TAX COURT OPINION

Case: Phuong H. Phan
Docket Number: 31743-21S
Judge: Leyden
Opinion Type: bench
Filed: 03/06/2023
Pages: 14

United States Tax Court Washington, DC 20217 PHUONG H. PHAN, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent Docket No. 31743-21S 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 remote trial in the above case before Special Trial Judge Diana L. Leyden at San Diego, California, on February 1, 2023, 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 petitioner as to the accuracyrelated penalty under section 6662(a). (Signed) Diana L. Leyden Special Trial Judge Served 03/06/23 IN THE UNITED STATES TAX COURT In the Matter of: PHUONG H. PHAN, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. Docket No. 31743-21S ) ) ) ) ) ) ) ) ) ) ) ) Pages: 1 through 12 Place: San Diego, California (Remote proceedings) Date: February 1, 2023 IN THE UNITED STATES TAX COURT 1 In the Matter of: PHUONG H. PHAN, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. Docket No. 31743-21S ) ) ) ) ) ) ) ) ) ) ) ) Federal Building 880 Front Street Room 4228, 4th Floor San Diego, California 92101-8828 February 1, 2023 The above-entitled matter came on for bench opinion, pursuant to notice at 8:30 a.m. BEFORE: HONORABLE DIANA L. LEYDEN Special Trial Judge APPEARANCES: For the Petitioner: No Appearance For the Respondent: No Appearance 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 P R O C E E D I N G S 2 (8:30 a.m.) THE CLERK: Calling docket number 31743-21S, Phuong H. Phan. Please state -- that's all. Thank you. (Whereupon, a bench opinion was rendered.) 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 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 Bench Opinion by Judge Diana L. Leyden February 1, 2023 Phuong H. Phan v. Commissioner of Internal Revenue Service Docket No. 31743-21S THE COURT: Yes, today I will be issuing a bench order in Phuong H. Phan, Petitioner, v. Commissioner of Internal Revenue Service, docket number 31743-21S. 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 are made pursuant to the authority granted by section 7459(b) of the Internal Revenue Code and Tax Court Rule 152. Rule references in this opinion are to the Tax Court rules, practice, and procedure, and section references are to the Internal Revenue Code in effect at all relevant times. The proceeding was heard as a Small Tax Case pursuant to the provisions of section 7463 and Rules 170 through 174. The Court uses the term "Internal Revenue Service" or "IRS" to refer to administrative actions taken outside these proceedings. The Court uses the term "Respondent", referring 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. 4 The trial of this case was conducted on January 31st, 2023, at the remote San Diego trial session of the Court. Petitioner appeared on his behalf. Julia Kapchinskiy appeared on behalf of Respondent. In a Notice of Deficiency issued on June 28th, 2021, the Internal Revenue Service (IRS) determined a deficiency of $32,591 and imposed a $3,689 section 6663(a) accuracy-related penalty for 2018. Petitioner concedes that he received a distribution and did not report retirement income of $41,151 and is liable for the ten percent additional tax on that amount under section 72(t). Petitioner also concedes he is liable for unreported wage income of $34. Respondent concedes that the accuracy-related penalty under section 6662(a) should not be imposed. The only remaining issue is whether Petitioner has gross income of $29,580.54 with respect to a loan from Fidelity Investments (Fidelity) and whether Petitioner is liable for the ten percent additional tax on such distribution under section 72(t). On the evidence before us and using the burden of proof principle as explained below, the Court concludes that Petitioner has gross income of $29,580.54 in 2018 and is liable for the ten percent additional tax on such 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 amount. BACKGROUND 5 Proposed Exhibits 500-P, 1000-R through 1021-R, and 1022-R through 1024-R were admitted into the record without objection by either party and are incorporated herein by this reference. Petitioner resided in California at the time he filed his petition in this case. On September 22nd, 2021, Petitioner timely filed a petition in this case seeking redetermination of the Notice of Deficiency. Petitioner timely filed a Federal individual income tax return for 2018. On that return, Petitioner reported as taxable IRAs, pensions, and annuities of $101,963. Petitioner did not report as taxable the retirement distribution that Petitioner now concedes, $41,151, or the loan from Fidelity of $29,580.54 the Petitioner continues to dispute. Petitioner did not attach to the filed return, any Forms 1099-R, distributions from pensions, annuities, retirement, or profit-sharing plans, IRAs, insurance contracts, et cetera. Petitioner had been employed by a company for many years and contributed to that company's section 401(k) retirement plan, hereinafter retirement plan. On July 31st, 2018, Petitioner ceased employment with the company. During the years in which Petitioner was employed by the company, he contributed to the retirement 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 plan and took out loans from the plan. Fidelity, the plan administrator, issued to Petitioner a Form 1099-R for 2018 listing Petitioner's then-address. On the Form 1099-R, reported in box 1, was a "Gross Distribution" of $29,580.54, and in box 7, a "Distribution Code" of 1M. The instructions for that form indicate the number 1 in the distribution code refers to "Early distribution, no known exception, (in most cases, under age 59-1/2)" . And the letter M refers to "Qualified plan loan offset" . Petitioner did not report the gross distribution on his 2018 tax return. DISCUSSION Petitioner testified that he fully repaid the loan from Fidelity but did not provide any evidence to support his testimony. Respondent contends that the loan was not repaid and that Fidelity reported the unpaid loan balance as a distribution to Petitioner in 2018. Respondent contends that the reason for the reported distribution was that the loan amount fell below the safe harbor under section 72(p)(1)(A). I. Loan Distribution From a Qualified Employer 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 Plan 24 25 As a general rule, section 72(p)(1)(A) provides that if a participant or beneficiary receives directly or 7 indirectly any amount as a loan from a qualified employer plan, then that amount shall be treated as having been received by such individual as a distribution under that plan. See generally Martinez v. Commissioner, T.C. Memo 2016-182 at 2 to 3; Plotkin v. Commissioner, T.C. Memo 2001-71 at 6-7, and cases cited thereat. For purposes of this rule, a qualified employer plan includes a section 401(k) plan. See IRC sections 72(d)(1)(G) and 4974(c)(1). In general, a loan from a qualified employer plan gives rise to a distribution that is taxable for the year in which the loan is received. However, section 72(p)(2) provides an exception to the general rule where the loan, when adding to the outstanding balance of all other loans from the same plan, does not exceed a specified limit. See IRC section 72(p)(2)(A). Sections 72(p)(2)(B) and (C) further provide that the general rule does not apply where the loan, by its terms, must be repaid in five years from the date of its inception, or was used to finance an acquisition of a home that is a principal residence of the participant, or where the loan is subject to substantially level amortization with quarterly or more frequent payments required over the term of the loan. Section 1.402(c)-(2) of the Treasury regulations describes a distribution as a planned loan offset amount 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 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 as follows: Question 9: What is a distribution of a plan loan offset amount? Answer 9: (b), Definition of plan loan offset amount. For purposes of section 402(c), a distribution of a plan loan offset amount is a distribution that occurs when, under the plan terms governing a plan loan, the participant's accrued benefit is reduced for an offset in order to repay the loan, including the enforcement of the plan's security interest and a participant's accrued benefit. A distribution of a plan loan offset amount can occur in a variety of circumstances, e.g. where the terms governing a plan loan require that in the event of the employee's termination of employment or request for a distribution, the loan be repaid immediately or treated as in default. A distribution of a plan loan offset amount also occurs when under the terms of the governing plan loan, the loan is canceled, accelerated, or treated as if it were in default, e.g. when the plan treats a loan as in default upon an employee's termination of employment or within a specified period thereafter. A distribution of a plan loan asset amount is an actual distribution, not a deemed distribution, under section 72(p). Although a loan might initially satisfy 9 the requirements of section 72(p)(2)(A) at the time it is made, a distribution may nevertheless occur subsequently because of a failure to repay the loan consistent with the loan agreement or if the loan amount exceeds the specified amount. IRC Section 72(p)(2). Accordingly, a distribution occurs at the time in the amount of the then- outstanding balance of the loan if the loan is defaulted, considered a qualified plan offset, or the total amount of the loan exceeds a specified amount. The record indicates that the loan was treated as a qualified plan offset. Thus, in 2018, the remaining loan balance of $29,580.54 was treated as a distribution. II. 10 Percent Additional Tax On Early Distributions Through A Qualified Employer Plan Under section 72(t), if a taxpayer receives an amount from a qualified employer plan, the amount received is increased by an additional tax of ten percent of the portion of the distribution includable. Under section 72(g)(2), there are certain exceptions to the additional tax. Petitioner did not assert any exceptions that would apply to the distribution, and the record does not support a finding that any exception applied. Therefore, the Respondent's proposed additional tax under section 72(t) as to the distribution is sustained. III. Burden of production, accuracy, and 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 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 information returns Petitioner asserts he did not receive the Form 1099-R from Fidelity, but he did not dispute that the listed address on the form was not his then-address. Further, to the extent that the Petitioner suggest that the Form 1099-R is inaccurate and that Respondent must prove that the loan balance was a distribution, Petitioner has not satisfied the requirement under section 6201(d) that would shift the burden of production to Respondent. Under section 6201(d), if a taxpayer asserts a reasonable dispute to an item of income reported on an information return filed by a third party and the taxpayer meets certain other requirements, Respondent bears the burden of producing reasonable and probative evidence in addition to the information return concerning the deficiency attributable to the income item. However, after trial and a review of the record in this case, Petitioner has not provided evidence to support a reasonable dispute with respect to the accuracy of the Form 1099-R. Consequently, the burden of production with respect to the income did not shift to Respondent under section 6201(d). The Court sustains Respondent's determination that Petitioner has unreported gross income of $29,580.54 from the qualified plan offset distribution and is liable 11 for the ten percent additional tax on such amount. To reflect the foregoing, a decision will be entered for Respondent with respect to the proposed deficiency and a decision will be entered for Petitioner with respect to the accuracy-related penalty under section 6662(a). This concludes the Court's bench opinion. (Whereupon, at 8:42 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 CERTIFICATE OF TRANSCRIBER AND PROOFREADER 12 CASE NAME: Phuong H. Phan v. Commissioner DOCKET NO.: 31743-21S We, the undersigned, do hereby certify that the foregoing pages, numbers 1 through 12 inclusive, are the true, accurate and complete transcript prepared from the verbal recording made by electronic recording by Amanda Self on February 1, 2023 before the United States Tax Court at its session in San Diego, CA, in accordance with the applicable provisions of the current verbatim reporting contract of the Court and have verified the accuracy of the transcript by comparing the typewritten transcript against the verbal recording. _______________________________________________ Javacia Huff, CDLT-223 Transcriber 2/8/23 Date _______________________________________________ Shoshana Chana Axtell, CDLT-106 2/8/23 Proofreader Date 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