Charlotte and Charles T. Gee v. Commissioner , 127 T.C. No. 1 ( 2006 )

127 T.C. No. 1
UNITED STATES TAX COURT
CHARLOTTE AND CHARLES T. GEE, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 8755-05. Filed July 24, 2006.
P rolled over a distribution from her deceased
husband’s individual retirement account (IRA) into her
separate IRA upon her husband’s death. Four years
later, P received a distribution from her IRA. She
claims that the distribution was an amount received
from her deceased husband’s IRA and therefore exempt
from the 10-percent additional tax on early
distributions under sec. 72(t)(2)(A)(ii), I.R.C., as a
distribution to a beneficiary upon a decedent’s death.
1. Held: P received an early distribution from
her own IRA subject to the sec. 72(t), I.R.C.,
additional tax. The amount received from P’s deceased
husband’s IRA lost its character as a distribution made
to a beneficiary upon a decedent’s death once P
transferred the funds to her separately owned IRA.
2. Held, further, Ps are not liable for the
accuracy-related penalty under sec. 6662(a), I.R.C.
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Ed Daniel IV, for petitioners.
Caroline R. Krivacka, for respondent.
OPINION
KROUPA, Judge: Respondent determined a $97,789 deficiency
in petitioners’ Federal income tax for 2002 and determined that
petitioners are liable for the accuracy-related penalty under
section 6662(a)1 for 2002.
There are two issues for decision. The first issue is
whether a $977,888 distribution petitioner Charlotte Gee
(petitioner) received in 2002 from an individual retirement
account (IRA) she maintained only in her name, and which had been
funded in part with a rollover from her deceased husband’s IRA,
is subject to the 10-percent additional tax on early
distributions under section 72(t). We hold that the distribution
is subject to the additional tax under section 72(t).
The second issue is whether petitioners are liable for the
accuracy-related penalty under section 6662(a) for substantial
understatement of income tax. We hold that they are not.
Background
This case was submitted to the Court fully stipulated under
Rule 122.2 The stipulation of facts and the accompanying
1
All section references are to the Internal Revenue Code
(Code) in effect for the year at issue, unless otherwise
indicated, and all Rule references are to the Tax Court Rules of
Practice and Procedure.
2
We decide this case without regard to the burden-shifting
rule of sec. 7491(a)(1) because the parties stipulated all the
facts in dispute under Rule 122.
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exhibits are incorporated by this reference, and the facts are so
found. Petitioners resided in Bolivar, Tennessee, when they
filed the petition.
Petitioner opened an IRA with PaineWebber in 1993. Her
husband at the time, Ray A. Campbell, Jr. (Mr. Campbell), also
opened an IRA with PaineWebber in 1993. Petitioner was married
to Mr. Campbell when the IRAs were established and remained
married until Mr. Campbell’s death on June 21, 1998, at age 73.
Mr. Campbell was the sole owner of his IRA, account number
MN 21719 17, and petitioner was the primary beneficiary.
Petitioner was the sole owner of her IRA, account number MN 21712
17, when Mr. Campbell died.
Petitioner requested PaineWebber to distribute the entire
balance in Mr. Campbell’s IRA to her IRA at PaineWebber.
PaineWebber distributed $1,010,988.38 to petitioner’s separately
owned IRA in July 1998 in the form of a direct rollover.
Petitioner was age 51 at the time of the rollover.
Petitioner transferred her IRA funds in November 2000, then
totaling $2,646,797.89, to SEI Private Trust Co. (SEI). In 2002,
petitioner requested and received a $977,887.79 distribution from
her IRA at SEI. Petitioner was under age 59½ in 2002 when she
received the distribution.
Petitioners reported the IRA distribution on their joint
Federal income tax return for 2002 but did not report or remit
the 10-percent additional tax on early distributions.
Petitioners attached a statement to their return stating that SEI
had entered the wrong distribution code on the information
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return. The correct distribution code should have been for “a
distribution of IRA for her deceased husband.”
Respondent determined that, although the distribution would
have been exempt from the 10-percent additional tax when it was
made to petitioner’s IRA upon Mr. Campbell’s death, the funds
became subject to the 10-percent additional tax when distributed
to her from her own IRA. Respondent also determined that
petitioners are liable for the accuracy-related penalty for
substantial understatement of income tax.
Petitioners timely filed a petition with this Court
contesting respondent’s determinations in the deficiency notice.
Discussion
I. Whether the IRA Distribution Was Subject to the 10-Percent
Additional Tax on Early Distributions
We are asked to decide whether petitioner is liable for the
10-percent additional tax on early distributions under section
72(t). Section 72(t) imposes a 10-percent additional tax on the
amount of an early distribution from a qualified retirement
account (as defined in section 4974(c)).3 See sec. 72(t)(1).
Section 72(t)(2) provides for certain exceptions to the
imposition of this 10-percent additional tax.
The parties agree that the only relevant exception is
section 72(t)(2)(A)(ii), which provides that distributions “made
to a beneficiary (or to the estate of the employee) on or after
the death of the employee” are not subject to the 10-percent
3
The parties agree that petitioner received the distribution
in 2002 from her IRA, which was a qualified retirement plan under
sec. 4974(c)(4).
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additional tax. Petitioner argues that the entire distribution
she received from her IRA was an amount received on or after the
death of Mr. Campbell.4 We note that this Court has not
previously decided whether an IRA distribution retains its
character as a distribution to a beneficiary “on or after the
death of an employee” if the distribution is of funds that were
rolled over to the IRA upon the employee’s death.
Respondent argues that once petitioner as surviving spouse
decided to maintain the funds in an account in her own name as
owner of the IRA, she became the owner of the IRA “for all
purposes of the Code,” relying upon section 1.408-8, Q&A-5 and 7,
Income Tax Regs. Petitioner counters that the funds from her
deceased husband’s IRA did not lose their character as funds from
her deceased husband’s IRA. Even though petitioner rolled over
the funds from her deceased husband’s IRA into her separate IRA,
petitioner did not make any additional contributions after her
husband died and also did not “redesignate” the account as her
own. See sec. 1.408-8, A-5(b), Income Tax Regs. We agree with
respondent.
We find that petitioner received the distribution from her
own IRA, not from an IRA of which she was a beneficiary on or
after the death of an employee. We further find that the source
of the amount received, whether originating from her deceased
husband’s IRA or petitioner’s own contributions, is irrelevant.
We recognize that petitioner may not have technically
4
Petitioner specifically argues that the distribution was of
funds she inherited from her deceased husband’s IRA. We use the
statutory language rather than the vernacular petitioner uses.
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redesignated the IRA as her own. She did not need to
“redesignate” the IRA. The IRA was her previously existing
account. We therefore find no merit to petitioner’s argument
that the rolled over funds retain their character because she did
not redesignate her IRA.
Petitioner rolled over the entire amount received from her
deceased husband’s IRA into her own IRA. Petitioner is and was
the sole owner of her separately created IRA. The distribution
petitioner received was not occasioned by the death of her
deceased husband nor made to her in her capacity as beneficiary
of his IRA.
Petitioner cannot have it both ways. She cannot choose to
roll the funds over into her own IRA and then later withdraw
funds from her IRA without additional tax liability because the
funds were originally from her deceased husband’s IRA.
Accordingly, once petitioner chose to roll the funds over into
her own IRA, she lost the ability to qualify for the exception
from the 10-percent additional tax on early distributions. The
funds became petitioner’s own and were no longer from her
deceased husband’s IRA once petitioner rolled them over into her
own IRA. The funds therefore no longer qualify for the
exception.
The section 72(t) tax discourages premature IRA
distributions 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 (1974), 1974-3 C.B. (Supp.) 80, 213.
To avoid the section 72(t) additional tax, petitioner must show
that the IRA distribution falls within one of the exceptions
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provided under section 72(t)(2). She has not done so. Thus, the
10-percent additional tax under section 72(t) applies to the
distribution petitioner received from her IRA in 2002.
We accordingly sustain respondent’s determination in the
deficiency notice that petitioners are liable for the $97,789
additional tax under section 72(t) for 2002.
II. Accuracy-Related Penalty
We turn now to respondent’s determination that petitioners
are 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 it is
appropriate to impose the penalty. See Higbee v. Commissioner,
116 T.C. 438, 446-447 (2001).
Respondent determined that petitioners are liable for the
accuracy-related penalty for a substantial understatement of
income tax under section 6662(b)(2) for 2002. There is a
substantial understatement of income tax 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(d)(1)(A); sec. 1.6662-4(b), Income Tax Regs.
Petitioners understated their income tax for 2002 by
$97,789,5 which is greater than $5,000 or 10 percent of the tax
required to be shown on their return. Respondent has therefore
met his burden of production with respect to petitioners’
substantial understatement of income tax.
5
The difference between the required tax of $364,125 and the
$266,336 tax reported on the return is $97,789.
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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(a), 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
into account all the pertinent facts and circumstances, the most
important of which is the extent of the taxpayer’s effort to
assess his or her proper tax liability for the year. Sec.
1.6664-4(b)(1), Income Tax Regs. Circumstances that may indicate
reasonable cause and good faith include an honest
misunderstanding of law that is reasonable in light of all of the
facts and circumstances. Sec. 1.6664-4(b)(1), Income Tax Regs.
While the Commissioner bears the burden of production under
section 7491(c), the taxpayer bears the burden of proof with
respect to reasonable cause. Higbee v. Commissioner, supra at
446. The mere fact that we have held against petitioners on the
substantive issue does not, in and of itself, require holding for
respondent on the penalty. See Hitchins v. Commissioner, 103
T.C. 711, 719-720 (1994) (“Indeed, we have specifically refused
to impose * * * [a penalty] where it appeared that the issue was
one not previously considered by the Court and the statutory
language was not entirely clear.”).
We agree with petitioners that they made a reasonable
attempt to comply with the Code in circumstances involving an
issue of first impression. We note that respondent has not
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referred us to nor have we found any cases that have previously
answered the question before us. Accordingly, in light of all
the facts and circumstances, we find petitioners acted reasonably
and in good faith with respect to the underpayment for 2002 and
are not liable for the accuracy-related penalty under section
6662(a).
We have considered the other arguments of the parties and,
to the extent not discussed, we conclude that the arguments are
irrelevant, moot, or meritless.
To reflect the foregoing,
Decision will be entered
for respondent with respect to
the deficiency and for
petitioners with respect to
the penalty under section
6662(a).