted with reasonable cause and in 21 good faith in failing to report all taxable income for 22 2005 and 2006 . Accordingly, Petitioners are no t 23 liable for the accuracy-related penalty under section 24 6662 for either of the years at issue . 25 To reflect the foregoing and the parties' Heritage Reporting Corporation (202) 628-4888 1 0 1 concessions, decision will be entered under Rule 155 . 2 This concludes the Court's oral findings of 3 fact and opinion in this case . 4 (Whereupon, at 9 :47 a .m ., the bench opinion 5 in the above-entitled matter was concluded . ) 6 7 8 9 /./ 10 11 12 13 14 / / 15 16 17 / / 18 19 20 / / 21 // 2 2 23 2 4 25 Heritage Reporting Corporation (202) 628-4888