CAMPBELL v. COMMISSIONER

T.C. Memo. 2001-118

UNITED STATES TAX COURT

ROYDELL CAMPBELL, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 3826-00. Filed May 17, 2001.

Roydell Campbell, pro se.

Shawna A. Early, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

PANUTHOS, Chief Special Trial Judge: Respondent determined

a deficiency in petitioner’s Federal income tax in the amount of

$810 and an accuracy-related penalty pursuant to section 6662(a)

of $162 for the taxable year 1997.1

1
Unless otherwise indicated, section references are to
the Internal Revenue Code in effect for the year in issue, and
(continued...)
 - 2 -

The issues for decision are: (1) Whether the proceeds of

loans received from a qualified employer plan are distributions

and, therefore, taxable income to petitioner; (2) whether

petitioner must include in income a State income tax refund; and

(3) whether petitioner is liable for the accuracy-related penalty

under section 6662(a).2

FINDINGS OF FACT

Some of the facts have been stipulated and are so found.

The stipulated facts and the related exhibits are incorporated

herein by this reference. At the time of filing the petition,

petitioner resided in the Bronx, New York.

Petitioner has been employed by the City of New York for

more than 38 years as an assistant engineer. Petitioner

participated in the New York City Employees’ Retirement System

(NYCERS) plan (the plan), a qualified employer plan. Employees

were permitted to borrow from the plan. The loan application

stated that “the balance outstanding on any existing loan is

combined with the new cash loan and establishes a new loan.” The

loans were repaid in biweekly payroll withholdings. Employees

1
(...continued)
all Rule references are to the Tax Court Rules of Practice and
Procedure.
2
The notice of deficiency contains adjustments to
petitioner’s itemized deductions. These are computational
adjustments which will be affected by the outcome of the other
issues to be decided, and we do not separately address them.
 - 3 -

had the following options for the repayment schedule: Minimum

repayment, repay in 5 years or less, a specific repayment amount

per pay period, or a specified number of repayments. The

following warning appears on the application above the repayment

schedule section:

PLEASE READ THIS INFORMATION BEFORE
MAKING YOUR SELECTIONS

Federal tax law provides that where the total
outstanding loan is either greater than $50,000 or the
term of repayment exceeds 5 years, or if the loan is
subsequently not repaid, the loan is subject to a
determination as to whether any part of it constitutes
a taxable distribution.

Between 1962 and 1978, petitioner borrowed funds from the

plan totaling $8,931, including interest. Petitioner borrowed

funds from the plan on 32 separate occasions between March 29,

1979, and March 2, 2000. When each new loan was made, any

existing loans were rolled into the new loan. At issue are the

28th and 29th loans. The 28th loan was made on February 6, 1997,

in the amount of $3,960. By the terms of the February 6, 1997,

loan, petitioner agreed to pay $110.73 biweekly over 999 pay

periods. The 29th loan was made on April 17, 1997, in the amount

of $690. Once again, all existing loans were rolled into the new

loan. By the terms of the April 17, 1997, loan, petitioner

agreed to pay $112.33 biweekly over 999 pay periods. Petitioner

selected the minimum repayment option in the aforementioned

loans.
 - 4 -

NYCERS sent petitioner two Forms 1099-R (Distributions from

Pensions, Annuities, Retirement Profit-Sharing Plans, IRAs,

Insurance Contracts, etc.) reflecting taxable amounts of $3,960

and $690.

On his 1996 Federal income tax return, petitioner itemized

his deductions on Schedule A and claimed a deduction of $4,653.55

for State and local taxes. Petitioner was entitled to a refund

of $368.55 from the State of New York for his 1996 tax year. In

1997, taxing authorities in New York did not issue a refund check

to petitioner; rather, the State applied the refund due to

petitioner to an outstanding New York State tax liability.

Respondent determined that petitioner failed to include as

income for 1997 the loan proceeds distributed from the plan.

Further, respondent determined that petitioner failed to include

as income the refund applied by the State of New York. Finally,

respondent determined that petitioner was liable for the

negligence penalty under section 6662(a).

Petitioner contends that the loans are not taxable income.

Petitioner argues that NYCERS and the publications from the

Internal Revenue Service (IRS) are at fault. Petitioner also

argues that the refund from the State of New York is not income

because he did not receive a refund check.
 - 5 -

OPINION

A. Loans From the Plan

Generally, when a participant receives a loan from a

qualified plan, the amount is considered a taxable distribution.

See sec. 72(p)(1)(A). Section 72(p)(2)(A) provides that if the

aggregate balance of all outstanding loans from the plan is less

than a prescribed ceiling, which may never exceed $50,000, the

loan will not be treated as a distribution. However, a loan will

be a taxable distribution if the loan is not a home loan and, by

its terms, does not require repayment within 5 years. See sec.

72(p)(2)(B).

The loans at issue, by their terms, require 999 payments

deducted biweekly from petitioner’s paycheck. According to the

payment schedule, it would take petitioner 38.42 years to fully

repay the loans. Petitioner has not argued or shown that the

loans served to finance the acquisition of a home used as his

principal residence. Therefore, the loan proceeds received by

petitioner in 1997 are distributions.

Petitioner contends, in the alternative, that the

distributions represent, in part, a return of his contributions

and to that extent are not includable as income. Section

72(o)(1) provides that any deductible employee contribution made

to a qualified employer plan shall be treated as an amount

contributed by the employer which is not includable in the gross
 - 6 -

income of the employee. However, unless the plan specifies

otherwise, any distribution from a qualified employer plan will

not be treated as made from the accumulated deductible employee

contributions until all other amounts to the credit of the

employee have been distributed. See sec. 72(o)(6).

The record does not reflect the terms of the plan, nor that

the distributions were made from deductible employee

contributions. Further, petitioner did not establish all other

amounts (not considering the deductible employee contributions)

were distributed. Therefore, the loan proceeds received in 1997

constitute taxable distributions to petitioner, and we sustain

respondent’s determination.

B. State Income Tax Refund

Pursuant to section 111, if State income tax was deducted on

a Federal income tax return for a prior taxable year and if such

deduction resulted in a tax benefit to the taxpayer, such as a

reduction of Federal income tax for the prior taxable year, a

subsequent recovery by the taxpayer of the State income tax must

be included in the taxpayer’s gross income for Federal income tax

purposes in the year in which the recovery is received. See

Kadunc v. Commissioner, T.C. Memo. 1997-92, and cases cited

therein.

Petitioner presented no evidence to show that he did not

realize a tax benefit from the deduction of State income tax on
 - 7 -

his Federal income tax return for 1997. Although petitioner did

not receive the refund check, the refund amount was applied to an

outstanding New York State tax liability in 1997. The amount

credited against petitioner’s New York State tax liability is

included as gross income as “constructively received” insofar as

it was credited to petitioner’s account, or set apart for him, or

otherwise made available to him. See sec. 1.451-2(a), Income Tax

Regs. Accordingly, we sustain respondent’s determination that

the refund of $368.55 of State income tax is includable in

petitioner’s gross income for his 1997 tax year.

C. Accuracy-Related Penalty

Respondent determined that petitioner is liable for the

accuracy-related penalty under section 6662(a) for 1997. The

accuracy-related penalty is equal to 20 percent of any portion of

an underpayment of tax required to be shown on the return that is

attributable to the taxpayer’s negligence or disregard of rules

or regulations. See sec. 6662(a) and (b)(1). “Negligence”

consists of any failure to make a reasonable attempt to comply

with the provisions of the Internal Revenue Code. Sec. 6662(c).

“Disregard” consists of any careless, reckless, or intentional

disregard. Id.

An exception applies to the accuracy-related penalty when

the taxpayer demonstrates (1) there was reasonable cause for the

underpayment, and (2) the taxpayer acted in good faith with
 - 8 -

respect to such underpayment. See sec. 6664(c). Whether the

taxpayer acted with reasonable cause and in good faith is

determined by the relevant facts and circumstances. The most

important factor is the extent of the taxpayer’s effort to assess

the proper tax liability. See Stubblefield v. Commissioner, T.C.

Memo. 1996-537; sec. 1.6664-4(b)(1), Income Tax Regs. Section

1.6664-4(b)(1), Income Tax Regs., specifically provides:

“Circumstances that may indicate reasonable cause and good faith

include an honest misunderstanding of fact or law that is

reasonable in light of all of the facts and circumstances,

including the experience, knowledge, and education of the

taxpayer.” See Neely v. Commissioner, 85 T.C. 934 (1985).

A taxpayer is generally charged with knowledge of the law.

See Niedringhaus v. Commissioner, 99 T.C. 202, 222 (1992).

Ignorance of the law is not always a defense to the imposition of

section 6662(a). A taxpayer must take reasonable steps to

determine the law and apply it. See id.

It is the taxpayer’s responsibility to establish that he or

she is not liable for the accuracy-related penalty imposed by

section 6662(a). See Rule 142(a); Tweeddale v. Commissioner, 92

T.C. 501, 505 (1989).

Petitioner argues that he relied on the 1997 version of IRS

Publication 17 (Tax Guide for Individuals). The section

regarding loans is as follows:
 - 9 -

Loans. If you borrow money from an employer’s
qualified pension or annuity plan * * * you may have to
treat the loan as a distribution. This means that you
may have to include in income all or part of the amount
borrowed. * * *

The record demonstrates that petitioner was aware that some

or all of each loan was a taxable distribution, yet he declined

to include any part of the loans as income. On the basis of the

entire record, we conclude petitioner has not established that

the underpayment was due to reasonable cause or that petitioner

acted in good faith. Accordingly, we hold petitioner is liable

for the accuracy-related penalty.

To reflect the foregoing,

Decision will be

entered under Rule 155.3

3
The Rule 155 computation will take into account a Form
W-2C, Corrected Wage and Tax Statement, from the City of New
York.