T.C. Summary Opinion 2002-51
UNITED STATES TAX COURT
JAMES JOSEPH TIMMERMAN, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 10735-00S. Filed May 9, 2002.
James Joseph Timmerman, pro se.
Donald Brachfeld, for respondent.
GOLDBERG, 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 Rule references are to the Tax
Court Rules of Practice and Procedure.
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Respondent determined a deficiency in petitioner’s Federal
income tax for the taxable year 1998 in the amount of $20,319,
and an accuracy-related penalty under section 6662(a) in the
amount of $4,064.
The issues for decision are (1) whether a distribution
received by petitioner in 1998 from his deceased brother’s
profit-sharing plan is includable in petitioner’s gross income,
and (2) whether petitioner is liable for an accuracy-related
penalty for substantial understatement of income under section
6662(a).
The stipulation of facts and the attached exhibits are
incorporated herein by this reference. At the time the petition
was filed, petitioner resided in Jersey City, New Jersey.
Petitioner’s brother, Martin Timmerman (Martin), died
intestate on March 23, 1997. On October 10, 1997, petitioner was
appointed Letters of Administration from the Surrogate’s Court of
Hudson County, New Jersey, to administer and settle Martin’s
estate.
Prior to his death, Martin worked for JP Morgan and held a
deferred interest in a profit-sharing plan (plan). In a letter
dated April 9, 1997, from Gary D. Naylor, Vice President of JP
Morgan, petitioner was notified of the monetary balance in the
plan and that he was the sole beneficiary of Martin’s plan.
Attached to the letter were an explanation of payment options
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with tax implications and a JP Morgan election form. Petitioner
failed to respond to this correspondence because “I was working
to settle my brother’s estate. * * * And I made no choice at that
time.”
At the time of Martin’s death, the balance in the plan was
$69,473.55. Martin died at the age of 52 years, prior to the
commencement of any distributions from the plan. Petitioner
received a check dated December 23, 1998, from the Chase
Manhattan Bank for $70,194.88, reflecting the total net
distribution of his brother’s plan.1 The check was payable to
“James J. Timmerman”, individually. On or about February 5,
1999, petitioner contributed the total net distribution from the
plan into an account at Charles Schwab & Co. originally titled
“Martin C. Timmerman in Trust for James Timmerman”. Petitioner
made a second contribution of $7,799.43 on or about February 5,
1999, from his own funds to “keep the account intact”. According
to petitioner, Martin opened this account for the benefit of
petitioner in 1995, and after the February 5, 1999,
contributions, the account was retitled the “James J Timmerman
Beneficiary Charles Schwab & Co. Cust Inherited IRA” (Inherited
IRA).
At trial, petitioner provided a document entitled “Death
1
The total gross distribution from the plan was
$77,994.31 less $7,799.43 withheld for Federal income tax.
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Benefit Election - Nonspousal Beneficiary/The Deferred Profit-
Sharing Plan of Morgan Guaranty Trust Company of New York and
Affiliated Companies for United States Employees” (election
form). It appears on the face of the election form that
petitioner completed, signed, and dated the form October 30,
1998. Under the “benefit election” paragraph, petitioner checked
off the box next to the choice “Annual installments over ____
years, beginning in the year the participant would have attained
age ____. (No younger than 50 or no older than 70 ½.)”
Petitioner left the blanks unanswered. The election form
requested that petitioner return the completed form by December
15, 1998. It appears, however, that the form was never sent to
Morgan Guaranty Trust Company of New York, and, therefore, the
election was never in effect.
Petitioner failed to provide at trial any fully executed
election forms, mail receipts, or other information to show that
an election was made. According to petitioner, he misplaced a
folder of mail receipts and other documents and it could not be
retrieved.
Petitioner received a 1998 Form 1099-R, Distributions From
Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs,
Insurance Contracts, etc., issued from American Century Services
Corp. for JP Morgan, reflecting a gross distribution of
$77,994.31 and Federal income tax withheld of $7,799.43.
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Petitioner timely filed his 1998 return without reporting
the income as reflected on the Form 1099-R, and claimed Federal
income tax withheld of $7,799.43. Petitioner received a refund
of $7,910.85 for his Federal income tax for 1998.
Respondent issued a notice of deficiency determining that
petitioner received income of $77,994.31. The derivation and the
computation of the amount reported on Form 1099-R by American
Century Services are not in dispute. The only question is
whether this amount is includable in petitioner’s gross income
for 1998.
Petitioner contends that the distribution is not subject to
tax because it was a “trustee-to-trustee” or “institution-to-
institution” transfer. It appears that petitioner further
contends that he received the distribution from Martin’s plan as
the administrator of the estate, rather than the beneficiary. We
disagree with both of petitioner’s arguments.
Respondent’s determination is presumed correct, and
petitioner bears the burden of proving that respondent’s
determination is erroneous. Rule 142(a); Welch v. Helvering, 290
U.S. 111, 115 (1933).2
2
Because petitioner failed to introduce any credible
evidence, he failed to meet the requirements of sec. 7491(a), as
amended, so as to place the burden of proof on respondent with
respect to any factual issue relevant to ascertaining liability
for the tax deficiency in issue. As to the accuracy-related
penalty, we find that respondent has satisfied his burden of
(continued...)
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Gross income includes all income from whatever source
derived. Sec. 61(a). Section 61(b) specifically includes items
included under section 72 (relating to annuities).
Petitioner does not dispute that he received the money from
Martin’s plan in 1998. Petitioner instead argues that the
transfer of Martin’s plan into the Inherited IRA should not be
characterized as a taxable distribution of Martin’s plan, but
rather a tax exempt “trustee-to-trustee” transfer.
The law is clear. Section 402(a) generally provides that
any amount actually distributed to any distributee by any
employees’ trust, such as Martin’s plan, shall be taxable to the
distributee in the taxable year of the distributee in which
distributed, under section 72. Section 402(c) provides that
certain amounts paid to an employee from a qualified trust are
considered “rollover” distributions, and thus excludable from
income. Under section 402(c)(5), a transfer from a qualified
plan to an eligible retirement plan, including an individual
retirement account described in section 408(a) or individual
retirement annuity described in section 408(b), shall be treated
as a rollover contribution described in section 408(d)(3).
However, section 408(d)(3)(C) specifically denies the rollover
2
(...continued)
production under sec. 7491(c) because the record shows that
petitioner failed to include the income on his return. Higbee v.
Commissioner, 116 T.C. 438 (2001).
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treatment of inherited accounts, including inherited individual
retirement accounts or annuities.
Section 402(c)(9) permits rollover treatment to a
distribution made to a spouse after the death of the employee.
However, the regulations state that such rollover treatment is
limited to the spousal beneficiary.3 Accordingly, a distribution
to a non-spousal beneficiary does not receive rollover treatment,
and therefore is taxable to the beneficiary upon receipt of the
distribution.
Petitioner is not the employee of the plan or the employee’s
spouse. Rather, petitioner is the non-spousal distributee and
sole beneficiary of Martin’s plan. Petitioner received the total
net distribution of Martin’s plan in his individual name.
Petitioner then contributed the total amount into the Inherited
IRA. We have no election form or other document reflecting a
valid annuity payment election. Rather, we have petitioner’s
3
Sec. 1.402(c)-2, Q&A-12(b), Income Tax Regs., provides
the following:
Q-12. How does section 402(c) apply to a
distributee who is not an employee?
A-12. (b) Non-spousal distributee. A distributee
other than the employee or the employee’s surviving
spouse (or a spouse or former spouse who is an
alternate payee under a qualified domestic relations
order) is not permitted to roll over distributions from
a qualified plan. Therefore, those distributions do
not constitute eligible rollover distributions under
section 402(c)(4) and are not subject to the 20-percent
income tax withholding under section 3405(c).
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self-serving statements as our only evidence. The facts
presented before us leave us no other choice but to find that the
receipt of the plan’s total net distribution is a lump sum
distribution from Martin’s plan.4
Petitioner’s final argument is that he received the total
distribution of the plan as the personal representative of
Martin’s estate and not in the capacity of the sole beneficiary.
We find no merit in petitioner’s argument. Under New Jersey law,
a pension plan, like an insurance policy, is a nontestamentary
asset, and therefore generally not subject to administration
under a probate estate. See Czoch v. Freeman, 721 A.2d 1019,
1024 (N.J. Super. Ct. App. Div. 1999). We find that petitioner
received the total plan amount in his individual capacity as the
beneficiary and not the personal representative of Martin’s
estate.
4
The pertinent part of sec. 402(d)(4)(A) states:
(A) Lump sum distribution. For purposes of this
section and section 403, the term “lump sum
distribution” means the distribution or payment within
1 taxable year of the recipient of the balance to the
credit of an employee which becomes payable to the
recipient-
(i) on account of the employee’s death,
* * * * * * *
from a trust which forms a part of a plan described in
section 401(a) and which is exempt from tax under
section 501 or from a plan described in section 403(a).
* * *
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Based upon the above, we find that petitioner received a
lump sum distribution in his individual name as the beneficiary
of Martin’s plan. Accordingly, $77,994.31 is includable in
petitioner’s gross income.
The last issue for decision is whether petitioner is liable
for an accuracy-related penalty pursuant to section 6662(a) for
the year in issue. Section 6662(a) imposes a penalty of 20
percent of the portion of the underpayment which is attributable
to any substantial understatement of income tax. Sec.
6662(b)(2). A “substantial understatement” exists where the
amount of the understatement exceeds the greater of 10 percent of
the tax required to be shown on the return for the taxable year
or $5,000. Sec. 6662(d)(1).
No penalty shall be imposed if it is shown that there was
reasonable cause for the underpayment and the taxpayer acted in
good faith with respect to the underpayment. Sec. 6664(c).
Petitioner failed to address the accuracy-related penalty
and offered no evidence that he had reasonable cause for the
underpayment. Petitioner apparently sought no advice on the
matter, and made no argument at trial. Accordingly, we sustain
respondent’s determination.
We have considered all arguments made by the parties, and,
to the extent not discussed above, conclude they are irrelevant
or without merit.
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Reviewed and adopted as the report of the Small Tax Case
Division.
Decision will be entered
for respondent.