TAX COURT OPINION

Case: Joe R, Anderson & Lorraine A. Anderson
Docket Number: 4993-17S
Judge: Leyden
Opinion Type: bench
Filed: 02/26/2018
Pages: 10

SR UNITED STATES TAX COURT WASHINGTON, DC 20217 JOE R, ANDERSON & LORRAINE A. ANDERSON, Petitioners, v. ) ) ) ) ) Docket No. 4993-17S. COMMISSIONER OF INTERNAL REVENUE, Respondent ) ) ) ORDER 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 petitioner and to respondent a copy of the pages of the transcript of the trial in the above case before Special Trial Judge Diana L. Leyden at Detroit, Michigan, on February 13, 2018, containing her oral findings of fact and opinion rendered at the trial session at which the case was heard. In accordance with the oral findings of fact and opinion, a decision will be entered for respondent as to the deficiency and for petitioners as to the accuracyrelated penalty under section 6662(a). (Signed) Diana L. Leyden Special Trial Judge Dated: Washington, D.C. February 26, 2018 SERVED Feb 26 2018 Bench Opinion by Special Trial Judge Diana L. Leyden 3 February 13, 2018 Joe R. Anderson & Lorraine A. Anderson v. Commissioner of Internal Revenue Docket No. 4993-17S THE COURT HAS DECIDED TO RENDER ORAL FINDINGS OE 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 1 2 3 4 5 6 7 8 9 10 UPON AS PRECEDENT IN ANY OTHER CASE. See Rule 152(c), Tag 11 Court Rules of Practice and Procedure. 12 13 This proceeding was heard as a Small Tax Case pursuant to the provisions of section 7463 of the Internal 14 Revenue Code of 1986, as amended, and Rules 170 through 15 16 175 of the Tax Court Rules of Practice and Procedure. This bench opinion is made pursuant to the 17 authority granted by section 7459(b) of the Internal 18 Revenue Code of 1986, as amended, and Rule 152 of the Tax 19 Court Rules of Practice and Procedure. 20 21 22 23 24 Hereinafter in this bench opinion, all section references are to the Internal Revenue Code, as amended, in effect at all relevant times, and all Rule references are to the Tax Court Rules of Practice and Procedure. The Court uses the term "Internal Revenue 25 Service" or "IRS" to refer to administrative actions taken (973)406-2250|operationseerrbetsmet|www.escribers.net 1 2 3 4 5 6 7 8 9 10 11 outside of these proceedings. The Court uses the term "respondent" to refer to the Commissioner of Internal Revenue, who is the head of the IRS and is respondent in this case, and to refer to actions taken in connection with this case. The trial of this case was conducted on February 12, 2018, in Detroit, Michigan. Petitioners appeared on their own behalf. Samuel Warren appeared on behalf of respondent. In a notice of deficiency dated December 5, 2016, the IRS determined a deficiency in petitioners' 2014 12 Federal income tax of $3,808 and a section 6662(a) 13 accuracy-related penalty of $762. 14 15 16 17 Respondent has conceded that petitioners are not liable for the section 6662(a) accuracy-related penalty for 2014. After concessions by respondent, the issues for 18 decision by the Court are: (1) whether $14,485 that Mr. 19 Anderson received from his traditional individual 20 retirement account (IRA) should be included in 21 petitioners' gross income for 2014 and (2) if so, whether 22 petitioners are liable for a 10% additional tax pursuant 23 24 section 72(t) on that portion of the IRA distribution. Some of the facts are stipulated and are so 25 found. The first stipulation of facts and the attached } (973)406-2250]operationseescrimrs.net]wwwAscrbersmet 1 2 3 4 5 6 7 8 9 10 11 exhibits are incorporated herein by this reference. Petitioners resided in the State of Michigan at the time that the petition was filed with the Court. Mr. Anderson was younger than 59-1/2 years of age in 2014. Ms. Anderson was having some problems at work and wanted to retire early as a result, but lacked the requisite number of years of service. Mr. Anderson decided to take money from his IRA and give it to his wife, Ms. Anderson, so she could buy the necessary years of service to retire. On May 19, 2014, a distribution of $20,000 fror 12 Mr. Anderson's IRA at Morgan Stanley Smith Barney LLC 13 (Morgan Stanley) was deposited into his bank account. . 14 Petitioners used $6,000 of that distribution to build a 15 deck on their home. On the same day, May 19, 2014, Mr. 16 Anderson transferred $14,000 into Ms. Anderson's bank 17 18 19 20 21 22 23 24 account. Mr. Anderson did not transfer any of the $20,000 to a retirement account in his name. Ms. Anderson subsequently took steps to purchase the needed years of service. She signed an Election Form for the Purchase of Universal Credited Service on October 23, 2014, and on that same day a cashier's check in the amount of $14,484.79 was drawn on her bank account and deposited with her employer's retirement system account. 25 The Court understands that Ms. Anderson added $484.79 of (973)406-2250|operationseestrbers.net|www.escrbers.net 1 2 3 4 5 6 7 8 9 10 11 her own funds to the amount Mr. Anderson transferred to her account, $14,000, to make this purchase. Also on the same day Ms. Anderson's employer credited her with that deposit. Morgan Stanley reported the $20,000 distributicn to petitioners and to the IRS on Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. The Form 1099-R reflected the distribution code of "1". We take notice of the IRS' "2014 Instructions for Forms 1099-R and 5498", which identify code 1 as "Early 12 distribution, no known exception". 13 14 15 16 17 Petitioners timely filed a Federal individual income tax return for 2014. On that tax return they reported $5,515 of the distribution as taxable income and a 10% additional tax pursuant to section 72(t) of $552 corresponding to that portion of the early distribution. 18 Petitioners calculated that $14,485 that Ms. Anderson used 19 20 21 22 to purchase her needed years of service, consisting of $14,000 that Mr. Anderson transferred to Ms. Anderson and $485 from Ms. Anderson own funds, was not taxable, did nct report it on their tax return, and did not calculate a 10% 23 additional tax on that amount. Instead, petitioners 24 25 reported only the remaining amount of the distribution, $5,515, on their 2014 tax return and reported the 10% (973)406-2250|operationseescrisersnet|www.escribers.net 7 1 2 3 4 5 6 7 8 9 additional tax on that amount. The IRS subsequently issued the notice of deficiency at issue in this case, which proposed a deficiency on the grounds that petitioners received the IRA distribution of $20,000 and failed to report $14,485 of it and the 10% additional tax of $1,448 pursuant to section 72(t) on that portion of the IRA distribution on their 2014 tax return. Generally, the Commissioner's determination of a 10 deficiency is presumed correct, and the taxpayer bears the 11 burden of proving it incorrect. See Rule 142(a); Welch v. 12 Helvering, 290 U.S. 111, 115 (1933). 13 Under section 7491(a), the burden of proof may 14 shift to the Commissioner if the taxpayer produces 15 credible evidence with respect to any relevant factual 16 17 18 issue and meets other requirements. Petitioners have not argued that section 7491(a) applies nor established that its requirements are met. The burden of proof remains 19 with petitioners. 20 21 A. IRA Distribution According to the notice of deficiency, 22 petitioners reported $5,515 but failed to report $14,485 23 of the IRA distribution on their 2014 tax return. Unless 24 25 specifically exempted or excluded, gross income means all income from whatever source derived. Sec. 61(a). (973)406-2250|operationseescrbersnet|www.escrbers.net 1 2 3 4 5 6 7 8 9 10 11 12 Generally, a distribution from an IRA is included in a taxpayer's gross income in the yea.r of distribution under the provisions of section 72. Sec. 408(d)(1). Petitioners argue that the distribution in the amount of $14,485, the amount that Ms. Anderson used to purchase the needed years of service is not includible in their gross income for 2014 because it was a rollover contribution into Ms. Anderson's retirement account. Section 408(d)(3) provides that rollover contributions may be excluded from gross income. A rollover contribution is "any amount paid or distributed out of an individual retirement account * * * to the individual for whose 13 benefit the account * * * is maintained" where either (1) 14 15 16 17 18 19 20 21 22 23 24 25 "the entire amount received * individual retirement account * * * * is paid into an * for the benefit of such individual not later than the 60th day after the date on which he receives the payment or distribution" or (2) "the entire amount received * * * is paid into an eligible retirement plan for the benefit of such individual not later than the 60th day after the date on which the payment or distribution is received". Sec. 408(d)(3) (A)(i) and (ii) (emphasis added). Taxpayers may also make partial rollover contributions of less than the full amount of a payment or distribution from an IRA if any portion of those funds is paid into an eligible plan (973)406-2250|operationseescribersnetlwww.escribersaet 1 2 3 4 5 6 7 8 9 10 11 not later than the 60th day after the day of receipt of the distribution. Sec. 408(d)(3)(D). Mr. Anderson did not transfer any portion of the $20,000 distribution to another retirement account for his benefit. Rather, he used $6,000 to build a deck on petitioners' home and transferred $14,000 into Ms. Anderson's bank account, which was then used by Ms. Anderson to purchase service credit years in her retirement plan. The $20,000 distribution does not constitute a rollover contribution for two reasons. First, the $14,485 12 were not paid into an IRA or eligible retirement plan for 13 the benefit of Mr. Anderson, the individual for whose 14 benefit the IRA was maintained. Mr. Anderson's and Ms. 15 Anderson's bank accounts are not IRAs or eligible 16 17 18 retirement plans. Ms. Anderson's employee retirement plan is a plan for her benefit, not Mr. Anderson's benefit. Second, the funds were not rolled over within 60 19 days after the distribution was received. The IRA 20 distribution was deposited into Mr. Anderson's bank 21 22 23 24 account on May 19, 2014, and $14,000 of it was ultimately transferred into Ms. Anderson's retirement plan on October 23, 2014, well after the 60-day period. Accordingly, the unreported portion of the IRA 25 distribution of $14,485 is includible in petitioners' (973)406-2250|operationseerrbers.net|www.escribersmet 1) 1 2 3 4 5 6 7 8 9 gross income for 2014. B. Additional 10% Tax Section 72(t)(1) imposes a 10% additional tax on an early distribution from a qualified retirement plan as defined in section 4974(c). A qualified retirement plan includes an IRA. Sec. 4974(c). A distribution is early if it is made to an employee who has not attained age 59- 1/2. Sec. 72(t)(2)(A)(i). The legislative purpose underlying the section 72(t) tax is that premature 10 distributions from qualified retirement plans "frustrate 11 12 13 14 15 16 17 18 19 the intention of saving for retirement, and section 72(t) discourages this from happening." Arnold v. Commissioner, 111 T.C. 250, 255 (1998); Dwyer v. Commissioner, 106 T.C. 337, 340 (1996); see S. Rept. 93-383, at 134 (1974), 1974- 3 C.B. (Supp.) 80, 213. A distribution that satisfies one of the statutory exceptions in section 72(t)(2) will not be subject to the 10% additional tax. The most common of these exceptions include distributions that are made on or 20 after the date on which the employee attains the age of 21 22 23 24 25 59-1/2, distributions that are attributable to the employee's being disabled, or distributions made to an employee after separation from service after attainment of age of 55. None of the statutory exceptions in section (973)406-2250]operationseestrhers.net|www.escrbersJtet 11 72(t)(2) applies to petitioners. Accordingly, petitioners are liable for the 10% additional tax on the $14,485 unreported portion of the IRA distribution. In order to give effect to our disposition of the disputed issues, a decision will be entered for respondent as to the deficiency and for petitioners as tc the section 6662(a) penalty. THIS CONCLUDES THE COURT'S ORAL FINDINGS OF FACT AND OPINION IN THIS CASE. (Whereupon, at 11:29 a.m., the above-entitled matter was concluded.) 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 (973)406-2250|operationseestrbers.net|www.escribers.net