TAX COURT OPINION

Case: Michael K. Billups
Docket Number: 17470-07S
Judge: Dean
Opinion Type: summary
Filed: 06/01/2009
Pages: 12

T .C . Summary'0pinion 009-8 6 UNITED STATES TAX COUR T MICHAEL K . BILLUPS, Pet'tioner v . COMMISSIONER'OF INTERNAL REVENUE, Respondent' Docket No . 17470-07S . led June 1, 2009 . Michael K . Billups, pro' se . Abigail F . Dunnigan '.and Michael Sh e lton ( student), for " respondent . DEAN, Special .Trial Judge: This case was heard pursuan t the provisions of section 7463 of the Internal Revenue Code i effect when the petition was filed .- Puruant to section 7463 the decision to be entered"is not review ble by any other co u and this opinion shall not be treated as precedent for--any'o t case . Unless otherwise indicated, subse are 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 . Respondent determined a deficiency in petitioner's 2005 Federal income tax of $12,059 and an accuracy-related penalty under section 6662(a) of $2,412 . The issues for decision are whether : (1) The loan proceed s received from petitioner's qualified employer plan are taxable distributions under section 72(p) ; (2) petitioner is subject t o the-40-percent additional tax under section 72(t) ; and (3) petitioner is liable for the accuracy-related penalty under section 6662(a)1 . Backgroun d Some of the facts have been stipulated and are so found . The stipulation of facts and the exhibits received in evidence are incorporated herein by reference . Petitioner resided in .New York when the petition was filed . During 2005 petitioner was employed with the New York Cit y Transit Authority (NYCTA) . He had been an NYCTA employee sinc e 1988 . Petitioner participated in the New York City Employees ' Retirement System (NYCERS), a qualified employer plan . On Apri l 11 'Adjustments to petitioner's itemized deductions and child tax credit are computational and .willabe resolved consistent with the Court's decision . See secs . 24(b), 67(a) . 41 3 - 29, 2005, petitioner replaced'a prior 1 an with anew loan a received cash proceeds of $12,630 from YCERS . Thereplacem n loan was to be amortized over 5 years a d repaid in biweekly installments of $363 .34 . When petition r received the $12,60, ' the replaced loan had an outstanding balance of $27,012 .73 . t Hi s receipt of $ 12,630 increased his,outsta ding loan balance to $ 39,748 . 06, the amount of the replacement loan . At the time of-the April 29, 2005, loan, petitioner's annual annuity account balance was $52,863 .38 . On the loan application form for°the replacement loan, petitioner selected th e "refinance" option . z NYCERS advised petitioner at the time he signed the loa application form that all or part of'th outstanding loan amount might be taxable . The application form notifies the borrower that more detailed tax information is available from NYCERS . Petitioner had . previously-borrowed from~NYCERS in 1993 ; 1995 through 2001, and 2003 through 2005, as'follows : ' 2In 2005 petitioner had not reachedlthe age of 59-1/2 . Yea r 1,993 199 5 19.96 1997 1998 1999 2000 2001 2003 2004 2005 Loan Amount $5,110 6,140 5, 000 7,370 7,180 7,240 7,870 7,520 9, 00,0 9, 000 12, 630 Prior Principal Amount -0- $3,147 .01 7, 694 .26 9,383 .36 .12,754 .46 16,359 .31 19,482,80 22,439 .39 22, 521 .97 26,140 .11 27,012 .73 Repaymen t Term 10 year s 10 year s 3 .77 year s 3 .69 year s 5 years ' 5 year s 5 years . 5 year s 5 years . 4 year s 5 years , Petitioner's loans were not in default as of 2005 . Petitioner and his wife purchased a home on June 25, 2004 . On October 11, 2005, petitioner refinanced the mortgage on his home . Petitioner did not use the loan proceeds from his retirement plan towards the purchase of his home or th e refinancing of his mortgage . t Petitioner, received a Form 1099-R, Distributions Fro m Pensions, Annuities, Retirement or Profit Sharing Plans, IRAs , Insurance Contracts, etc ., for 2005, reporting a gross distribution of $29,467 .00 . On the bottom of petitioner's Form 1099-R was the word "LOAN" and a distribution code "L1" . Petitioner's 2005 Form 1040, U .S . Individual Income Ta x Return, was prepared by Allen S . Lokensky Associates . On the advice of his accountant, petitioner reported a pension an d it annuities distribution of $29,467 on his 2005 Form .1040 bu t designated it as a "rollover" . No computation of the 10-percent additional tax on early distributions-was reported on 5 petitioner's return . I . Burden of Proo f The Commissioner's determinations in a notice-of defici are presumed correct, and the taxpayer ears the burden to p that the determinations are in error . See Rule 142(a) ; Wel d Helvering, 290 U .S . 111, 115 (1933) . Bit the burden of pro o factual issues that affect the taxpayerls tax liability ma y shifted to the Commissioner where the "taxpayer introduce s 7491(a)(1) . Petitioner has not allegedlthat sectio n applies . However, the Court need not decide whethe r shifted to respondent since there is no dispute as to any f a issue . Accordingly, the case is decide by the applicatio n law to the undisputed facts, and,sectio 7491(a) is inapplicable . II . NYCER Loan s Generally, loans from qualified employer plans are treat as distributions from the plan . Sec . 7 (p) (1) (A)' . Section 402(a) provides that distributions from a qualified employe r are taxable to the distributee in the d(cid:127)stributee's taxable ear(cid:127) in which the distribution occurs, pursuant to section 72 . Princ e v . Commissioner , T .C . Memo . 1997-324 . ection 72(p)(2)(A), however, provides an exception : a loan will not give rise to 11 -6- deemed distribution to the extent that the loan (when added to the outstanding balance of all other loans from the-plan)'' does not exceed the lesser of : (1) $50,000 (reduced by the excess, if it any, of the highest outstanding balance of loans from the plan during the 1-year period ending on the day before the date on which the loan was made, over the outstanding balance of rloans 11 from . the plan on the date on which the loan was made) ; or (2) th e greater of one-half of, the present value of the participant's "nonforfeitable accrued .benefit" under the plan or $10,000 . But the exception provided . in section 72 .(p) (2) (A) does not apply unless :, (1) The loan, by . its terms, is required to be repaid within5,,years, sec . 72(p)(2);(B) ; and .(2) "substantially level amortization of such loan (with payments not less frequently than quarterly) is required over the term of the loan", sec . i6 72(p)(2)(C) ;; ;.see Prince v . Commissioner , supra ; see also sec . 72(p)(2)(B)(ii) (providing an exception to the 5-year repaymen t requirement for loan proceeds used to "acquire any dwelling unit within a reasonable. time * * * as the principal residence of the participant") 3 For petitioner to avoid having his loan proceeds treated a s a!!taxable distribut'i.on, petitioner's $,39,642 .73 Than (when adde d 3At trial petitioner admitted that he did not'use the loan proceeds from his retirement plan to purchase his home or refinance the mortgage on his home . Therefore ;-the exception in sec . 72(p) (2) (B) (ii) does not apply . to the outstanding balance ofall other loans from the plan, $27,012 .23) could not exceed the lesser of $50,000 (reduced y the excess, if any, of the highest out s anding balance of 1 0 ns' from the plan during the 1-year perio d nding on the day bef rei the date on which the loan was made, ov r the outstanding balance of loans from the plan .on the date on w ich the, loan was made) o r the greater of $2 .6,431 .69 or $10,000 . ec . 72(p) (2) (A) ; se e sec . 1 .72(p)-1, Q&A-20(b), Income Ta x 4S . permit the Court t o determine the highest outstanding bala n e of loans during the 1- year period ending the day before the d to that the $39,642 .73 loan was made . It is necessary to know that amount to determine the excess, if any, of the highest outs anding balance of loans ; from the plan during the 1-year period nding on the day before,, the date on which the loan was made, ov r the .outstanding balance of loans from the plan on the date .on w ich the loan was made . Neither petitioner nor respondent provi ed evidence on the issue,;. Therefore, the Court-cannot determine t ch the $50,000 ceiling -is reduced pursuan t 72 (p) (2) (A) (i) . 'Sec . 1 .72(p)-1, .Q&A-20, Income Tax Regs ., applies to assignments, pledges, and loans made-on or after Jan . 1, 2004 Sec . 1 .72(p)-1, Q&A-22(d), Income Tax Regs . V -8_ The Court, however, can determine with reasonable certaint y from the evidence thatil,the lesser of the reduced $50,00 .0 ceiling limitation and one-hal of the present value of petitioner' s nonforfeitable accrued,benefit is theIlatter . Therefore, NYCERS used the appropriate amount available :to petitioner under section 72(p)(2)(A), the greater of one-half of the present value of petitioner's "nonforfeitable accrued benefit" under the plan, $26,431 .69, or $10,000 . NYCERS followed the correct procedure ; consequently petitioner is taxable on any amount in .exces;,s of one-half of the present value of petitioner's nonforfeitabl e accrued benefit, $26,431 .69 . The evidence shows that the sum of the new loan and the loan it replaced ($ 39,642 .73 + $27, 012 .73 ) is $66 , 655 .46 , and,it exceeds his applicable limitation .of $26 , 431 .69 by $39 , 748 .06 .5 Petitioner . failed to satisfy the requirements of the exception under ,;section 72(p) (2) ( ;'(A) , and that is enough to find that he. 'ha d a taxable distribution, notwithstanding that each loan provided for repayment terms of 5 years or less and substantially level amortization . See Prince v . Commissioner , supra . 'The Court notes that NYCERS deducted from the sum of the loans a $475 .71 "Cost Allocation" for a "Net Loan For Tax Calc" of $66,179 .75 and credited petitioner with a limitation amount of $26,435 . . The Court also notes that NYCERS credited petitioner with $10,277 .29 for "taxes previously reported", reducing the $39,748 .06 "excess" figure by that amount . NCYERS reported, therefore, a taxable amount of $29,467 .46 . Respondent has not challenged this figure . Petitioner has not alleged or proven any error with NYCERS's calculation of his taxable amount . In 2005 petitioner refinanced hi s rior loan from NYCERS -9- Because he chose the refinancing option extended the prior loan's repayment ter prior loan and the refinanced loan ar e reated as outstandin g the date of .the refinancing . Sec . 72(p ) Q&A-20(a)(2), Income Tax Regs . Therefo exceed the limitation amount under sect excess results in a deemed distributio n III . 10-Percent Additional Tax for Ear]Iy Withdrawa l Section 72(t)(1) imposes an additi nal tax on an earl y distribution from a qualified retiremen plan equal to 10 pe r of the portion of the amount that is i n lu.dable in gross income . The .10-percent additional tax does, .not (1) To an employee age 59-1/2 or older ; the employee's estate) on or after the Oployee's death ; (3) p n account of the employee's disability ; (4) as part of a serie s substantially equal periodic payments m e for life ; (5) to a employee after separation from service after attainment of ag A 55 ; (6) as dividends paid with, respect to corporate stoc k described in section 404(k) ; (7) to an employee for medica l or (8) to an alternate payee pursuant tol a qualified domesti c relations order . Sec . 72(t) (2) ; , see also sec . '- 72 (t) (2) (B) - ( F (setting forth other exceptions not applicable here) -10- When petitioner received the loan proceeds, he had no t reached . the age of 59-1/2, and he has not alleged or shown tha t he comes within any of the other exceptions under section 72(t) .6 Therefore , respondent ' s determination that petitioner is liabl e for the 10-percent additional tax on the distribution i s sustained . IV . Accuracy-Related Penalt v Section 7491(c) imposes on the . Commissioner the burden o f production in any court proceeding with respect to the liabilit y of any individual for penalties and additions to tax . Higbee v . Commissioner , 116 T . C . .438 , 446 (2001 ) ; Trowbridge v . Commissioner , T .C . Memo . 2003-164, affd . 378 F .3d 432 (5th Cir . 2004) .' In order to meet the burden of production under section 7491(c), the Commissioner need only make a prima facie case tha t imposition of the penalty or addition to tax is appropriate . Higbee v : Commissioner ", supra at 446 . Section 6662 ( a) and (b)(1) imposes a 20-percent penalty on the portion of an underpayment attributable to negligence o r disregard of rules or regulations . Negligence includes any failure to make a reasonable attempt to comply with th e 6 Whether or not the sec . 72(t) 10-percent additional tax is a penalty or additional amount for which respondent would have the burden of production, under sec . 7491(c), hehas met that burden by showing petitioner was not 59-1/2 when he received the distribution . See Milner v . Commissioner , T .C . Memo . 2004-111 n .2 . -1 of the Internal Revenue Code Sec . 6662 ( c) ; sec . 1provisions 1 .6662-3 ( b)(1), Income Tax Regs . But the section 6662(a) pe r does not apply to any portion of an underpayment of tax if ii i s shown that there was reasonable cause for the'taxpayer',s(cid:127)positio n and that the taxpayer acted in good fai h with respect to th a portion . Sec . 6664(c)°(l) . The determination of whether a taxpayer acted with reasonable cause an in good faith is ma d a case-by-case basis, taking into account all the pertinentact s and circumstances . Sec . 1 .6664-4(b) (1) ' Income Tax Regs . Th e most important factor is the extent of he taxpayer 's effort to , assess the taxpayer ' s proper tax liability . Id . A taxpayer who makes full disclosure to an accountant o r other qualified expert and reasonably relies on the expert' s advice in good faith is not negligent . Conlorez Corp . v . Commissioner , 51 T .C . 467, 475 (1968) ; lotkin v . Commissioner , T .C . Memo . 2001-71 ; sec . 1 .6664-4(b)(1), (c), Income Tax Reg s The Court, on the basis of the testimony of petitioner ' accountant, finds that petitioner was not negligent in filin g 2005 return . Accordingly, the Court reects respondent ' determination of the accuracy-related p nalty under sectio n 6662 (a) . -12- Other arguments made by the parties and not discussed herei n were considered and rejected as irrelevant, without merit, or moot . To"reflect the foregoing, ti 1A Decision will be entered for respondent with respect to the deficiency and fo r petitioner with respect to the accuracy-related penalty under section 6662(a) .