Kaldi v. Comm'r , 2007 Tax Ct. Summary LEXIS 45 ( 2007 )

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.
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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.
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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.
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$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).
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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.
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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.
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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
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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.
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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
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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.
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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.
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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.
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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
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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).
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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.