TAX COURT OPINION

Case: Sharen S. Steele
Docket Number: 3861-07S
Judge: Colvin
Opinion Type: bench
Filed: 11/18/2008
Pages: 7

Sub . S'(5 &-w-, UNITED STATES TAX COURT WASHINGTON , DC 2021 7 SHAREN S . STEELE, Petitione r v . ) Docket No . 3861-07 S COMMISSIONER OF INTERNAL REVENUE, Respondent O R D E R Pursuant to Rule 152(b), Tax Court Rules of Practice and Procedure, it i s 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 of the above case before Special Trial Judge Robert N . Armen, Jr . at Kansas City, Missouri on November 4, 2008, containing his oral findings of fact and opinion rendered at the conclusion of the trial . In accordance with the oral findings of fact and opinion, a decision will be entered unaar- I k (Signed) Robert N . Armen, Jr. Special Trial Judg e Dated : Washington, D .C . November 18, 2008 SERVED NON 19 2008 1 Bench Opinion by Special Trial Judge Robert N . Armen, Jr . 2 Docket No . 3861-07S Steele v . Commissione r 3 3 November 4, 200 8 4 I . 5 THE COURT : The Court has decided to render 6 oral findings of fact and opinion in this case, and the 7 following represents the Court's oral findings of fac t 8 and opinion . The oral findings of fact and opinion shall 9 not be relied upon as precedent in any other case . 10 II . 11 This proceeding was heard as a Small Tax Case 12 pursuant to the provisions of section 7463 of th e 13 Internal Revenue Code of 1986, as amended, and Rules 170 14 through 175 of the Tax Court Rules of Practice an d 15 Procedure . 16 III . 17 This bench opinion is made pursuant to the 18 authority granted by section 7459(b) of the Interna l 19 Revenue Code of 1986, as amended, and Rule 152 of the Tax 20 Court Rules of Practice and Procedure . 21 Hereinafter in this bench opinion, and unless 22 otherwise indicated, all section numbers refer to th e 23 Internal Revenue Code, as amended and in effect for 2004, 24 the taxable year in issue, and all Rule numbers refer to 25 the Tax Court Rules of Practice and Procedure . Heritage Reporting Corporation (202) 628-4888 4 1 IV . 2 Sharen S . Steele appeared on her own behalf . 3 Charles J . Graves appeared on behalf of respondent . 4 V . 5 Respondent determined a deficiency i n 6 petitioner's Federal income tax for 2004 of $6,567 . The 7 "deficiency is solely attributable to the 10-percen t 8 additional tax under section 72(t) on premature 9 distributions from qualified retirement plans . 10 VI . 11 The issue for decision by the Court is 12 whether petitioner is liable for the 10-percen t 13 additional tax under section 72(t) on an earl y 14 distribution from a qualified retirement plan in the 15 amount determined by respondent in the notice o f 16 deficiency or in the lesser amount as contended by the 17 petitioner . 18 Respondent determined that petitioner is 19 liable for the 10 - percent additional tax on the entire 20 distribution in question, i .e ., on $ 65,673 . Petitioner 21 concedes that she is liable for the 10-percent additional 22 tax on only a portion , i .e ., $58,608, of the entire 23 distribution ; she disputes that she is liable for the 10- 24 percent additional tax on the balance, i . e ., on $7,065 . 25 We note that there is no issue in this case Heritage Reporting Corporatio n (202) 628-4888 1 concerning the taxability under section 1 of th e 2 distribution in question, i .e ., the $65,673 amount . 3 Petitioner included the entire amount in income on her 4 2004 return and paid the proper tax under section 1 on 5 5 it . 6 VII . 7 Most of the facts have been stipulated, and 8 they are so found . 9 Petitioner resided in the State of Kansas at 10 the time that the petition was filed with the Court . 11 During 2004, petitioner had an open Chapter 12 13 bankruptcy case . Wishing not to be burdened by a 13 large monthly payment under the plan, petitioner sought 14 permission from the bankruptcy trustee to pay he r 15 obligation in full by having funds withdrawn from her 16 individual retirement account (IRA) . The bankruptcy 17 trustee agreed and advised petitioner that she needed to 18 come up with $65,673 . Petitioner then authorized th e 19 withdrawal of that amount from her IRA with Security 20 Benefit of Topeka, Kansas . Pursuant to tha t 21 authorization, Security Benefit transferred $65,67 3 22 directly to the bankruptcy trustee in 2004 . Petitioner 23 included that entire amount in income on her 2004 tax 24 return . She did not, however, pay the 10-percen t 25 additional tax on any part of the distribution . Heritage Reporting Corporation (202) 628-4888 6 1 Later, petitioner was advised, for the first 2 time, that the bankruptcy trustee had overstate d 3 petitioner's obligation and that the amount actuall y 4 needed to satisfy her bankruptcy obligation in full was 5 $58,608 . Shortly thereafter,*the bankruptcy truste e 6 returned the balance, i .e ., $7,065, to petitioner . 7 Petitioner then tried to redeposit that balance back into 8 the IRA from which the funds had been withdrawn ; however, 9 Security Benefit inexplicably refused to accept the mone y 10 back, and petitioner was therefore unable to restore the 11 $7,065 to an IRA within 60 days of receipt of the funds . 12 VIII . 13 Section 72(t) provides for a 10-percen t 14 additional tax on early distributions from qualifie d 15 retirement plans, such as IRAs . However, the 10-percent 16 additional tax does not apply to certain distributions . 17 Thus, section 72(t) sets forth specific exceptions . One 18 exception involves a distribution made pursuant to a 19 levy . Sec . 72(t)(2)(A)(vii) ; see Larotonda v . 20 Commissioner , 89 T .C . 287 (1987) . Although there was no 21 levy in the instant case, the context within which the 22 distribution was made, i .e . petitioner's bankruptc y 23 action, involves similar economic duress and impairment 24 of free will . 25 But more to the point : This Court has, in Heritage Reporting Corporatio n (202) 628-4888 7 1 the past, disregarded an IRA trustee's error that would 2 have frustrated the taxpayer's intent in preserving a 3 tax-sheltered account . Wood v . Commissioner , 93 T .C . 114 4 (1989) . We think that same approach should be followed 5 here . Petitioner had transferred to the bankruptc y 6 trustee the exact amount of funds as designated by the 7 trustee in order to full pay her Chapter 13 obligation . 8 Later (and without any advance notice whatsoever) th e 9 bankruptcy trustee returned a portion of those funds to 10 petitioner, acknowledging a miscalculation . Petitioner 11 tried to restore that money to her IRA, yet the IR A 12 trustee inexplicitly refused to accept the money back, 13 thereby frustrating petitioner's attempt to restore the 14 funds to an IRA within 60 days of their receipt . Under 15 these circumstances, we think that respondent' s 16 determination of a 10-percent additional tax in 2004 on 17 the " excess" distribution should not be sustained . 18 IX . 19 In order to give effect to our disposition of 20 the disputed issue, as well as petitioner's concession, 21 decision shall be entered under Rule 155 . 22 X . 23 This concludes the Court's oral findings of 24 fact and opinion in this case . 25 Heritage Reporting Corporation (202) 628-4888 1 (Whereupon , at 4 :00 p .m ., the bench opinion 2 in the above - entitled matter was concluded . ) 8 3 4 11 5 6 7 8 1 1 9 11 1 0 11 12 13 14 15 16 17 18 19 20 21 2 2 23 24 25 // Heritage Reporting Corporation (202) 628-4888