TAX COURT OPINION

Case: Bilal Ahmed
Docket Number: 23807-15
Judge: Goeke
Opinion Type: bench
Filed: 12/14/2016
Pages: 11

UNITED STATES TAX COURT WASHINGTON, DC 20217 BILAL AHMED, Petitioner(s), v. COMMISSIONER OF INTERNAL REVENUE, Respondent ) ) ) ) ) Docket No. 23807-15. ) ) ) ) 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 Joseph Robert Goeke at San Francisco, California on December 2, 2016, containing his 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 under Rule 155, Tax Court Rules of Practice and Procedure. (Signed) Joseph Robert Goeke Judge Dated: Washington, D.C. December 14, 2016 SERVED DEC 15 2016 Capital Reporting Company 3 1 2 Bench Opinion by Judge Joseph Robert Goeke December 2, 2016 3 Bilal Ahmed v. Commissioner 4 5 6 7 8 9 10 11 12 Docket No. 23807-15 THE COURT: 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. This opinion is authorized by Internal Revenue Code Section 7459 (E) and Rule 152 of the Tax 13 Court Rules of Practice and Procedure. Section 14 15 16 17 18 19 20 21 22 23 24 25 references in this opinion are to the Internal Revenue Code in effect for the year 2013 and Rules references are to the Tax Court Rules and Practice and Procedure. The Court has jurisdiction over this matter pursuant to sections of the Internal Revenue Code, including Sections Ó213 and Ó214. Respondent issued a Notice of Deficiency to the Petitioner for the year 2013 and the Petitioner timely filed a petition for review of that Notice of Deficiency determination. Respondent determined a deficiency in income tax in the amount of $8,730 and an addition to 866.488.DEPO www.Capita1ReportingCompany.com Capital Reporting Company 4 1 2 3 4 5 tax based upon the substantial tax understatement penalty under Section 6662(a) in the amount of $1,732. At trial, Petitioner did not contest all of the adjustments in the Notice of Deficiency. The 6 Notice of Deficiency included additional income for 7 8 9 10 11 12 unemployment compensation in the amount of $1,687. That amount was not contested by the Petitioner at trial. Respondent also made a determination based upon the 10 percent addition to tax under Section 72(t) for an early distribution from an IRA and 13 Petitioner did contest that determination at trial. 14 15 16 17 18 The only other issue remained in dispute is the applicability of the addition to tax under Section 6662. The facts were largely stipulated by the parties and, in addition, testimony was taken from 19 Petitioner and entered into the record. At the time 20 21 22 23 24 25 the petition was filed in this case Pet·itioner resided in Oakland, California. As stated previously he received a Notice 6 of Deficiency from the Respondent which was based upon an audit of his federal income tax return for the year 2013. On that income tax return the 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 5 1 Petitioner reported $81,808 as an IRA distribution. 2 The Petitioner included with the return Form 5329, 3 which deals with the computation of whether 4 5 6 7 8 additional taxes are due regarding distributions from IRAs and other pension plans. Petitioner asserted on that form that the entire distribution he received in 2013 was not subject to the additional tax under Section 72(t). 9 Petitioner based his position regarding the 10 applicability of the additional tax under Section 11 12 13 14 15 16 17 18 19 72(t) upon his argument that in an order issued by the Superior Court of California resolving the issues in his divorce the court, pursuant to an agreement between he and his former spouse,Aordered that he was to sell property in his IRA for use to settle credit cardnof the marital community. In particular, paragraph F2 of the stipulation regarding division of remainder of the estate innorder entered by the Superior Court of Wke 20 California, County of Contra Costa, in Docket Number 21 22 23 24 25 D11-05276, provides as follows: "Bilal's IRA. The stipulation regarding credit card balance in an order executed by the parties on March 11, 2013, identifies t e present balances of Bilal's Wells Fargo business card Visa 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 6 1 2 account , the Citi AA Advantage American Express Card account , and the Citi Gold AA Advantage 3 World Elite MasterCard account , as community 4 5 6 7 8 9 10 11 12 13 obligations subject to division by the court. The parties hereby agree that the entire balance of each of the credit cards identified in this paragraph shall be paid in full by funds obtained from the sale of assets on deposit in Bilal's Fidelity rollover IRA account Any mandatory tax withholding, penalties assessed for early withdrawal of funds, and transactional costs assessed by the plan administrator as a result of the sale of assets shall be divided between the parties in equal·shares. 14 Bilal shall make all necessary arrangements for and 15 16 17 execute the sale of the assets in said IRA within 30 calendar days of the date of execution of this agreement and give Shakt's attorneys proof of sale in 18 writing. After the sale of assets is cömplete, Bilal 19 20 shall pay the entire balance of each credit card specified in this paragraph with funds from said IRA 21 within 30 calendar days of the final sale of assets. 22 Bilal shall provide proof to Shakt's attorneys in 23 writing that the balance of each account has been 24 25 paid in full. All charges of any kind whatsoever incurred after March 10, 2013, shall be the sole 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company I 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 separate obligation of Bilal and Shakt shall be held harmless for said obligations. Any balance remaining in Bilal's IRA after said credif card balances are paid in full shall be divided equally between the parties. Shakt's one-half share of the remaining assets shall be transferred to the appropriate account of her designation by trustee-to-trustee transfer. Each party shall cooperate fully to promptly execute the trustee-to-trustee transfer." Following this order, the Petitioner sought the withdrawal of the $81,808 from his IRA and used that amount, based upon his testimony, to satisfy the credit card debt and then use the remaining amount to pay the legal fees of his former spouse and himself. He maintains that having been ordered to do so pursuant to the stipulation and order of the 17 California Superior Court that the withdrawal is 18 19 20 21 22 23 exempt from the 10 percent additional tax provided by Section 72 (t) . Section 72(t) provides for a 10 percent increase of the portion of tax associated with gross income from an early withdrawal from an IRA. There's no dispute that that provision is applicable to 24 Petitioner's early withdrawal; however, Section 25 72(t) (2) provides exceptions to the applicability of 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 8 1 that 10 percent additional tax. And Petitioner 2 maintains that he is subject to the exception 3 4 5 6 contained in Section 72(t) (C). That subsection provides as follows: Any distribution to an alternate payee pursuant to a qualified domestic relations order (within the 7 meaning of Section 414(p)(1)). 8 9 10 11 12 13 14 15 16 17 18 19 Section 414(p) defines a qualified domestic relation order as a domestic relations order which creates or recognizes the existence of an alternate I payee's right to assign, to receive all or a portion of the benefits payable to the participant in the plan. Subsection 414(p) (2) requires that a qualified domestic relations order clarify the name and last-known mailing address of the participant and of the alternate payee and also the amount or percentage of the participant's benefits to be paid by the plan to the alternative payee in the manner in 20 which that amount is to be determined. 21 22 23 24 25 In addition, Section 414(p)(6) provides procedures for the notification of the plan administrator of the qualified domestic relations order and requirements as to the coordination of the procedural aspects of the administratioh of the order 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 9 1 with the plan administrator. 2 3 4 5 6 7 It's undisputed that the Petitioner did not provide the order in question to the administrator of his IRA and it is also clear from the order, itself, that it does not meet the requirements of Subsection 414(p)(2) as described above. Respondent correctly points out that 8 Petitioner was required to submit the order to the 9 plan administrator in order to be subject to the 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 statutory exception under Section 72(t)(2)(C). Given this and other inadequacies of the order in question, there's no question that the Petitioner's position that he was exempt from the application of Section 72(t) is incorrect. The order was not a qualified domestic relations order and the inadequacies of the order are not mere technical failures. The order is intended to ensure the credit card debt of the marital community of Petitioner and his former spouse is satisfied and he was ordered to receive the money initially himself, not to transfer the money to his spouse. He testified that remaining amounts after the satisfaction of the credit card debt, which was to his benefit as well as to his former spouse, were 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 10 1 2 3 4 5 6 7 8 9 10 11 12 13 used to pay obligations of himself as well as his former spouse in legal fees. Use of the funds in this manner is not consistent with a statutory exception as a policy matter in addition to the technical inadequacies of the order and Petitioner's failure to provide the order to the plan administrator. As stated previously, the exdeption anticipates a specified payment or payments to the alternative payee and the amounts made available to satisfy the credit card debt and otherwise made available to Petitioner' s former spouse were not adequately specified in the order. In addition, 14 Petitioner's position is inconsistent with the case 15 16 17 18 19 20 21 22 23 24 25 law in this area, including Rodoni v. Commissioner, 105 T.C. 29, 37 (1995). Having determined that the early withdrawal from the IRA in question in this case i's not subject to the exception in Section 72 (t) (2) (C)·, we turn to the remaining issue in the case which is the applicability of Section 6662(a) to the deficiencies which we have sustained. Respondent accepts that Respondent bears the burden of production under Section 7491 (c) with respect to the accuracy-related penalty: under Section 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 11 1 2 3 4 5 6 7 8 9 10 11 12 13 6662(a). We find the Respondent has met the initial burden of production pursuant to the analysis previously described which sustains the deficiency in this case. Once Respondent has met that initial production, the burden is on the Petitioner to provide persuasive evidence that the accuracy-related penalty does not apply. Higbee v. Commissioner, 116 T.C. 438 (2001). A substantial understatement of tax occurred in the present case as the amount of the deficiency exceeds $5,000, Section 6662(d)(1); however, the penalty in question may not be imposed 14 with respect to any portion of the underpayment if 15 16 17 18 19 20 21 22 23 24 25 there was reasonable cause and the taxpayer acted in good faith with respect to that portion of 1 the underpayment, Section 6664(c)(1). In determining whether there ùas reasonable cause it is appropriate to consider the taxpayer's knowledge and experience and it is also important to assess the taxpayer's efforts to determine his proper tax liability, Treas. Regs. Section 1.6664-4(b)(1). In this regard, we believe it is important that the Petitioner filed the appropriate form with respect to the early withdrawal from the IRA. While 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 12 1 the Petitioner incorrectly claimed that. the 2 withdrawal was exempt, his assertÛ that the 3 withdrawal was exempt we believe was good faith 4 5 6 7 8 9 10 11 12 13 14 15 16 given the rather complex nature of the law regarding the treatment of qualified domestic relations orders. Therefore, we do not believe the Section 6662 addition to tax should apply to the underpayment of tax resulting from the 10 percent additional tax associated with the early withdraw from the IRA; however, we do believe the addition to tax is applicable to Petitioner's underreporting of the $1,687 in unemployment compensation whiáh he failed to reflect on his return. Therefore, in connection with the application of the addition to tax a Rule 155 computation will be necessary; however, ·we sustain 17 Respondent's determination with respect to the complete deficiency in this case. This concludes The Court's oral findings of fact and opinion in this case. (Whereupon, at 9:37 a.m., the above- entitled matter was concluded.) 18 19 20 21 22 23 24 25 866.488.DEPO www.CapitalReportingCompany.com