TAX COURT OPINION

Case: Lifang Wang & Ke Zhong
Docket Number: 8763-16
Judge: Gustafson
Opinion Type: bench
Filed: 04/13/2017
Pages: 10

UNITED STATES TAX COURT WASHINGTON, DC 20217 LIFANG WANG & KE ZHONG, Petitioners, v. ) ) ) SR ) Docket No. 8763-16. COMMISSIONER OF INTERNAL REVENUE, Respondent ) ) ) ORDER Pursuant to Rule 152(b) of the 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 proceedings in the above case before the undersigned judge at San Francisco, California, on March 28, 2017, 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, decision will be entered under Rule 155. (Signed) David Gustafson Judge Dated: Washington, D.C. April 13, 2017 SERVED Apr 13 2017 Capital Reporting Company 3 1 Bench Opinion by Judge David Gustafson 2 March 28, 2017 3 4 5 6 Lifang Wang & Ke Zhong v. Commissioner Docket No. 8763-16 THE COURT: The Court has decided to render the following as its oral Findings of Fact and 7 Opinion in this case. This Bench Opinion is made 8 9 pursuant to the authority granted by section 7459(b) of the Internal Revenue Code (26 U.S.C.), and Tax 10 Court Rule 152; and it shall not be relied on as 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 precedent in any other case. By a notice of deficiency dated February 8, 2016, (Ex. 1-J), the Internal Revenue Service ("IRS") determined a deficiency in the Federal income tax of petitioners Lifang Wang and Ke Zhong for the year 2013. After petitioners' concession that they received $43 of dividend income in 2013, the remaining issues for us to decide are whether petitioners received distributions of retirement income totaling $6,548 that they failed to report and, if so, whether they owe additional tax of 10% pursuant to section 72(t). For the reasons explained below, we hold in favor of petitioners. Trial of this case was conducted on March 27, 2017, in San Francisco, California. Petitioners 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 4 1 2 3 4 represented themselves; and respondent, the Commissioner of the IRS, was represented by Phillip D. Hatfield. English is not the first language of petitioners, and Ms. Wang is not fluent in English. 5 Petitioners did not arrange in advance for an 6 interpreter to assist at trial nor give notice to the 7 Court of Ms. Wang's difficulty with English. 8 9 10 11 12 13 14 15 However, the parties stipulated that the first page of petitioners' pretrial memorandum would be received into evidence as the testimony of the petitioners, which facilitated Ms. Wang's testimony being presented without the difficulty of her understanding questions and giving answers in English. FINDINGS OF FACT In 2013 Ms. Wang was in her late 40s and 16 Mr. Zhong was in his 50s. (Ms. Wang had not yet 17 18 19 20 21 22 23 reached age 59-1/2.) Ms. Wang had serious psychiatric problems. She had been institutionalized; and Mr. Zhong had been her conservator; but in June 2013 she was released. Intended rollover transaction In November 2013 Ms. Wang went to Chase Bank, where she had retirement accounts, and withdrew 24 all the money from those accounts by two cashier's 25 checks, totaling $6,548.74. Two days later she went 866.488.DEPO www.Capita1ReportingCompany.com Capital Reporting Company 5 1 2 3 4 5 6 7 to a branch of the Bank of America ("BOA"), where petitioners had some accounts, and asked that these checks from Chase Bank be deposited as rollover into a new IR account. BOA did accept and process the deposit. However, there is no evidence in the record that the new account at Bank of American qualified as an IRA, and petitioners concede that it was not. Ms. 8 Wang left the money in the new account and did not 9 withdraw it. 10 11 Tax return and notice of deficiency Petitioners filed a tax return for 2013 on 12 which they did not report the Chase withdrawals as 13 14 15 16 17 18 19 20 21 income. Chase Bank reported the withdrawals to the IRS on Forms 1099-R, with the distribution code ("Distrib CD") of "J". (See Ex. 1-J, p.4 of 6. We take notice of the IRS's "2013 Instructions for Forms 1099-R and 5498", which (at page 0-16) identify code J as "Early distribution from a Roth IRA.") In February 2016 petitioners received the notice of deficiency ("NOD") from the IRS, which proposed a tax deficiency on the grounds that Ms. 22 Wang had received an IRA distribution before age 59 23 1/2 and had not rolled it over into another IRA. 24 Correction of the rollover transaction 25 Petitioners learned from the NOD that the 866.488.DEPO www.CapitalReportingCompany.com F Capital Reporting Company 6 1 2 3 4 5 6 7 8 9 IRS had concluded that the intended rollover contribution had not been deposited into an IRA account. Petitioners then consulted with BOA and learned that it had erroneously created a non-IRA account to which the intended rollover contribution had been deposited. BOA personnel apologized to petitioners and admitted the error. Petitioners instructed Bank of America to create an IRA account, and the money was transferred to the IRA account in 10 about April 2016. 11 12 13 14 We find that the deposit of Ms. Wang's Chase IRA distribution into a non-IRA account in 2013 was without fault on her part and was the result of an error by Bank of American in failing to follow Ms. 15 Wang's instructions. 16 17 18 19 20 21 22 23 24 25 In response to the NOD, petitioners timely filed their petition in the Tax Court in April 2016. At that time they resided in California. OPINION I. Burden of proof and production As a general rule, the IRS's determination is presumed correct, and the taxpayer bears the burden to prove any adjustments to the income the IRS determined. See Rule 142(a). In this case, the IRS relied on Forms 1099 866.488.DEPO www.CapitalReportingCompany.com ! Capital Reporting Company 7 1 2 3 4 5 6 7 8 9 submitted by a third party (Chase Bank) to attribute income to Ms. Wang. The IRS may indeed rely on information returns (such as Forms 1099) from third- party payors when determining a taxpayer's liability. See e.g., Cabirac v. Commissioner, 120 T.C. 163, 167 (2003) . But if "[i]n any court proceeding...a taxpayer asserts a reasonable dispute with respect to any item of income reported on an information return filed with the Secretary...and the taxpayer has fully 10 cooperated with the Secretary..., the Secretary shall 11 12 13 14 15 16 17 18 have the burden of producing reasonable and probative information concerning the deficiency in addition to such information return." Sec. 6201(d). We hold that petitioners have asserted a "reasonable dispute" as to the income reported on the Form 1099 from Chase Bank, so that the Commissioner has the burden in this suit to produce "reasonable and probative information" showing additional income. 19 During closing argument, we questioned whether 20 respondent here had made that showing, especially 21 22 23 24 25 since neither the Forms 1099 nor a wage and tax statement derived from the IRS's records was offered into evidence. (Exhibit 3-J is not such a statement.) However, up on perceiving that the NOD itself reflects Chase Bank's submission of Forms 866.488.DEPO www.Capita1ReportingCompany.com Capital Reporting Company 8 1 2 3 4 5 1099-R with distribution code "J", and observing that petitioners themselves do not dispute that Ms. Wang's accounts at Chase Bank were "IRA accounts" and that the Bank of America account was "opened NOT as a rollover account" (see petitioners' pretrial 6 memorandum at 1), we now conclude that respondent 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 satisfied his burden of production under section 6201(d). He has made a showing of a distribution from an IRA and a failure to complete a rollover transaction within 60 days. Since respondent has met that burden, petitioners retain the burden of proof. II. IRA principèbs Generally, under section 72, amounts distributed to the taxpayer from an IRA are includible in the taxpayer's gross income, see sec. 408(d)(1), and those amounts are subject to a "10- Percent Additional Tax" if the taxpayer has not yet "attained[ed] age 59-1/2", see sec. 72(t). The IRA must be a trust or a custodial account, administered by a trustee or custodian (here, Chase Bank or BOA) who acts as a fiduciary for that IRA. Sec. 408(a),(h); 26 C.F.R. sec. 1.408- 2(a), (d), Income Tax Regs. The Fiduciary is responsible for the investment and disposition of the property held in the IRA. 26 C.F.R. sec. 1.408-2(e). 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 9 1 2 3 4 5 6 An amount will not be treated as a taxable distribution from an IRA if it is a qualified rollover. Sec. 408(d)(3). A distribution is considered a qualified rollover contribution if the entire amount an individual receives is paid into a qualifying IRA or other eligible retirement plan 7 within 60 days of the distribution. Id.; see also 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Schoof v. Commissioner, 110 T.C. 1, 7 (1998). Because the Chase Bank IRA paid out $6,548 to Ms. Wang at her request, and because that amount was not paid into another IRA account until after the 60-day rollover period, the IRS treated the transaction as a taxable distribution. III. Analysis Section 408 and the regulations thereunder prescribe the rules generally applicable to IRAs, including how taxpayers may roll over amounts in their IRAs without the inclusion of those amounts in their taxable income. However, we have concluded in a prior rollover case that "a bookkeeping error does not alter the rights and responsibilities between the parties to a transaction", and that there is not "any indication in the statute, legislative history, or case law that Congress intended to deny rollover benefits to taxpayers on the basis that a financial 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 10 1 institution or other qualified IRA trustee made a 2 mistake in recording a transaction." Wood v. 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Commissioner, 93 T.C. 114, 121-122 (1989). Here, the noncompliance with the statutory and regulatory requirements for a valid IRA rollover was solely attributable to the account custodian's error. It would be inappropriate to punish the petitioners for an error that they did not make, and where at all times Ms. Wang's actions (going to a qualifying bank; depositing the Chase Bank distribution within two days of receiving it; instructing that it be deposited as an IRA rollover; and leaving the money untouched in the non-IRA account) were consistent with a belief that she had executed a valid rollover. IV. Waiver Section 408(d)(3)(I) provides: "The Secretary may waive the 60-day requirement under subparagraphs (A) and (D) where the failure to waive such requirement would be against equity or good conscience, including casualty, disaster, or other events beyond the reasonable control of the individual subject to such requirement." Rev. Proc. 2016-47 sets out the principals that the IRS applies in decided whether to grant such a waiver. At trial 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 11 1 2 3 4 5 6 7 8 9 petitioners presented a letter (Ex. 4-J), which they had prepared the day before trial, which states a plausible request for a waiver under those principles. Since we decide the case on other grounds, we do not need to resolve this issue. However, for petitioners' information we note that it is the Secretary of the Treasury (acting through the IRS), and not this Court, to whom the statute gives 10 discretion to determine whether to grant such a 11 waiver. Assuming that the Tax Court has authority to 12 13 14 review the Secretary's exercise of that discretion, it seems we could do so only after the Secretary had considered and denied a taxpayer's request for a 15 waiver. The statute does not seem to grant us the 16 17 18 19 20 21 22 23 24 25 authority to entertain in the first instance in litigation a request for a waiver. So that the tax liability can be recalculated to reflect petitioners' partial concession and this opinion, decision will be entered pursuant to Rule 155. This concludes the Court's oral Findings of Fact and Opinion in this case. (Whereupon, at 1:57 p.m., the above- entitled matter was concluded.) 866.488.DEPO www.Capita1ReportingCompany.com