T.C. Memo. 1998-399
UNITED STATES TAX COURT
RONNY H. AND CHARLOTTE A. SCHMALZER, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 21473-95. Filed November 10, 1998.
Ronny H. and Charlotte A. Schmalzer, pro se.
Robert H. Schorman, for respondent.
MEMORANDUM OPINION
NAMEROFF, Special Trial Judge: This case was heard pursuant
to the provisions of section 7443A(b)(3)1 and Rules 180, 181, and
182. Respondent determined a deficiency in petitioners’ Federal
income tax for the taxable year 1992 in the amount of $3,060.
All section references are to the Internal Revenue Code in
1
effect for the year at issue. All Rule references are to the Tax
Court Rules of Practice and Procedure.
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After a concession by respondent,2 the issues for decision are:
(1) To what extent are petitioners taxable on withdrawals from
an Individual Retirement Account (IRA) during 1992; and (2)
whether petitioners are liable for the additional tax under
section 72(t). The facts stipulated by the parties in the
stipulation of facts and the supplemental stipulation of facts
are incorporated herein by reference. Petitioners resided in
Eagle Rock, California, at the time their petition was filed with
the Court.
During the years 1985 through 1992, petitioner Ronny H.
Schmalzer (petitioner) was employed in the lithography business
by various employers. Several of petitioner’s employers during
this period had pension plans in which petitioner may have been
eligible to participate or in which he did participate.
On November 29, 1985, petitioner established an IRA with the
purchase of a variable rate certificate at California Federal
Savings and Loan. The record title for the certificate was
“California Federal Savings and Loan as Trustee for Ronny H.
Schmalzer Under the IRA League Retirement Plan”. The initial
deposit for this certificate was $1,000.3 Subsequently from time
2
Respondent conceded that the petitioners are entitled to
the mortgage interest deduction claimed on their return.
Although the certificate shows the initial maturity date
3
to be May 28, 1985, we believe the date should have been May 28,
1987, as the renewal term for the certificate was 1-1/2 years.
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to time, petitioner made various deposits to and withdrawals from
the IRA account. The record reflects that petitioner made the
following deposits to and withdrawals from the IRA account:
Date Deposits Withdrawals
Dec. 8, 1989 $50
Dec. 15, 1989 50
Dec. 22, 1989 50
Dec. 29, 1989 50
Jan. 5, 1990 50
Apr. 18, 1990 1,100
May 4, 1991 $1,400
May 22, 1991 2,000
In 1992, petitioner made the following withdrawals from the IRA
account:
Jan. 29, 1992 $1,000
Apr. 6, 1992 2,000
July 21, 1992 2,000
Dec. 7, 1992 1,100
Total 6,100
On December 31, 1992, there was a balance in the IRA account of
$1,374.53.
Petitioners contend that they did not claim any deductions
for contributions to petitioner’s IRA account on their Federal
income tax returns. Petitioners’ Federal income tax returns for
the years 1985 and 1986 are not part of the record. Petitioners’
1987 return, with the exception of the first page, is part of the
record, but in the absence of the first page, it is not possible
to determine whether a deduction was claimed for an IRA
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contribution in 1987.4 Petitioners’ tax returns from 1988
through 1991 are part of the record and reflect that petitioners
did not claim any deduction for contributions to the IRA account
for 1989, 1990, and 1991, but did claim a $300 deduction for a
contribution in 1988.
On their 1992 Federal income tax return, petitioners did not
disclose the receipt of the distribution from the IRA account and
did not report any amount as taxable income. In the notice of
deficiency respondent determined that the $6,100 withdrawn from
the IRA account in 1992 is includable in petitioner’s gross
income, pursuant to sections 408(d)(1) and 72.
Petitioners contend that they are entitled to exclude from
gross income the IRA distributions on the grounds that they had a
basis in the IRA contributions. Respondent contends that
petitioners had a zero basis in the contributions.
Generally, taxpayers do not have a basis in IRA
contributions that were made prior to 1987. Section 408(d)(1),
as in effect for 1986 provides: “Notwithstanding any other
provision of this title * * * the basis of any person in such an
account or annuity is zero.” For contributions made after 1986,
however, taxpayers are allowed a basis in IRA contributions to
4
The exhibit containing most of the 1987 return does have a
“data sheet” which, if closely examined, lends the inference that
no IRA contribution was deducted but does not permit any
inference as to whether any IRA contribution was made.
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the extent the contribution is considered an “investment in the
contract”. Secs. 408(d)(2), 72. Thus, a distribution of IRA
contributions that were made before 1987, as well as the earnings
thereon, are fully includable in the taxpayer’s gross income upon
distribution. Further, a distribution of IRA contributions that
are made after 1986 may or may not be includable in the
taxpayer’s gross income depending upon whether the contributions
are considered an investment in a contract.
Under these rules, petitioner is not entitled to any basis
in his contributions made for 1985 and 1986. The record does not
reflect whether petitioner made any contributions in 1987 or
whether petitioners claimed a deduction on their return for
contributions made in 1987. In 1988, petitioner made a
contribution of $300 based upon the fact that petitioners claimed
a $300 deduction on their 1988 return. Petitioner is not
entitled to a basis in that contribution.
In the years 1989 and 1990, petitioner deposited $1,350 in
the IRA account, and petitioners did not claim any deduction
therefor on their 1989 or 1990 Federal income tax return.
Accordingly for these contributions, petitioner has a basis of
$1,350. In 1991 petitioner withdrew $1,400 and, within 60 days
thereafter, deposited $2,000 to the IRA account. Accordingly,
the $1,400 withdrawn and redeposited does not constitute a
deposit, as it is a timely rollover of a previous withdrawal.
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See sec. 408(d)(3). Accordingly, in 1991 petitioner made a
deposit into the IRA account of $600 from new money for which no
deduction was claimed on their 1991 Federal income tax return.
Accordingly, petitioner has a basis of $600 with regard to said
contribution. Therefore, the record reflects that petitioner has
a total basis in his IRA account contributions of $1,950.
That is not the end of our inquiry, however, for we must
still calculate the amount to be excluded from gross income. The
portion of the distribution that is excludable from income as a
return of basis is determined by multiplying the distribution by
a fraction, the numerator of which consists of the total amount
of the nondeductible contributions (i.e., basis) and the
denominator of which consists of the sum of the following items:
(1) The IRA account balance as of the last day of the tax year in
which the distribution is made ($1,374.53); (2) the amount of the
distribution valued as of the day of the distribution ($6,100);
and (3) any outstanding rollover. Secs. 72(e)(8)(B), 408(d)(1)
and (2); Hall v. Commissioner, T.C. Memo. 1998-336. There is no
indication that there is any outstanding rollover involved in
this case. Accordingly, the amount of excludable basis in the
instant case is computed by multiplying the amount of the
distribution $6,100 by a fraction the numerator of which is
$1,950 and the denominator of which is $1,374.53 plus $6,100,
resulting in an amount excludable of $1,591.40.
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Finally, we must consider whether petitioner is liable for
the additional tax set forth in section 72(t). Section 72(t)(1)
provides for a 10-percent additional tax on premature
distributions from all qualified retirement plans,5 with
exceptions numerated in section 72(t)(2). One of those
exceptions is for distributions made after the taxpayer reaches
the age of 59-1/2. That exception is clearly not involved herein
as petitioner was 58 years old at the time of the distributions.
None of the other exceptions are relevant to this case.
Accordingly, we hold that petitioner is liable for the 10-percent
additional tax on premature distributions from a qualified plan
for 1992 as provided in section 72(t).
To reflect the above,
Decision will be entered
under Rule 155.
5
An IRA is a qualified retirement plan. Sec. 4974(c)(4).