TAX COURT OPINION

Case: Anthony C. & Tanya E.W. Lamar
Docket Number: 28522-09S
Judge: Colvin
Opinion Type: bench
Filed: 11/12/2010
Pages: 11

UNITED STATES TAX COURT 20 217 WASHINGTON, D . C . ANTHONY C. AND TANYA E.W. LAMAR, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. ) ) ) ) ) ) ) ) ) Docket No. 28522-09S 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 the above case before Special Trial Judge Lewis R..Carluzzo at Boston, Massachusetts, on September 30, 2010, containing his oral rendered at the conclusion of trial. fact and opinion the pages of the the trial of findings of 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 Dated: Washington, D.C. November 12, 2010 (Signed) Lewis R. Carluzzo Special Trial Judge SEWED NOV 1 5 200 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 Lamar v. Commissioner Docket No. 28522-095 September 30, 2010 The Court has decided to render oral findings of fact and opinion in this case. And the following represents the Court's oral finding of fact and opinion. The oral findings of fact and opinion shall not be relied upon as precedent in any other case. This proceeding for the redetermination of deficiency is a small tax case conducted pursuant to the provisions of Section 7463 of the Internal Revenue Code of 1986 as amended and Rules 170 through 175 of the Tax Court Rules of Practice and Procedure. This bench opinion is made pursuant to the authority granted by Section 7459(b) of the Internal Revenue Code of 1986 as amended, and Rule 152 of the Tax Court Rules of Practice and Procedure. Hereinafter, in this bench opinion, unless otherwise noted, the section references are to the Internal Revenue Code of 1986 as amended in effect for 2007. Rule references are to the Tax Court Rules of Practice and Procedure. Anthony C. Lamar and Tanya E. W. Lamar appeared pro sese. Erika Cormier appeared on behalf 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 4 of Respondent. In a notice of: deficiency dated October 5, 2009, Respondent determined a deficiency of $19,676 in Petitioner's 2007 Federal income tax and imposed a $1491 Section 6662(a) accuracy related penalty. The issues for decision are, (1) whether a distribution from a retirement account is includable in Petitioner's 2007 income, if so, (2) whether the 10 percent additional tax imposed by Section 72(t) is applicable to that distribution or any portion of it. And (3) whether the under payment of tax required to be shown on Petitioner's 2007 joint Federal income tax return (the joint return), is a substantial understatement of income tax. Some of the facts have been stipulated and are so found. Petitioners are and have been, at all times relevant here, married to each other. For 2007, they elected to file a joint return as has been their practice over the course of their marriage. At the time the petition was filed, Petitioners resided in Massachusetts. Petitioners will be referred to as "Mr. Lamar" or "Mrs. Lamar" as appropriate. Neither of them had attained the age of 59 1/2 years as of the close of 2007. For years prior 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 5 the year at issue, Mrs. Lamar was employed by the John Hancock Life Insurance Company (Insurance). While employed by Insurance, she participated in an employer based retirement plan that Insurance offered to its employees, (the retirement plan). The exact nature of the retirement plan cannot be determined from the record. However, the parties seem to agree that the retirement plan was a Section 401(k) plan and we proceed as though it was. . Petitioners have two children who were enrolled in and attended college during the year in issue. Because of the financial burden imposed upon them to satisfy the educational and related living expenses of those children, and no doubt, due to other financial obligations, Mrs. Lamar requested and received a $61,105.28 distribution from the retirement plan during 2007 (the distribution). The distribution is reported on a Form 1099R, distributions from pensions, annuities, retirement or profit sharing plans, IRA's, insurance contracts, etcetera, (the form). But, the form was not issued, or at least, Petitioners had not received the form before their joint return was prepared and filed. The distribution is not included in the $79,795 adjusted gross income reported on Petitioner's 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 6 joint return. Mr. Lamar prepared that return. According to him, he inadvertently omitted the distribution because he had not yet received the form. Mr. Lamar further explained that he had received the form before he prepared and filed Petitioners' State income tax return and the distribution is included on that return. Based on his explanations, we consider Petitioners to have, in effect, conceded that the distribution is includable in their 2007 income, which it clearly is . And we summarily reject what might have been their suggestion that the failure of Insurance to timely provide them with the form would require a contrary result. In the notice of deficiency, in addition to including the distribution in Petitioners' income, Respondent (1) imposed a Section 72(t) additional tax on the entire amount of the distribution and (2) , imposed a Section 6662(a) penalty upon the ground that the under payment of tax required to be shown on Petitioners' 2007 return is a substantial understatement of income tax. See Section 6662(b) (2), (d). other adjustments are made in the notice of deficiency, some of which are deemed conceded because they have not been placed in dispute by Petitioners' 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 7 and others of which are computational. For example, computational adjustments are made to the deduction for interest on student loans and other credits claimed on Petitioners' 2007 joint return, because of a change to the adjustment gross income reported on that return. These adjustments will not be discussed even though Petitioners consider the computational adjustments to be additional "penalties" imposed upon them. Section 72(t) (1) imposes an additional tax on certain distributions from qualified retirement plans, "equal to 10 percent of the portion of such amount which is includable in gross income." As noted above, the entire distribution is includable in Petitioners' 2007 gross income. See section 61(a) (11), 72(a) 4974(c). There are a number of exceptions to the imposition of the additional tax imposed by Section 72(t), but only one need be mentioned here. Section 72(t) (2) (E), provides that a distribution from an individual retirement plan to the extent used for certain defined qualified higher education purposes is accepted from the imposition of the Section 72(t) (1) additional tax. 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 Relying on that exception, Petitioners argue for a reduction in the Section 72(t) additional tax imposed in the notice of deficiency because, according to them, a portion of the distribution was used to pay for higher educational expenses for their children then in college. Respondent disagrees. According to Respondent, because the distribution was not from "an individual retirement plan," the exception does not apply. We need not consider whether a distribution from a Section 401(k) retirement plan used for purposes contemplated by Section 72(t) (2) (E) allows the distribution or an appropriate portion of it to escape the imposition of the Section 72(t) additional tax. In this case, there is nothing in the record to allow us to determine what portion of the distribution was actually used to pay the type of expenses listed in Section 72(t) (2) (E), see also, Section 72(t) (7). The imposition of the Section 72(t) additional tax, as shown in the notice of deficiency, is sustained. Respondent's imposition of the Section 6662(a) accuracy related penalty is not so clear cut. Because the under payment of tax required to be shown on Petitioner's joint return exceeds $5,000, (this is 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 9 so even though the underpayment of tax is significantly less than the deficiency), see Section 6664(a), Section 1.6664,3(c) Income Tax Regs), the under payment is a substantial understatement of income tax. See Section 6662(d) (1) (A) (ii). That being so, Respondent met his burden of production with respect to the imposition of the penalty here in dispute, see Section 7491(c). Nevertheless, Section 6664(C) allows the taxpayer to escape the imposition of a section 6662(a) penalty for any portion of an under payment, "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." According to Petitioners, this "reasonable cause exception" to the imposition of the Section 6662(a) penalty applies to them. They bear the burden of proof on this point. Petitioners claim that the failure to include the distribution and the income reported on their joint return is due to the fact that they did not have the form at the time the return was prepared and filed. This excuse, in and of itself, would provide little support for their claim that the underpayment of tax in this case was due to reasonable 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 cause and that they acted in good faith with respect to it. After all, it was their responsibility to account for their own income. Because the distribution was significant as compared to the amount of the adjusted gross income shown on Petitioner's 2007 return, we wonder whether they, in good faith, needed to be "reminded" of the distribution by the form. Withöut more, Petitioners' explanation might very well have been rejected out of hand as with similar claims made by other taxpayers in other cases. But, there is more in this case. But for the imposition of the Section 72(t) tax, the deficiency would have closely approximated the amount of tax that Mrs. Lamar directed to be withheld from the distribution. Furthermore, but for the imposition of the Section 72(t) tax, the under payment of tax, as defined in the applicable statute and regulations cited about, and therefore, the penalty imposed upon that under payment, would have been close to nothing. Mrs. Lamar explained that she directed Insurance to make the substantial tax withholdings from the distribution in order to ensure that the additional income tax liability that was going 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 11 result from the distribution would have been, in effect, prepaid or accounted for, if not, totally, at least in large part. By requesting the withholdings, Petitioners claim that the omission of the distribution was due to what should be treated as an honest mistake is viewed in a more credible light. Furthermore, absent some showing of a taxpayer's specific knowledge of the existence of the Section 72(t) additional tax, we would be reluctant to impose a Section 6662(a) penalty based on nothing more than the taxpayer's failure to report, when applicable, that tax on the taxpayer's return. Under the circumstances, we think the scales tip ever so slightly in Petitioner's favor with respect to the imposition of the Section 6662(a) penalty. That being so,: we find that they are not subject to it. 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. And I think, that concludes all of our proceedings during this trial session; is that 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 12 correct? All right. Ms. Blondin, thank you for assistance during this trial session. Ms. Rossi, thank you for your assistance. I see I have one or two marshals in the courtroom still. Thank you, gentlemen, for your assistance. I can't say enough how much I appreciate it. And I see I have some of Respondent' s counsel in the courtroom. And I want to thank you folks as well for the efficient and effective manner in which all of these -- all of the cases that were set for trial on this trial session have been handled. And with that, let' s go of f the record. (Whereupon, at 2:26 p.m., the bench opinion in the above-entitled matter was concluded.) // // // // // // // // // Heritage Reporting Corporation (202) 628-4888