TAX COURT OPINION

Case: Richard B. Crow
Docket Number: 2651-01
Judge: Ruwe
Opinion Type: memo
Filed: 07/30/2002
Pages: 7

T.C. Memo. 2002-178 FII,ES UNITED STATES TAX COURT RICHARD B. CROW, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent . Docket No. 2651-01. Filed July 30, 2002. Bruce C. O'Neill, for petitioner. Frederic J. Fernandez, for respondent. MEMORANDUM OPINION RUWE, Judge: Respondent determined a deficiency in petitioner's 1998 Federal income tax of $10,000 and an accuracy-related penalty under section 6662(a)¹ of $2,000. The ¹Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the year in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure. SERVED JUL 30 2001 - 3 - IRA, account number 0400014416, which was invested in a certificate of deposit that was earning 1.75 percent. On that same day, petitioner withdrew the entire amount, $39,295.08, from the IRA and closed the account. The amount withdrawn from the IRA was transferred into a nonqualified annuity through American Express Life Insurance Company (AEL).3 The nonqualified annuity consisted of the funds from the closed IRA and additional funds • added by petitioner. In 1999, petitioner received a 1998 Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit- Sharing Plans, IRAs, Insurance Contracts, Etc., from the bank relating to his IRA, account number 0400014416. The Form 1099-R reported a gross distribution of $39,295.08 and a taxable amount of $39,295.08. Petitioner did not include the $39,295.08 reported on the Form 1099-R on his 1998 Form 1040, U.S. Individual Income Tax 3On the "Annuity Contract Data and Application", completed The boxes for The funds from petitioner's in connection with the transfer of individual retirement account to the nonqualified annuity, (IRA) there is a section entitled "Annuity Plan" and an instruction to check one of three boxes indicating different annuity plans. box for "Nonqualified Annuity" is checked. "Individual Retirement Annuity" and "Other" are not checked. Below the heading "Annuity Plan" appears the words "If IRA:", and three choices are given. IRA", and "Trustee to Trustee Transfer". to these choices are checked. The choices are "Regular", "Rollover None of the boxes next - 5 - 1099-R because "This was to have been a trustee transfer to AEL IRA Annuity, not a distribution for $39,295.08". The bank also changed the distribution code to "Trustee Transfer". The parties agree that Ms. Koble would have testified that the corrected Form 1099-R was sent to petitioner in April 2001 and should have been, but apparently was not, sent to respondent in April 2001. The par:ies also agree that Ms. Koble would have further testified • that the bank sent the corrected Form 1099-R to respondent on February 7, 2002. Respondent has been unable to verify through its record-keeping system that the corrected Form 1099-R was sent by Ms. Koble on February 7, 2002. As of March 12, 2002, the transferred funds from petitioner's IRA remained in the AEL nonqualified annuity. On March 18, 2002, the Court granted the parties' joint motion to submit this case fully stipulated under Rule 122. The record does not contain evidence demonstrating that the funds withdrawn froa. the IRA on August 28, 1998, and transferred to the nonqualified annuity that same day, have been transferred to an IRA or other qualified plan. - 7 - . Rev. Rul. 78-406, 1978-2 C.B. 157, states that the direct transfer of funds from one IRA trustee to a new IRA trustee which involves no payment or distribution of funds to the IRA participant is not a rollover contribution because the funds are not within the direct control or use of the participant.6 See also Martin v. Commissioner, T.C. Memo. 1992-331, affd. without published opinion 987 F.2d 770 (5th Cir. 1993). The revenue ruling further states that this conclusion would apply whether the bank trustee initiates, or the IRA participant directs, the transfer of funds. Rev. Rul. 78-406, 1978-2 C.B. at 157-158. Thus, Rev. Rul. 78-406, supra, indicates that a trustee-to- trustee transfer which otherwise meets the requirements of the revenue ruling is not a taxable transaction because no amount is treated as paid or distributed out of an IRA. In the instant case, petitioner appears to argue that the funds withdrawn from the IRA on August 28, 1998, are not includable in gross income because either (1) the bank mistakenly rolled over the funds into a nonqualified annuity instead of correctly rolling over the funds into an IRA or other qualified plan or (2) the bank mistakenly rolled over the funds instead of correctly making a trustee-to-trustee transfer to an IRA or other qualified plan. The parties dispute whether the bank made a 6We note that, although entitled to consideration, revenue rulings are not precedent. Dixon v. United States, 381 U.S. 68, 73 (1965). - 9 - expiration of the 60-day period, the trustee corrected its records to reflect that all of the distribution had been transferred to the taxpayer's IRA rollover account. The parties stipulated that the taxpayer's IRA rollover account was established and satisfied the requirements of the Internal Revenue Code. The taxpayer did not become aware of the error until after the Commissioner questioned his failure to report the lump-sum distribution on his tax return. We held that the financial institution's bookkeeping error did not preclude rollover treatment because, in substance, the taxpayer had satisfied the statutory requirements. In Schoof v. Commissioner, supra at 11, we held that the failure of a fundamental element of the statutory requirements for an IRA rollover contribution, namely, the qualification of an IRA trustee, required distributions from an IRA to be includable in the taxpayers' gross income. We relied on the following passage to support our holding: "Where the requirements of a statute relate to the the statute, they must be On the other hand, if the substance or essence of rigidly observed. requirements are procedural or directory in that do not go to the essence of rather are given with a view to the orderly conduct of business, compliance." (quoting Rodoni v. Commissioner, 105 T.C. 29, 38-39 (1955)); citations omitted.] they the thing to be done, but they may be fulfilled by substantial [Schoof v. Commissioner, supra at 11 - 11 - Section 6662(a) imposes a penalty equal to 20 percent of the portion of an underpayment of tax attributable to a taxpayer's negligence, disregard of rules or regulations, or substantial understatement of income tax. Sec. 6662(a), (b)(1) and (2). An understatement is "substantial" if it exceeds the greater of 10 percent of the tax required to be shown on the return for the taxable year, or $5,000. Sec. 6662(d)(1) and (2). Respondent concedes that he bears the burden of production under section 7491(c) with respect to the accuracy-related penalty. Petitioner reported tax liability of $1,020.01 on his 1998 return. We have sustained respondent's determination that petitioner has a deficiency of $10,000 for 1998. Thus, there was an understatement of tax because the deficiency exceeds the greater of 10 percent of the tax required to be shown on petitioner's 1998 return, or $5,000. The accuracy-related penalty does not apply to any part of an underpayment if the taxpayer shows that there was reasonable cause for that part of the underpayment and that he acted in good faith in view of the facts and circumstances. Sec. 6664(c). The determination of whether a taxpayer acted with reasonable cause and good faith is made on a case-by-case basis, taking into account all the pertinent facts and circumstances. Sec. 1.6664- 4(h)(1), Income Tax Regs. The taxpayer bears the burden of - 13 - dealings with the bank and Ms. Koble and their subsequent attempts to correct the situation. Accordingly, we hold that petitioner is not liable for the accuracy-related penalty for 1998. Decision will be entered for respondent as to the deficiency.