Court Opinion

ID: 4336385
Source: CourtListenerOpinion
Date Created: 2018-11-14 02:48:23.836491+00
Date Added: 2024-06-11T07:59:08.924293
License: Public Domain

T.C. Summary Opinion 2007-45

                     UNITED STATES TAX COURT

               STEVEN RUDOLPH KALDI, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent

     Docket No. 5591-06S.                Filed March 21, 2007.

     Steven Rudolph Kaldi, pro se.

     Derek W. Kaczmarek, for respondent.

     ARMEN, Special Trial Judge:     This case was heard pursuant to

the provisions of section 7463 of the Internal Revenue Code in

effect when the petition was filed.1    The decision to be entered

is not reviewable by any other court, and this opinion should not

be cited as authority.

     1
        Unless otherwise indicated, all subsequent section
references are to the Internal Revenue Code in effect for 2002,
the taxable year in issue, and all Rule references are to the Tax
Court Rules of Practice and Procedure.
                                - 2 -

     Petitioner Steven Rudolph Kaldi filed a petition with this

Court in response to a Notice of Determination Concerning

Collection Action(s) Under Section 6320 and/or 6330 for 2002.

Pursuant to section 6330(d), petitioner seeks review of

respondent’s determination.

                              Background

     Some of the facts have been stipulated, and they are so

found.   We incorporate by reference the parties’ stipulation of

facts and accompanying exhibits.

     At the time that the petition was filed, petitioner resided

in Las Vegas, Nevada.

     Petitioner, an insurance agent, filed his Form 1040, U.S.

Individual Income Tax Return, for the taxable year 2002 on July

14, 2004, showing an underpayment of income tax.2    The source of

the underpayment was a $45,000 distribution from a qualified

retirement account.3    He included the $45,000 in his gross income

for 2002 and reported the corresponding additional early

withdrawal tax of $4,500 under section 72(t).

     Petitioner gave $20,000 of the distribution to his daughter,

and put the remaining $25,000 into an investment account managed

     2
        Petitioner had the return prepared by an accountant who
had been preparing his taxes since 1980.
     3
        Petitioner received a distribution of $117,552 from a
qualified retirement account and properly rolled over all but
$45,000 of that amount into another qualified retirement account.
Petitioner was 57 years of age at the time of the distribution.
                               - 3 -

by Vestin Mortgage.4   The account was a “transfer on death”

account with a listed beneficiary.

     On August 16, 2004, respondent assessed the underpayment

from petitioner’s 2002 tax return, as well as additions to tax

for late filing and late payment, and statutory interest.

     On September 17, 2005, respondent issued to petitioner a

Final Notice of Intent to Levy and Notice of Your Right to a

Hearing with respect to petitioner’s Federal income tax liability

for the taxable year 2002.   Petitioner timely requested an

administrative appeals hearing.

     Respondent mailed to petitioner a Notice of Determination

Concerning Collection Action(s) Under Section 6320 and/or 6330

dated March 7, 2006, determining that he was liable for both the

regular tax and the additional early withdrawal tax on the

$45,000, as well as the additions to tax and interest previously

assessed.   Petitioner timely filed a petition with this Court.

     At trial, petitioner conceded that $20,000 of his Individual

Retirement Account (IRA) distribution was properly includable in

his income and subject to the additional 10-percent tax imposed

by section 72(t).   He maintained, however, that $25,000 of the

     4
        Petitioner heard about Vestin Mortgage from a friend who
recommended the investment company because “they are on TV all
the time.” According to petitioner’s testimony, it was only
after he gave Vestin Mortgage his money that he discovered the
company was under investigation by the Securities and Exchange
Commission.
                                  - 4 -

$45,000 should not have been included as gross income, despite

its inclusion on his return, and he disputed the assessment of

the additions to tax on the basis of reasonable cause.

                               Discussion

A.   Section 6330

      Section 6330 provides that no levy may be made on any

property or right to property of a person unless the Secretary

first notifies him or her in writing of the right to a hearing

before the Appeals Office.     The Appeals officer must verify at

the hearing that the applicable laws and administrative

procedures have been followed.     Sec. 6330(c)(1).    At the hearing,

the person requesting a hearing may raise any relevant issues

relating to the unpaid tax or the proposed levy, including

appropriate spousal defenses, challenges to the appropriateness

of collection actions, and collection alternatives.       Sec.

6330(c)(2)(A).      The person may challenge the existence or amount

of the underlying tax if he or she did not receive any statutory

notice of deficiency for the tax liability or did not otherwise

have an opportunity to dispute the tax liability.       Sec.

6330(c)(2)(B).

      As the underlying tax liability is properly at issue in this

case, we decide the issue de novo.        See Montgomery v.

Commissioner, 122 T.C. 1 (2004); Sego v. Commissioner, 114 T.C.
604, 610 (2000); Goza v. Commissioner, 114 T.C. 176, 180 (2000).
                                   - 5 -

      Comparable to a refund suit, petitioner bears the burden of

proving the error in his self-assessment.     See, e.g., Brown v.

United States, 890 F.2d 1329, 1334 (5th Cir. 1989).      Petitioner

has not met his burden, and consequently we must side with

respondent.

B.   Distributions From Individual Retirement Accounts

      Generally, a distribution from an IRA is includable in the

distributee’s gross income in the year of distribution under the

provisions of section 72.     Secs. 61(a)(11), 408(d)(1), 4974(c);

Arnold v. Commissioner, 111 T.C. 250, 253 (1998).     Distributions

made prior to a taxpayer’s attaining the age of 59½ that are

includable in income are generally subject to a 10-percent

additional early withdrawal tax unless an exception to the tax

applies.5    Sec. 72(t)(1).   In this case, no exception is

available to petitioner.

     1.     Disability Exception

      Section 72(t)(2)(A)(iii) exempts distributions “attributable

to the * * * [distributee’s] being disabled”.     At trial,

petitioner argued that he was disabled, and he testified that he

suffers from “temporal lobe spiking” resulting from a head injury

sustained during military service in 1965.     He testified that the

      5
        The sec. 72(t) additional tax is intended to discourage
premature distributions from retirement plans. 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.
                               - 6 -

temporal lobe spiking causes “severe anxiety and panic attacks”

and prevented him from working for several years.    As proof of

this disability, he offered a copy of his card from the Veterans’

Administration showing that he is a “service-connected, disabled

veteran receiving medical benefits”.

     While we do not doubt petitioner’s ongoing mental health

issues, from the testimony and evidence presented at trial, these

issues do not rise to the level of “disability” as contemplated

by the Internal Revenue Code for relief from the additional tax

imposed by section 72(t).   “Disabled”, as defined in section

72(m)(7), means:

     [being] unable to engage in any substantial gainful
     activity by reason of any medically determinable
     physical or mental impairment which can be expected
     to result in death or to be of long-continued and
     indefinite duration.

See also sec. 1.72-17A(f)(3), Income Tax Regs.

     Petitioner testified at trial that he was better and had

previously been able to regain control of his affairs; thus, his

disability was clearly not of long-continued duration.    See sec.

72(m)(7).   He also testified that he had begun a professional

comeback and was “recovering from” his disability.    Accordingly,

the Court remains unconvinced that petitioner’s disability

warrants inclusion under the exception to section 72(t).    See

sec. 1.72-17A(f)(2) and (4), Income Tax Regs.
                                - 7 -

     Further, “an individual shall not be considered to be

disabled unless he furnishes proof of the existence” of his

disability.   Sec. 72(m)(7).   Petitioner offered a medical

benefits card issued by the Veterans’ Administration and some

brief testimony, neither of which rises to a level sufficient to

meet the standard required by the Internal Revenue Code.      See

sec. 72(m)(7); Tokarski v. Commissioner, 87 T.C. 74, 77 (1986).

     Petitioner also claimed “this Tax Court has previously ruled

on my late filings and accepted my disability.”    But the issue of

petitioner’s disability has never been litigated and decided by

this Court; rather, in petitioner’s prior proceeding at docket

No. 1093-04S (regarding taxable year 1999), the Court merely

entered a decision pursuant to the stipulation of the parties.

See United States v. Intl. Bldg. Co., 345 U.S. 502, 505 (1953)

(only judgments on matters actually litigated between the parties

are conclusive in another action); Peck v. Commissioner, 90 T.C.
162, 166-167 (1988) (discussing the requirements for collateral

estoppel), affd. 904 F.2d 525 (9th Cir. 1990); Hart Metal Prods.

Corp. v. Commissioner, T.C. Memo. 1969-164 (holding that the

doctrine of collateral estoppel does not apply when a decision of

the Court constitutes only a pro forma acceptance of the parties’

agreement), affd. 437 F.2d 946 (7th Cir. 1971).

     Without more persuasive documentation to support

petitioner’s claim of disability, and without evidence that the
                                - 8 -

disability meets the standard set forth in section 72(m)(7) and

section 1.72-17A(f)(2) and (4), Income Tax Regs., we find that no

portion of the $45,000 distributed to petitioner would be

exempted from the additional early withdrawal tax on the basis of

the disability exception.

     2.   Rollovers

     Petitioner argues that $25,000 of the $45,000 was rolled

over into another IRA and should be exempt from both inclusion in

his gross income for 2002 and from the additional early

withdrawal tax.   “Rollover contributions” are not includable in

gross income.   Sec. 408(d)(3); Lemishow v. Commissioner, 110 T.C.
110, 112 (1998), supplemented 110 T.C. 346 (1998).   Further,

rollover contributions are not subject to the additional early

withdrawal tax.   Sec. 408(d)(3).

     To qualify as a rollover contribution, a payment or

distribution from an individual retirement plan must be rolled

over into another IRA or other qualified plan within 60 days of

the payment or distribution.    Sec. 408(d)(3); Schoof v.

Commissioner, 110 T.C. 1, 7 (1998); Metcalf v. Commissioner, T.C.

Memo. 2002-123, affd. 62 Fed. Appx. 811 (9th Cir. 2003); sec.

1.408-4(b)(1) and (2), Income Tax Regs.   “A fundamental

requirement for a rollover contribution under section 408(d)(3) *

* * is that funds actually be rolled over or transferred into an

IRA or other qualified plan.”    Crow v. Commissioner, T.C. Memo.
                                - 9 -

2002-178.    The $25,000 in question here was not rolled over into

an IRA or other qualified plan.    Instead, that portion of the

distribution was placed into a regular investment account and is

thus not exempt from the additional early withdrawal tax or

inclusion in petitioner’s 2002 gross income.

       Although Vestin Mortgage does offer qualified IRAs, in order

to make a rollover contribution, the person opening such an

account would have to utilize the services of a custodian to make

a valid transfer of funds.    Petitioner did not employ the use of

a custodian when opening his account.

       In addition, the documents petitioner filled out to open his

account with Vestin Mortgage indicated that he was interested in

a “transfer-on-death” account, an individual account.    According

to Vestin Mortgage’s representative, a beneficiary designation

for an IRA would have been filled out with a completely different

form, thus providing circumstantial evidence of petitioner’s

intent.

       Petitioner argues that his intent was to open an IRA and not

an individual account, and he should not be penalized for the

mistake.    It is not unheard of that mistakes, such as clerical or

bookkeeping errors, made on the opening of a new account have

later come to light, rendering the rollover defective in some

way.    In some rare instances, courts have been willing to

recharacterize an imperfect transaction as a rollover
                              - 10 -

contribution when there has been substantial compliance with--

and the fulfillment of--the remaining requirements of the

statute.   See, e.g., Wood v. Commissioner, 93 T.C. 114 (1989)

(IRA trustee’s error did not preclude rollover treatment because

taxpayer had substantially complied with statutory requirements).

But such treatment is not common, and the facts here do not

warrant or support a recharacterization.   See Schoof v.

Commissioner, supra (nonqualification of IRA trustee was

fundamental defect requiring inclusion of failed rollover into

gross income); Crow v. Commissioner, supra (bank’s

mischaracterization of transaction combined with timing error was

fatal to taxpayer’s argument that the funds should be treated as

a rollover).

      In the instant case, petitioner has not demonstrated that he

substantially complied with the rollover provisions outlined in

the statute, nor has he provided us with persusive evidence in

support of his claim that his intent was to open an IRA, rather

than a regular investment account, with Vestin Mortgage.

      Accordingly, the Court finds that petitioner did not roll

over the $25,000 into another qualified retirement plan, and the

amount is subject to the section 72(t) additional tax.

C.   Additions to Tax

      Respondent bears the burden of production with respect to

the additions to tax.   See sec. 7491(c); see also, e.g., Swain v.
                               - 11 -

Commissioner, 118 T.C. 358, 363 (2002); Higbee v. Commissioner,

116 T.C. 438 (2001).    Respondent has met his burden.

     1.   Late Filing

     Section 6651(a)(1) imposes an addition to tax for failure to

file a return by its due date.    The addition equals 5 percent for

each month or fraction thereof that the return is late, not to

exceed 25 percent.   Sec. 6651(a)(1).

     In the absence of an extension, the last date for petitioner

to file his Federal income tax return for taxable year 2002 was

April 15, 2003.   Secs. 6072(b), 7503.   Petitioner’s 2002 return

was not filed, however, until July 14, 2004.

     “A failure to file a tax return on the date prescribed leads

to a mandatory penalty unless the taxpayer shows that such

failure was due to reasonable cause and not due to willful

neglect.”   McMahan v. Commissioner, 114 F.3d 366, 368 (2d Cir.

1997), affg. T.C. Memo. 1995-547.    A showing of reasonable cause

requires taxpayers to demonstrate they exercised “ordinary

business care and prudence” but were nevertheless unable to file

the return within the prescribed time.    United States v. Boyle,

469 U.S. 241, 246 (1985); sec. 301.6651-1(c)(1), Proced. & Admin.

Regs.
                              - 12 -

     Petitioner contends that he had reasonable cause for filing

late, and that the late filing of his return is attributable to

his disability.6

     A taxpayer may have reasonable cause for failure to timely

file a return where the taxpayer or a member of the taxpayer’s

family experiences an illness or incapacity that prevents the

taxpayer from filing his or her return.   See, e.g., United States

v. Sanford, 979 F.2d 1511 (11th Cir. 1992) (holding that

reasonable cause may be found if a taxpayer convincingly

demonstrates that a disability beyond his control rendered him

unable to exercise ordinary business care).   The type of

disability required is “one that because of severity or timing

makes it virtually impossible for the taxpayer to comply--things

like emergency hospitalization or other incapacity occurring

around tax time.”   Carlson v. United States, 126 F.3d 915, 923

(7th Cir. 1997).

     6
        Petitioner argued in his posttrial brief that he had been
“awarded by this court late filing status under docket 1093-04S.”
As noted above, see Disability Exception, supra, the previous
case to which petitioner was a party resulted in the Court’s
entering a stipulated decision based on an agreement reached by
the parties; none of the issues were actually litigated. Any
waiver of additions to tax on the basis of petitioner’s late-
filing a return for the taxable year 1999 agreed to by the IRS in
that case was at the IRS’s sole discretion and has no bearing on
the instant case. Petitioner should note that this Court has no
authority to permanently grant a taxpayer permission to file his
or her tax returns in an untimely fashion, and that extensions of
time to file may be obtained from the IRS.
                               - 13 -

     While we recognize petitioner’s mental health difficulties

had some impact on his day-to-day life, petitioner employed the

same accountant for more than 20 years.    In fact, he testified

that his practice was to put all his papers into an envelope and

deliver the envelope to his accountant who then prepared his

returns.    Petitioner did not explain how his disability prevented

him from doing this for the taxable year in issue or how his

disability was so incapacitating as to prevent the exercise of

ordinary business care.

     On the basis of the record before us, we therefore conclude

that petitioner did not demonstrate that his failure to timely

file a return was because of reasonable cause and not willful

neglect.    See sec. 301.6651-1(c), Proced. & Admin. Regs.

Accordingly, petitioner is liable for the addition to tax under

section 6651(a)(1) for 2002.

     2.    Late Payment

     Section 6651(a)(2) imposes an addition to tax for failure to

pay the amount shown as tax on the return on or before the date

prescribed for payment of that tax, unless the failure was

because of reasonable cause and not willful neglect.    Sec.

301.6651-1(c)(1), Proced. & Admin. Regs.    Petitioner may

demonstrate reasonable cause for late payment by showing that he

exercised ordinary business care and prudence in providing for

payment of his tax liability and was nevertheless either unable
                               - 14 -

to pay the tax or would suffer an undue hardship if he paid on

the due date.    Sec. 301.6651-1(c), Proced. & Admin. Regs.    “Undue

hardship” means more than mere inconvenience to the taxpayer.

See sec. 1.6161-1(b), Income Tax Regs.

     Petitioner mailed in $5,000 of the almost $14,000 due at the

same time he late-filed his 2002 Federal income tax return on

July 14, 2004.    He argues that he had reasonable cause for not

paying the full amount of tax due in a timely manner.    The

principal thrust of his argument seems to be that he regretted

following his accountant’s advice to report the $25,000 given to

Vestin Mortgage as an early withdrawal from an IRA, and he

believed he was showing “good faith” by sending in any money at

all until he had the opportunity to dispute the sum’s inclusion.

He argued that he thought settling the matter would take only a

“reasonable period of time, 90 days, six months”.    Petitioner did

not, however, argue any set of facts or circumstances that would

lead the Court to find that he exercised ordinary business care

and prudence in providing for the timely payment of his self-

reported tax liability or that he would have suffered undue

hardship if he had paid the tax in full on its actual due date,

April 15, 2003.    See secs. 6072(a), 6151(a), 7503; sec. 301.6651-

1(c), Proced. & Admin. Regs.

     Consequently, petitioner is liable for an addition to tax

under section 6651(a)(2).
                              - 15 -

D.   Conclusion

      To the extent petitioner has made other arguments, the Court

concludes such arguments are without merit.

      Reviewed and adopted as the report of the Small Tax Case

Division.

      To reflect our disposition of the disputed issues,

                                    Decision will be entered

                               for respondent.