TAX COURT OPINION

Case: Vincent Marquez
Docket Number: 25885-07S
Judge: Panuthos
Opinion Type: summary
Filed: 05/20/2009
Pages: 8

T .C . Summary-0pinion 2009-8 0 UNITED STATES TAX COUR T VINCENT MARQUEZ~, Petitioner v . 'COMMISSIONER OF'INTERNAL REVENUE, Responden t Docket No . 25885-07S . Filed May 20 , 2009 . Vincent Marquez, prol'se . Sheila Olaksen , for respondent . PANUTHOS, Chief Special Trial Judge : This case was heard pursuant to the provisions of section 7463 of the Interna l Revenue Code in effect when the petition was filed .' Pursuan t t o section 7463(b), the decision to be entered is not reviewable ; by I p 1 Unless otherwise indicatedl, all section references arei,,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 . S FtV [) MAY 2 0 2Et any other court, and this opinion shall not be treated as precedent for any other case . Respondent determined a deficiency of $2,346 in petitioner' s .2005 Federal income tax . The issues for decision are : (1) To what extent proceeds of a loan petitioner took from his employer-provided pension plan pare taxable in 2005 ; and (2) whether petitioner is liable for th e 10-percent additiona l tax pursuant to section 72(t) on a deeme d distribution (cid:127)2 IJ, t, k Backgroun d Some of the facts have been stipulated, and we incorporate the stipulation and accompanying exhibits by this reference . Petitioner lived in New York when he filed the petition :. At 1all relevant times petitioner worked for the City of New York as an emergency medical technician and participated in the New York City Employees' Retirement System (NYCERS) . He applied for and received several loans from his NYCERS account , consistently selecting the maximum loan amounts, as well as the minimum repayment amounts, allowed by NYCERS . May 23, 2005, petitioner signed an application t o refinance his loans . The loan processing authorization document, which petitioner signed the same day, explicitly stated that th e 2"The parties have settled an issue related to petitioner's State income tax refund . .G I refinancing option wouldilikely result in income taxable t o A petitioner . The documentl also 'dffered two other options tha t 1 would not result in income : (1) An additional loan on th e original terms ; or (2) a new loan for a smaller amount . Petitioner chose the refinancing loan of $12,346 .95 .3 I f .petitioner had borrowed on the "original terms", as he had in 2004, he would have had to repay the $12,346 .95 in 77 payments . Instead, the replacement loan reset the number of remaining payments to the maximum of 13 0 NYCERS issued a Form 1099-R Distributions From Pensions, { Annuities, Retirement or Profit-(haring Plans, IRAs,' Insurance Contracts, etc ., for tax year 2005, reporting a distribution 0 f, $10,032, with no Federal"income tax withheld . Petitioner filed his 2005 Form 1040, U .S . Individual Income Tax Return, and died not report this $10, 032 as , income. -~ 1 Respondent issued a notice if deficiency on August 20, 2 ~ 007~, determining a deficiency d .f -$2,346 resulting from the unreported : loan proceeds and .the 10-percent additional tax imposed b y section 72(t) . In his petition and at triaLIpetitioner asserted that the loan proceeds should be excluded from . income pursuant to sectio n 72 (p) (2) . ' 3 Petitioner receivedt$4,630iin loan proceeds . The remainder of the loan was utilized to repay the $7,716 .95 outstanding balance of thefprior loans . k I 4 Discussion , ;In ;general, the . Commissioner's determination .set forth in a notice .of deficiency is presumed correct, and the taxpayer bears the burden . of proving that the determination is in error . Rule 142(a) ; Welch v . Helverina , 290 U .S . 111, 115 (1933) . Pursuan t s~ection 7491(a), the burden of proof as to factual matter s shifts to the Commissioner under certain circumstances . Petitioner has neither alleged that section 7491(a) applies nor established his compliance with its requirements .4 Petitione r therefore bears the burden of proof . In any event, theme is no factual . dispute in this case .. 'I . Includability of Qualified Retirement Plan Loan Proceeds In 1982 Congress was "concerned that the widespread use of loans-from tax-qualified plans and tax-sheltered annuities diminishes retirement savings ." S . Rept . 97-494, at 31"9 (1982) . Recognizing that rank-and-file employees might need access t o retirement savings for emergencies, Congress allowed for loans to be made from those savings ., Id . To deter people from :Pabusing the system to their own detriment, section 72(p) allows loans from4-qualified retirement plans only to the extent that they d o not exceed a limited proportion of the nonforfeitable amount o f " Regardless of whether the additional tax under sec . 72(t) See, e .g ., Milne r is .a penalty or an additional amount . to which sec . 7491(c) applies to place the burden of production on respondent, respondent has met that burden of production . v . Commissioner , T .C . Memo . 2004 -111 n .2 . the plan and must be repaid within 5 years via equal paymen's . See The Tax .Reform Act of . 1986, ,Pub . L ., 99-514, sec . 1134 (b)urr, '100 Stat . 2483 ; Tax Equity and Fiscal Responsibility Act of 19821 , Pub . L . 97-248, sec .-236,1 96 St a t . 50 9 (replacin g section 72 (m)) . Section 402(a) provides gen erally that a distribution from .a qualified plan is taxable'in the year in which the distributio n occurs, pursuant to section 72 . Section 72(p) (1) (A) provides th e general rule that proceeds of a (loan from a qualified employer , plan to a plan participant are treate d as a taxable distribution in the year in which the loa n proceeds are received . See Paitrick v . Commissioner , T .C . Memo . 1998 30, affd . without published' § opinion 181 F .3d 103 (6th,Cir . 1 99) . Section 72(p)(2), however, provides an exception to thi s I general rule . Loan proceeds are not treated as a taxable distribution if : (1) The principal amount of the loan (whenl ' added to the outstanding balance of all other loans from the same 1 plan ) does not exceed a specifie limit , sec . 72(p) (2) (A) ;5 (2) the loan, by its terms, must be repaid within 5 years of I inception (unless the loan financed the acquisition of a home which is the principal residence of the participant), sec . 5 Sec . 72(p)(2)(A), specifying the limit, provides that the exemption applies only when any loan (when added to the outstanding balance of all, other loans from the plan) does not exceed the lesser of : (I) $50,00,0 (reduced under conditions not here relevant), or (ii) the greater of : (I) One-half of thel present value of the participant's "nonforfeitable accrued benefit" under the plan ; or (II) '$10,000 . 72(p)(2),(B) ; and (3) the loan has substantially leve l amortization, . with quarterly or more frequent payments require d over the term of-the loan, sec . 72(p)(2)(C) . I[ I The relevant regulation states that where a loan tha t ,satisfies section 72(p)(2) is replaced by a loan that has a late r repayment date, both loans are treated as outstanding on the dat e f- the transaction . Sec . 1 .72(p)-l, Q, 20, A-20(a) (2) , Income Ta x Regs, .,, If the sum of both loans, as well as all other outstanding loans, exceeds the limit of . section 72(p)(2)(A), then th e 11 . is I .replacement loan results in a deemed distribution in the amoun t 4i that is above .that limit . Id . In 2005 petitioner applied for and received a loan that ,refinanced and thus replaced the loans that he had previously taken from his NYCERS account . Because he chose to repay in 13 0 biweekly installments instead of 77,this .replacement loan effectively extended by 2 years the repayment terms of the loans being r,eplaced .6 The replacement loan, when added to the sum of the . loans replaced, exceeded the section 72(p)(2)(A)(ii) limitation by $10,032 . NYCERS advised petitioner of the probabl e tax consequences of his decision to refinance the loan ;' an d Because petitioner .was repaying the loans from his biweekly paychecks, 130'payments would result in repayment within 5 years . Likewise, 77 payments would have resulted in,trepayment .within :,3 years . . d P petitioner acknowledged these consequences when he signed'th'e loan processing authorization agreement . 1 I t I Petitioner has not argued that his retirement account had a- sufficient balance to be within the limitation of section 72 (p) (2) (A) Petitioner instead argues that the regulation s 't provide for a $50,000 limit on loans from qualified retirement accounts . ' Because the refinancing resulted in petitioner's exceeding the section 72(p)(2)(A)(ii) limit by $10,032, we hold that he received a deemed distribution of $10,032 in 2005 which is includable in income . Sec . 72(p) (1) (A) . II . Applicability of Section 72(t), Additional Ta x The Code imposes a 10-percent additional tax on an early distribution from a qualified retirement plan . Sec . 72(t)(1 ) The section 72(t) additional tax applies to deemed distributions . Sec . 1 .72 (p) -1, Q&A-11, A-I20 (b) , ~~Income Tax Regs . The 10-percen t additional tax is not imposed if the distribution comes within!a statutory exception . Sec .' 72(t)(I2) . None of the exception s ' We note that the document petitioner relies upon, T .D . 9021, 2002-2 C .B . 973, is a notice of final regulations which ; amended sec . 1 .72(p)-1, Q- 2 0, A-2 :0(a)(2), Income Tax Regs . Petitioner's reading of that regulation fails to note that the . $50,000 limit of sec . 72 .(p)(2) (A),(ii) (I) applies because the Ii taxpayer in Example (1) had a retirement account balance that, exceeded $100,000 . Petitioner, however, appears to have had la retirement account balance'between $10,000 and $50 ;000 . Accordingly, his loans areflimited by sec . 72(p)(2)(A) to one .- half of his retirement account balance . 1, applies,,in this case . Petitioner is subject to the section 72(t) additional tax . To ; reflect our disposition of the issues , Decision will be entere d for respondent . it, r