Garza-Martinez v. Comm'r , 2009 Tax Ct. Summary LEXIS 38 ( 2009 )

T.C. Summary Opinion 2009-38
UNITED STATES TAX COURT
NANCY GARZA-MARTINEZ, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 4390-07S. Filed March 23, 2009.
Nancy Garza-Martinez, pro se.
Sheila R. Pattison, for respondent.
JACOBS, Judge: This case was heard pursuant to the
provisions of section 7463 of the Internal Revenue Code in effect
when the petition was filed. Pursuant to section 7463(b), the
decision to be entered is not reviewable by any other court,
and this opinion shall not be treated as precedent for any other
case. All subsequent section references are to the Internal
- 2 -
Revenue Code in effect for the year in issue, and all Rule
references are to the Tax Court Rules of Practice and Procedure.
Respondent determined a $1,845 deficiency in petitioner’s
Federal income tax for 2004. The deficiency arises from the
imposition of the 10-percent additional tax mandated by section
72(t)(1) on early distributions from a qualified retirement plan.
Respondent contends that the 10-percent additional tax was
triggered by an impermissible modification to a “series of
substantially equal periodic payments” (the additional
distributions) petitioner had been receiving from her individual
retirement account (IRA) pursuant to section 72(t)(2)(iv).
Petitioner asserts that these additional distributions did not
trigger the 10-percent additional tax because they were used for
“qualified higher educational expenses” and therefore were
excepted from the 10-percent additional tax pursuant to section
72(t)(2)(E). Thus, the issues for decision are: (1) Whether
petitioner is liable for the section 72(t)(1) 10-percent
additional tax on early distributions from a qualified retirement
plan; and, if so, (2) the amount ($18,450, as respondent asserts
or $4,050, as petitioner maintains) of the distributions that is
subject to the 10-percent additional tax.
Background
Some of the facts have been stipulated, and they are so
found. We incorporate by reference the parties’ stipulations of
- 3 -
facts and accompanying exhibits. At the time she filed her
petition, petitioner resided in Texas.
Petitioner worked for Southwestern Bell for more than 20
years before 2001. In 2001, at age 48, she took early
retirement. At the end of 2000 petitioner rolled the amount in
her Southwestern Bell retirement plan account into an IRA with
Merrill Lynch and thereafter elected to receive monthly
distributions of $1,200 (the periodic payment distributions) from
her IRA, beginning February 1, 2001, and ending on February 18,
2012.
Petitioner began receiving her periodic payment
distributions as scheduled. However, during each of years 2001
to 2004 she received additional distributions from her IRA. In
2001 she received distributions from her IRA totaling $33,266.
Petitioner took the additional distributions in 2001 because she
had overcontributed to her IRA and took the additional
distributions in order to be in compliance with IRA contribution
rules. In 2002 petitioner received distributions totaling
$46,331, taking the additional distributions in 2002 because the
value of the investments that made up her IRA was plummeting and
she wanted to withdraw money from the stock market. In 2003
petitioner received distributions totaling $25,145. The
additional distributions were made pursuant to a qualified
domestic relations order arising from her divorce.
- 4 -
In 2004, when petitioner was 52 years old, she received (in
addition to her periodic payment distributions of $1,200) $4,050
of additional distributions as follows:
Date Amount
Jan. 9 $1,800
Mar. 30 800
May 24 500
July 19 400
Oct. 25 400
Nov. 30 150
Thus, in 2004 petitioner received distributions totaling $18,450.
The $4,050 of additional distributions was used to pay her son’s
higher education expenses.1 However, she did not know
specifically how her son spent the money she gave him, although
she believed that he used most of the money for college books and
supplies. When her son requested money, petitioner would make
withdrawals from her IRA and give him cash or transfer money to
his bank account. Petitioner did not provide documentation to
corroborate her assertion that she gave the money to her son or
that her son used the money for college tuition, books, and/or
supplies.
1
In 2004 petitioner’s son was 23. He lived off and on with
his girlfriend and at times with petitioner. For 2001-2004
petitioner claimed her son as a dependent. On her 2001 tax
return she claimed an education credit of $1,500; on her 2002 tax
return she claimed a tuition and fees deduction of $3,000; and on
her 2003 tax return she claimed an education credit of $2,000.
She did not claim an education credit or a deduction (with
respect to her son) on her 2004 tax return.
- 5 -
Petitioner reported the following amounts as being subject
to the section 72(t)(1) additional tax as a consequence of the
additional distributions she received in 2001, 2002, and 2003:
Date Amount
2001 $11,331
2002 31,931
2003 1,938
She did not report any amount as being subject to the section
72(t)(1) additional tax for 2004.
Discussion
Section 72(t)(1) imposes a 10-percent additional tax on the
amount of any distribution from a qualified retirement plan (such
as an IRA) that fails to satisfy one of the statutory exceptions
in section 72(t)(2).2 One exception, found in section
72(t)(2)(A)(iv), relates to periodic payments that are
substantially equal in amount:
(2) Subsection not to apply to certain distributions.
--Except as provided in paragraphs (3) and (4), paragraph
(1) shall not apply to any of the following distributions:
(A) In general.--Distributions which are--
2
Petitioner did not argue that the burden of proof should be
shifted to respondent pursuant to sec. 7491. Regardless of
whether the sec. 72(t) additional tax is a “penalty, addition to
tax, or additional amount imposed by this title” for which
respondent would have the burden of production pursuant to sec.
7491(c), we find that respondent has met that burden. See Milner
v. Commissioner, T.C. Memo. 2004-111 n.2.
- 6 -
* * * * * * *
(iv) part of a series of substantially equal
periodic payments (not less frequently than
annually) made for the life (or life expectancy)
of the employee or the joint lives (or joint life
expectancies) of such employee and his designated
beneficiary,
Petitioner asserts that distributions of $14,440 that she
received from her IRA plan during 2004 were designed to qualify
as substantially equal periodic payments under section
72(t)(2)(A)(iv) and thus are not subject to the 10-percent
additional tax. Petitioner readily admits, however, that she
received distributions during 2004 (and in previous years) in
addition to the $1,200 monthly payment.
Assuming arguendo that the series of $1,200 monthly payments
originally complied with section 72(t)(2)(A)(iv), petitioner ran
afoul of the recapture provision of section 72(t)(4).3
3
Although sec. 72(t)(2)(A)(iv) requires that the series of
payments be made for the life or life expectancy of the employee,
petitioner elected to receive monthly distributions from her IRA
from February 2001 through February 2012. We need not and do not
decide whether these payments were to be made for her life or
life expectancy. See Rev. Rul. 2002-62, 2002-2 C.B. 710; Notice
89-25, Q&A-12, 1989-1 C.B. 662, 666.
- 7 -
Section 72(t)(4)4 provides that the exception found in section
72(t)(2)(A)(iv) is not applicable if the series of substantially
equal periodic payments is subsequently modified (other than by
reason of death or disability) before the employee attains age
59-1/2. However, respondent is not seeking the 10-percent
additional tax for 2001, 2002, or 2003 in an amount greater than
reported on petitioner’s income tax return as a consequence of
the section 72(t)(4) recapture provision.
Petitioner maintains that she should not be subject to the
10-percent additional tax under section 72(t)(1) for 2004
because, as noted supra, she received those additional
4
Sec. 72(t)(4) provides in pertinent part:
(4) Change in substantially equal payments.--
(A) In general.--If–-
(i) paragraph (1) does not apply to a
distribution by reason of paragraph (2)(A)(iv), and
(ii) the series of payments under such paragraph
are subsequently modified (other than by reason of
death or disability)--
(I) before the close of the 5-year period
beginning with the date of the first payment and
after the employee attains age 59-1/2, or
(II) before the employee attains age 59-1/2,
the taxpayer’s tax for the 1st taxable year in which such
modification occurs shall be increased by an amount,
determined under regulations, equal to the tax which (but
for paragraph (2)(A)(iv)) would have been imposed, plus
interest for the deferral period.
- 8 -
distributions in order to pay her son’s higher education
expenses. Petitioner introduced no documentation such as bills
or receipts to substantiate her claim. Petitioner initially
testified that all of the additional amounts in 2004 were for her
son’s educational expenses. But under cross-examination,
petitioner testified that 90 percent of the 2004 distributions
were for her son’s educational expenses. Moreover, when asked
how she knew how her son used the money given to him, petitioner
admitted that once she gave the money to her son, he did not give
her any receipts. She testified: “I knew he had things due at
school * * * [b]ut I took his word, because they [sic] told me,
because once they’re [sic] in college, they [sic] don’t allow you
to look at their [sic] records and stuff.”
To assist petitioner, we held the record open for 30 days
after trial to allow her to submit documentation showing how the
2004 additional distributions were used. Petitioner failed to
submit such documentation.
It is well established that the taxpayer has the burden of
proving the applicability of the exception found in section
72(t)(2)(E). Lodder-Beckert v. Commissioner, T.C. Memo. 2005-
162; see Matthews v. Commissioner, 92 T.C. 351, 361-362 (1989)
(exemptions and exclusions from taxable income should be
construed narrowly, and the taxpayers must bring themselves
within the clear scope of the exclusions), affd. 907 F.2d 1173
 - 9 -
(D.C. Cir. 1990). And we have rejected a taxpayer’s claim for
the exception under section 72(t)(2) where the taxpayer failed to
provide the substantiating evidence. See Nolan v. Commissioner,
T.C. Memo. 2007-306 (taxpayer failed to provide evidence of
medical expenses and therefore could not claim an exception to
the additional tax under the medical expense exception of section
72(t)(2)(B)). Because petitioner failed to present documentation
to corroborate the alleged higher education expense use of the
additional distributions, we hold that petitioner is not entitled
to the claimed exception. See Rule 142(a).
Finally, petitioner argues that should we conclude that she
is liable for the section 72(t)(1) additional tax, the 10-percent
additional tax should be imposed only with respect to the $4,050
in additional distributions she received in 2004. Respondent
disagrees and asserts that the 10-percent additional tax should
be imposed on the entire $18,450 of the distributions petitioner
received in 2004. We agree with respondent.
Section 72(t)(4) provides that if a series of substantially
equal payments (which otherwise is excepted from the 10-percent
additional tax) is modified (other than by reason of death or
disability) before the employee reaches 59-1/2 years of age,
beginning on the date of the first distribution, then the
taxpayer’s tax for the first taxable year in which such
modification occurs is to be increased by an amount equal to the
- 10 -
tax which (but for section 72(t)(2)(A)(iv)) would have been
imposed, plus interest. Thus paragraph (4) makes clear that the
10-percent additional tax is imposed on the full distribution for
the year. See Arnold v. Commissioner, 111 T.C. 250, 255-256
(1998); Notice 89-25, Q&A-12, 1989-1 C.B. 662, 666. Moreover,
the conference report accompanying the Tax Reform Act of 1986,
Pub. L. 99-514, 100 Stat. 2085, includes the following example
regarding the imposition of the tax:
if, at age 50, a participant begins receiving payments
under a distribution method which provides for substantially
equal payments over the individual’s life expectancy, and,
at age 58, the individual elects to receive the remaining
benefits in a lump sum, the additional tax will apply to the
lump sum and to amounts previously distributed.
H. Conf. Rept. 99-841 (Vol. II), at II-457 (1986), 1986-3 C.B.
(Vol. 4) 1, 457.
Accordingly, we hold that the 10-percent additional tax
applies to the entire $18,450 distributed to petitioner from her
IRA in 2004, as respondent maintains.
To give effect to respondent’s statement in his posttrial
brief,
Decision will be entered
under Rule 155.