TAX COURT OPINION

Case: Gloria J. Jones
Docket Number: 11908-12
Judge: Paris
Opinion Type: bench
Filed: 07/09/2013
Pages: 20

UNITED STATES TAX COURT WASHINGTON, DC 20217 GLORIA J. JONES, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent ) ) ) ) ) Docket No. 11908-12. ) ) ) ) ) ) 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 Judge Elizabeth Crewson Paris at Kansas City, Missouri, on June 11, 2013, 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. (Signed) Elizabeth Crewson Paris Judge Dated: Washington, D.C. July 9, 2013 ED JUL 12 (cid:0)576ÓÜ Capital Reportîng Company 3 1 2 Bench Opinion by Judge Elizabeth Crewson Paris June 11, 2013 3 Gloria J. Jones v. Commissioner Docket No. 11908-12 I. 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 SHALL NOT BE RELIED UPON AS PRECEDENT IN ANY OTHER CASE. II. This bench opinion is made pursuant to the authority granted by section 7459(b) of the Internal Revenue Code of 1986, as amended, and Rule 152 of the Tax Court Rules of Practice and Procedure. Hereinafter in this bench opinion, all section numbers refer to the Internal Revenue Code of 1986, as amended, and all Rule numbers refer to the Tax Court Rules of Practice and Procedure. III. Petitioner Gloria J. Jones appeared and was heard. Joline M. Wang appeared on behalf of respondent. 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 1 2 3 4 5 6 IV. Respondent issued to petitioner a notice of deficiency for tax year 2009 reflecting a Federal income tax deficiency of $16,717, an addition to tax under section 6651(a) (1) of $1,725, and an accuracy- related penalty under section 6662(a) of $2,443. 7 Petitioner has conceded that she failed to report 8 9 interest income from Mazuma Credit Union in the amount of $154 and non-employee compensation from 10 Christ Church Temple Tutoring in the amount of $1,098 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 on her 2009 return. The remaining issues for decision are: (1) whether petitioner failed to report a taxable distribution of $45,000 from her Thrift Savings Plan (TSP), a defined contribution retirement plan for Federal employees, for tax year 2009; (2) whether petitioner is subject to the ten percent penalty for early withdrawal from a qualified retirement plan in the amount of $4,500 for tax year 2009; (3) whether petitioner is liable for the addition to tax under section 6651(a) (1) for failure to timely file a return for tax year 2009; and (4) whether petitioner is liable for the accuracy-related penalty under section 6662(a) for 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 5 1 2 3 4 5 6 7 8 9 tax year 2009. V. Some of the of the facts have been stipulated, and they are so found. The stipulation of facts, supplemental stipulation of facts, and attached exhibits are incorporated herein by this reference. Petitioner resided in Kansas when this petition was filed. Tax Year 2009 10 Petitioner is a Federal employee under the 11 Civil Service Retirement System. She has worked for 12 13 14 15 16 17 18 19 20 21 22 23 24 25 the Federal government since September 1978. She currently works for the Department of Transportation as a computer specialist. Petitioner began making contributions to her Thrift Savings Plan in August 1993. Over the course of her participation petitioner made approximately $40,788 of pre-tax contributions to her TSP account. On or around January 5, 2009, petitioner requested a financial hardship in-service withdrawal from her TSP account in the amount of $45,000. In a letter dated January 20, 2009, Thrift Savings Plan indicated it would transfer funds by electronic payment. Of that amount, TSP withheld $4,500 for federal income tax and distributed to her the 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 6 remaining $40,500. A 2009 Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit- Sharing Plans, IRAs, Insurance Contracts, etc., was prepared and mailed from TSP to petitioner's current address. Petitioner did not file her 2009 Federal income tax return by the due date of April 15, 2010, nor did she receive any applicable extensions to the filing deadline. On or around October 5, 2010, petitioner filed her 2009 tax return reflecting a refund due of $5,572. Petitioner failed to report any income or withholding from the TSP distribution. On November 15, 2010, respondent issued to petitioner a notice of proposed changes for petitioner's 2009 return, reflecting only minor changes and proposing an adjusted refund amount of $5,315.68. Petitioner did not respond to the letter and the refund was applied as a treasury offset to the Kansas Department of Revenue for past-due state taxes owed. Sometime later petitioner's 2009 return was selected for examination. Respondent redetermined petitioner's 2009 Federal income tax and prepared a summary on October 24, 2011, based on Forms 1099 provided by third-party payers. Respondent subsequently issued a notice of deficiency for tax 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 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 year 2009 on February 13, 2012. The notice of deficiency reflected respondent's determination that petitioner failed to report $154 of interest from Mazuma Credit Union, $1,098 of non-employee compensation from Christ Temple Church Tutoring, and $45,000 of retirement income from her TSP distribution. As a result respondent determined that petitioner had a deficiency in Federal income tax of $16,717. This amount included a 10% penalty of $4,500 under section 72(t) on the distribution from her TSP. Respondent also imposed an addition to tax under section 6651(a) (1) and an accuracy-related penalty under section 6662(a) for tax year 2009. Respondent determined that petitioner had also failed to report the $4,500 withholding by TSP on the $45,000 distribution, and properly noted that she would be credited that amount. The notice reflected a total amount due of $17,274, consisting of $16,717 deficiency, the $1,726 addition to tax, the $2,443 penalty, interest of $889, and a credit of $4,500 for the unreported withholding. On May 11, 2012, petitioner timely filed a petition in this Court for review of respondent's determination for tax year 2009. 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company Prior Tax Years Though not directly related to the year at 8 issue, the following should be noted as background for arguments presented by petitioner. Petitioner failed to file Federal income tax returns for tax years 2003 through 2008. Respondent prepared substitutes for returns under section 6020(b) and issued notices of deficiency for tax years 2003 and 2004. Petitioner failed to file a petition in the United States Tax Court to dispute these deficiencies. On June 11, 2007, respondent assessed the tax for tax years 2003 and 2004. On November 26, 2007, respondent issued a Final Notice, 1 2 3 4 5 6 7 8 9 10 11 12 13 14 Notice of Intent to Levy and Notice of Your Right to 15 16 17 18 19 20 21 22 23 24 25 a Hearing, advising petitioner that respondent intended to levy to collect the balances for tax years 2003 and 2004. Petitioner did not reply to this notice. In February 2008 respondent issued a wage levy to petitioner's employer to collect the unpaid balances for tax years 2003 and 2004. Between February 12, 2008, and May 18, 2010, respondent received payments totaling $19,565 from the wage levy. Of this amount, $8,898.46 was applied to petitioner's 2003 liability and $10,566.75 was 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 9 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 applied to petitioner's 2004 tax liability. On or around October 5, 2010, petitioner filed her delinquent Federal income tax returns for tax years 2003 through 2008. Based upon the information shown on petitioner's 2003 and 2004 returns, respondent abated a portion of the income tax, additions to tax, penalties, and interest previously assessed from the substitutes for returns for those years. After the abatement for tax year 2003, petitioner's amount due for that year totaled $3,806.89. The levy proceeds of $8,998.46 applied to tax year 2003 were applied as follows: (1) $3,806.89 to the 2003 balance due and owing, (2) $2,059.60 was transferred to petitioner's 2006 tax account, and (3) $3,168.47 was a treasury offset to the Kansas Department of Revenue for past-due state taxes owed. 18 After this allocation, the transcript reflects that 19 20 21 22 23 24 25 an overpayment of $36.50 was refunded to petitioner. After the abatement for tax year 2004, petitioner's amount due for that year totaled $2,418.94. The levy proceeds of $10,566.75 applied to tax year 2004 were applied as follows: (1) $2,418.94 to the 2004 balance due and owing, and (2) $8,239.73 was a treasury offset to the Kansas 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 1 Department of Revenue for past-due state taxes owed. 2 After this allocation, the transcript reflects that 10 3 4 5 6 7 8 9 an overpayment of $91.92 was refunded to petitioner. VI. We turn now to the substantive law. Inclusion of TSP Distribution Taxation of distributions from retirement accounts is governed specifically by statute and regulation. Section 61(a) defines gross income as 10 all income from whatever source derived, including 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 (but not limited to) annuities and pensions. See Sec. 61(a) (9) and (11). Section 408(d) (1) provides a series of rules relating to qualified retirement plans, specifically that: "Except as otherwise provided in this subsection, any amount paid or distributed out of a qualified retirement plan shall be included in gross income by the payee or distributee, as the case may be, in the manner provided under section 72." See Sec. 1.408-4 (a), Income Tax Regs.; Arnold v. Commissioner, 111 T.C. 250, 253 (1998). For tax purposes, a TSP is a qualified retirement plan that is treated substantially the same as an individual retirement account (IRA). Secs. 4974 (c) (1), 7701(j) (1); see Hemrick v. Commissioner, T.C. Memo. 2009-272. 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 11 In the instant case, there is no reason not to apply this general principal, and petitioner essentially concedes the matter by recognizing that her TSP distribution in tax year 2009 should have been included in her income. However, petitioner argues that she should be allowed to deduct the amounts she contributed to her TSP plan from the total amount of proceeds distributed in tax year 2009. Petitioner's argument is misguided. A taxpayer will generally not have a basis in a qualified retirement plan unless the taxpayer contributed nondeductible amounts to the plan. Secs. 72(e), 219(a) and (b), 408 (d) (1) and (2); Sec. 1.408- 4 (a) and (c), Income Tax Regs. The evidence does not support a finding that petitioner's contributions to her TSP were nondeductible. In fact, the records indicate that petitioner's contributions to her TSP account were made with pre-tax dollars. Such pre-tax contributions and any increase in value of a TSP account are taxable when received as distributions unless there is a qualified rollover into another qualified plan. Bernard v. Commissioner, T.C. Memo. 2012-221. Accordingly, respondent's determination is sustained in that petitioner failed to report a 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 12 taxable distribution of $45,000 from her TSP in tax year 2009. Section 72(t) Penalty Section 72 (t) provides for a 10% additional tax on early distributions from qualified retirement plans, such as the TSP. However, the 10 percent additional tax does not apply to certain distributions. Thus, section 72(t) sets forth specific exceptions. The most common of these exceptions include distributions that are made on or after the date on which the employee attains age Sta distributions that are attributable to the employee*g being disabled, or distributions made to an employee after separation from service after attainment of age 55. The legislative purpose underlying the section 72(t) tax is that premature distributions from qualified retirement plans "frustrate the intention of saving for retirement, and section 72(t) discourages this from happening." Arnold v. Commissioner, 111 T.C. at 255; Dwyer v. Commissioner, 106 T.C. 337, 340 (1996); see S. Rept. 93-383, at 134 (1974), 1974-3 C.B. (Supp.) 80, 213. Petitioner was born in 1959 and has not yet attained the age of 59 1/2. Petitioner does not 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 13 1 2 contend that any of the other statutory exceptions apply to her, and none do. Rather, petitioner 3 mistakes the financial hardship exception that allows 4 withdrawal from her TSP for one of the enumerated 5 6 7 8 9 10 11 12 13 14 15 16 17 18 exceptions under section 72(t) that would reduce or eliminate the additional 10% tax. Although paying one's bills is laudatory, and the need to meet living expenses is readily apparent, there is, unfortunately for petitioner, no exception in section 72 (t) for general financial hardship. E.g., Arnold v. Commissioner, supra; Thompson v. Commissioner, T.C. Memo. 2007-327; Cole v. Commissioner, T.C. Memo. 2006-44; Milner v. Commissioner, T.C. Memo. 2004-111; Gallagher v. Commissioner, T.C. Memo. 2001-34. Petitioner also argues that the penalty should be reduced under section 72 (t) (2) (B) because she has used the money to pay medical expenses associated with her son's death. 19 Unfortunately, petitioner has failed to provide any 20 21 22 23 24 25 evidence that she incurred and paid medical expenses eligible for relief under section 72(t) (2) (B) during tax year 2009. Accordingly, we are constrained to conclude that petitioner is liable for the 10 percent additional tax under section 72(t) on the $45,000 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 14 1 2 3 distribution from her TSP in tax year 2009. Collection Issues Petitioner also argues as a procedural 4 matter that all Federal income tax refunds and levied 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 wages accumulated for tax years 2003 through 2008 should be applied to her outstanding liability for tax year 2009, with the remaining balance refunded to her. Petitioner argues that respondent improperly offset amounts to the Kansas Department of Revenue that should properly have been credited to her outstanding liability. Specifically, petitioner points to the excess levied wages applied to tax years 2003 and 2004 and subsequently offset in the amounts of $3,168.47 and $8,239.73, as well as the $5,315.87 offset for petitioner's claimed 2009 refund prior to the issuance of the notice of deficiency. Section 6402 (a) states that, generally, "in the case of an overpayment, the Secretary * * * may credit the amount of such overpayment, including any interest allowed thereon against any liability in respect of an internal revenue tax on the part of the person who made the overpayment and shall * * * refund any balance to such person." However, section 6402(e) (1) states that upon receiving notice from any State that a named taxpayer owes a past-due, legally 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 15 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 enforceable State income tax obligation to the State, the Secretary shall: (1) reduce the amount of any overpayment payable to such taxpayer by the amount of the State tax obligation; (2) pay the amount reduced to the State and notify the State of the taxpayer's name, address, and taxpayer identification number; and (3) notify the taxpayer that the overpayment has been reduced by an amount necessary to satisfy a past-due, legally enforceable State income tax obligation. It appears that respondent has followed all applicable guidelines under section 6402. While respondent offset the excess levied.wages applied to tax years 2003 and 2004 to the Kansas Department of Revenue, this was before respondent had determined a deficiency for tax year 2009. Similarly, respondent's offset of petitioner's claimed refund for tax year 2009 was also prior to respondent's determination of a deficiency for that year. In fact, respondent's issuance of the offset was based on petitioner's Federal income tax return, filed on 22 October 5, 2010, which failed to include income from 23 24 25 her TSP distribution and reflected a refund due of $5,572. Accordingly, respondent's determinations are sustained. 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 16 1 2 3 4 5 6 7 8 9 Addition to Tax under Section 6651(a) (1) Section 6651(a) (1) imposes a mandatory addition to tax for any failure to file a return by the date prescribed. For each month a return is late, an addition to tax equal to 5% of the amount of tax required to be shown on the return shall be assessed, not exceeding 25% of the aggregate. See id. The addition is imposed on the net amount due, calculated by reducing the amount required to be 10 shown as tax on the return by any part of the tax 11 which is paid on or before its due date. See sec. 12 13 14 15 16 17 18 19 20 21 22 6651(b) (1). Petitioner bears the burden of proving that the failure to file a timely return was due to reasonable cause, and not due to willful neglect. See sec. 6651(a) (1); United States v. Boyle, 469 U.S. 241, 245 (1985). Failure to timely file is due to reasonable cause "If the taxpayer exercised ordinary business care and prudence and was nevertheless unable to file the return within the prescribed time". Sec. 301.6651-1(c) (1), Proced. & Admin. Regs.; see United States v. Boyle, 469 U.S. at 246. 23 Willful neglect is interpreted as a "conscious, 24 intentional failure or reckless indifference." 25 United States v. Boyle, 469 U.S. at 245. 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 17 1 Petitioner's 2009 tax return was due on 2 April 15, 2010, but she did not file her return until 3 October 5, 2010. Petitioner did not offer any 4 5 6 7 8 9 10 11 12 13 14 15 16 evidence showing her tardiness was due to a reasonable cause, nor did she offer any evidence that she had been granted an applicable extension of the filing deadline. Further, petitioner offers no evidence that her filing was not a result of willful neglect. In fact, petitioner stated in her pleadings that she "neglect[ed] to submit [her] written tax document[s] in a timely manner." This statement appears to directly admit that the addition to tax under section 6651(a) (1) is appropriate. Petitioner presents various arguments why she thinks the deficiency is incorrect, but does not address the fact that her 2009 tax return was filed nearly six 17 months after the due date. Accordingly, respondent's 18 19 20 21 22 23 24 25 determination that petitioner is liable for the addition to tax under section 6651(a) (1) for tax year 2009 is sustained. Accuracy-Related Penalty under Section 6662(a) Section 6662 1mposes an accuracy-related penalty equal to 20% of the underpayment attributable to any substantial understatement of income tax or to negligence or disregard of rules or regulations. 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 18 1 2 3 4 5 Sec. 6662 (a) and (b) (1) and (2). Under section 7491(c), the Commissioner has the burden of production to show that the imposition of a penalty under section 6662(a) is appropriate. However, this does not mean respondent bears the burden of proof 6 with regard to penalties, only that respondent "must 7 8 9 10 11 12 13 14 come forward with sufficient evidence indicating that it is appropriate to impose the relevant penalty." Higbee v. Commissioner, 116 T.C. 438, 446-447 (2001). Further, respondent does not have the burden to introduce evidence regarding reasonable cause or substantial authority. Id. No penalty will be imposed under section 6662(a) if the taxpayer establishes that he acted 15 with reasonable cause and in good faith. Sec. 16 17 18 19 20 21 22 23 24 25 6664 (c) (1). Circumstances that indicate reasonable cause and good faith include reliance on the advice of a tax professional or an honest misunderstanding of the law that is reasonable in light of all the facts and circumstances. Sec. 1.6664-4 (b), Income Tax Regs. The taxpayer has the burden of proving that he acted with reasonable cause and in good faith. Rule 142(a); Higbee v. Commissioner, 116 T.C. at 446-447. Regulations promulgated under section 6664 (c) further provide that the determination of 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 19 reasonable cause and good faith "is made on a case-by- TP case basis, taking into account all pertinent facts and circumstances." Sec. 1.6664-4 (b) (1), Income Tax Regs. Section 6662(d) defines "substantial understatement" as the greater of: (1) 10% of the amount of tax required to be shown on the return; or (2) $5,000. "Negligence" includes any failure to 1 2 3 4 5 6 7 8 9 make a reasonable attempt to comply with the 10 11 12 13 14 15 16 17 18 provisions of the Code, and "disregard" includes any careless, reckless, or intentional disregard of rules or regulations. Sec. 6662(c). On her 2009 tax return, petitioner reported total income tax of $12,546, and in conjunction with her federal withholding for that year, requested a refund of $5,572. Respondent has demonstrated that the amount of tax required to be shown on petitioner's 2009 tax return was $29,119. 19 Petitioner's understatement of $16,973 is therefore 20 21 22 23 24 25 greater than 10% of the amount required to be shown on the return. Accordingly, respondent has met his burden of production under section 7491(c). Petitioner argues that she had reasonable cause because of an honest and reasonable mistake of the law. Petitioner contends that she reasonably 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 20 1 2 3 4 5 6 7 8 9 believed that her contributions to her TSP were nondeductible and therefore that she had a basis in the plan. Petitioner's belief seems to be predicated on her misinterpretation of difficult tax principals and a misreading of the confusing language describing her TSP. However, petitioner received Forms W-2 for the years of her contributions - and filed tax returns based on those forms - reflecting that those contributions were not taxed in the years they were 10 made. Petitioner cannot be found to have made a 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 reasonable mistake in believing that her TSP contributions to be nondeductible while filing Federal income tax returns reflecting their deductibility. Petitioner's also mentions in her petition that she consulted with legal representation and was told that her case was easily resolvable. One of the requirements to escape 6662(a) penalties through reliance on a tax professional requires that taxpayers actually relied on the adviser's judgment. See Neonatology Assocs., P.A. v. Commissioner, 115 T.C. 43, 99 (2000), aff'd, 299 F.3d 221 (3d Cir. 2002); see also Charlotte's Office Boutique, Inc. v. Commissioner, 425 F.3d 1203, 1212 n. 8 (9th Cir. 2005). Here, petitioner did not rely on the legal 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 21 representation for tax preparation or planning, but appears to have talked with the legal representation only after the deficiency was asserted. Further, the identity and competency of the legal representation was never established. The record is vacant of any other evidence to support a reasonable cause for the underpayment. Accordingly, respondent's determination that petitioner is liable for the accuracy-related penalty under section 6662(a) for tax year 2009 is sustained. VII. In order to give effect to our disposition of the disputed issues, decision will be entered for respondent. VIII. This concludes the Court's oral findings of fact and opinion in this case. (Whereupon, at 3:55 p.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 25 866.488.DEPO www.CapitalReportingCompany.com