Kopty v. Comm'r , 94 T.C.M. 480 ( 2007 )

T.C. Memo. 2007-343
UNITED STATES TAX COURT
RAMZY M. AND LENA KOPTY, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 4188-05. Filed November 21, 2007.
Ramzy M. and Lena Kopty, pro se.
Cleve Lisecki, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
WHALEN, Judge: Respondent determined the following
deficiencies in, and penalties with respect to, petitioners’
Federal income tax for 1999 and 2000:
-2-
Additions to Tax/Penalties
Year Deficiency Sec. 6651(a)(1) Sec. 6662(a)
1999 $94,699.32 $23,674.83 $12,793.13
2000 1,000.00 None None
Unless stated otherwise, all section references in this opinion
are to the Internal Revenue Code as in effect during the years in
issue.
The issues for decision are: (1) Whether the distributions
received by petitioners during 1999 and 2000 from petitioner
Ramzy M. Kopty’s individual retirement account (IRA) in the
aggregate amounts of $331,500 and $10,000, respectively, are
includable in petitioners’ gross income, pursuant to section
408(d); (2) whether petitioners are subject to the 10-percent
additional tax on early distributions imposed by section 72(t) on
the distributions received by petitioners from Mr. Kopty’s IRA
during 1999 and 2000; (3) whether petitioners are liable for the
addition to tax of $23,674.83 determined by respondent under
section 6651(a)(1) for failure to file a timely return for 1999;
and (4) whether petitioners are subject to the accuracy-related
penalty of $12,793.13 determined by respondent under section
6662(a) with respect to their 1999 return.
FINDINGS OF FACT
Petitioners are husband and wife. They resided in Waterloo,
Belgium, at the time they filed their petition in this case. In
-3-
this opinion, references to petitioner are references to Mr.
Ramzy M. Kopty.
From March 18, 1991, through the end of 1997, petitioner was
employed by a software company, J.D. Edwards & Co. On or about
July 1, 1992, he began participating in the J.D. Edwards Employee
Stock Ownership Plan (ESOP), a qualified plan under which the
company made contributions of its stock to petitioner’s account
in the plan. By December 31, 1997, when petitioner left the
employ of J.D. Edwards & Co., the company had contributed
10,323.9064 shares of its stock into petitioner’s ESOP account.
Set out below are the number of shares of J.D. Edwards & Co.
stock, the aggregate value of those shares of stock, the cash
held in petitioner’s ESOP account, and the total value of
petitioner’s account, at the end of each of the years 1992
through and including 1997:
Year Shares Value Cash Total
1992 20.3100 $3,756.70 ($57.43) $3,699.27
1993 36.1085 6,818.47 1,608.94 8,427.41
1994 66.0084 15,698.12 1,725.72 17,423.84
1995 108.1071 46,776.86 6.29 46,783.15
1996 144.5164 108,732.69 30.90 108,763.59
1
1996 10,116.1480
1997 10,323.9064 304,555.24 10.31 304,565.55
1
Number of shares restated to reflect a 70-to-1 stock split.
After petitioner left J.D. Edwards & Co. at the end of 1997,
he began working through a sole proprietorship, Kopty Management
Consulting. In that capacity, he provided management,
-4-
scientific, and technical consulting services to various clients.
The Schedules C, Profit or Loss From Business, for petitioner’s
sole proprietorship that were filed with petitioners’ returns for
1998, 1999, and 2000 are summarized below:
1998 1999 2000
Income:
1 Gross receipts or sales $114,634 -0- -0-
2 Returns and allowances -0-
3 Subtract line 2 from line 1 114,634
4 Cost of goods sold -0-
5 Gross profit, subtract line
4 from line 3 114,634
6 Other income -0-
7 Gross income. Add lines 5 and 6 114,634 -0- -0-
Expenses:
10 Car and truck expenses 2,340 $2,340.00 $1,270
11 Commissions and fees 7,900 8,560.00 5,330
13 Depreciation and section 179 3,756 3,756.00 1,430
expense deduction
18 Office expense -0- 667.59 267
20 Rent or lease
a Vehicles, machinery, and
equipment
b Other business property 1,500 24,931.51 18,670
24 Travel, meals, and entertainment
a Travel 33,288 10,208.49 2,450
b Meals and entertainment $5,000 $3,415.00 $1,760
c Enter nondeductible 2,500 1,707.50 880
amount
d Subtract line 24c from 2,500 1,707.50 880
line 24b
25 Utilities -0- 1,744.96 1,460
26 Wages (less employment credits) None 28,916.44 14,320
27 Other expenses
Telephone 7,191 12,588.64 6,380
Other misc. 2,300 -0- -0-
Total expenses 60,775 95,421.13 52,457
Net profit or (loss) 53,859 -95,421.13 -52,457
Circa June of 1999, petitioner’s wife and children moved
from Dubai in the United Arab Emirates to Waterloo, Belgium.
Until sometime during 2000, petitioner’s business activities were
based in Dubai, and he retained a residence there. Between June
1999 and the latter part of 2000, petitioner traveled between
Belgium, where he and his family resided, and Dubai, where his
business activities were centered. Some of the expenses claimed
-5-
on the above Schedules C for 1999 and 2000 reflect Mr. Kopty’s
travel between his home in Belgium and his business in the United
Arab Emirates.
On or about July 1, 1998, after leaving the employ of J.D.
Edwards & Co., petitioner sent a distribution request form to the
company asking the company to distribute to him the shares of
stock and cash held in his ESOP account. As completed by
petitioner, the distribution request form states: “I elect a
payout of all my whole shares of J.D. Edwards stock, plus cash, *
* * payable to me with the applicable taxes withheld for federal
tax.”
On the following day, petitioner transmitted a facsimile of
the distribution request form to a representative of Norwest
Investment Services, Inc. (hereinafter Norwest). Several days
later, on or about July 8, 1998, petitioner applied to open a
self-directed IRA with Norwest. As completed by petitioner, the
application states that petitioner wanted to establish a
“Rollover IRA”.
On or about July 15, 1998, in response to petitioner’s
distribution request, the ESOP’s trustee, Wells Fargo Bank, sent
10,323 shares of J.D. Edwards & Co. stock to the transfer agent
and registrar of the stock, Harris Trust Co. of California, with
instructions to reissue the stock in petitioner’s name. In
accordance with those instructions, on or about July 30, 1998,
-6-
the transfer agent mailed to petitioner a stock certificate for
10,323 shares of J.D. Edwards & Co. stock. The stock
certificate, No. JDE1185, was dated July 15, 1998. The shares
represented by that stock certificate had not been registered
under the Securities Act of 1933, and the stock certificate bore
the following restricted legend:
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933. THEY MAY NOT BE SOLD, OFFERED
FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN
EFFECTIVE REGISTRATION STATEMENT UNDER SAID ACT OR
OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT
SUCH REGISTRATION IS NOT REQUIRED. * * *
Petitioner received the stock certificate from the transfer
agent, but the record does not reveal precisely when he received
it.
On August 4, 1998, 5 days after the stock certificate had
been mailed to him by the transfer agent, petitioner hand-
delivered it to Norwest. In return, a representative of Norwest
gave petitioner a receipt for the stock certificate. The receipt
states that the purpose of receiving the stock certificate was
“Deposit to account”. Thus, according to the receipt, Norwest
received the J.D. Edwards & Co. stock certificate from petitioner
for the purpose of depositing the shares into petitioner’s
rollover IRA at Norwest.
Mr. Kopty’s rollover of the stock distribution from his ESOP
account to his IRA was confirmed by the statement for
petitioner’s IRA which was issued by Norwest for the period
-7-
ending August 31, 1998. That statement records a “stock rollover
DS” on August 24, 1998, consisting of 10,323 shares of J.D.
Edwards & Co. stock valued at $40.50 per share in the aggregate
amount $418,081.50. It is not clear from the record why the
rollover was not booked into petitioner’s account as of August 4,
1998, the date of the receipt issued by Norwest for petitioner’s
J.D. Edwards & Co. stock certificate.
A letter to petitioner dated August 11, 1998, written by a
representative of the ESOP’s trustee, Wells Fargo Bank, states as
follows:
You elected to take a distribution from the J.D.
Edwards & Company (the “Company”) Employee Stock
Ownership Plan (the “ESOP”). In accordance with the
terms of the ESOP and your distribution request form, a
stock certificate in the amount of 10,323 shares. [sic]
You will receive your stock certificate from J.D.
Edwards in the near future.
You elected not to rollover your ESOP account balance.
As a result, the cash balance, consisting of your cash
account and fractional shares, has been withheld for
tax purposes. You will receive a 1099R in January 1999
to reflect your distribution. You may be liable for
additional taxes concerning this distribution.
The above letter is wrong on two important points. First, as
discussed above, by August 11, 1998, the date of the letter,
petitioner had already received the stock certificate for 10,323
shares of J.D. Edwards & Co. stock from the transfer agent.
Second, by the date of the letter, petitioner had already hand-
delivered the stock certificate to Norwest for deposit into his
rollover IRA.
-8-
Enclosed in the above letter is a “Settlement Statement
(Prepared 8/11/98 with values as of 7/15/98)”. According to that
statement, the market value of petitioner’s current vested
account balance in the ESOP amounted to $467,817.48. The
statement says that $467,766.10 of that amount was paid to
petitioner in the form of 10,323 shares of J.D. Edwards & Co.
stock. The stock was valued as of July 15, 1998, at $45.31 per
share. The statement also says that the payment to petitioner
was “less withholding” of $51.38 “consisting of your cash account
and fractional shares”. We note that the value of petitioner’s
fractional share, $41.07 (i.e., 0.90164 x $45.31), plus the cash
balance in his account, $10.31, is $51.38.
On October 2, 1998, petitioner executed a Norwest form
entitled Self-Directed IRA Rollover/Direct Rollover
Documentation. According to that form, petitioner’s signature
signified his irrevocable election, “pursuant to IRS regulation
1.402(a)(5)-1T, to treat this contribution [viz. of 10,323 shares
of J.D. Edwards & Co. stock] as a rollover contribution.”
Petitioner’s signature appears on the form a second time in order
to give Norwest the following “Commingling Authorization”:
The undersigned authorizes the Trustee/Custodian to
commingle regular IRA contributions with
rollover/direct rollover contributions pursuant to Part
II above. I understand that commingling regular IRA
contributions with rollover/direct rollover
contributions from employer plans may preclude me from
rolling over funds in my rollover IRA into another
qualified plan or 403(b) plan. With such knowledge, I
-9-
authorize and direct the Trustee/Custodian to place
regular IRA contributions in my rollover IRA or vice
versa.
Sometime after petitioner had hand-delivered his J.D.
Edwards & Co. stock certificate to Norwest, representatives of
Norwest prepared the paperwork necessary to permit the
registration and sale of petitioner’s shares, and they sent the
paperwork to petitioner for completion. The completed paperwork
was received from petitioner by Norwest’s office in Boulder,
Colorado, on or about October 7, 1998, and was forwarded to
Norwest’s home office in Minneapolis, Minnesota. The paperwork
and the stock certificate were then sent to the transfer agent on
or about October 20, 1998, and the shares of stock were
registered in unrestricted form on or about November 4, 1998.
Norwest sold petitioner’s J.D. Edwards & Co. stock on or
about November 16, 1998. The statement for petitioner’s IRA for
the period ending November 30, 1998, reflects the following sales
of J.D. Edwards & Co. stock:
Net Proceeds
Trade Date Shares Price (after Commissions)
Nov. 19, 1998 300 $32.750 $9,786.79
Nov. 19, 1998 23 32.750 750.62
Nov. 19, 1998 8,000 32.625 260,087.75
Nov. 19, 1998 2,000 32.812 65,396.92
10,323 32.737 336,022.08
The above proceeds were invested in a money-market mutual
fund and earned dividend income in the amount $509.90 for the
-10-
remaining 12 days of November and $1,322.35 for the month of
December. Thus, through the end of 1998, petitioner’s IRA earned
dividend income in the aggregate amount of $1,832.25 on the net
proceeds realized from the sale of his J.D. Edwards & Co. stock.
In early 1999, the ESOP’s trustee, Wells Fargo Bank, issued
to petitioner a Form 1099-R, Distributions From Pensions,
Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance
Contracts, etc., for tax year 1998. According to that form,
during 1998, petitioner had received gross distributions from the
J.D. Edwards ESOP of $467,817.48 of which the taxable amount is
$42,695.14, and on which Federal income tax of $51.38 had been
withheld. Similarly, Norwest Bank Minnesota, N.A., issued to
petitioner a Form 5498, IRA Contribution Information, on behalf
of Norwest Bank MN NA IRA C/F Ramzy Kopty reporting rollover
contributions of $411,629.63 for 1998. According to that form,
the fair market value of petitioner’s IRA account was
$337,854.33.
During 1999, petitioner’s IRA earned dividend income in the
aggregate amount of $6,093.21. During the year, petitioner
caused Norwest to make distributions from his IRA in the
aggregate amount of $331,500, as follows:
Date Amount
Jan. 4, 1999 $70,000
Jan. 4, 1999 20,000
Feb. 1, 1999 15,000
Apr. 26, 1999 30,000
-11-
May 13, 1999 30,000
May 31, 1999 15,000
July 19, 1999 20,000
July 19, 1999 50,000
Sept. 20, 1999 10,000
Oct. 18, 1999 20,000
Oct. 18, 1999 10,000
Oct. 25, 1999 17,000
Nov. 15, 1999 10,000
Nov. 29, 1999 10,000
Dec. 1, 1999 4,500
331,500
With one exception, all of the distributions that petitioner
requested from his IRA were accompanied by a Norwest form
entitled “Self-Directed IRA Withdrawal Request”. According to
each such form, the type of withdrawal that petitioner requested
was “Premature Distribution (under age 59½) (no known
exception)”. Each form also instructed Norwest not to withhold
Federal income tax from the amount distributed. The form states:
If I elect not to have Federal income tax
withheld, I am still liable for payment of Federal
income tax on the taxable portion of my distribution; I
also may be subject to tax penalties under the
estimated tax payment rules, if my payments or
estimated tax and withholding, if any, are not
adequate.
Finally, as the source of the funds, each form states that “Funds
will first be withdrawn from the liquid asset portion of my IRA.”
Subsequently, during the year 2000, Norwest Bank Minnesota,
NA, sent a Form 1099-R to petitioners reporting gross
distributions of $331,500 from petitioner’s IRA during 1999.
-12-
During 2000, the money invested in petitioner’s IRA earned
mutual fund dividends in the amount of $141.27. During that
year, petitioner requested distributions of $10,000 from his IRA.
By the end of 2000, the value of petitioner’s IRA was zero.
Wells Fargo Investments, LLC, later issued a Form 1099-R to
petitioners reporting gross distributions of $10,000 from
petitioner’s IRA during the year 2000. The record of this case
suggests that Wells Fargo Bank acquired Norwest, but it does not
say when the acquisition took place.
Petitioners filed their Federal income tax return for 1998
on October 18, 2000. The return had been prepared by Arthur
Anderson. Consistent with the Form 1099-R issued to petitioners
by Wells Fargo Bank, and the Form 5498, IRA Contribution
Information, issued by Norwest Bank Minnesota, N.A., petitioners’
1998 return reports total pensions and annuities of $467,817.
Petitioners’ 1998 return reports that the taxable amount of the
distribution is “NONE”. Petitioners’ 1998 return also reports
income tax withholding of $51. Finally, petitioners’ 1998 return
reports none of the dividend income earned by petitioners’ IRA
during 1998 in the aggregate amount of $1,832.25.
In passing, we note that by October 18, 2000, when
petitioners filed their return for 1998, and reported that "NONE"
of the ESOP distribution was taxable, they had already withdrawn
most, if not all, of the money from the IRA. Stated differently,
-13-
by October 18, 2000, the distributions received from Mr. Kopty’s
IRA amounted to most, if not all, of the proceeds realized from
the sale of the J.D. Edwards & Co. stock and the income realized
on those proceeds.
Prior to filing petitioners’ return for 1998, Mr. Kopty had
sent a letter to the Internal Revenue Service dated May 27, 2000,
in which he explained why petitioners’ 1998 return had not been
filed. Petitioner’s letter, which was mailed on June 6, 2000,
states as follows:
Please be informed that the 1998 taxes are held up due
to an error made by my ex-employer J.D. Edwards in the
preparation of the Form 1099. Please take note of the
following:
1. The 1099 Form of J.D. Edwards indicates that
the gross distribution is US $467,817.48
attached.
2. J.D. Edwards claims that the calculation for the
above is based on 10,323 shares x $45.313 per
share.
3. According to the bank statement, Norwest
Investment Services the shares were $31.00 per
share when they were finally “free and clear” on
November 4, 1998. As a matter of fact, the shares
were sold by Norwest Investment Services on
November 16, 1998, for a total of $339,203 which
is an average per share of $32.85. This was put
in an IRA account.
4. I re-addressed this issue again with J.D. Edwards
and based on their last response they believe that
their calculation is correct. From what appears
to be the issue is that J.D. Edwards has made
their calculation at a much higher price per share
on July 15, 1998. On the other hand, the shares
-14-
were not “free and clear” on that date of
preparation which was solely under JDEdwards
control.
5. We are considering to hand this matter over to a
legal adviser to resolve this matter since it has
material repercussions on lost amounts and taxable
income.
In order to avoid penalties and interests, we have
forwarded to you earlier a check amount of US
$13,529.00 to be considered as a pre-payment for the
time being. Also we would like to request from you any
suggestions that will help us resolve this matter.
[Emphasis added.]
In substance, the above letter states that the filing of
petitioners’ 1998 return was delayed due to an error made by Mr.
Kopty’s ex-employer, J.D. Edwards & Co., in preparing his Form
1099-R for 1998. Petitioner complains that the gross
distribution shown on the Form 1099-R in the amount of
$467,817.48, valued as of July 15, 1998, greatly exceeds the
proceeds realized from the sale of the shares on November 16,
1998, in the amount of $339,230. Petitioner complains that the
value of the distribution reported to the Internal Revenue
Service on the Form 1099-R was based upon the higher price per
share on July 15, 1998, when “the shares were not ‘free and
clear’”. In effect, petitioner’s letter suggests that the Form
1099-R overstates the value of the stock issued to petitioner
and, thus, overstates the amount includable in petitioners’
income. The letter refers to the fact that petitioner had made a
“pre-payment” of tax of $13,529, and it requests “any suggestions
-15-
that will help us resolve this matter.”
When petitioner transmitted his 1998 Federal income tax
return to the IRS, he did so with a cover letter dated October 4,
2000, which states as follows:
Reference - 1998 taxes (Ramzy Kopty - SSN * * *)
The error in the 1099-R was discovered during the tax
preparation in December 1999 which would have added an
additional income of $42,695.14. Immediately I
contacted JD Edwards for the problem & did not receive
any correction or attention to this date.
April, 2000 - with no correction from JD Edwards/their
bank, and in avoidance of delay of payments I did a
rough calculation without the $42,695.14 & immediately
I forwarded a check on April 17, 2000 for the amount of
$13,529.00 (copy attached)
June 2000 - and still, with no correction from JD
Edwards/their bank I sent a detailed explanation to the
IRS on June 6, 2000 [i.e., above-quoted letter dated
May 27, 2000] with all the supporting documents
(Attached) & requested any suggestions that will help
resolve the matter. I did not get a response from the
IRS on this issue, and contrary, I received a letter
dated September 18, 2000 (cover sheet attached for your
reference) which included name & a contact of Robert
Stathntan (telephone - 215- * * *)
Upon Receipt and on September 26, 2000 I called the IRS
& talked to Ms. Kazlauskas who was very understanding
to the issues and we agreed that I file the tax return
(attached) citing the error & the pervious
correspondence
Under the circumstance I would like you to consider all
the above points while reviewing this situation and
confirm to me your finding. Additionally there was a
medical factor involved in this time frame (attached
medical report). In view of my health situation I have
also applied for long term disability with the Social
security (Social security confirmation attached).
-16-
Thus, petitioner’s transmittal letter of October 4, 2000,
again raises the issue discussed in his letter dated May 27,
2000, quoted above. That issue involves his contention that the
gross distribution reported on the Form 1099-R issued for 1998,
consisting of the stock of J.D. Edwards & Co., is overstated, as
shown by the fact that the amount reported on the Form 1099-R
greatly exceeds the proceeds realized from the sale of the stock.
The transmittal letter expresses petitioner’s concern that the
amount of the gross distribution reported on the Form 1099-R
would cause additional income of $42,695.14 for 1998.
Petitioners filed their 1999 Federal income tax return on or
about November 21, 2001. That return does not report any of the
distributions from petitioner’s IRA at Norwest during 1999 in the
aggregate amount of $331,500. At the same time, the return
reports none of the dividend income in the aggregate amount of
$6,093.21 realized by petitioner’s IRA during the year.
Petitioners also filed their 2000 Federal income tax return
on or about November 21, 2001. That return does not report the
distributions of $10,000 received from petitioner’s IRA during
2000. Furthermore, that return does not report the dividends of
$141.27 realized on the moneys invested in petitioner’s IRA
during 2000.
In the later part of 1999, petitioner consulted doctors at
the cardiopulmonary department of the American Hospital in Dubai.
-17-
He was briefly treated in the emergency room of the American
Hospital in Dubai on November 29, 1999, and approximately one
week later, on December 6, 1999, he returned to the hospital to
engage in a treadmill test. The interpretation of that test
states the following:
Exercise EKG positive for Ischemie by EKG criteria. No
exercise induced chest pains or arrhythmia. Normal BP
response to exercise. Impaired functional capacity for
patient’s age achieving 10.6 METS.
Subsequently, Mr. Kopty was admitted to the American
Hospital in Dubai on March 3, 2000, with the symptoms of a heart
attack. Approximately 2 weeks later he was transported to the
Universite Catholique De Louvain Cliniques Universitaires Saint-
Luc, a hospital in Belgium, where he underwent coronary bypass
and mitral valve repair on March 25, 2000. Mr. Kopty was
released on April 10, 2000, but was readmitted from time to time
for further treatment through the end of June 2000.
The medical records submitted by petitioners make it clear
that Mr. Kopty’s heart attack and related medical problems
between March and June of 2000 were serious. Mr. Kopty’s
treating physician in Belgium wrote on July 29, 2000, “since
March 3, 2000 Mr. Kopty had to stop his professional activities.
It seems obvious that these activities will have to be strongly
reduced in the future.”
In November of 2004, after the Internal Revenue Service
audited petitioners’ returns for 1999 and 2000 and issued the
-18-
notice of deficiency which is at issue in this case, Mr. Kopty
contacted Wells Fargo and asked the bank to issue a new Form
5498, IRA Contribution Information, for taxable year 1998 and new
Forms 1099-R for taxable years 1999 and 2000. Pursuant to his
request, Wells Fargo issued a new Form 5498 for 1998 stating that
his IRA contribution for the year was zero, and it issued new
Forms 1099-R reporting gross distributions from his account at
Norwest of zero for 1999 and 2000.
OPINION
Taxability of the Distributions From Petitioner’s IRA During 1999
and 2000
The principal issue in this case is whether petitioners are
subject to tax, as provided by section 408(d)(1), on the
aggregate distributions of $331,500 and $10,000 that they
received from petitioner’s IRA during 1999 and 2000,
respectively. Petitioners argue that they are not subject to tax
on those distributions because the account from which the
distributions were made was not an IRA.
Mr. Kopty had established that account with Norwest in 1998,
and he funded it by making a purported rollover contribution of
the stock he had received as a distribution from the J.D. Edwards
ESOP. According to petitioners, they learned in 2004, during the
audit of their returns for 1999 and 2000, that Mr. Kopty had
failed to complete the rollover contribution within 60 days
following the day on which he had received the stock from the
-19-
ESOP, as required by section 402(c)(3). We discuss the basis for
petitioners’ assertion that Mr. Kopty failed to make a valid
rollover in more detail below.
Based on the factual premise that Mr. Kopty failed to make a
valid rollover, petitioners contend that Mr. Kopty’s account at
Norwest was not an IRA within the meaning of section 408(a) and
they are not subject to tax on the distributions from that
account. Furthermore, petitioners argue that the determination
made by respondent in the notice of deficiency is based upon
Norwest’s incorrect conclusion that Mr. Kopty had made a valid
rollover of his J.D. Edwards & Co. stock in 1998. They argue
that, because Norwest’s conclusion was wrong, the notice of
deficiency, based thereon, must also be wrong. According to
petitioners:
respondents [sic] relied on the erroneous bank
determination that the 1998 roll over of the ESOP to
the IRA account * * * was valid and relied on the
erroneous reporting that followed that determination by
the bank. * * * Hence, respondent’s determination in
paragraph 3 [of the notice of deficiency] and
consequently the deficiency notice is null and void.
Petitioners do not explain the legal basis, or cite any
authority, for their conclusion that they are not subject to tax
on the distributions from Mr. Kopty’s account at Norwest. The
general rule is that any amount "paid or distributed out of" an
IRA is subject to tax as prescribed by section 72. See sec.
408(d)(1). Petitioners seem to be arguing that Mr. Kopty’s
-20-
Norwest account is disqualified from being an IRA because it was
funded by an excess contribution. To the contrary, an IRA is not
necessarily disqualified by the fact that it accepted excess
contributions, even if it was funded entirely with excess
contributions. See Orzechowski v. Commissioner, 69 T.C. 750
(1978), affd. 592 F.2d 677 (2d Cir. 1979); see also Boggs v.
Commissioner, 83 T.C. 132 (1984), affd. 774 F.2d 740 (7th Cir.
1985); Benbow v. Commissioner, 82 T.C. 941 (1984). In another
context we concluded that excess contributions were not subject
to tax when distributed by an IRA. See Campbell v. Commissioner,
108 T.C. 54 (1997) (holding that the taxpayer received basis to
the extent of his “investment in the contract” under section
72(e)(6)). Petitioners have not made any such argument in this
case.
Respondent urges the Court to reject petitioner’s position.
Respondent asserts that “the record clearly reflects that the
position taken by petitioners on their 1998 return was correct”
and that a valid rollover of the distribution received from the
ESOP was made in that year. Furthermore, respondent points out
that petitioners’ 1998 return reported the receipt of the ESOP
distribution in the amount of $467,817 and reported that the
taxable amount of such distribution was “NONE”. Respondent
asserts that “petitioners are estopped, pursuant to the duty of
consistency doctrine, from adopting a position on their 1999 and
-21-
2000 tax returns inconsistent with the position taken on their
1998 Return.”
We agree with respondent that, under the facts of this case,
Mr. Kopty made a valid rollover of the stock distribution he
received from the J.D. Edwards ESOP in 1998. Accordingly, we
reject the factual premise of petitioners’ argument that Mr.
Kopty’s account at Norwest was not an IRA, and we find that the
distributions from that account during 1999 and 2000 are subject
to tax under sections 408(d)(1) and 72(a). We do not reach
respondent’s second point that petitioners are estopped under the
duty of consistency from taking a different position on their
1999 and 2000 returns.
In order to fully address petitioners’ argument, we must set
out petitioners’ argument in more detail. Petitioners
acknowledge that they physically transferred the J.D. Edwards &
Co. stock certificate to Norwest within 60 days of the date on
which they received it, but they contend that they did not
irrevocably elect to make a rollover contribution to the IRA at
that time. According to petitioners, the stock certificate “was
hand-delivered to Norwest Bank [only] for safekeeping until the
shares become our [sic] unrestricted and eventually sold.” They
assert that “the bank placed the restricted shares by mistake in
the new account while the bank proceeded with the paperwork to
un-restrict and sell the shares.”
-22-
Petitioners contend that the stock certificate did not
properly become invested in the IRA account until October 2,
1998, when Mr. Kopty executed the Norwest form entitled “Self-
Directed IRA Rollover/Direct Rollover Documentation”.
Petitioners point out that October 2, 1998, is 79 days after Mr.
Kopty had constructively “received” the certificate on July 15,
1998, and is beyond the 60-day period specified in section
402(c)(3) during which a distributee is required to transfer the
property distributed to an eligible retirement plan. Petitioners
further contend that the form executed on October 2, 1998, was
not properly completed and did not serve to transfer the stock to
Norwest. In effect, petitioners’ position is that Mr. Kopty did
not elect to treat the contribution of his J.D. Edwards & Co.
stock certificate as a rollover contribution until October 2,
1998, when he executed the Norwest form entitled “Self-Directed
IRA Rollover/Direct Rollover Documentation”.
According to the regulations promulgated under section 402,
an election to treat a contribution to an IRA as a rollover
contribution is made simply by designating the contribution as a
rollover contribution. The regulations promulgated under section
402 provide as follows:
In order for a contribution of an eligible
rollover distribution to an individual retirement plan
to constitute a rollover and, thus, to qualify for
current exclusion from gross income, a distributee
must elect, at the time the contribution is made, to
treat the contribution as a rollover contribution. An
-23-
election is made by designating to the trustee, issuer,
or custodian of the eligible retirement plan that the
contribution is a rollover contribution. This election
is irrevocable. Once any portion of an eligible
rollover distribution has been contributed to an
individual retirement plan and designated as a rollover
distribution, taxation of the withdrawal of the
contribution from the individual retirement plan is
determined under section 408(d) rather than under
section 402 or 403. Therefore, the eligible rollover
distribution is not eligible for capital gains
treatment, five-year or ten-year averaging, or the
exclusion from gross income for net unrealized
appreciation on employer stock. [Sec. 1.402(c)-2, Q&A-
13, Income Tax Regs.; emphasis added.]
Thus, no particular form is required by the regulations in order
to designate a contribution as a rollover contribution.
In this case, petitioner opened a “Rollover IRA” at Norwest
on July 8, 1998, and he hand-delivered his J.D. Edwards & Co.
stock certificate to Norwest on August 4, 1998, several days
after the transfer agent had mailed the stock certificate to him.
According to the receipt issued to petitioner by a representative
of Norwest, “Deposit to account” was the purpose for which
Norwest received petitioner’s stock certificate. Petitioner’s
only account at Norwest was the “Rollover IRA” which he had
opened by submitting an application to Norwest on or about July
8, 1998. Furthermore, the statement issued by Norwest for
petitioner’s IRA for the period ending August 31, 1998, reflects
a “stock rollover” of 10,323 shares of J.D. Edwards & Co. stock
on August 24, 1998. Thus, it is evident that Norwest, the
trustee, issuer, or custodian of the IRA, believed that
-24-
petitioner had designated his J.D. Edwards & Co. stock as a
"rollover contribution" to his IRA. See sec. 1.402(c)-2, Q&A-13,
Income Tax Regs.
Petitioner’s contribution of J.D. Edwards & Co. stock to his
IRA and his designation of the contribution as a rollover
contribution took place well within 60 days of receipt as
required by section 402(c)(3). This is true no matter what we
use as the starting date, that is, "the day on which the
distributee received the property distributed." See sec.
402(c)(3). In this case, the starting date of the 60-day period
could be the date on which petitioner constructively received the
stock, July 15, 1998. See generally Rev. Rul. 82-75, 1982-1 C.B.
116 and Rev. Rul. 81-158, 1981-1 C.B. 205 (holding that, for
purposes of section 402, the distributee received shares from an
employer established profit-sharing plan that qualified under
section 401(a) when the trustee of the plan delivered to the
transfer agent stock certificates previously issued in the
trustee’s name, together with written instructions to reissue the
certificates in the name of the distributee). The starting date
could also be the date on which petitioner actually received the
stock. Petitioner actually received the stock certificate
between July 30, 1998, when the transfer agent mailed it to him,
and August 4, 1998, when he hand-delivered the stock certificate
to Norwest.
-25-
Furthermore, in this case, the 60-day period is satisfied
regardless of the date used as the date of the "transfer of a
distribution". See sec. 402(c)(3). That date could be August 4,
1998, the day on which petitioner hand-delivered the certificate
to Norwest, or August 24, 1998, the day on which Norwest recorded
the transfer on its statement for petitioner’s IRA for the period
ending August 31, 1998.
Petitioners do not deny that they intended to rollover the
distribution which Mr. Kopty received in 1998 from the J.D.
Edwards & Co. ESOP. Further, they do not deny that Mr. Kopty
delivered his J.D. Edwards & Co. stock certificate to Norwest on
August 4, 1998. What they argue is that when Mr. Kopty hand-
delivered the stock certificate to Norwest on August 4, 1998, he
intended to give the certificate to Norwest only for safekeeping,
pending the reissuance of the stock without restriction and its
sale. Petitioners assert that Norwest made a mistake by
depositing the stock into petitioner’s IRA before October 2,
1998, the date on which petitioner executed the Norwest form
entitled “Self-Directed IRA Rollover/Direct Rollover
Documentation”.
One problem we have with this factual contention is that
there is nothing in the record, other than petitioners’
testimony, to substantiate it. Certainly, Mr. Kopty did nothing
to call this alleged mistake to the attention of the Norwest
-26-
representative who issued the receipt for Mr. Kopty’s stock
certificate. Additionally, Mr. Kopty said nothing about this
alleged mistake when he received the August 1998 statement for
his IRA on which was recorded a “stock rollover DS” on August 24,
1998, consisting of 10,323 shares of J.D. Edwards & Co. stock.
Furthermore, petitioners’ argument presupposes that no
rollover to Mr. Kopty’s IRA at Norwest could take place for
purposes of section 402(c) unless and until the form entitled
"Self-Directed IRA Rollover/Direct Rollover Documentation" was
submitted to Norwest. To the contrary, as discussed above, the
regulations promulgated under section 402 merely require the
contribution to be designated a rollover contribution. The
Norwest form which petitioner executed on October 2, 1998,
entitled “Self-Directed IRA Rollover/Direct Rollover
Documentation” may have been helpful in terms of petitioner’s
relationship with Norwest, to document Mr. Kopty’s wishes, but it
was not essential for purposes of finding a rollover contribution
under section 402(c).
Finally, petitioners’ assertion that Mr. Kopty transferred
the stock certificate to Norwest only for safekeeping until the
shares could be reissued in unrestricted form and sold is
contradicted by Mr. Kopty’s actions. The fact is that Mr. Kopty
executed the form on October 2, 1998, well before the shares were
registered in unrestricted form and sold on November 16, 1998.
-27-
Indeed, it appears that Mr. Kopty may have executed the form even
before he returned to Norwest the paperwork necessary to permit
the registration and sale of the shares. As mentioned above, the
completed paperwork to permit the registration and sale of
petitioner’s stock was not received from petitioner by Norwest’s
office in Boulder until October 7, 1998.
Based on the facts of this case, we find that Mr. Kopty made
an irrevocable election to roll over, to his IRA, the
distribution of stock he had received from the J.D. Edwards ESOP.
We further find that petitioner made this irrevocable election
within the 60-day period required by section 402(c)(3).
Ten Percent Additional Tax on Early Distributions
The second issue in this case is whether petitioners are
liable for the 10-percent additional tax on early distributions
from qualified retirement plans imposed by section 72(t)(1).
Respondent applied the 10-percent additional tax on the aggregate
distributions of $331,500 made by petitioner’s IRA in 1999 and
the aggregate distributions of $10,000 made by the IRA in 2000.
Accordingly, respondent determined taxes under section 72(t)(1)
for 1999 and 2000 in the amounts of $31,500 and $1,000,
respectively.
Petitioners argue that section 72(t)(1) does not apply to
any of the subject distributions because all of them qualify
under the exception set forth in section 72(t)(2)(A)(iii) for
-28-
distributions “attributable to the employee’s being disabled
within the meaning of subsection (m)(7)”. Section 72(m)(7)
provides as follows: "an individual shall be considered disabled
if he is 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)(1), Income Tax Regs. Whether an impairment constitutes a
disability is to be determined with reference to all of the facts
in the case. Sec. 1.72-17A(f)(2), Income Tax Regs. The
regulations provide examples of impairments which would
ordinarily be considered as preventing substantial gainful
activity. One of those examples is the following:
Diseases of the heart, lungs, or blood vessels which
have resulted in major loss of heart or lung reserve as
evidenced by X-ray, electrocardiogram, or other
objective findings, so that despite medical treatment
breathlessness, pain, or fatigue is produced on slight
exertion, such as walking several blocks, using public
transportation, or doing small chores * * * [Sec.
1.72-17A(f)(2)(iii), Income Tax Regs.]
The regulations point out that the existence of one or more
of the impairments described therein, including the one quoted
above, "will not, however, in and of itself always permit a
finding that an individual is disabled as defined in section
72(m)(7)." See sec. 1.72-17A(f)(2), Income Tax Regs.
Furthermore, the regulations caution that any impairment must be
evaluated in terms of whether it does in fact prevent the
-29-
individual from engaging in his customary or any comparable
substantial gainful activity. Id. In order to meet the
requirements of section 72(m)(7), the regulations provide that
“an impairment must be expected either to continue for a long and
indefinite period or to result in death.” Sec. 1.72-17A(f)(3),
Income Tax Regs. An impairment which is remediable does not
constitute a disability, and an individual will not be deemed
disabled if it can be diminished to the extent that the
individual can engage in his customary or any comparable
substantial gainful activity. Sec. 1.72-17A(f)(4), Income Tax
Regs. Furthermore, a taxpayer may be engaged in a gainful
activity even though he realizes a net loss from that activity
during the year. See Dwyer v. Commissioner, 106 T.C. 337, 341
(1996).
In this case, petitioners introduced into evidence certain
medical records involving the medical treatment of Mr. Kopty’s
heart condition. Based upon those records they claim that "from
1999 onwards, Ramzy Kopty was disabled due to heart failure and
unable to engage in any substantial gainful activity." According
to petitioners, Mr. Kopty "had no income after 2000 which is
reflected in petitioners[’] tax returns for the years 2001, 2002,
2003, 2004." Petitioners assert that Mr. Kopty receives long-
term disability benefits from the U.S. Social Security
Administration. Based upon Mr. Kopty’s heart disease,
-30-
petitioners assert that they are not subject to the 10-percent
additional tax on early distributions under section 72(t) because
all of the distributions are attributable to Mr. Kopty’s being
disabled within the meaning of section 72(m)(7).
As to the distributions made during 1999, we do not accept
petitioners’ assertion that the distributions are attributable to
Mr. Kopty’s being disabled. According to the medical records
submitted by petitioners, Mr. Kopty was briefly treated in the
emergency room of the American Hospital in Dubai on November 29,
1999, and approximately 1 week later, on December 6, 1999,
returned to engage in a treadmill test. According to
petitioners’ brief: "petitioner was diagnosed in 1999 with
Pectoris Spasm and Ischemia which limited petitioner’s ability to
have gainful activity from 1999 onwards and that the same disease
led to an myocardial infarction (MI) in March 2000." That
diagnosis, however, did not even take place until December 6,
1999, at the earliest. By that time, all of the distributions
for 1999 had been made. In our view, the record of this case
fails to show that any of the distributions made during 1999 in
the amount of $331,500 were attributable to Mr. Kopty’s being
disabled.
As to the distributions made during 2000, Mr. Kopty was
admitted to the American Hospital in Dubai on March 3, 2000, with
the symptoms of a heart attack. Approximately 2 weeks later, he
-31-
was transported to a hospital in Belgium where he underwent
coronary bypass and mitral valve repair on March 25, 2000. Mr.
Kopty was released on April 10, 2000, but was readmitted from
time to time for further treatment through the end of June 2000.
The medical records submitted by petitioners make it clear that
Mr. Kopty’s heart attack and related medical problems between
March and June of 2000 were serious. Mr. Kopty’s treating
physician in Belgium wrote on July 29, 2000: “since March 3,
2000 Mr. Kopty had to stop his professional activities. It seems
obvious that these activities will have to be strongly reduced in
the future.”
The record in this case, however, makes it difficult to find
that Mr. Kopty was "disabled" within the meaning of section
72(m)(7) by his heart condition. First, after June of 2000 he
continued to travel between Dubai and Belgium. He testified at
trial about the steps which he had to take in order to close his
business in Dubai and "relocate" to Belgium. Furthermore,
petitioners’ income tax return for 2000 includes a Schedule C of
Mr. Kopty’s sole proprietorship which reflects business expenses
of $52,457 for the year. The expenses claimed on that Schedule C
include travel expenses of $2,450, expenses for meals of $1,760,
and telephone expenses of $6,380. The business activities
suggested by those expenses belie petitioners’ claim that Mr.
Kopty was “unable to engage in any substantial gainful activity”
-32-
during the year. See sec. 72(m)(7). Significantly, petitioners’
return for 2000 also reports that Mr. Kopty received wages of
$22,795.28 from J.D. Edwards World Solutions. Finally, Mr. Kopty
presented his case at trial. The Court had an opportunity to
observe him over the course of 2 days. The Court detected no
medical disability in his presentation of the case to the Court.
Addition to Tax Under Section 6651(a)(1) Determined With Respect
to Petitioners’ 1999 Return
The time for filing petitioners’ 1999 return was extended to
December 15, 2000. Petitioners filed their 1999 return on
November 21, 2001, and, thus, they failed to file a timely
return. Accordingly, respondent determined an addition to tax
under section 6651(a)(1) of $23,674.83 in the notice of
deficiency. We find that respondent satisfied his burdens of
production under section 7491(c) with respect to the addition to
tax under section 6651(a). See Higbee v. Commissioner, 116 T.C.
438, 446-447 (2001).
Petitioners argue that they are not liable for the addition
to tax under section 6651(a)(1) because their failure to file a
timely return for 1999 was due to reasonable cause and not due to
willful neglect. See sec. 6651(a)(1). According to petitioners,
reasonable cause for the late filing of their 1999 return is
demonstrated by three points: First, Mr. Kopty’s medical
history, including his heart attack on March 3, 2000, and his
related medical issues; second, the alleged fact that petitioners
-33-
never received the Form 1099-R issued by Norwest for 1999
reporting the distributions from Mr. Kopty’s IRA during the year
totaling $331,500; and third, the fact that petitioners reported
a loss on their 1999 return and did not believe that the filing
of their 1999 return was an urgent matter, especially in light of
Mr. Kopty’s medical problems during that year.
Petitioners assert the late filing of their 1999 return was
not due to willful neglect. According to petitioners, they were
“proactive with the ESOP issue” in that they corresponded with
J.D. Edwards & Co. through Mr. Kopty’s letter dated February 9,
2000, and they communicated with the Internal Revenue Service
through Mr. Kopty’s letters dated April 15, 2000, May 27, 2000,
and October 4, 2000, and Mr. Kopty’s telephone call on September
26, 2000.
We do not believe that petitioners have shown that their
failure to file a timely 1999 return was due to reasonable cause
and not due to willful neglect. As stated above, we agree that
Mr. Kopty’s heart attack in March of 2000 and his related
surgeries and medical care through June of 2000 were serious.
Nevertheless, the record of Mr. Kopty’s correspondence and other
activities during the year fails to explain why petitioners did
not file, or could not have filed, their return for 1999 on or
before the due date, December 15, 2000. Indeed, notwithstanding
Mr. Kopty’s medical condition, petitioners filed their 1998
-34-
return on October 18, 2000. At that point, they had ample time
before the due date of the 1999 return in which to file that
return as well. Furthermore, we reject petitioners’ assertion
that they should be relieved of the addition to tax under section
6651(a)(1) because they did not receive the Form 1099-R from
Norwest or because they did not think that the filing of that
return was “an urgent matter”.
Imposition of the Accuracy-Related Penalty Under Section 6662(a)
With Respect to Petitioners’ 1999 Return
Respondent determined petitioners’ liability for the
accuracy-related penalty under section 6662(a) to be $12,793.13.
Respondent determined that a portion of the underpayment of tax
required to be shown on petitioners’ 1999 return is attributable
to negligence or disregard of rules or regulations, or to a
substantial understatement of income tax. See sec. 6662(b)(1)
and (2). For this purpose, “the term ‘negligence’ includes any
failure to make a reasonable attempt to comply with the
provisions of this title, and the term ‘disregard’ includes any
careless, reckless, or intentional disregard.” Sec. 6662(c). An
understatement of income tax is “substantial” if the amount of
the understatement exceeds the greater of (a) 10 percent of the
tax required to be shown on the return, or (b) $5,000. Sec.
6662(d)(1)(A).
We agree with respondent that the portion of the
underpayment of tax on which respondent imposed the accuracy-
-35-
related penalty is attributable to negligence or disregard of
rules or regulations. Furthermore, we find that respondent has
carried his burden of production with respect to the addition to
tax under section 6662(a). See Higbee v. Commissioner, supra at
448-449.
Petitioners’ return for 1998 reported the ESOP distribution
of $467,817 and further reported the taxable amount of that
distribution as “NONE”. That return is consistent with the Form
5498 issued by Norwest for the year 1998 which shows rollover
contributions of $411,629.63, and it is consistent with the
Norwest statement for petitioner’s IRA for the period ending
August 31, 1998, showing a stock rollover into the account on
August 24, 1998, consisting of 10,323 shares of J.D. Edwards &
Co. stock. Petitioners’ 1998 return was not filed until October
4, 2000, by which time almost all of the money in Mr. Kopty’s IRA
had been withdrawn. In filing their 1998 return claiming that
the ESOP distribution was not taxable, petitioners knew, or
should have known, that the distributions from Mr. Kopty’s IRA
during 1999 and 2000 were subject to tax under section 408(d).
Accordingly, when they filed their return for 1999 on November
21, 2001, and reported none of the distributions as income, we
agree with respondent that the portion of the underpayment of tax
resulting therefrom is attributable to negligence or disregard of
rules or regulations. Furthermore, petitioners not only failed
-36-
to report the IRA distributions during 1999 as taxable income,
but they also failed to report any of the dividend income in the
amount of $6,093.21 earned by the IRA during 1999.
Petitioners assert that they are not liable for the
accuracy-related penalty under section 6662(a) for three reasons.
First, petitioners claim that, at the time they filed their 1999
return, they did not know whether the rollover in 1998 was valid
because “respondents [sic] never answered their several
assistance appeals” and petitioners had not received the Form
1099-R for 1999 from Norwest. Second, petitioners assert that
respondent has determined their liability for the accuracy-
related penalty “to hide their [sic] [respondent’s] negligence of
not responding to petitioners appeal for assistance with the ESOP
transaction". Third, petitioners assert that they “exercised
extreme duty of care towards to the ESOP transaction issue under
severe circumstances of being abroad and seriously ill”.
In summary, petitioners argue that, before they filed their
1999 return, they asked for advice from respondent concerning the
validity of the rollover in 1998, and, when they received no
response from their inquiries from respondent, they did the best
they could under the circumstances of being abroad and with Mr.
Kopty’s health issues. Petitioners appear to invoke the
reasonable cause exception under section 6664(c) which provides
that no penalty shall be imposed with respect to any portion of
-37-
an understatement if it is shown that there was a reasonable
cause for such portion and the taxpayer acted in good faith with
respect to such portion.
We agree that petitioners corresponded with representatives
of the Internal Revenue Service prior to filing their 1999 return
(Mr. Kopty’s letter dated May 27, 2000, which was sent on June 6,
2000, and his transmittal letter dated October 4, 2000). We also
agree that Mr. Kopty engaged in correspondence with Norwest and
J.D. Edwards & Co. during 2000 regarding the distribution from
the ESOP. That correspondence shows that Mr. Kopty was unhappy
about the fact that his shares of J.D. Edwards & Co. stock were
not sent until July 30, 1998, and were unregistered shares that
could not be immediately sold. According to one of petitioner’s
letters to J.D. Edwards & Co., the “ESOP shares were supposed to
have been received in April ‘clear for sales’ from J.D. Edwards.”
During the delay, the value of the shares decreased from
$467,766.10, the value on July 15, 1998, to $336,022.08, the
value of the shares on November 16, 1998, when they were sold.
Petitioner was concerned by the fact that the Form 1099-R which
he received from the ESOP was based upon the value of the shares
on July 15, 1998, and showed the taxable amount of such
distribution to be $42,695.14. When Mr. Kopty stated in his
letter to the Internal Revenue Service dated May 27, 2000: “also
we would like to request from you any suggestions that will help
-38-
us resolve this matter”, he was referring to this valuation
issue. Similarly, petitioner’s letter dated October 4, 2000,
transmitting petitioners’ 1998 tax return to the Internal Revenue
Service, refers to the same error in the Form 1099-R.
Petitioners’ letter states: “under the circumstances I would
like you to consider all of the above points while reviewing this
situation and confirm to me your finding.” Petitioner’s letter
was again asking the Internal Revenue Service to review the Form
1099-R issued by the ESOP on which petitioner’s shares of J.D.
Edwards & Co. stock were valued as of July 15, 1998, in the
amount of $467,766.10, whereas the net proceeds from the sale of
the stock on November 16, 1998, were $336,022.08.
In none of petitioner’s correspondence with the Internal
Revenue Service does he raise a question about the validity of
the rollover of J.D. Edwards & Co. stock into his IRA or the
Forms 1099-R issued to report the distributions from the IRA in
1999 and 2000. In fact, petitioners’ opening brief states that
they did not become aware “that the ESOP rollover was invalid in
1998 due to the 60 days rollover rule” until the audit of their
1999 and 2000 returns which took place between April and
September of 2004. We reject any suggestion that petitioners
raised with respondent, before the audit of their returns, an
issue concerning the validity of the rollover contribution of
J.D. Edwards & Co. stock to Mr. Kopty’s IRA. In conclusion, we
-39-
find that petitioners have not shown that there was reasonable
cause for the understatement of tax required to be shown on their
1999 return or that they acted in good faith with respect
thereto.
Computational Errors
In their posttrial brief, petitioners allege three
“computational errors” for the first time in these proceedings.
The first computational error involves the amount of the net
operating loss for taxable 2000 that can be carried back to 1999.
According to petitioners, respondent miscalculated the net
operating loss by basing the calculation on adjusted gross income
of -$5,522, rather than on -$15,522, the correct amount.
Petitioners failed to raise this issue in their petition,
and it is not before the Court. We do not consider an issue that
has not been pleaded. See, e.g., Frentz v. Commissioner, 44 T.C.
485, 491 (1965), affd. 375 F.2d (6th Cir. 1967); Sicanoff
Vegetable Oil Corp. v. Commissioner, 27 T.C. 1056, 1066 (1957)
(and the cases cited thereon), revd. on other grounds 251 F.2d
764 (7th Cir. 1958). This is particularly true in a case like
this where the issue cannot be considered without surprise and
prejudice to the other party. See Estate of Mandels v.
Commissioner, 64 T.C. 61, 73 (1975). Furthermore, we note that
the difference of $10,000, about which petitioners complain, is
due to the inclusion in gross income of the distributions of
-40-
$10,000 from Mr. Kopty’s IRA during the year.
The second so-called computational error alleged by
petitioners involves deductions for moving expenses under section
217(a). Apparently, during the audit of petitioners’ returns,
petitioners submitted a letter in which they claimed moving
expenses in the amount of $5,770 for 1999 and $1,950 for 2000.
In the notice of deficiency, respondent did not determine that
petitioners were allowed moving expenses. Petitioners ask the
Court “to order the moving expense correction.”
Petitioners did not raise this matter in their petition.
This is a new issue that was raised for the first time after
trial. As stated above, we do not consider an issue that has not
been pleaded. See, e.g., Frentz v. Commissioner, supra; Sicanoff
Vegetable Oil Corp. v. Commissioner, supra. This is particularly
true in a case like this where the issue cannot be considered
without surprise and prejudice to the other party. See Estate of
Mandels v. Commissioner, supra. Accordingly, we will not
consider it.
Finally, petitioners argue that interest on underpayments
under section 6601(a) should be computed from the date when the
tax return was due, taking into consideration extensions of time
to file, rather than from the original due date of the return.
Petitioners ask the Court to rule that interest on any
underpayment for taxable 1999 should begin on December 15, 2000,
-41-
rather than on April 15, 2000.
Petitioners are correct when they state in their brief that
this issue is not properly before the Court at this time.
Moreover, we note that, pursuant to section 6601(a), interest
begins to run on “the last date prescribed for payment” of the
tax and, pursuant to section 6151(a), an extension of time for
filing an income tax return does not extend the time for paying
the tax due.
Based upon the foregoing,
Decision will be entered for
respondent.