T.C. Summary Opinion 2003-41
UNITED STATES TAX COURT
LARRY JOE MILLS, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 7036-02S. Filed April 22, 2003.
Larry Joe Mills, pro se.
Donald E. Edwards, for respondent.
DEAN, Special Trial Judge: This case was heard under the
provisions of section 7463 of the Internal Revenue Code as in
effect at the time the petition was filed. Unless otherwise
indicated, all other section references are to the Internal
Revenue Code in effect for the year at issue. The decision to be
entered is not reviewable by any other court, and this opinion
should not be cited as authority.
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Respondent determined a deficiency in petitioner's Federal
income tax of $2,901 for 1998. The issues for decision are:
(1) Whether petitioner may deduct the Federal income tax withheld
from a distribution from an Individual Retirement Account (IRA),
and (2) whether petitioner is liable for the 10-percent
additional tax on an early distribution from a qualified
retirement plan.
The stipulated facts and exhibits received into evidence are
incorporated herein by reference. At the time the petition in
this case was filed, petitioner resided in Jennings, Oklahoma.
Background
In 1994, petitioner rolled over an amount from his 401(k)
profit sharing plan at Moore Corporation into an IRA, a qualified
retirement plan, at Payne County Bank (PCB) in Perkins, Oklahoma.
On November 14, 1997, the District Court In And For Lincoln
County, State of Oklahoma, issued a Qualified Domestic Relations
Order (QDRO) in the case of Alvetta J. Mills v. Larry J. Mills.
The QDRO ordered PCB to segregate for the benefit of Alvetta
Mills, the alternate payee, the sum of $17,745 along with the
interest accruing between November 14, 1997, until the date of
distribution.
Petitioner signed on January 10, 1998, an "IRA Distribution
Form", containing several sections, including: (1) "IRA Owner
Information"; (2) "Distribution Reason"; (3) "Payment
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Information"; and (4) "Withholding Election". In the
"Distribution Reason" section, box number 1 was checked for
"Premature Distribution. Under 59-1/2 and no other exceptions
apply". Under "Withholding Election", the box was checked for "I
elect to have Federal income tax withheld from my IRA
distribution (10% withholding)". The amount of $2,518 is listed
in the "Payment Information" section as the amount of Federal
income tax withheld and the net distribution is listed as
$22,662.
On January 12, 1998, pursuant to the terms of the QDRO,
$17,895 was distributed from petitioner's IRA at PCB to his
former wife. At the same time, the balance of the IRA, $25,180,
was distributed to petitioner as described above. Petitioner was
not yet 59-1/2 years old at the time of the distribution.
PCB issued to petitioner a Form 1099-R, Distributions From
Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs,
Insurance Contracts, etc., showing a gross and taxable
distribution of $25,180 and Federal income tax withheld of
$2,518. Petitioner filed his Federal income tax return for 1998
in which he reported the distribution of $25,180 as income on
line 15b. Petitioner, however, deducted on line 30, "Penalty on
early withdrawal of savings", $2,518, and failed to report any
amount in the "Other Taxes" section on line 53 of his return,
"Tax on IRAs, other retirement plans, and MSAs. Attach Form 5329
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if required". Form 5329 is for reporting "Additional Taxes on
Qualified Plans (Including IRAs) and Other Tax-Favored Accounts".
Respondent determined in the notice of deficiency that
petitioner is liable for the additional tax on an early
distribution from a qualified retirement plan. Petitioner
believes that the additional tax on early distributions is not
applicable in this case because he believes his distribution of
$25,180 was "forced" under his wife's QDRO.
Discussion1
The Deduction of Federal Withholding Tax
Section 62(a)(9) allows deductions under section 165 from
gross income for amounts "forfeited to a bank, mutual savings
bank, savings and loan association, building and loan
association, cooperative bank or homestead association as a
penalty for premature withdrawal of funds". The Federal income
tax withheld from petitioner's IRA distribution is not an amount
forfeited to a bank or other financial institution as a penalty.
The Court notes that petitioner also claimed a credit for
Federal withholding tax of $4,191 on line 57 of his 1998 Federal
income tax return. That amount represents the sum of the amounts
reported on petitioner's Form W-2, Wage and Tax Statement, of
$1,673 and the amount reported on his Form 1099-R, Distributions
1
Because the issues in this case are not factual but are
instead legal, sec. 7491 does not apply.
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From Pensions, Annuities, Retirement or Profit-Sharing Plans,
IRAs, Insurance Contracts, etc., issued by PCB that shows Federal
income tax withheld of $2,518. What petitioner did was to claim
a deduction and a withholding credit for the same $2,518.
Petitioner properly reported the amount as Federal income tax
withheld. The Court concurs in respondent's determination that
the deduction of the $2,518 as an amount forfeited as a penalty
to a bank is improper.
Additional Tax on Early Distributions
Section 72(t)(1) provides for the imposition of a 10-percent
additional tax on early distributions from qualified retirement
plans with certain exceptions.
Petitioner testified that he received the distribution of
$25,180 in 1998 upon the oral advice of a bank employee. If he
was going to make the QDRO distribution to his wife, "she said
you have to take it all out. You can't take a part of it out
without borrowing the money to replace it back." Unfortunately
for petitioner, he relied on bad advice. Even if the advice were
true, however, the operative provision offers him no relief.
Section 72(t)(2) provides that the additional tax on early
distributions shall not apply to certain types of distributions.
One type of distribution that is not subject to the additional
tax is "Payments to alternate payees pursuant to qualified
domestic relations order". Sec. 72(t)(2)(C). Under this
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provision, a distribution to an "alternate payee" under a QDRO is
excepted from the additional tax on early distributions. Section
402(e)(1)(A) provides that an "alternate payee" who is the spouse
or former spouse of the plan participant shall be treated as the
distributee of any distribution or payment made to the "alternate
payee" under a "qualified domestic relations order" as defined in
section 414(p). Therefore, a distribution made to such an
alternate payee under a QDRO will be taxable to that alternate
payee, and not to the plan participant, because section
402(e)(1)(A) treats the alternate payee as the distributee.
But it is not the distribution to his wife, the alternate
payee, that is under consideration here. The distribution in
dispute is the distribution to petitioner himself. Petitioner is
a distributee, the plan participant or beneficiary who, under the
plan, is entitled to receive the distribution. See Darby v.
Commissioner, 97 T.C. 51, 58 (1991); Estate of Machat v.
Commissioner, T.C. Memo. 1998-154; Smith v. Commissioner, T.C.
Memo. 1996-292. As petitioner is not an "alternate payee", he
may not look to section 72(t)(2)(C) for relief.
It does not appear that any of the statutory exceptions to
the application of section 72(t) apply in this case, and
petitioner has not suggested otherwise.
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The Court concurs in respondent's determination that
petitioner is subject to the 10-percent additional tax on an
early distribution from a qualified retirement plan.
Reviewed and adopted as the report of the Small Tax Case
Division.
Decision will be entered
for respondent.