TAX COURT OPINION

Case: Young Kim
Docket Number: 11902-10
Judge: Laro
Opinion Type: bench
Filed: 06/27/2011
Pages: 14

UNITED STATES TAX COURT WASHINGTON, DC 20217 June 23, 2011 l YOUNG KIM, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. ) ) ) ) ) ) ) ) ) ) ORDER Docket No. 11902-10. Pursuant to Rule 152 (b) , Tàx 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 transcript of Laro at Chicago, findings of fact and opinion rendèred at hearing . the hearing in the above case before Judge David IL, on May 20, 2011, containing his oral the pages of the the conclusion of the In accordance with the oral findings of fact and opinion, decision will be entered under Rule 155. (Signed) David Laro Judge Dated: Washington, DC June 27, 2011 SERVED JUN 2 7 2011 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 Bench Opinion by Senior Judge David Laro May 20, 2011 Young Kin v. Commissioner Docket No. 22901-10 THE COURT: The Court has decided to render Oral Findings of Fact and Opinion in this case. This bench opinion is made pursuant to the authority granted by section 7459(b) of the Internal Revenue Code, an Rule 152 of the Tax Court Rules of Practice and Pro dure. Petitioner refers to Young Kim; Seyfart Shaw refers to the law firm Seyfarth Shaw, LLP; section references re to the Internal Revenue Code; and Rule references are to the Tax Court Rules of Practice and Procedure. Some dollar amounts have been rounded. Petitioner petitioned the Court to redetermine respondent's(determination of a $23,872 deficiency in his 2006 Federal income tax, a $1,330 addition to tax under section 6651(a) (1),,and a $4,774 accuracy-related penalty under section 6662. Petitiorer resided in Illinois when he filed his petitio . Background Petitioner was born on January 12, 1949. He is a graduate of Shimer College, Northwestern Universjty School of Law, and.the London School of Economics and Political Science. He was a partner in Heritage Repórting Corporation (202) 628-4888 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 4 Seyfarth Shaw from 1997 through 2004 or 2005, at which time he separated from that firm. While employed with Seyfarth Shaw, he participated in the firm's 401(k) savings and retirement plan. Some time after petition r separated from the firm but prior to January 1, 2006, he rolled over the entire balance of his 401(<) account into a noncontributory individual retiremeat account (herein, IRA). Petitioner spoke with his accountant and Seyfarth Shaw's plan administrator before he rolled over his 401(k) account. After leaving Seyfarth Shaw, petitioner enrolled fullttime at the London School of Economics and Political Science in pursuit of a master of science degree. During 2006 he paid approximately $12,000 in tuition and fees to that university, and paid $2,127 for travel between London and Illinois. Petitioner paid $2,665 for room, board, and lodging expenses during 2006, including: $275 on September 25; $389 on September 27; and $2,001 on October 6. Finally, he paid $751 for books during 2006, including: $52 on May 6; $35 on May 10; $12 on May 30; $22 on June 26; $43 on July 14; $15 on August 8; and $572 on December 19. During 2006 petitioner's daughter, S.K., Heritage Reporting Corporation (202) 628-4888 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 5 attended Bryn Mawr College and lived in an off-campus apartmens. Petitioner paid $15,185 in tuition and fees to Bryn Mawr College in connection with S.K.'s educatio:1. These fees included $14,785 for tuition, $20 for public safety charges, $120 for dues, and $26Ø for fees. Petitioner cosigned a lease with his daughter to rent apartment No. 313 for $699 per month from October 15, 2005 through May 31, 2006. In total, petitionar paid $3,495 in connection with S.K.'s rent during 2206. Finally, petitioner gave S.K. $1,000 per month foc additional expenses. Petitioner withdrew $238,661 from his IRA in 2006. Ha used a portion of these funds to pay for his educatio1 at the London School of Economics and Political Science, and for S.K.'s education at Bryn Mawr College. By 2007, petitioner had engaged an accounta t to prepare his 2006 Federal income tax return. Although he filed an application for automati extension of time to file his 2006 return, respondent did not receive that return until October 17, 2007. The 2006 return reported distributions from petitioner's IRA as taxable but excluded a 10-percent additional tax on those distributions. See sec. 72(t) (1). // Heritage Reporting Corporation (202) 628-4888 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 Discussion 6 I. 10-Percent Additional Tax on Early Distributions From IRA Respondent contends that petitioner is liable for the 10-percent additional tax imposed on early distributions from a qualified retirement plan under se tion 72(t). Section 72(t) (1) generally imposes a 10-percent additional tax on the amount of any early distribution from a qualified retirement plan unl ss that distribution satisfies any of the exceptions enumerated in section 72(t) (2) (A). An IRA is a qualified retirement plan to which section 72(t) (1) appl es. See secs. 408(a), 4974(c) (4). Petition r claims entitlement to two exceptions under section 72(t) (2) (A) and bears the burden of proving that these exceptions apply. See Bunney v. Commissioner, 114 T.C. 259, 265 (2000). First, petitioner argues that he is excepted from the section 72 (t) ádditional tax under section 72 (t) (2) (A) (v) . We disaýree. Section 72 (t) (2) (A) (v) excepts from the section 72(t) addition to tax distributions which are made to an employee after separation from service after attainment of age 55. However, section 72(t) (3) (A) plainly provides that section 72(t) (2) (A) (v) does not apply to distributions Heritage Reporting Corporation (202) 628-4888 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 7 from an individual retirement plan, such as an IRA. See sec. 7701(a) (37). Although petitioner was over 55 years of age when he separated from Seyfarth Shaw, section 72(t) (3) (A) renders the section 72(t) (2) (A) (v) exception inapplicable to amounts withdrawn from his IRA in 2006. Emerson v.iCommissioner, T.C. Memo. 2000-137; Deal v. Commissioner, T.C. Memo. 1999-352. Accordingly, petitioner is not entitled to relief under section 72 (t) (2) (A) (v) . Second, petitioner argues that he is excepted from the section 72(t) additional tax under section 72(t) (2) (E). Section 72(t) (2) (E) provides an exception to the 10-percent additional tax for distributions from an individual retirement plan for higher education expense$ that do not exceed the taxpayer's qualified higher education expenses. Qualified higher education expenses are defined in section 529(e) (3), and generally include certain education expenses furnished to the taxpayer, the taxpayer's spouse, or any child of the taxpayer or the taxpaye 's spouse, at an eligible institution. Sec. 72(t) (7). These expenses generally include tuition, fees, books, supplies, eguipment, and in limited circumstances, room and board. Sec. 529(e) (3) (A) (i) (B). Heritage Reporting Corporation (202) 628-4888 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 Section 529(e) (3) (]B) (ii) limits the amount of room and board expenses that may be treated as qualifie higher education to the allowance for room and board included in the cost of attendance as defined in section 472 of the Higher Education Act of 1965, 20 U.S.C. section 1087LL, or if greater, the actual invoice amount the student residing in housing owned or operated by the eligible educational institution is charged by such institution for room and board costs. See also sec. 1.529-1(c), Proposed Income Tax Regs., 63 Fed. Reg. 45019 (Aug. 24, 1998). Under the Higher Education Act, the allowance for room and board included in the cost of attendance is determined by the institution. See 20 U.S.C. sec. 1087LL(3). At trial, petitioner did not establish that all of the room and board expenses he incurred on behalf of himself and S.K. were within the limits established by section 529(e) (3) (ii). We are satisfied that a portion of these expenses were within the 2006 allowance for room and board at the London School of Economics and Political Science and Bryn Mawr College. We leave it to the parties to determine as part of their Rule 155 computation the applicable limit on expenses incurred for room and board as Heritage Reporting Corporation (202) 628-4888 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 9 stated by the London School of Economics and Political Science and Bryn Mawr College in their 2006 costs of attendanze. See Venet v. Commissioner, T.C. Memo. 2009-268. Petitioner may exclude from the section 72(t) (1) additional tax that portion of expenses which he paid as room and board for his education at the London School of Economics and Political Science, or $2,665, and that portion of expenses which he paid as room and board for S.K.'s education at Bryn Mawr College, or $3,495, but only if the expenses paid are within tue allowance for room and board as stated by those universities in their 2006 costs of attendance. To the extent that the allowances for room and board are less than the amounts paid by petitioner, then petitioner is limited by that amount. See sec. 529 (e) (3) . On the basis of petitioner's direct testimony and documents received into evidence, both of which we found to be credible, we are satisfied that petitioner incurred approximately $12,751 in connection with his enrollment at the London School of Economics and Political Science, including: $12,000 for tuition and fees, and $751 for books. We are also satisfied that petitioner paid $15,185 for tuition and fees related to S.K.'s enrollment at Bryn Mawr Heritage Reporting Corporation (202) 628-4888 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 College. We do not credit petitioner's transportation expenses as qualified higher education expenses. See Argyle v. Commissioner, T.C. Memo. 2009-218, affd. 397 Fed. Appx. 823 (3d Cir. 2010). Nor do we credit petitioner's $1,000 monthly allowance for S.K., because petitioner did not establish that these expenses were within the purview of section 529(e) (3). See Rudnick v. Commissioner, T.C. Memo. 2009-133. In sum, we conclude that petitioner is not subject to the 10-percent additional tax on the $12,751 he paid to the London School of Economics and Political Science or the $15,185 he paid to Bryn Mawr College. Petitioner has not proven his entitlement to any other exception under section 72(.t) (2) as to the remaining amounts withdrawn from his IRA. See Venet v. Commissioner, supra; Lodder-Beckert v. Commissioner, T.C. Memo. 2005-162. Accordingly, the remainirg amount withdrawn by petitioner from his IRA in 2006 is subject to the 10-percent additional tax under section 72(t) (1). See Roundy v. Commissioner, T.C. Mero. 19447997-affd. 122 F.3d 835 (9th Cir. 1997) . gg II. Adiustments to Income As set forth in the notice of deficiency, respondEnt also determined that petitioner received Heritage Reporting Corporation (202) 628-4888 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 11 $28 in interest income from Northern Trust Co. but only reported $8 as taxable on his 2006 return. Including the unreported $20 of interest income in petitioner's 2006 taxable income resulted in a $1 computational adjustment to petitioner's itemized deductions for that year. Because these issues were not raised at trial, they are deemed conceded under Rule 34(b) (4). III. Section 6651(a) (1) Addition to Tax Respondent determined that petitioner is liable for an addition to tax under section 6651(a) (1). That section imposes an addition to tax for failure to file a required return by its due date, unless the taxpayer proves that the failure to file was due to reasonable cause and not due to willful neglect. The Commissioner bears the burden of production with respect to a taxpayer's liability for an addition to tax under section 6651(a) (1). See sec. 7491(c); Higbee v. Commissioner, 116 T.C. 438, 446-447 (2001). Once the Commissioner has met his burden of production, the burden of proof then shifts to the taxpayer to prove his entitlement to the reasonable cause exception of section 6651(a) (1). See Higbee v. Commissioner, supra, at 446; sec. 301.6651-1(c) (1), Heritage Reporting Corporation (202) 628-4888 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 12 Proced. & Admin. Regs. Respondent provided transcripts which showed that respondent did not file petitioner's 2006 return until October 17, 2007, which date was two days after the deadline for filing that return with extension. Thus, respondent has carried his burdsn of production. Petitioner offered no direct evidence, other than his own testimony, to establish that he mailed his 2006| return timely. He contends that the 2006 return was timely mailed because such date is reasonably consistent with the date the return was received by respondent. Merely showing that the return was likely timely filed, however, is insufficient to establish timely filing for purposes of section '6651(a) (1). Various courts have held that section 7502 creates the only exception to the physical delivery rule. See Miller v. United States, 784 F.2d 728 (6th Cir. 1986); Surowka v. United States, 909 F.2d 148 (6th Cir.1990); Fabian v. Commissioner, T.C. Memo. 1994-487. In Hiner v. Commissioner, T.C. Memo. 1993-608, this Court noted that Congress has provided that mailing by certified or registered mail creates prima facie evidence of the date of mailing and the fact of delivery. See sec. 7502(c). By choosing to not use certified or Heritage Reporting Corporation (202) 628-4888 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 13 registered mail, petitioner assumed the risk that he might be unable to prove the date of mailing. We therefore hold that petitioner is liable for an addition to tax under section 6651(a) (1). IV. Accuracy-Related Penalty Respondent also determined that petitioner is liable for an accuracy-related penalty pursuant to section 6662(a) and (b) (1) and (2) for negligence or substantial understatement of income tax. An understatement is substantial if it exceeds the greater of 10 percent of the tax required to be shown on the return or $5,000. See Sec. 6662(d) (1). The Commissioner bears the burden of producirg sufficient evidence to support imposition of an accuracy-related penalty. See sec. 7491(c). Once the Comn.issioner has met his burden, the burden of proof i then placed on the taxpayer to prove that the accuracy-related penalty does not apply because of reasonable cause, substantial authority, or the like. See sect. 6662(d) (2) ()B), 6664(c) (1) ; Higbee v. Commissioner, supra at 449. The notice of deficiency determired a deficiency of $23,872, which amount exceeds the greater of $5,000 or 10 percent of the tax required to be shown on the 2006 return. Thus, we conclude that respondent has met his burden of Heritage Reporting Corporation (202) 628-4888 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 14 production. Section 6664(c) provides that the accuracy-related penalty is not imposed with respect to any portion of an underpayment to which the taxpayer acted with reasonable cause and in good faith eliance on the advice of a professional, such as an accountaat, may constitute reasonable cause and good faith in limited circumstances. Neonatology Associatas, P.A. v. Commissioner, 115 T.C. 43, 98 (2000), affd. 299 F.3d 221 (3d Cir. 2002); sec. 1.6664-4(c) (1), Income Tax Regs. We have stated that a taxpayer's reliance on a professional is with reasonable cause and in Qood faith where the taxpayer proves by a preponderance of the evidence that: (1) The taxpayer reasonably believes that the professional upon whon the reliance is placed is a competent tax adviser who has sufficient expertise to justify reliance; (2) the taxpayer provides necessary and accurate information to the adviser; and (3) the taxpayer actually relies'in good faith on the adviser's judgment. See Neonatology Associates, P.A. v. Commissioner, supra, at 99. Petitioner has failed to satisfy the three-part test articulated by this Court in Neonatolagv. Although petitioner testified credibly Heritage Reporting Corporation (202) 628-4888 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 15 that he relied on an accountant to prepare his 2006 return, he did not introduce evidence which would enable us to evaluate that accountant's expertise to prepare that return. See Williams v. Commissioner, T.C. Memo. 2011-89; Sykes v. Commissioner, T.C. Memo. 2010-84; Jordan v. Commissioner, T.C. Memo. 2009-223. Nor did petitioner demonstrate that he provided his accountant with necessary and accurate information to prepare his 2006 return. See Tash v. Commissioner, T.C. Memo. 2008-120. Having otherwise failed to establish reasonable cause sufficient to negate the penalty, we hold that petitioner is liable for a section 6662 accuracy-related penalty equal to 20 percent of the underpayment due from petitioner. V. Conclusion In reaching these holdings, we have considered all arguments made at trial and, to the extent not mentioned above, we conclude that they are moot, irrelevant, or without merit. Decision will be entered under Rule 155. This concludes the Court's Oral Findings of Fact and Opinion in this case. (Whereupon, at 9:47 a.m., the bench opinion in the above-entitled matter was concluded.) // // Heritage Reporting Corporation (202) 628-4888