T.C. Memo. 1998-379
UNITED STATES TAX COURT
DALE REID EDMONDS, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 11916-97. Filed October 20, 1998.
Dale Reid Edmonds, pro se.
J. Craig Young, for respondent.
MEMORANDUM OPINION
COUVILLION, Special Trial Judge: This case was heard
1
pursuant to section 7443A(b)(3) and Rules 180, 181, and 182.
Respondent determined a deficiency of $418 in petitioner's
Federal income tax for 1994.
1
Unless otherwise indicated, section references are to the
Internal Revenue Code in effect for the year at issue. All Rule
references are to the Tax Court Rules of Practice and Procedure.
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The issues for decision are: (1) Whether petitioner is
entitled to a $2,000 deduction for a contribution to an
individual retirement account (IRA) in 1994; (2) whether a $500
distribution received by petitioner from an IRA is includable in
gross income; and (3) whether petitioner is liable for the 10-
percent additional tax under section 72(t) on a premature
distribution from an IRA.
Some of the facts were stipulated, and those facts, with the
annexed exhibits, are so found and are incorporated herein by
reference. At the time the petition was filed, petitioner's
legal residence was Raleigh, North Carolina.
During the year at issue, petitioner was employed as a
research technician by the U.S. Department of Agriculture (USDA)
in Raleigh, North Carolina. Petitioner had a degree in
agricultural and biological life sciences from North Carolina
State University and, since the early 1990's, had studied DNA
breakdown in various plant life for USDA.
In November 1993 (the year prior to the year at issue),
respondent issued a Notice of Levy to Asheville Savings, a bank
in Asheville, North Carolina, with respect to petitioner's unpaid
tax liability for the 1985 tax year. Pursuant to the Notice of
Levy, Asheville Savings, in December 1993, paid $1,562 to
respondent in satisfaction of the notice. The $1,562 was paid
out of the proceeds of a premature withdrawal from petitioner's
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certificate of deposit (CD) at Asheville Savings. Petitioner was
required to pay a penalty of $115 to Asheville Savings because of
the premature withdrawal of funds from his CD. Petitioner claims
that he did not owe any unpaid Federal income taxes for 1985;
however, at the time of trial, petitioner had been unsuccessful
in recouping the $1,562 that he alleges was wrongfully seized by
respondent.
On the joint Federal income tax return filed by petitioner
2
and his wife for 1994, petitioner reported $65,514 in wage
income, $139 in taxable interest income, $1,350 in taxable
refunds of State and local income taxes, $1,800 in taxable
pension income, and a $7,140 loss from rental real estate, for a
total income of $61,663. Petitioner claimed a $2,000 deduction
for a contribution to an IRA and an $8,000 deduction for alimony
paid, resulting in an adjusted gross income of $51,663.
In the notice of deficiency, respondent determined that
petitioner received $19 in unreported taxable interest income and
a $500 unreported taxable distribution from an IRA, based on
information reported to respondent by the payor. Respondent also
disallowed petitioner's $2,000 IRA contribution deduction and
made computational adjustments to petitioner's miscellaneous
itemized deductions. Respondent allowed petitioner a $115
2
Although the notice of deficiency was issued to petitioner
and his wife, the petition was filed only by petitioner.
Petitioner's wife is not a party in this proceeding.
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deduction under sections 62(a)(9) and 165 for payment of the
penalty for premature withdrawal of funds from his CD in December
1993. Finally, respondent determined that petitioner was liable
for the 10-percent additional tax on an early distribution from a
qualified retirement plan under section 72(t) in the amount of
$50.
At trial, petitioner conceded that he received $19 in
unreported taxable interest income in 1994. Also, the parties
agree that petitioner is entitled to the $115 deduction with
respect to the penalty for early cancellation of petitioner's CD
in December 1993. Moreover, the computational adjustments to
petitioner's miscellaneous itemized deductions will be resolved
by the Court's holdings on the issues herein.
The first issue is whether petitioner is entitled to a
$2,000 deduction for a contribution to an IRA in 1994. In
general, an individual is allowed a deduction for qualified
retirement contributions in an amount not in excess of the lesser
of $2,000 or "an amount equal to the compensation includible in
the individual's gross income". Sec. 219(a) and (b)(1). A
"qualified retirement contribution" is defined as "any amount
paid in cash for the taxable year by or on behalf of an
individual to an individual retirement plan for such individual's
benefit" and "any amount contributed on behalf of any individual
to a plan described in section 501(c)(18)." Sec. 219(e).
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Section 219(g) limits the allowable deduction where the
individual or the individual's spouse is an active participant
for any part of any plan year ending with or within a taxable
year. An active participant is defined to include, inter alia,
an individual who is an active participant in "a plan established
for its employees by the United States, by a State or political
subdivision thereof, or by an agency or instrumentality of any of
the foregoing". Sec. 219(g)(5)(A)(iii). The allowable deduction
is reduced, as pertinent herein, by a factor based on the
adjusted gross income of the individual and the individual's
3
spouse. Sec. 219(g)(2). The net effect of this provision is
that the allowable deduction begins to be reduced when the joint
adjusted gross income reaches $40,000 and completely phases out
where the joint adjusted gross income reaches $50,000.
Respondent contends that petitioner did not make a qualified
retirement contribution to an IRA during 1994. In the
3
Sec. 219(g)(2)(A) provides that the $2,000 dollar limitation
shall be reduced by:
the amount which bears the same ratio to such
limitation as--
(i) the excess of--
(I) the taxpayer's adjusted gross income for such
taxable year, over
(II) the applicable dollar amount, bears to
(ii) $10,000.
In the case of a taxpayer filing a joint return, the
applicable dollar amount is $40,000. Sec. 219(g)(3)(B). As
relevant here, adjusted gross income is determined without regard
to any deduction for an IRA. Sec. 219(g)(3)(A).
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alternative, respondent argues that, even if petitioner did make
a qualified IRA contribution during 1994, he is precluded by the
limitations of section 219(g) from deducting such contribution.
Petitioner freely admits that he claimed the subject $2,000
IRA deduction solely in an attempt to recoup the funds collected
by respondent in connection with the 1993 levy of his CD at
Asheville Savings, which he contends was wrongful. Petitioner
acknowledged at trial that he did not make any contribution to an
IRA during 1994. Thus, the Court finds that petitioner did not
make a qualified retirement contribution to an IRA in 1994.
Petitioner also admitted that he was a participant in the Federal
Employees Retirement System (FERS) in connection with his
employment at USDA during that entire year. Thus, the Court
finds that petitioner was an active participant in a retirement
plan for that year. Petitioner's adjusted gross income for 1994,
without regard to his deduction for an IRA contribution, was
$53,663, which exceeds the point at which an IRA deduction is
entirely phased out for a married couple filing jointly.
In short, petitioner failed to meet the statutory
requirements under section 219 for claiming a deduction for an
IRA contribution in 1994. Thus, the Court holds that petitioner
is not entitled to any deduction for a contribution to an IRA in
1994. Petitioner, moreover, is admonished over the manner in
which he attempted to circumvent what he felt was an improper
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collection action by respondent totally unrelated to the year at
issue. Such conduct is not acceptable. Respondent, therefore,
is sustained on this issue.
The second issue is whether a $500 distribution received by
petitioner from an IRA is includable in gross income. Section
402(a) provides that "any amount actually distributed to any
distributee by any employees' trust described in section 401(a)
* * * shall be taxable to the distributee, in the taxable year of
the distributee in which distributed, under section 72 (relating
to annuities)." However, an exception to this general rule is
found in section 402(c)(1), which provides:
(1) Exclusion from income.--If.--
(A) any portion of the balance to the credit
of an employee in a qualified trust is paid to the
employee in an eligible rollover distribution,
(B) the distributee transfers any portion of
the property received in such distribution to an
eligible retirement plan, and
(C) in the case of a distribution of property
other than money, the amount so transferred
consists of the property distributed,
then such distribution (to the extent so transferred)
shall not be includible in gross income for the taxable
year in which paid.
Further, section 402(c)(3) provides that such a rollover
exclusion shall not apply "to any transfer of a distribution made
after the 60th day following the day on which the distributee
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received the property distributed." In other words, if a
taxpayer receives a distribution from a retirement plan and fails
to make a rollover of such distribution to an eligible retirement
plan within 60 days of taxpayer's receipt of such distribution,
the amount shall be taxable under section 72 in the year of
distribution. The term "eligible retirement plan" is defined in
section 402(c)(8)(B) as "(i) an individual retirement account
* * *, (ii) an individual retirement annuity * * *, (iii) a
qualified trust, and (iv) an annuity plan described in section
403(a)." (Emphasis added.)
Petitioner admits receiving a $500 IRA distribution in 1994
but contends that it is not includable in his gross income
because he rolled it over into another IRA account soon after he
received the distribution. When questioned as to how much time
passed between the time petitioner received the $500 and the time
he deposited it into another IRA petitioner testified "I don't
recall". He stated that he was not willing to swear under oath
that he deposited the funds into another IRA on or before the
60th day following the date of their receipt. The parties
stipulated that petitioner phoned Asheville Savings on July 7,
1994, to request a $500 distribution from his IRA. Petitioner
testified that he felt certain he received that $500 distribution
within 2 weeks of the telephone call but he could not testify as
to a specific date. Moreover, petitioner produced the signature
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page of an IRA application, signed by petitioner and dated
October 21, 1994, which purported to show a deposit of $28,406.99
into a new IRA (i.e., the IRA into which petitioner contends he
deposited the subject $500). Petitioner contends that he
deposited the subject $500 into this IRA prior to the date of the
application (although he did not attempt to specify how many days
or weeks prior thereto); however, the Court is not convinced.
Petitioner failed to produce any documentary evidence of either
the date he received the $500 distribution or of the date he
deposited the same into a different IRA.
On this record, the Court holds that petitioner failed to
make a section 402(c)(1) rollover of the $500 distribution,
either to an IRA or any other type of eligible retirement plan.
Consequently, the Court holds that the $500 distribution from the
IRA was not transferred to an eligible retirement plan as
required by section 402(c)(1)(B) in order for such distribution
to be excluded from petitioner's gross income. Respondent,
therefore, is sustained on this issue.
The final issue is whether petitioner is liable for the 10-
percent additional tax, under section 72(t), on a premature
distribution from an IRA. Section 72(t) provides for a 10-
percent additional tax on early distributions from qualified
retirement plans. Paragraph (1) provides in relevant part:
(1) Imposition of additional tax.--If any taxpayer
receives any amount from a qualified retirement plan (as
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defined in section 4974(c)), the taxpayer's tax under this
chapter for the taxable year in which such amount is
received shall be increased by an amount equal to 10 percent
of the portion of such amount which is includible in gross
income.
Section 4974(c) provides that the term "qualified retirement
plan" includes an "individual retirement account". Sec.
4974(c)(4).
The 10-percent additional tax, however, does not apply to
certain distributions. Section 72(t)(2) exempts distributions
from the additional tax if the distributions are made: (1) To an
employee age 59-1/2 or older; (2) to a beneficiary (or to the
estate of the employee) on or after the death of the employee;
(3) on account of disability; (4) as part of a series of
substantially equal periodic payments made for life; (5) to an
employee after separation from service after attainment of age
55; (6) as dividends paid with respect to corporate stock
described in section 404(k); (7) to an employee for medical care;
or (8) to an alternate payee pursuant to a qualified domestic
relations order. Section 72(t)(3)(A) provides generally that
exceptions (5), (7), and (8) do not apply to distributions from
an IRA.
Petitioner received an early distribution of $500 from an
IRA during the year at issue, which the Court has held is
includable in his gross income for that year. Petitioner was
born on August 29, 1945; therefore, petitioner did not reach the
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age of 59-1/2 during the year at issue. Petitioner presented no
evidence to show that any of the other exceptions under section
72(t)(2) applied to exclude his 1994 distribution from the 10-
percent additional tax provided for in section 72(t)(1).
Accordingly, the Court holds that petitioner is liable for the
10-percent additional tax on early distributions from qualified
retirement plans under section 72(t) in the amount of $50.
Respondent, therefore, is sustained on this issue.
Decision will be entered
for respondent.