T.C. Summary Opinion 2001-148
UNITED STATES TAX COURT
PATRICK L. O’BRIEN, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 8217-00S. Filed September 21, 2001.
Patrick L. O’Brien, pro se.
William I. Miller, for respondent.
PAJAK, Special Trial Judge: This case was heard pursuant to
the provisions of section 7463 of the Internal Revenue Code in
effect at the time the petition was filed. The decision to be
entered is not reviewable by any other court, and this opinion
should not be cited as authority. Unless otherwise indicated,
subsequent section references are to the Internal Revenue Code in
effect for the year in issue, and all Rule references are to the
Tax Court Rules of Practice and Procedure.
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Respondent determined a deficiency in petitioner’s 1997
Federal income tax in the amount of $14,148, and a penalty under
section 6662(a) in the amount of $2,830. Respondent conceded
that petitioner was not liable for $19,990 of additional income,
or for the section 6662(a) penalty. The sole issue the Court
must decide is whether petitioner is liable for the 10-percent
additional tax under section 72(t).
Some of the facts in this case have been stipulated and are
so found. Petitioner resided in Schaumburg, Illinois, at the
time he filed his petition.
In 1997, petitioner Patrick L. O’Brien (petitioner) received
a distribution of a rounded amount of $51,623 from a defined
benefit plan, and a distribution of a rounded amount of $27,846
from an employee stock ownership plan, for a total of $79,469.
Hereinafter, both distributions will be referred to as one
distribution. On his 1997 Federal income tax return, petitioner
reported that $37,848 of the $79,469 distribution was taxable.
Respondent determined that the section 72(t) additional tax
on early distributions applied to $79,467. The parties
stipulated that this amount should have been $79,469. The
difference appears to be due to rounding, and we shall use the
stipulated amount. Respondent now concedes that $41,621 of the
distribution is not subject to the section 72(t) additional tax.
Therefore, respondent now asserts that only the taxable amount of
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$37,848 of petitioner’s distribution is at issue with respect to
the section 72(t) additional tax.
The funds were distributed to petitioner as a result of his
termination of employment. He does not contend that the
distribution was made due to death, disability, a series of
periodic payments, separation from service after attaining the
age of 55, or for the purpose of medical expenses. Petitioner
contends that the distribution is not subject to the section
72(t) additional tax because the distribution was made pursuant
to a qualified domestic relations order.
Section 72(t) provides for an additional tax of 10 percent
on any amount received as an early distribution from a qualified
retirement plan (as defined in section 4974(c)). The section
72(t) additional tax does not apply in certain situations and the
sole exception on which petitioner relies is section 72(t)(2)(C).
That section provides that distributions from qualified
retirement plans are not subject to the additional tax if they
are made to an alternate payee pursuant to a qualified domestic
relations order (QDRO) within the meaning of section 414(p)(1).
A QDRO is a domestic relations order which in pertinent part
(1) creates an alternate payee's right to receive all or part of
the benefits payable with respect to a participant under a plan,
(2) clearly specifies certain facts, and (3) does not alter the
amount of the benefits under the plan. Sec. 414(p)(1 )(A), (2),
and (3). A “domestic relations order” is defined in pertinent
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part as any judgment which relates to the provision of marital
property rights to a spouse, or former spouse, of a participant
and is made pursuant to a State domestic relations law. Sec.
414(p)(1)(B).
The Circuit Court of Cook County, Illinois, entered a
“Judgment for Dissolution of Marriage” (Judgment) with respect to
petitioner and his former wife. The Judgment states that the
parties acknowledged that petitioner’s retirement plan was
marital property. The Judgment determined that “in consideration
of [petitioner’s] waiver of his vested interest in the marital
real estate, [petitioner’s former wife] hereby waives any and all
right, title, claim or interest she may have in the [retirement
plan] in favor of [petitioner].”
The Judgment relates to the marital property rights of
petitioner and his former wife pursuant to the domestic relations
laws of Illinois. It is a domestic relations order under section
414(p)(1)(B). The Judgment did not award petitioner’s former
wife any interest in the pension plan distribution. Petitioner
admits that the Judgment did not require any distribution of his
retirement funds. The distribution took place after petitioner’s
divorce from his former wife. Only petitioner received the
$37,848 distribution. What is most significant is that
petitioner was not an alternative payee under his retirement
plan, but was a participant in that plan. For the foregoing
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reasons, the Judgment is not a QDRO under section 414(p)(1).
Petitioner’s distribution was not a payment to an alternate payee
pursuant to a QDRO and does not fall within the section
72(t)(2)(C) exception to the section 72(t) additional tax.
Petitioner further argues that he is not liable for the
72(t) additional tax because he received a closing letter from
the Internal Revenue Service (IRS) accepting the additional
information he provided and informing him that he would not:
“need to file a petition with the United States Tax Court to
reconsider the tax [he owed]. If you have already filed a
petition, the office of the District Counsel will contact you on
[sic] the final closing of this case.” Petitioner took this to
mean that the case was closed based on the heading, “Closing
Letter”.
A closing letter is to be sharply distinguished from a
closing agreement entered under section 7121. Kiourtsis v.
Commissioner, T.C. Memo. 1996-534. A closing agreement is
entered into by both the taxpayer and the Commissioner and is
binding in accordance with its terms. Id. Section 7121 sets
forth the exclusive procedure under which a final closing
agreement as to the tax liability of any person can be executed.
Botany Worsted Mills v. United States, 278 U.S. 282, 288 (1929);
Estate of Meyer v. Commissioner, 58 T.C. 69, 70-71 (1972);
Reynolds v. Commissioner, T.C. Memo. 2000-20.
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Section 7121 envisages an agreement knowingly entered into
by both parties. Harrington v. Commissioner, 48 T.C. 939, 953
(1967), affd. on another issue 404 F.2d 237 (5th Cir. 1968).
Petitioner and respondent did not enter into a valid closing
agreement. The closing letter issued by the IRS to petitioner is
not a closing agreement under the provisions found in section
7121 and does not affect petitioner’s liability for tax. We hold
that petitioner is liable under section 72(t) for the additional
10 percent tax on the $37,848 of early distributions from his
qualified retirement plans.
Reviewed and adopted as the report of the Small Tax Case
Division.
To reflect the foregoing,
Decision will be entered
under Rule 155.