Court Opinion

ID: 4334079
Source: CourtListenerOpinion
Date Created: 2018-11-14 01:29:57.053377+00
Date Added: 2024-06-11T13:29:27.203625
License: Public Domain

ROBERT L. AND SARA J. HELM, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentHELM v. COMMISSIONERNo. 13170-00S; No. 3727-02SUnited States Tax CourtT.C. Summary Opinion 2002-138; 2002 Tax Ct. Summary LEXIS 140; October 18, 2002, Filed *140  PURSUANT TO INTERNAL REVENUE CODE SECTION 7463(b), THIS OPINION MAY NOT BE TREATED AS PRECEDENT FOR ANY OTHER CASE.  Robert L. and Sara J. Helm, pro sese.John A. Freeman, for respondent.  Armen, Robert N., Jr.  Armen, Robert N., Jr.  ARMEN, Special Trial Judge: These consolidated cases were heard pursuant to the provisions of section 7463 of the Internal Revenue Code in effect at the time that the petitions were filed.1 The decisions to be entered are not reviewable by any other court, and this opinion should not be cited as authority.Respondent determined deficiencies in petitioners' Federal income taxes as shown below:   Docket No.       Year        Deficiency   __________       ____        __________*141     13170-00S       1998       $ 1,133   3727-02S       1999        2,674 [3] After a concession by respondent,2 the sole issue for decision is whether the amount of income resulting from petitioners' conversion of their traditional Individual Retirement Accounts (IRA) to Roth IRAs (conversion income) is an item of income for purposes of calculating whether petitioners' Social Security benefits are taxable. We hold that it is.             Background [4] Most of the facts were stipulated, and they are so found. Petitioners resided in Howard, Ohio, at the time that their petitions were filed with the Court.A. Petitioners' IRA ConversionsIn 1998, petitioner Robert L. Helm converted his traditional IRA with Fidelity Mutual to a Roth IRA with the same trustee. *142  The total amount converted was $ 59,758. In addition, petitioner Sara J. Helm converted her traditional IRA with Fidelity Mutual to a Roth IRA with the same trustee in 1998. The total amount converted was $ 25,872.90.Collectively, petitioners realized $ 85,630.90 of conversion income in 1998. Pursuant to section 408A(d)(3)(A)(iii), petitioners elected to report the conversion income on a 4-year ratable basis for a total annual amount of $ 21,407.73 beginning in 1998 through 2001.B. Petitioners' Social Security BenefitsPetitioners received the following Social Security benefits during the years in issue:                     1998      1999                     ____      ____   Petitioner Robert L. Helm      $ 2,277     $ 9,228   Petitioner Sara J. Helm        6,561      6,654                    ______     ______   Total                 8,838     15,882 C. Petitioners' Forms 1040For each of the 1998 and 1999 tax years, petitioners timely*143  filed a joint Form 1040, U.S. Individual Income Tax Return. On both returns, petitioners listed their occupation as retired. Each petitioner attached a Form 8606, Nondeductible IRAs, to their 1998 return reporting their respective amount of conversion income and electing to ratably report such income over a 4-year period.Petitioners reported the following income items on their returns for the years in issue:                      1998         1999                  ____________________  ____________Line 8a.  Taxable interest          [1]$ 980.00   $ 1,037.99Line 9.   Ordinary dividends           6,265.99    6,395.04Line 13.  Capital gain or (loss)  *144        14,473.86    19,902.36Line 15a. Total IRA distributions $ 85,630.90       ---Line 15b. Taxable amount            21,407.73  221,407.50                       _________    _________Line 33.  Adjusted gross income         43,127.58    48,742.89On their returns for 1998 and 1999, petitioners did not report that they received any Social Security benefits, nor did they report that any portion of their benefits was taxable.D. Respondent's Deficiency NoticesIn the notices of deficiency, respondent determined that petitioners received, but failed to report, taxable Social Security benefits of $ 7,434 for 1998 and $ 13,500 for 1999, which resulted in the deficiencies at issue. Respondent concluded that petitioners' conversion income is*145  included in income pursuant to section 408A and, therefore, that petitioners' Social Security benefits are taxable pursuant to section 86.           Discussion3 A. Petitioners' ContentionIn their petition, petitioners contend that respondent erred because:   The IRS used our conversion of our IRA's from traditional to   Roth as an excuse to cause our Social Security Benefits to   become taxable that would not have otherwise been taxable. This   was not the intent of the Roth IRA law. [13] Petitioners expanded on their contention at trial as follows:   IRS * * * used the words "rollover" and "distribution"   interchangeably, sometimes in the same sentence, which from the   point of view of taxing the IRA rollover,*146  doesn't really matter.   When you go on next step down the line, and you're considering   it as income, the rollover doesn't create income. A distribution   would create income, but a rollover doesn't. You don't get any   money. And from a simplistic point of view, there's the   difference between not getting money and getting money.   When the law was passed with reference to taxability of Social   Security benefits, they referred to income. And I think they   meant actual income. Money that you got, not a mythical amount   of money that you didn't get.              * * * * * * *   There is a big difference between getting money and not getting   money. And I don't think my Social Security benefits should be   taxed based on money I didn't get. * * * Yes, as far as taxing   the rollover, it is a taxable rollover. But it is not a   distribution.   Now, the fact that Form 8606 said to report this on [Form 1040]   line 15b [taxable amount of IRA distribution] is their   directions. We ended up reporting a rollover on a line that is*147     specifically for distributions. That creates an error, because   there is nothing in the Code to exclude anything on line 15b   when it comes to calculating taxability of Social Security   benefits.              * * * * * * *   I have the problem with considering that as income, when it   isn't, considering it as a distribution, which it isn't * * *.   Now you owe tax on your Social Security benefits, because you   had so much money coming in. But I didn't have so much money   coming in. [14] We disagree with petitioners' contention. As a matter of statutory interpretation, the plain language of the statute and the regulations mandates that we sustain respondent's determination on the disputed issue.B. Roth IRAThe Taxpayer Relief Act of 1997 (TRA 1997), Pub. L. 105- 34, sec. 302, 111 Stat. 788, 825, established a new individual retirement plan called the "Roth IRA", effective for taxable years beginning after December 31, 1997.4 See sec. 408A. Congress created the Roth IRA to further encourage individual savings by allowing funds set aside in a tax-favored account to be withdrawn without*148  tax after a reasonable holding period for retirement or certain special purposes. See H. Rept. 105-148, at 337 (1997), 1997-4 C.B. (Vol. 1) 319, 659; S. Rept. 105-33, at 29 (1997), 1997-4 C.B. (Vol. 2) 1067, 1109. The tax characteristics of the Roth IRA are: (1) Contributions are nondeductible, sec. 408A(c)(1); (2) earnings accumulate tax free, sec. 408A(a); see sec. 408(e); and (3) qualified distributions are not includable in income if all requirements are satisfied, sec. 408A(d)(1)(A); see sec. 1.408A-1, Income Tax Regs.Beginning in 1998, eligible taxpayers could establish a new Roth IRA either with a regular contribution or a qualified rollover contribution (including conversion contributions). See sec. 408A(c)(3)(B), (c)(6), (d)(3)(C); see also sec. 1.408A-3*149  and 1.408A- 4, Income Tax Regs. Taxpayers could accomplish a conversion contribution by any of the following three methods:   (1) An amount distributed from a traditional IRA is contributed   (rolled over) to a Roth IRA * * *   (2) An amount in a traditional IRA is transferred in a trustee-   to-trustee transfer from the trustee of the traditional IRA to   the trustee of the Roth IRA; or   (3) An amount in a traditional IRA is transferred to a Roth IRA   maintained by the same trustee. * * *Sec. 1.408A-4, Q&A-1(a), Income Tax Regs.; see H. Rept. 105-148, at 339, (1997), 1997-4 C.B. (Vol. 1) 319, 661; S. Rept. 105-33, at 32, (1997), 1997-4 C.B. (Vol. 2) 1067, 1112.For tax purposes, the converted amount is treated as a distribution from the traditional IRA and as a qualified rollover contribution to the Roth IRA. Sec. 1.408A-4, Q&A-1(c), Income Tax Regs. Specifically with respect to conversions to a Roth IRA, the amount distributed from the traditional IRA is treated as a taxable distribution (except for nondeductible contributions) and, therefore, included in gross income. See sec. 408A(d)(3)(A)(i); *150 sec. 1.408A-4, Q&A-7(a), Income Tax Regs.; see also H. Conf. Rept. 105-220, at 380 (1997), 1997-4 C.B. (Vol. 2) 1457, 1850 (wherein the conference committee articulated the intent to tax conversion income currently such that the "Amounts that would have been includible in income had the amounts converted been withdrawn are includible in income ratably over 4 years."); contrast with sec. 408(d)(3) (a qualified rollover contribution among nonRoth IRAs is not included in gross income if it meets certain requirements). Furthermore, the pertinent parts of the regulations provide:   any taxable conversion amount includible in gross income for a   year as a result of the conversion (regardless of whether the   individual is using a 4-year spread) is included in income for   all purposes. Thus, for example, it is counted for purposes of   determining the taxable portion of social security payments   under section 86 * * *. [Sec. 1.408A-4, Q&A-9, Income Tax   Regs.] C. Calculating the Taxable Portion of Petitioners' Social Security BenefitsSection 86 provides for the taxability of Social Security benefits pursuant to a statutory*151  formula. Thus, if a taxpayer's "modified adjusted gross income" (MAGI) plus one-half of the taxpayer's Social Security benefits exceeds a certain base amount, then a portion of the taxpayer's Social Security benefits is includable in gross income and subject to Federal income tax. Sec. 86(a) through (d).Section 86(b)(2) defines MAGI as adjusted gross income, less certain specified types of income plus tax-exempt interest, which are not present here. For an individual taxpayer, AGI is gross income minus a specifically enumerated list of deductions, which deductions also are not present here. Sec. 62. Finally, section 61 defines gross income as "all income from whatever source derived", unless otherwise provided. Section 61(a)(9) and (11) expressly defines gross income to include income from annuities and pensions. Therefore, petitioners' gross income includes their conversion income. See sec. 408A(d)(3)(A), (C).Accordingly, petitioners had MAGI of $ 43,127.58 in 1998 and $ 48,742.89 in 1999, sec. 86(b)(2), and they received Social Security benefits of $ 8,838 and $ 15,882, respectively. As a result, petitioners' MAGI plus one-half of their benefits ($ 47,546.58 for 1998 and $ 56,683.89*152  for 1999) exceeds the base amount, and, therefore, a portion of their Social Security benefits is taxable. See sec. 86(a)(2), (c)(2).D. The Tax Consequences of Petitioners' IRA ConversionPetitioners agree that their conversion income is a "taxable rollover" requiring them to pay income tax on such income. However, petitioners object to the conversion income's being characterized as a "taxable distribution" that has the effect of making their Social Security benefits taxable under section 86. Petitioners, however, do not fully appreciate the tax consequences involving a conversion of a traditional IRA to a Roth IRA.As stated above, a conversion from a traditional IRA to a new Roth IRA is a taxable recognition event such that the rollover distribution is included in gross income for all tax purposes, unless otherwise specifically provided, whether or not petitioners actually receive money. Furthermore, neither section 408A nor section 86 specifically excludes conversion income in the calculation of gross income for purposes of Social Security benefits. At trial, petitioners also specifically acknowledged the absence of any provision shielding Social Security benefits from the tax*153  consequences of a conversion from a traditional IRA to a Roth IRA. Accordingly, we have no basis to carve out such an exclusion.            E. Conclusion [23] We hold that petitioners' conversion income is included as an item of income for purposes of calculating the taxability of their Social Security benefits. In view of the foregoing, we sustain respondent's determination on the disputed issue.We have considered all of the other arguments made by petitioners, and, to the extent that we have not specifically addressed them, we conclude they are without merit.Reviewed and adopted as the report of the Small Tax Case Division.To give effect to our disposition of the disputed issue, as well as respondent's concession,Decision will be entered under Rule 155 in docket No. 13170-00S.Decision will be entered for respondent in docket No. 3727-02S.  Footnotes1. Unless otherwise indicated, all subsequent section references are to the Internal Revenue Code in effect for the taxable years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.↩2. For 1998, respondent concedes that petitioners received $ 980 of interest income rather than the greater amount reported by them on their return for that year.↩1. In 1998, petitioners originally reported $ 1,016.20 of interest income but actually received only $ 980. See supra note 2.↩2. We note that in 1999 petitioners reported only $ 21,407.50 as conversion income instead of $ 21,407.73. There is nothing in the record to explain this discrepancy.↩3. We need not decide whether sec. 7491, concerning burden of proof, applies to the present case because the facts are not in dispute and the issue is one of law. See Higbee v. Commissioner, 116 T.C. 438">116 T.C. 438↩ (2001).4. On Feb. 4, 1999, the IRS issued final regulations, secs. 1.408A-1 through -9, applicable to taxable years beginning after Dec. 31, 1997. See sec. 1.408A-9, Income Tax Regs.↩