TAX COURT OPINION

Case: Frederick P. Laoretti
Docket Number: 28702-09S
Judge: Colvin
Opinion Type: bench
Filed: 11/16/2010
Pages: 8

UNITED STATES TAX COURT WASHINGTON, DC 20217 FREDERICK P. LAORETTI, Petitioner v. COMMISSIONER OF INTERNAL REliENUE Respondent ) ) ) ) ) ) ) ) ) O R D E R -Docket No. 28~/02-09S. ^ Pursuant to Rule 152 (b) Tax Court Rules of Practice and Procedure, it is ORØERED that the Clerk of the Court shall transmit herewith to petitioner and to respondent a copy of transcript of the trial of Judge Robert N. Armen, Jr. at .San Diego, California on Oâtober . 26, 2010, containing his oral rendered at the conclusion of the above case before Special Triál the- pages of the findings of the trial. fact and opinion In accordance with the oral findings of fact and opinion, a Decision will be entered under Rule 155. (Signed) Robert N. Armen, Jr. Special Trial Judge Dated: Washington, D.C. November 16, 2010 SERVED 0 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 2 Bench Opinion by Special Trial Judge Robert N. Armen, Jr. Frederick P; Laoretti Docket No. 28702-095 October 26, 2010 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. This proceeding was heard as a Small Tax Case 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 s e 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 and, unless otherwise indicated, all section numbers refer to the Internal Revenue Code, as amended and in effect for 2007, the taxable year in issue, and all Rule numbers refer to the Tax Court Rules of Practice and Procedure. Frederick P. Laoretti (Petitioner) appeared on his own behalf. Chad E. Martinelli appeared on behalf of Respondent. For the taxable year 2007, Respondent determined a 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 3 deficiency in, and an accuracy-related penalty on, Petitioner's Federal income tax in the amounts of $5,491 and $1,098, respectively. At trial, Respondent conceded the accuracy-related penalty; Respondent also conceded another matter, which we shall describe shortly. After Respondent's. concessions, the issue for decision by the Court is whether some additional part of a distribution from an individual retirement account (IRA) is includable in Petitioner's gross income and is therefore taxable. An adjustment to Petitioner's gross income related to Social Security benefits is essentially a mechanical (i.e., a computational) matter, the resolution of which is dependent principally on our disposition of the IRA distribution issue. Most of the facts have been stipulated, and they are so found. Petitioner resided in the State of California at the time that the petition was filed with the Court. Petitioner was married throughout 2007. In 2007, Petitioner and his spouse received a total of $29,124 in IRA distributions. Of this amount, $15,000 was rolled over within 60 days into a new IRA. The balance was deposited into a personal savings account, which was not 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 an IRA. Also in 2007, Petitioner and his spouse received Social Security benefits in the total amount of $28,177. Petitioner and his spouse filed a joint return (Form 1040A) for 2007. On the return, Petitioner and his spouse reported IRA distributions of $29,125, a rollover of $24,600, and the taxable amount as the difference between those two amounts, or $4,525. (The $1 discrepancy between reported distributions and.actual distributions is attributable to rounding). Also on their 2007 return, Petitioner and his spouse reported taxable amount of their Social Security benefits as zero. In the notice of deficiency, Respondent disallowed in full the IRA rollover claimed by Petitioner and his spouse on their 2007 return. Respondent also determined that a portion of the Social Security benefits received by Petitioner and his spouse were includable in their income pursuant to the formula set forth in Section 86. Finally, Respondent determined that Petitioner and his spouse were liable for the accuracy-related penalty under Section 6662(a). As previously stated, Respondent conceded the accuracy-related penalty at trial. Respondent also conceded at trial that the statutory notice overstated the taxable 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 portion of the IRA distributions by $15,000 by failing to take into account the amount that was rolled over within 60 days into the new IRA. Thus, in Respondent's view, the IRA adjustment to income is properly $9,599; i.e., $29,124 total IRA distribution, less $15,000 rollover, less $4,525 taxable amount reported on return. Finally, Respondent conceded at trial that because the IRA adjustment was overstated in the statutory notice, the taxable amount of Social Security benefits was also overstated in the statutory notice. But, as there is no dispute between the parties regarding the gross amount of Social Security benefits that were received in 2007, Respondent contends that the taxable amount is simply a matter of applying the statutory formula prescribed by Section 86. There are no facts in dispute, and the issue for decision is essentially legal in nature. Accordingly, we decide it without regard to the burden of proof. Generally, a distribution from an IRA is includable in the distributee's gross income in the.year of distribution under the provisions of Section 72. Secs. 61(a) (11), 408(d) (1); Arnold v. Commissioner, 111 T.C. 250, 253 (1998). However, "rollover contributions" are not includable in gross income. Sec. 408(d) (3); Lemishow v. Commissioner, 110 T.C. 110, 112 (1998), supplemented 110 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 T.C. 346 (1998). A "rollover contribution" is a payment or distribution from an individual retirement plan that is rolled ouer into another IRA or other qualified plan within 60 days of the payment for distribution. Sec. 408(d) (3); Schoof v. Commissioner, 110 T.C. 1, 7 (1998); Crow v. Commissioner, T.C. Memo 2002-178; Metcalf v. Commissioner, T.C. Memo 2002-123, affd. 62 Fed. Appx. 811 (9th Cir. 2003); Sec. 1.408 4(b) (1) and (2), Income Tax Regs. In the present case, the parties agree that Petitioner ånd his wife received a total of $29,124 in IRA diëtributions in 2007. The parties likewise agree that of this amount, $15,000 was rolled over within 60 days into a new IRA and.that the balance was deposited into a personal savings.account that was not an IRA. Accordingly, the law is clear that the difference between the distributions and the rollover; i.e., $29,124 less $15,000, or $14,124, is not exempt from inclusion in Petitioner's gross income for 2007 and is therefore taxable in that year. (We note parentheticallt that there is no intimation by Petitioner that he also tried to roll over the $14,124 amount but that his effort was frustrated by an IRA trustee's error, as occurred in Wood v. Commissioner, 93 T.C. 114 (1989); thus, thatscase is inapposite here.) Because Petitioner and his wife included $4 525 of the $14,124 amount on their return, there was a shortfall of the difference, or $9,599, which 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 gives rise to a deficiency, but in an amount much less than that determined by Respondent in the statutory notice. Petitioner contends that the IRA distributions were taken because of "the declining value of my IRA" and the desire "to preserve my nest egg. " We are well aware of the economic disruption that began in 2007, and we certainly sympathize with Petitioner regarding his concern for his financial well being. However, the law clearly specifies the year in which IRA distributions are includable in income and, unfortunately for Petitioner, market fluctuations have no bearing on that matter. Petitioner-also contends that "I didn't need the money" and that "it's not fair I have to pay taxes." But, as previously discussed, the includability of an IRA distribution in income is determined independently of at taxpayer's "need" for the funds. And "fairness" is a matter that our elected representatives have determined in enacting a law that specifies when an IRA distribution is to be included in income. In sum, we hold that Petitioner underreported IRA distributions in 2007 by failing to include an additional $9,599 of such distributions in income. As a consequence, an adjustment is also required to the amount of Social Security benefits properly reportable in income pursuant to Heritage Reporting Corporation (202) 628-4888 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 l'7/ 18 19 20 21 22 23 24 25 8 the statutor formula prescribed in Section 86. In order to give effect to our disposition of the disputed issue, as well as Respondent' s concessions, decision will be entered pyrsuant to Rule 155. This concludes the Court's oral findings of fact and opinion in this case . (Whereupon, at 410:16 a.m., the bench opinion in the above-entitled mattenwas concluded.) Heritage Reportirig Corporation (202) 628-4888