Court Opinion

ID: 4336817
Source: CourtListenerOpinion
Date Created: 2018-11-14 03:01:27.919784+00
Date Added: 2024-06-11T14:19:43.214069
License: Public Domain

T.C. Memo. 2007-327

                      UNITED STATES TAX COURT

             GREGORY EUGENE THOMPSON, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent

     Docket No. 1182-06.                Filed October 31, 2007.

     Gregory Eugene Thompson, pro se.

     Douglas S. Polsky, for respondent.

                        MEMORANDUM OPINION

     KROUPA, Judge:   Respondent determined a $23,027 deficiency

in petitioner’s Federal income tax and a $2,106.80 accuracy-

related penalty under section 66621 for 2004.

     There are four issues for decision.     We are first asked to

decide whether petitioner should have included a distribution

     1
      All section references are to the Internal Revenue Code in
effect for 2004, and all Rule references are to the Tax Court
Rules of Practice and Procedure, unless otherwise indicated.
                                 -2-

from his retirement account in his income in 2004.      We hold that

he should have included the distribution in income in 2004.      The

second issue is whether petitioner is liable for the 10-percent

additional tax on the distribution from his retirement account

under section 72(t).    We hold that he is.    The third issue is

whether petitioner is liable for the accuracy-related penalty

under section 6662.    We hold that he is.    The fourth issue is

whether we should impose a penalty on petitioner under section

6673.   We hold that we shall not impose a penalty in this case,

but caution petitioner that he is at risk of a penalty if he

brings similar arguments before the Court in the future.

                             Background

     This case was submitted fully stipulated pursuant to Rule

122, and the facts are so found.    The stipulation of facts, the

supplemental stipulation of facts, and the accompanying exhibits

are incorporated by this reference.    Petitioner resided in

Humansville, Missouri, at the time he filed the petition.

     Petitioner was the superintendent of schools for the

Humansville R-IV school district in Humansville, Missouri.

Petitioner had a retirement account with the school district

regarding his employment, which account was administered by the

Public School Retirement System of Missouri (PSRS).      The parties

agree that the PSRS retirement plan was a qualified plan under

section 401(a).

     Petitioner’s employment was terminated in September 2004.

After the termination, petitioner contacted PSRS to determine how
                                  -3-

long it would take to obtain a distribution from his retirement

account.   PSRS advised petitioner that it would take about 60

days.   Petitioner planned to use the distribution to live on

during 2005.

     Petitioner requested a distribution from his retirement

account in mid-November 2004.   The distribution did not take as

long to process as anticipated.    Petitioner received $62,467.58

from his retirement account in December 2004.   PSRS withheld

$12,493.52 in Federal tax from the distribution.   Petitioner was

53 when he received the distribution.

     The retirement plan issued petitioner a Form 1099-R,

Distributions From Pensions, Annuities, Retirement or Profit-

Sharing Plans, IRAs, Insurance Contracts, etc., reporting it paid

petitioner the $62,467.58 from his retirement account in 2004 and

that it withheld $12,493.52 in Federal tax from the distribution.

Petitioner did not report the distribution on his tax return for

2004, however.   Petitioner crossed out the “taxable amount” on

the line on the return for reporting pension and annuity income,

and wrote in “mistake” and “next year.”   Petitioner also attached

a statement to his return for 2004 explaining that he did not

want the funds from his retirement plan in 2004 and asserting

that he would not pay taxes on the funds for 2004.   Petitioner

reported the distribution from the retirement account as wages on

his return for 2005.

     Respondent issued a deficiency notice for 2004 in which

respondent determined that petitioner should have reported the
                                 -4-

distribution as income in 2004, that petitioner was liable for

the 10-percent additional tax on the distribution under section

72(t), and that petitioner was liable for the accuracy-related

penalty.   Petitioner timely filed a petition.

                             Discussion
     We are asked to consider whether petitioner was required to

include the distribution from his retirement account in his

income for 2004, the year he received it, or 2005, the year he

intended to spend it.    We are also asked to consider whether

petitioner is liable for the 10-percent additional tax on the

distribution under section 72(t) and whether petitioner is liable

for the accuracy-related penalty.      We shall finally consider

whether to impose a penalty on petitioner under section 6673.      We

shall consider each of these issues in turn.2

I.   Whether the Distribution Is Includable in Income for 2004

     We first consider whether petitioner should have included

the distribution from his retirement account in his income for

2004, the year he received the distribution.      We begin by

outlining the governing law.

     Gross income includes all income from whatever source

derived.   Sec. 61(a).   This includes items included under section

72 (relating to annuities and retirement accounts).      Sec. 61(b).

     2
      Petitioner does not claim the burden of proof shifts to
respondent under sec. 7491(a). Petitioner also did not establish
he satisfies the requirements of sec. 7491(a)(2). We therefore
find that the burden of proof remains with petitioner as to any
factual issue affecting his liability for the deficiency in his
tax.
                                 -5-

     The recipient of amounts paid or distributed out of a

retirement account generally includes the distributions in gross

income under the provisions of section 72.    Sec. 408(d)(1); see

also sec. 61(a)(9), (11); Arnold v. Commissioner, 111 T.C. 250,

253 (1998).    The amounts distributed from a retirement account

are generally included in the payee’s gross income for the

taxable year in which the distribution is received.    Sec. 1.408-

4(a)(1), Income Tax Regs.

     The parties agree that the retirement plan was a qualified

retirement plan.    The parties also agree that petitioner actually

received the cash distribution in December 2004.    Accordingly,

petitioner must include the distribution in his income for 2004,

the year he received it.    See secs. 1.408-4(a)(1), 1.446-

1(c)(1)(i), Income Tax Regs.

     Petitioner argues that he intended to use the funds in 2005

and thus is not taxable on the funds until 2005.    Petitioner is

misguided.    He received the distribution in 2004 and was

therefore taxable on the funds in 2004.    See secs. 1.408-4(a)(1),

1.446-1(c)(1)(i), Income Tax Regs.     Petitioner relies on various

subsections of section 72, such as (a), (b), and (h), to argue

that the distribution should not be included in his gross income

for any year.    Petitioner misapplies the subsections of section

72 upon which he relies.    The distribution from the retirement

account was not an annuity, and petitioner did not exercise any

option to receive an annuity with respect to the retirement

account.
                                -6-

      Petitioner also makes numerous arguments that his income is

not subject to tax, including arguments that there is no

definition of “income” and “taxable” in the Code, that no person

is liable for the income tax, and arguments based on the

Sixteenth Amendment to the Constitution of the United States.

All of these arguments have been considered by this and other

Courts to be frivolous and groundless.     We decline to address

them further.   To do so might suggest that these arguments have

some colorable merit.   Crain v. Commissioner, 737 F.2d 1417,
1417-1418 (5th Cir. 1984).

II.   Does the 10-Percent Additional Tax Apply To the
      Distribution?

      We next consider whether petitioner is liable for the 10-

percent additional tax on the early distribution from his

retirement account under section 72(t).3

      Section 72(t)(1) imposes a 10-percent additional tax on

early distributions from qualified retirement accounts.     There

are certain exceptions to the imposition of the 10-percent

additional tax, which include distributions made on or after the

date the employee attains 59-1/2 years old; distributions made to

the employee to the extent such distributions do not exceed

amounts paid for medical care; distributions to unemployed

      3
      Petitioner states on brief that respondent determined in
the deficiency notice that petitioner is liable for the 10-
percent additional tax under sec. 72(q) for premature
distributions from annuity contracts as well as the additional
tax under sec. 72(t). Petitioner has misunderstood respondent’s
determinations. Respondent did not determine petitioner was
liable for any additional tax under sec. 72(q), only sec. 72(t).
                                 -7-

persons for health insurance premiums; and distributions from

certain plans for first home purchases.      Sec. 72(t)(2)(A)(i),

(A)(v), (B), (D), (F).   The purpose of the 10-percent additional

tax is to discourage premature distributions from IRAs that

frustrate the intention of saving for retirement.      Dwyer v.

Commissioner, 106 T.C. 337, 340 (1996); see also S. Rept. 93-383,

at 134 (1973), 1974-3 C.B. (Supp.) 80, 213.

     Petitioner was 53 years old when he received the

distribution from the retirement account.      He used the funds for

living expenses after being terminated from his job.      Petitioner

has not asserted, and we do not find, that any of the exceptions

under section 72(t)(2) apply to the early distribution from his

retirement plan.

     Petitioner also makes several arguments why the 10-percent

additional tax should not apply to the early distribution, all of

which we find to lack merit.   For example, petitioner asserts

that section 72(t) does not apply because the retirement account

is not a contract.   We disagree.    Section 72(t) applies to

qualified retirement plans.    The parties do not dispute that the

retirement plan here is a qualified retirement plan.      Sec.

401(a).   Petitioner also argues that only the interest is taxable

and that the retirement plan itself, not petitioner, is liable

for the tax.   Again, we disagree.     The recipient of an early

distribution is liable for the 10-percent additional tax, not the

retirement plan.   Sec. 72(t)(1).    The additional tax is 10
                                 -8-

percent of the amount includable in gross income for the year.
Id.

      Petitioner also argues that PSRS’s 20-percent withholding on

the early distribution accounts for the 10-percent additional tax

under section 72(q) and the 10-percent additional tax under

section 72(t) and asserts that no law authorizes this

withholding.   Respondent did not determine, nor do we find, that

petitioner is liable under section 72(q).   See supra note 3.

Withholding of 20 percent generally is required on any eligible

rollover distribution, such as the distribution to petitioner,

unless the employee elects a direct rollover.   Secs.

402(f)(2)(A), (c)(4), 3405(c).   The amount withheld as tax may be

credited toward the tax liability, however.   Sec. 31(a).    In

fact, respondent adjusted the tax respondent determined that

petitioner owed in the deficiency notice by crediting the amount

withheld on the distribution against the amount respondent

determined petitioner owed on the premature distribution.

      We therefore sustain respondent’s determination that

petitioner is liable for the 10-percent additional tax on the

early distribution.

III. Accuracy-Related Penalty

      We next consider whether petitioner is liable for the

accuracy-related penalty under section 6662(a).   Respondent has

the burden of production under section 7491(c) and must come

forward with sufficient evidence that is it appropriate to impose
                                -9-

the penalty.   See Higbee v. Commissioner, 116 T.C. 438, 446-447

(2001).

     A taxpayer is liable for an accuracy-related penalty of 20

percent of any portion of an underpayment attributable to, among

other things, a substantial understatement of income tax.    There

is a substantial understatement of income tax under section

6662(b)(2) if the amount of the understatement exceeds the

greater of either 10 percent of the tax required to be shown on

the return, or $5,000.   Sec. 6662(a), (b)(1) and (2), (d)(1)(A);

sec. 1.6662-4(a), Income Tax Regs.

     Petitioner reported he owed $8,169 for 2004 and respondent

determined upon examination that petitioner owed $29,983.4    Thus,

petitioner understated the tax on his return by $21,814, which is

greater than 10 percent of the tax required to be shown on the

return, or $5,000.   Accordingly, respondent has met his burden of

production with respect to petitioner’s substantial

understatement of income tax for 2004.

     The accuracy-related penalty under section 6662(a) does not

apply to any portion of an underpayment, however, if it is shown

that there was reasonable cause for the taxpayer’s position and

that the taxpayer acted in good faith with respect to that

portion.   Sec. 6664(c)(1); sec. 1.6664-4(b), Income Tax Regs.

The determination of whether a taxpayer acted with reasonable

cause and in good faith is made on a case-by-case basis, taking

     4
      Respondent adjusted petitioner’s reported tax liability to
$6,956 after examining the taxable income petitioner reported on
the return.
                                -10-

into account all the pertinent facts and circumstances, including

the taxpayer’s efforts to assess his or her proper tax liability

and the knowledge and experience of the taxpayer.     Sec. 1.6664-

4(b)(1), Income Tax Regs.   The taxpayer bears the burden of proof

with respect to reasonable cause.      Higbee v. Commissioner, supra

at 446.

     Petitioner failed to assert any arguments that reasonable

cause existed.   Petitioner focused his arguments on why the

distribution should not be treated as income, should not be

subject to the additional tax, as well as tax-protester type

arguments that wages are not income.     Specifically, petitioner

did not argue and did not introduce any evidence that he acted

with reasonable cause or in good faith with respect to the

underpayment for 2004.5

     After considering all of the facts and circumstances, we

find that petitioner has failed to establish that he had

reasonable cause and acted in good faith with respect to the

underpayment.    Accordingly, we sustain respondent’s determination

that petitioner is liable for the accuracy-related penalty for

2004.

     5
      Petitioner states that the Code is difficult for the IRS to
understand, relying on a case involving the recovery of
attorney’s fees. McKee v. Commissioner, T.C. Memo. 2004-115, as
supplemented T.C. Memo. 2004-169, revd. 209 Fed. Appx. 691 (9th
Cir. 2006). There is no uncertainty about petitioner’s legal
obligations here. See, e.g., Pessin v. Commissioner, 59 T.C.
473, 489 (1972); Rosanova v. Commissioner, T.C. Memo. 1985-306;
Grant v. Commissioner, T.C. Memo. 1980-242.
                                -11-

IV.   Section 6673 Penalty

      We now consider whether petitioner should be held liable for

a penalty under section 6673.   We take this opportunity to warn

petitioner that we are authorized to impose a penalty of up to

$25,000 on a taxpayer if the Court finds, among other things,

that the taxpayer’s position in proceedings is frivolous or

groundless.   A taxpayer’s position is frivolous if it is contrary

to established law and unsupported by a reasoned, colorable

argument for change in the law.6   See Coleman v. Commissioner,

791 F.2d 68, 71 (7th Cir. 1986); see also Hansen v. Commissioner,

820 F.2d 1464, 1470 (9th Cir. 1987); Nis Family Trust v.

Commissioner, 115 T.C. 523, 544 (2000).

      The purpose of section 6673 is to compel taxpayers to think

and conform their conduct to settled tax principles.   Coleman v.

Commissioner, supra; see also Takaba v. Commissioner, 119 T.C.
285, 295 (2002).   The section is a penalty provision intended to

deter and penalize frivolous claims and positions in proceedings

before this Court.

      Petitioner makes numerous frivolous arguments on brief.

Petitioner asserts that none of his income is taxable, arguing

that wages are not income and no person is liable for income tax.

Though we do not impose a penalty here, nor does respondent ask

us to impose a section 6673 penalty, we caution petitioner that

should he bring similar arguments before this Court in the

      6
      We have jurisdiction to hear the case notwithstanding that
we find petitioner’s arguments frivolous. Petitioner’s
assertions to the contrary are incorrect.
                                 -12-

future, he is at risk that the Court is likely to impose such a

penalty, up to $25,000.

     We sustain respondent’s determinations in the deficiency

notice.   We have considered all remaining arguments the parties

made and, to the extent not addressed, we conclude they are

irrelevant, moot, or meritless.

     To reflect the foregoing,

                                             Decision will be entered

                                        for respondent.