T.C. Summary Opinion 2004-11
UNITED STATES TAX COURT
JAMES J. LEONARD, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 20205-02S. Filed February 4, 2004.
James J. Leonard, pro se.
Michael K. Park, 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.
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Respondent determined a deficiency in petitioner’s Federal
income tax of $5,976 for the taxable year 2000.
The issues for decision are: (1) Whether petitioner’s
failure to make payments on a loan from a qualified retirement
plan resulted in a taxable distribution from that plan, and if so
(2) whether petitioner is liable for a section 72(t) additional
tax on the distribution.1
Some of the facts have been stipulated and are so found.
The stipulation of facts and the attached exhibits are
incorporated herein by this reference. Petitioner resided in
North Richland Hills, Texas, on the date the petition was filed
in this case.
Petitioner began working for General Electric (GE) Railcar
Services (GE Railcar) in 1997. Petitioner maintained a
retirement account with the GE Railcar Services Investment
Retirement Program (GE Railcar plan). In June 2000, while
petitioner was still employed at GE Railcar, he withdrew $14,500
from his GE Railcar retirement account as a loan. Under the
terms of the loan agreement, the loan principal and finance
charges were to be repaid through deductions from each of
1
Petitioner does not dispute respondent’s determination that
petitioner received dividend income in the year in issue.
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petitioner’s biweekly payroll checks through July 8, 2005. Each
biweekly payment was to be $143.59.2
By letter dated June 12, 2000, petitioner was offered a
position in another operating division of GE, GE Sports Lighting
Systems, L.P. (GE Lighting). Petitioner accepted this position
and began working at GE Lighting in the last week of June. In
July 2000, petitioner changed his residence from Texarkana,
Texas, to North Richland Hills, Texas, in order to be closer to
his workplace.
By letter dated August 18, 2000, the GE Railcar benefits
administrator notified GE Investment Retirement Services that
petitioner’s employment with GE Railcar had been terminated and
that he had changed his mailing address. The address listed in
this notification was the address of GE Lighting: “8713 Airport
Freeway Suite 104, North Star Plaza, N. Richland Hills, TX
76180”. Petitioner’s quarterly retirement account statements
were sent to this address from September 2000 through March 2001.
In December 2000, GE Lighting changed to a different suite in the
same building, resulting in a change in petitioner’s employment
address. Petitioner’s new address was not correctly recorded by
the GE Railcar plan, causing petitioner’s quarterly statements
2
The promissory note that petitioner signed in order to
obtain the loan states that petitioner “further agrees that the
loan is subject to the loan provisions contained in the Plan”.
These provisions are not in the evidentiary record in this case.
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from June 2001 through March 2002 to be sent to this address:
“8713 Airport Fwy Sui, North Star Plaza II, N. Richland Hills,
TX”. Neither of the two addresses above contained the name of
petitioner’s operating division, GE Lighting, and the latter
address omitted petitioner’s suite number.
From the time that the loan was distributed to petitioner in
June 2000, no loan payments were ever deducted from petitioner’s
paychecks because of petitioner’s transfer to GE Lighting.
Petitioner was aware that no deductions were being made, but he
did not remit any payment to the GE Railcar plan. During this
same timeframe, certain child support payments which petitioner
was required to make also were not being deducted from his
paychecks. Petitioner was aware of this fact, and in response he
made payments directly to the appropriate child support
enforcement authority.
On November 27, 2000, GE Investment Retirement Services sent
a letter to petitioner notifying him that no payments had been
applied against his loan and requesting that petitioner remit to
the GE Railcar plan, by no later than December 29, 2000, either
the delinquent payments or the full amount of the loan. The
letter stated that failure to do so would result in a deemed
distribution due to a loan default. In January 2001, a Form
1099-R, Distributions From Pensions, Annuities, Retirement or
Profit-Sharing Plans, IRAs, Insurance Contracts, etc., was issued
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to petitioner, reporting the full amount of the loan as a taxable
distribution. The Form 1099-R was mailed to “8713 Airport
Freeway, North Star Plaza II, N. Richland Hills, TX 76118”;
petitioner’s operating division and suite number were again
omitted.
On petitioner’s Federal income tax return for taxable year
2000, petitioner did not report the $14,500 loan amount as
income. In the notice of deficiency, respondent determined that
the $14,500 was both includable in petitioner’s income as a
taxable distribution and subject to the section 72(t) additional
tax on early distributions from qualified retirement plans.
The first issue for decision is whether petitioner’s failure
to make payments on the loan from the qualified retirement plan
resulted in a taxable distribution from the plan.
Distributions from qualified plans generally are included in
the distributee’s income in the year of the distribution in
accordance with the provisions of section 72. Sec. 402(a). As a
general rule, a qualified plan participant who receives a loan
from a plan is treated as having received a distribution from the
plan in the year the loan is received. Sec. 72(p)(1)(A).
However, paragraph (2) of section 72(p) provides an exception for
certain loans which prevents the inclusion in income. A
limitation upon this exception is found in subparagraph (C) of
paragraph (2), which provides as follows:
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Except as provided in regulations, this paragraph shall not
apply to any loan unless substantially level amortization of
such loan (with payments not less frequently than quarterly)
is required over the term of the loan.
Thus, a loan which does not meet the requirement of section
72(p)(2)(C) by requiring substantially level amortization is
treated as a distribution and is included in income under section
72(p)(1)(A).
Respondent argues that a deemed distribution to petitioner
was made in 2000 because petitioner defaulted on the loan in that
year. Specifically, respondent argues that petitioner’s failure
to make the loan payments as required under the terms of the loan
violated the section 72(p)(2)(C) requirement, thereby resulting
in a deemed distribution in the year of the default. In support
of this argument, respondent in his trial memorandum cites the
final regulations issued under section 72(p). However, because
petitioner’s loan was made in June 2000, these regulations do not
apply in this case.3
3
The final regulations under sec. 72(p) generally apply only
to loans made on or after Jan. 1, 2002. Sec. 1.72(p)-1, Q&A-
22(b), Income Tax Regs. Under these regulations, when a
participant fails to make payments in accordance with the terms
of a loan, the loan is treated as no longer meeting the sec.
72(p)(2)(C) requirement, thereby resulting in a deemed
distribution. Sec. 1.72(p)-1, Q&A-4(a), Income Tax Regs. The
regulations elaborate on the timing and amount of deemed
distributions resulting from loan defaults as follows:
(a) Timing of deemed distribution. Failure to make any
installment payment when due in accordance with the terms of
the loan violates section 72(p)(2)(C) and, accordingly,
(continued...)
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We agree with respondent’s application of section
72(p)(2)(C) to the facts of this case. Petitioner did not make
any payments from the time of the loan disbursement in June 2000
through the time that the loan was reported as a distribution by
the plan on December 29, 2000. Two calendar quarters had passed
since petitioner had obtained the loan, resulting in a violation
of the statutory imperative that the terms of the loan require
that payments be made “not less than quarterly”. Sec.
72(p)(2)(C). Furthermore, this was a period of approximately 6
months, or 10 percent of the original 5-year term of the loan.
3
(...continued)
results in a deemed distribution at the time of such
failure. However, the plan administrator may allow a cure
period and section 72(p)(2)(C) will not be considered to
have been violated if the installment payment is made not
later than the end of the cure period, which period cannot
continue beyond the last day of the calendar quarter
following the calendar quarter in which the required
installment payment was due.
(b) Amount of deemed distribution. If * * * there is a
failure to pay the installment payments required under the
terms of the loan * * * then the amount of the deemed
distribution equals the entire outstanding balance of the
loan (including accrued interest) at the time of such
failure.
Sec. 1.72(p)-1, Q&A-10, Income Tax Regs. Before the issuance of
the final regulations, proposed regulations had been issued
which, for purposes of this case, had the same provisions as the
final regulations. The proposed regulations were to apply only
to loans made a certain period of time after final regulations
had been published. Sec. 1.72(p)-1, Q&A-19, Proposed Income Tax
Regs., 60 Fed. Reg. 66237 (Dec. 21, 1995). In this Court,
proposed regulations generally are afforded no more weight than
that of any other position advanced by the Commissioner at trial.
Gen. Dynamics Corp. & Subs. v. Commissioner, 108 T.C. 107, 120
(1997); Laglia v. Commissioner, 88 T.C. 894, 897 (1987).
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Thus, as of December 29, 2000, the terms of the loan could no
longer have required “substantially level amortization * * * over
the term of the loan”. Id. Because at that time the loan
violated the terms of section 72(p)(2)(C), it no longer met the
requirements for the section 72(p)(2)(A) exception, and under
section 72(p)(1)(A) the loan amount was treated as having been
distributed to, and received by, petitioner in the taxable year
2000.
Petitioner argues that he did not receive a deemed
distribution from his retirement plan because he never received
(a) the quarterly retirement account statements that were mailed
to his employment address, (b) the letter dated November 27,
2000, that requested that he remit the delinquent payments, or
(c) the Form 1099-R which was issued to him. Petitioner admits
that he knew the payments were not being deducted from his
paycheck. In fact, petitioner asserts that he contacted GE’s
accounting department by e-mail, notifying them that neither his
loan payments nor his child support payments were being deducted
from his paychecks. Petitioner also admits that he did not make
any loan payments directly to the plan.
None of the assertions that petitioner offers in support of
his argument, even if accepted as fact, would alter the result
under the statute. As discussed above, petitioner did not make
the periodic payments required under the terms of the loan and
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required under section 72(p)(2)(C). The result was a deemed
distribution to petitioner in 2000.
The second issue for decision is whether petitioner is
liable for a section 72(t) additional tax on the distribution
from the qualified retirement plan. Section 72(t)(1) generally
imposes a 10-percent additional tax on certain early
distributions from qualified retirement plans, unless a
distribution comes within one of several statutory exceptions.
See sec. 72(t)(2). Petitioner does not argue, and nothing in the
record indicates, that any of the exceptions apply to the case at
hand. We therefore hold that petitioner is liable for the
section 72(t) additional tax as determined by respondent.
Reviewed and adopted as the report of the Small Tax Case
Division.
Decision will be entered
for respondent.