T.C. Memo. 2001-299
UNITED STATES TAX COURT
JAMES E. HENDRICKS AND ROBERTA J. HENDRICKS, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 13646-99. Filed November 8, 2001.
James E. Hendricks and Roberta J. Hendricks, pro se.
Jeanne Gramling, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
COLVIN, Judge: Respondent determined a $19,420 deficiency
in petitioners’ Federal income tax for 1996 and a $3,884
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accuracy-related penalty under section 6662(a)(1)1 and (d)(1)
for substantial understatement of tax.
Following concessions,2 we must decide the following issues:
1. Whether $69,500 that James E. Hendricks (petitioner)
withdrew from his individual retirement account (IRA) is taxable
to petitioners in 1996. We hold that it is.
2. Whether petitioners are liable for the accuracy-related
penalty under section 6662(a) and (d) for substantial
understatement of tax. We hold that they are.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found.
A. Petitioners
Petitioners are married and lived in Laurinburg, North
Carolina, when they filed the petition in this case.
B. Bechtel Trust & Thrift Plan
Petitioner worked for Bechtel Corp. (Bechtel) from 1977 to
1988, when he resigned, and from 1992 until 1995, when he
retired. He became a participant in the Bechtel Trust & Thrift
1
Unless otherwise stated, section references are to the
Internal Revenue Code in effect in 1996, and Rule references are
to the Tax Court Rules of Practice and Procedure.
Sec. 6662(a)(1) did not exist in 1996. We assume that
respondent meant to cite sec. 6662(a).
2
Petitioners concede that their 1996 income should be
increased by $500 for unemployment compensation and by $11 for
interest income.
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Plan, a retirement plan, on January 27, 1992. The Bechtel Trust
& Thrift Plan included a trust and profit-sharing account, a
section 401(k) account to which Bechtel contributed funds on
behalf of petitioner which he and Bechtel treated as elective
deferrals of petitioner, an account comprising contributions by
Bechtel that matched petitioner’s elective deferrals (the company
matching account), and an after-tax thrift savings account (i.e.,
an account to which petitioner contributed funds on which he had
paid income taxes). The following table shows petitioner’s
thrift savings account contributions, earnings, losses,
withdrawals, and balances:
Contributions to, Earnings of, Distributions From, and
Balances in Petitioner’s Thrift Savings Account
Contributions
(Withdrawals) Balance
1992 Contributions $1,095.98 $1,095.98
1992 Earnings 16.38 1,112.36
1993 Contributions 2,598.91 3,711.27
1993 Earnings 251.84 3,963.11
1994 1st & 2d qtrs Contributions -0- 3,963.11
1994 1st & 2d qtrs Distributions (3,963.11) -0-
1994 3d qtr Contributions 799.80 799.80
1994 3d qtr Earnings (13.76) 786.04
1994 4th qtr Contributions 3,715.53
4,501.57
1994 4th qtr Earnings (38.35) 4,463.22
1994 4th qtr Withdrawals (4,463.22) -0-
1995 Contributions -0- -0-
1
1995 Refund (52.11) -0-
1
Bechtel refunded the $52.11 loss from the thrift savings
account to petitioner on Nov. 22, 1995, for reasons not apparent in
the record.
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All of the funds in petitioner’s thrift savings account had
been distributed to him by the end of 1994. He made no
contributions to the thrift savings account in 1995.
C. Petitioner’s Section 401(k) Account With Bechtel
Petitioner had a section 401(k) account with Bechtel to
which Bechtel contributed on petitioner’s behalf $8,994 in 1993,
$9,240 in 1994, and $8,355.70 in 1995. Bechtel issued Forms W-2,
Wage and Tax Statement, for those years.
D. Rollover From Petitioner’s Bechtel Trust & Thrift Plan to an
IRA and Withdrawal of IRA Funds
On November 27, 1995, petitioner received a $69,421.05
distribution from the Bechtel Trust & Thrift Plan. On December
6, 1995, petitioner deposited that amount in a Nations Bank
Regular Money Market Individual Retirement Account. Petitioner
withdrew $69,500 ($69,421.05 plus $78.95 in interest) from his
Nations Bank IRA in 1996.
E. Petitioners’ Income Tax Returns
Petitioners reported petitioner’s wages as income from 1993
to 1996. Petitioners did not report as income the $8,994 in
1993, $9,240 in 1994, and $8,355.70 in 1995 that he contributed
to his section 401(k) account. Petitioners did not attach a
statement to their 1996 income tax return disclosing the $69,500
withdrawal or explaining why they excluded that amount from their
1996 income.
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OPINION
A. Whether Petitioners Must Include in Income $69,500 That
Petitioner Withdrew From His IRA Account in 1996
We first decide whether petitioners must include in income
$69,500 that petitioner withdrew from his Nations Bank IRA in
1996.3 Petitioners contend that they need not do so because:
(1) Petitioner had basis in his IRA; (2) petitioner had paid
taxes on the funds that were deposited in the IRA; and (3) the
thrift savings account lost money in its last 2 years. We
disagree for reasons stated below.
1. Whether Petitioner Had Basis in His IRA When He
Withdrew Funds in 1996
A taxpayer may exclude from income IRA distributions
attributable to after-tax contributions for which the taxpayer
has basis. Secs. 72(e)(6), 408(d)(2); Campbell v. Commissioner,
108 T.C. 54, 66-67 (1997). Petitioners contend that they may
exclude from income $35,317 because petitioner had basis of that
amount in his IRA when he withdrew amounts in 1996. Petitioners
contend that petitioner had $35,317 in his thrift savings account
on September 30, 1995, and that he rolled over that amount to his
IRA. We disagree. Petitioner had no funds in his thrift savings
3
The examination in this case began after July 22, 1998.
Petitioners were aware at trial that the Commissioner bears the
burden of proof if conditions stated in sec. 7491 are met.
However, they do not contend that sec. 7491 applies. Thus,
petitioners bear the burden of proof on this issue. Rule 142(a).
However, the burden of proof does not affect our holding on this
issue.
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account on September 30, 1995, made no contributions to that
account in 1995 or 1996, and did not roll over any funds from
that account to his IRA in 1995 or 1996.
Bechtel’s records of petitioner’s earnings, distributions,
losses, and balances for his thrift savings account state that
Bechtel had distributed all of the funds in the thrift savings
account to petitioner by the end of 1994, that petitioner made no
contributions to his thrift savings account in 1995 or 1996, and
that petitioner had no balance in his thrift savings account on
September 30, 1995.
Petitioners point out that the Bechtel quarterly statement
of account as of September 30, 1995, said: “The maximum amount
you can withdraw from your after-tax Thrift Account and 401(k)
contributions is $35,317.70", and they contend that this
establishes that petitioner had a balance of $35,317.70 in his
thrift savings account on September 30, 1995. We disagree. The
quarterly statement states that petitioner’s thrift savings
account balance was zero on September 30, 1995. Bechtel
contributed on behalf of petitioner a total of $35,317.70 to his
section 401(k) account in 1992, 1993, 1994, and 1995. Petitioner
had no funds in his thrift savings account to roll over to the
Nations Bank IRA on September 30, 1995, and he made no
contributions to his thrift savings account, nor did he roll over
any amount from that account to his IRA in 1995 or 1996.
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As discussed next, petitioner did not pay income tax on
Bechtel’s contributions on his behalf to his section 401(k)
account. We conclude that petitioner had no basis in his Nations
Bank IRA when he withdrew retirement funds from the IRA.
2. Whether Petitioner Paid Income Tax on Funds in His
Section 401(k) Account That He Rolled Over to the IRA
Petitioners contend in the alternative that petitioner had
paid income tax on the funds in his section 401(k) account that
he rolled over to the IRA, and as a result, the $69,500 that he
withdrew from his IRA in 1996 is a nontaxable return of
contributions for which he had previously paid income tax and is
not included in income under section 408(d)(1). We disagree.
On petitioner’s Forms W-2 for 1993, 1994, and 1995, Bechtel
reported that petitioner did not pay income tax on contributions
to his section 401(k) account in 1993, 1994, and 1995, and that
he deferred tax on compensation contributed to his pension plan.
Bechtel reported on the Forms W-2 that petitioner deferred income
tax on $8,994 in 1993, $9,240 in 1994, and $8,355.70 in 1995.
The difference between the amounts for “Medicare Wages” and the
amounts for “Wages, tips and other compensation” on petitioner’s
Forms W-2 for 1993, 1994, and 1995 equaled $8,994 in 1993, $9,240
in 1994, and $8,355.70 in 1995. Petitioners did not report the
contributions of $8,994 in 1993, $9,240 in 1994, and $8,355.70 in
1995 to petitioner’s section 401(k) account as income on their
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1993, 1994, and 1995 income tax returns. Thus, petitioners’ tax
returns for 1993, 1994, and 1995 and petitioner’s Forms W-2 for
those years show that petitioners did not include in income the
contributions to his section 401(k) account for those years.
Bechtel made contributions to petitioner’s section 401(k)
account in 1992. Petitioners’ 1992 return is not in evidence.
We assume that petitioners and Bechtel treated the 1992
contributions like those made in 1993, 1994, or 1995.
We conclude that petitioners had not previously included in
income the funds petitioner deposited in his IRA, and that his
IRA distribution is included in petitioners’ income in 1996.
3. Petitioners’ Other Contentions
Petitioners contend that they did not receive $78.95 in
interest as part of the distribution from the IRA in 1996 because
petitioner’s retirement plan had losses in 1995 and 1996. We
disagree. The earnings on the accounts exceeded the losses.
Petitioner rolled over $69,421.05 to his IRA in 1995 and received
$69,500 from the IRA in 1996. Petitioner made no contributions
to the IRA after the rollover. We conclude that the difference
of $78.95 between the $69,500 distribution in 1996 and the
$69,421.05 rollover in 1995 is taxable interest.
Petitioners point out that they and respondent had settled a
case involving petitioners’ tax years 1977 through 1988, docket
No. 13027-92S, and contend that settlement binds respondent here.
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We do not consider that settlement here. See Fed. R. Evid. 408.
Petitioners also contend that they have paid more tax than their
coworkers, that respondent unreasonably refused to settle this
case, and that respondent has harassed them. Petitioners state
no details to support these claims, and we do not consider them
further.
4. Conclusion
We conclude that petitioners must include in income the
$69,500 that petitioner withdrew from his IRA in 1996.
B. Whether Petitioners Are Liable for the Accuracy-Related
Penalty
Respondent concedes that respondent bears the burden of
production relating to petitioners’ liability under section
6662(a). Sec. 7491(c). The Commissioner satisfies the burden of
production with respect to the accuracy-related penalty under
section 6662 by coming forward with sufficient evidence
indicating that it is appropriate to impose the relevant penalty;
the Commissioner need not introduce evidence regarding reasonable
cause, substantial authority, or similar provisions. Higbee v.
Commissioner, 116 T.C. 438, 446 (2001); see H. Conf. Rept. 105-
599, at 241 (1998), 1998-3 C.B. 747, 995.
A substantial understatement of tax exists if the amount of
the understatement is more than 10 percent of the correct amount
of tax or $5,000. Sec. 6662(d)(1)(A). Petitioners reported tax
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liability for 1996 of $5,441. However, their liability is
$24,861. Thus, respondent has satisfied the burden of production
under section 7491(c).
We deem petitioners to have conceded that they are liable
for the accuracy-related penalty under section 6662(a) for
substantial understatement of their 1996 income tax because they
make no argument about the penalty. See Levin v. Commissioner,
87 T.C. 698, 722-723 (1986) (we deemed the taxpayers to have
abandoned claims in the petition for which they made no
argument), affd. 832 F.2d 403 (7th Cir. 1987); Zimmerman v.
Commissioner, 67 T.C. 94, 104 n.7 (1976) (we deemed the taxpayers
to have conceded an issue they raised in their petition because
they made no argument at trial or on brief relating to that
issue). We conclude that petitioners are liable for the
accuracy-related penalty under section 6662(a) for substantial
understatement of income tax for 1996.
For the foregoing reasons,
Decision will be
entered for respondent.