Aj Scroggins & Kelly E. Scroggins v. Commissioner

PURSUANT TO INTERNAL REVENUE CODE
SECTION 7463(b),THIS OPINION MAY NOT
BE TREATED AS PRECEDENT FOR ANY
OTHER CASE.
T.C. Summary Opinion 2014-106
UNITED STATES TAX COURT
AJ SCROGGINS AND KELLY E. SCROGGINS, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 27403-12S. Filed November 13, 2014.
AJ Scroggins, pro se.
Jeffrey A. Schlei, for respondent.
SUMMARY OPINION
CARLUZZO, 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 Pursuant to section 7463(b), the decision to be entered is not
1
Unless otherwise indicated, subsequent section references are to the
Internal Revenue Code of 1986, as amended, in effect for 2010. Rule references
(continued...)
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reviewable by any other court, and this opinion shall not be treated as precedent
for any other case.
In a notice of deficiency dated August 6, 2012 (notice), respondent
determined an $8,393 deficiency in petitioners’ 2010 Federal income tax and
imposed a section 6662(a) accuracy-related penalty.2 The issue for decision is
whether as of the close of 2010 a loan that Mr. Scroggins (petitioner) had obtained
in a prior year from a qualified employer plan (retirement plan) was in default so
as to constitute a “distribution” from that retirement plan during 2010.
Background
Some of the facts have been stipulated and are so found. At all times
relevant, petitioners were married to each other.3 At the time the petition was
filed, petitioners resided in California.
1
(...continued)
are to the Tax Court Rules of Practice and Procedure.
2
Respondent now concedes that petitioners are not liable for the accuracy-
related penalty.
3
Kelly E. Scroggins did not appear at trial and did not sign the stipulation of
facts admitted into evidence at trial. Accordingly, the case will be dismissed as to
her for lack of prosecution. See Rule 123. The decision to be entered with respect
to her, however, will be consistent with the decision to be entered with respect to
petitioner.
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In December 2007 petitioner borrowed $29,700 from his section 401(k)
retirement plan. The retirement plan was administered by the Mercer Trust Co.
(Mercer), a subsidiary of Marsh & McLennan Cos., Inc. The proceeds of the loan
were paid to him in a lump sum by check on December 24 of that year. Although
it is not clear from the record, it appears that during 2008 he used some, or all, of
the loan proceeds to purchase stock in Quebecor World (Quebecor), the company
that he was employed by at the time. Petitioner sold or disposed of some, or all, of
his Quebecor stock during 2009 with a resulting capital loss that was reported on
his 2009 Federal income tax return and carried forward at least into the year in
issue.
Not all of the terms of the loan have been provided. However, it appears
that petitioner was obligated to repay the loan in monthly payments of $562.66.
The payments started in March 2008 and ended in September or October 2010,
before the loan was repaid, when petitioner lost his job with Quebecor because of
an undescribed disability.
According to Mercer’s records, the loan was in default as of the close of
2010 because petitioner failed to make the payments as required. Mercer issued to
petitioner a Form 1099-R, Distributions From Pensions, Annuities, Retirement or
Profit-Sharing Plans, IRAs, Insurance Contracts, etc., showing a $17,459.19
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taxable distribution--the amount then outstanding on the loan after taking into
account the amounts repaid (retirement plan distribution). Petitioners did not
include the retirement plan distribution in the income reported on their timely filed
joint 2010 Federal income tax return. According to respondent, the retirement
plan distribution is includable in petitioners’ 2010 income.4
Discussion
Section 402(a) provides generally that distributions from a qualified plan
are taxable to the distributee in the taxable year in which the distribution occurs
pursuant to the provisions of section 72. The parties agree that the retirement plan
distribution was made from a qualified plan within the meaning of section 402.
Generally, a loan from a qualified plan is treated as a distribution from the
plan in the year the loan was made. See sec. 72(p)(1)(A). See generally Owusu v.
Commissioner, T.C. Memo. 2010-186; Plotkin v. Commissioner, T.C. Memo.
2001-71. There is an exception to this general rule, however, if the terms of the
4
The deficiency here in dispute includes the additional tax imposed by sec.
72(t). Except for the imposition of the tax in the notice, neither party made any
reference to that additional tax in anything submitted before or during trial, and
there is no evidence in the record regarding its applicability under the
circumstances before us. We assume and proceed as though the parties have
resolved the matter between them, and their agreement can be reflected in
computations to be submitted pursuant to Rule 155.
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loan satisfy certain conditions. See sec. 72(p)(2).5 If the exception applies, then
no distribution is considered to have been made from the qualified plan if the
borrower satisfied the terms of the loan. If the borrower defaults, however, a
deemed distribution from the qualified plan is considered to have been made in the
year of the default. See sec. 72(p)(2)(C); Owusu v. Commissioner, T.C. Memo.
2010-186; Plotkin v. Commissioner, T.C. Memo. 2001-71.
Petitioner now agrees, more or less, that he defaulted on the loan from the
retirement plan; petitioners disagree with respondent on the year that the default
occurred and on the year that the retirement plan distribution should be deemed to
have been made. According to petitioners, the default and deemed distribution
occurred in 2011 although nothing in the record suggests that they treated the
retirement plan distribution as taxable for that year. According to respondent, the
default, and therefore the deemed distribution, occurred in 2010.
Section 1.72(p)-1, Q&A-10, Income Tax Regs., addresses the timing of a
deemed distribution upon a default on a loan from a qualified plan as follows:
5
The parties proceed as though the exception applies to the retirement plan
distribution; neither party suggests that the loan should be treated as a distribution
in the year it was made.
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“Failure to make any installment payment when due in accordance
with the terms of the loan violates section 72(p)(2)(C) and,
accordingly, results in a deemed distribution at the time of such
failure.”
Petitioners have offered no reason why the default should be treated as
having occurred in 2011. Their claim that the default occurred in 2011 is
undermined not only by their agreement that petitioner failed to make any payment
on the loan after September or October 2010, but also by the records of Mercer
that confirm that fact. We find that the default occurred in 2010. It follows that
the retirement plan distribution is deemed to have been made during 2010 and is
includable in petitioners’ income for that year. Respondent’s adjustment in that
regard is sustained.
To reflect the foregoing as well as the express and apparent concessions of
the parties,
An appropriate order of dismissal
and decision will be entered under Rule
155.