Robert Ancira v. Commissioner , 119 T.C. No. 6 ( 2002 )

119 T.C. No. 6UNITED STATES TAX COURT
ROBERT ANCIRA, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 425-01. Filed September 24, 2002.
P had a self-directed IRA account of which C was the
custodian. P requested that C purchase common stock in X
for the IRA. Although the investment in X stock was not
prohibited, C, as a matter of policy, refused to purchase
the stock because X was not publicly traded. P arranged for
C to issue a check drawn on the IRA account made payable to
X. C sent the check to P, who forwarded it to X. X issued
the stock in the name of P’s IRA. P received X’s stock and
delivered the stock to C. R determined that there was a
distribution from the IRA to P.
Held: P was a conduit for C, and there was no
distribution from the IRA to P. Lemishow v. Commissioner,
110 T.C. 110 (1998), distinguished.
David Bruce Spizer, for petitioner.
Emile L. Hebert III and Louis John Zeller, Jr., for
respondent.
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OPINION
DAWSON, Judge: This case was assigned to Special Trial
Judge Carleton D. Powell pursuant to section 7443A(b)(3) and
Rules 180, 181, and 182.1 The Court agrees with and adopts the
opinion of the Special Trial Judge, which is set forth below.
OPINION OF THE SPECIAL TRIAL JUDGE
POWELL, Special Trial Judge: Respondent determined a
deficiency of $17,393 and a section 6662 accuracy-related penalty
of $3,479 in petitioner’s 1998 Federal income tax. After
concessions,2 the issue is whether a transaction involving the
purchase of stock in S.K./R.M.A., Inc. (S.K.),3 constituted a
distribution to petitioner from his individual retirement account
(IRA). At the time the petition was filed, petitioner resided in
New Orleans, Louisiana.
1
Unless otherwise indicated, section references are to the
Internal Revenue Code in effect for the year in issue, and Rule
references are to the Tax Court Rules of Practice and Procedure.
2
Petitioner concedes that he failed to report $87 of
interest income. Respondent concedes that petitioner is not
liable for the sec. 6662 penalty.
3
S.K. apparently stands for Smoothie King, which we gather
was the trade name of a product.
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Background
This case was submitted fully stipulated under Rule 122, and
the applicable facts may be summarized as follows.4 During 1998
petitioner maintained a self-directed IRA. Pershing, a division
of Donaldson, Lufkin & Jenrette Securities Corp., was the
custodian of the IRA, and Hibernia Investments, L.L.C.
(Hibernia), was the investment adviser.
Petitioner could request that the funds of the IRA be
invested in specific assets (specific mutual funds, stocks,
etc.). These requests were typically made by telephone to
Hibernia, and Pershing, as custodian, would then execute the
requests. In September 1998, petitioner requested that his IRA
invest $40,000 in the stock of S.K. An employee of Hibernia
informed petitioner that although S.K. stock could be held as an
asset of the IRA, Pershing would not purchase the stock on behalf
of the IRA because the stock was not publicly traded.
Subsequently, petitioner contacted S.K. directly and was informed
that its stock was available for purchase directly from S.K.
Petitioner and Hibernia determined that the IRA could invest in
S.K. if Pershing issued a check payable directly to S.K.
Hibernia furnished petitioner with a “Distribution Request Form”
from Pershing to facilitate the issuance of the check. The form
4
The facts are not in dispute and the issue is primarily
one of law. Sec. 7491, concerning burden of proof, has no
bearing on this case.
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stated that “(Use of this form will result in a distribution
reportable to the IRS [Internal Revenue Service] on Form 1099-R
[Distributions From Pensions, Annuities, Retirement or Profit-
Sharing Plans, IRAs, Insurance Contracts, etc.]).”
On September 14, 1998, petitioner executed the form
requesting Pershing to issue a $40,000 check made payable to S.K.
and instructed that the check constituted an investment of his
IRA assets. Pershing sent petitioner a confirmation letter
indicating that a distribution of $40,000 had occurred on
September 15, 1998, and instructed petitioner to contact Pershing
if he had any questions. On the same day, Pershing issued the
$40,000 check payable to S.K. drawn on petitioner’s IRA account.
Pershing sent the check to petitioner. Petitioner did not
negotiate the check. Instead, petitioner forwarded the check
directly to S.K.
A “Memorandum of Corporate Stock Purchase” maintained by
S.K. reflected that, on October 29, 1998, petitioner’s IRA
purchased 714.28 shares of stock for $40,000. On December 1,
1998, S.K. issued stock certificate No. 3. The certificate
stated that “IRA fbo ROBERT ANCIRA, M.D. DLJSC. is the owner” of
714.28 shares. For reasons that are not clear, the stock was not
immediately transferred to Pershing or to petitioner. Petitioner
was unaware that Pershing did not have the stock until much
later. When petitioner learned that the stock had not been
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transferred to Pershing, which was after the notice of deficiency
was issued, he contacted S.K. and had the certificate sent to
him. Petitioner then delivered the stock to Pershing, and the
stock was accepted by Pershing and placed in petitioner’s IRA
account.
For petitioner’s 1998 Federal income tax year, Pershing
issued petitioner a Form 1099-R, indicating that a $40,000
distribution had been made to petitioner. Petitioner did not
report this $40,000 transaction on his 1998 Federal income tax
return.
Respondent determined that the check issued by Pershing on
September 14, 1998, constituted a distribution from the IRA to
petitioner and was includable in income under sections 408(d) and
72. Respondent also imposed the section 72(t) 10-percent
additional tax.
Discussion
Section 408(d)(1) provides that “any amount paid or
distributed out of an individual retirement plan shall be
included in gross income by the * * * distributee * * * in the
manner provided under section 72.” Respondent argues that
petitioner’s completion of the distribution request form and the
resulting issuance of the $40,000 check constituted a
distribution to petitioner under section 408(d)(1).
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Neither the Internal Revenue Code nor the applicable
regulations provide specific guidance on whether an amount is
considered to have been “paid or distributed out of an individual
retirement plan” in the circumstances here. If, on petitioner’s
instructions, Pershing had paid the $40,000 to S.K. for its
stock, there simply would have been an investment in an asset of
the IRA, and there would have been no question whether there had
been a distribution to petitioner. Similarly, if Pershing had
delivered the check to a broker who had purchased the shares for
petitioner’s IRA account, there would have been no distribution.
The broker would have been Pershing’s agent. The question then
is whether, when Pershing delivered the check made out to S.K. to
petitioner, who in turn delivered it to S.K. to purchase the
stock for the IRA account, there was a distribution to
petitioner. We point out that the question does not involve
whether there was a nontaxable rollover of the IRA assets within
the period specified by section 408(d)(3).
In Diamond v. Commissioner, 56 T.C. 530, 541 (1971), affd.
492 F.2d 286 (7th Cir. 1974), we noted: “We accept as sound law
the rule that a taxpayer need not treat as income moneys which he
did not receive under a claim of right, which were not his to
keep, and which he was required to transmit to someone else as a
mere conduit.”
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While the considerations in Diamond may have been different,
we believe that our observation is applicable here. From our
perspective, the soundest view of this case is that petitioner
acted as a conduit for Pershing by both arranging the stock
purchase and ensuring that the check was delivered to S.K. The
IRA was a custodial account, and Pershing was the trustee
thereof, as well as the holder of the assets in the account.
Sec. 408(h); sec. 1.408-2(d), Income Tax Regs. Petitioner
exercised his right, under the IRA agreement, to direct
investments of the IRA assets by requesting that Pershing invest
a portion of his IRA assets in S.K. stock. Because of Pershing’s
policy not to purchase securities that are not publicly traded,
petitioner acted as a conduit for Pershing in arranging the
investment. The check was payable to and negotiated by S.K. The
stock was issued to the IRA account.
Petitioner’s actions as the IRA trustee’s agent consisted of
insuring that the check was delivered to S.K. We are not aware
of any provisions of the Internal Revenue Code, applicable
regulations, or case law that prohibit a taxpayer from acting as
a conduit for an IRA trustee under the circumstances presented
here. We further note that it cannot be argued cogently that
petitioner was in constructive receipt of the assets represented
by the transaction. See Estate of Brooks v. Commissioner, 50
T.C. 585 (1968). “Its essence [of constructive receipt] is that
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funds which are subject to a taxpayer’s unfettered command and
which he is free to enjoy at his option are constructively
received by him whether he sees fit to enjoy them or not.” Id.
at 592. Specifically, under Louisiana law, petitioner was not a
holder of and could not negotiate the check. La. Rev. Stat. Ann.
secs. 10:1-201 (defining a holder); 10:3-201 (defining
negotiation); 10:3-301 (defining an individual entitled to
enforce an instrument) (West 1993). Petitioner’s actions as a
conduit for the IRA trustee in these limited circumstances
violated no prohibition regarding a taxpayer’s relationship to
his IRA and, therefore, did not result in a distribution.
Respondent argues that this transaction is controlled by
Lemishow v. Commissioner, 110 T.C. 110 (1998). In Lemishow the
taxpayer made withdrawals from retirement accounts, invested the
distributions in stock, and contributed the stock to a new IRA.
We held that this transaction could not qualify as a tax-free
rollover of qualified plan assets because the character of the
property transferred to the new IRA was different from the
character of the property distributed to the taxpayer, and,
therefore, under section 402(c)(1) the transaction did not
qualify as a rollover. Id. at 113. But, in this case,
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petitioner received no cash. Lemishow, therefore, is not on
point.5
Nor do we find any significance in the fact that S.K. did
not immediately deliver the shares to Pershing. In this regard,
we point out again that we are not dealing directly with the 60-
day limitation on a rollover of a distribution under section
408(d)(3). Rather, we are concerned with whether the delayed
transfer of the stock certificate alters our conclusion that
there was no distribution from the IRA to petitioner. At all
times, the IRA, not the petitioner, was the owner of the shares
even though it may not have been in physical possession of the
stock certificate.
Furthermore, to the extent that this fact is relevant, the
failure of S.K. to deliver the stock certificate would not
invalidate the transaction. In Wood v. Commissioner, 93 T.C. 114(1989), we held that a bookkeeping error by the trustee of an
IRA, which resulted in a portion of a rollover distribution from
another qualified plan not being credited to the IRA account
within the applicable period, did not preclude the rollover. We
noted that “a bookkeeping error does not alter the rights and
responsibilities between parties to a transaction.” Id. at 121.
While the question here is somewhat different, we believe that
5
Similarly, respondent’s reliance on Bunney v.
Commissioner, 114 T.C. 259 (2000), and Darby v. Commissioner, 97
T.C. 51 (1991), is misplaced.
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the rationale is similar. The failure here did not alter the
ownership of the stock by the IRA and certainly did not transfer
the ownership to petitioner. The worst that could be said is
that there was an oversight from which we draw no adverse
inference.
To reflect the foregoing,
Decision will be entered
under Rule 155.