Dirks v. Comm'r

T.C. Memo. 2004-138

UNITED STATES TAX COURT

JAMES DIRKS, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 6867-03. Filed June 10, 2004.

Michael P. Casterton, for petitioner.

Kathryn K. Vetter, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

LARO, Judge: Petitioner petitioned the Court to redetermine

a $44,097 deficiency in his 2000 Federal income tax and an $8,819

accuracy-related penalty under section 6662(a) and (d) for

substantial understatement of income tax.1 We decide whether

1
Unless otherwise noted, section references are to the
(continued...)
 -2-

distributions of cash which petitioner received in 2000 from one

individual retirement account (IRA) and rolled over to another

IRA more than 60 days later are excludable from his 2000 gross

income under the 60-day rule of section 408(d)(3)(A)(i) (60-day

rule) by virtue of the substantial compliance doctrine. We hold

they are not. We also decide whether petitioner is liable for an

accuracy-related penalty under section 6662(a) and (d). We hold

he is.

FINDINGS OF FACT

Some facts were stipulated. The stipulated facts and the

exhibits submitted therewith are incorporated herein by this

reference. We find the stipulated facts accordingly. Petitioner

is an attorney who lived in Pollock Pines, California, when his

petition was filed. He was born on September 5, 1950, and has

been a member of the State Bar of California since 1982. He

presently works as a research lawyer for a superior court in

California.

Petitioner and his companion purchased a home in May 1999.

At the end of 1999, while living in that home, petitioner learned

of a house (house) that was being auctioned in a foreclosure

sale. Petitioner bid on the house during December 1999. His bid

was accepted in or about the second week of January 2000.

1
(...continued)
applicable versions of the Internal Revenue Code.
 -3-

During 2000, petitioner had an IRA (first IRA) at Nicholas

Fund, Inc. He withdrew a total of $118,000 from the first IRA on

January 19 and 21, 2000, in order to purchase the house. He had

previously researched section 408 as it applied to withdrawing

those funds and to paying them into another IRA within 60 days so

as to exclude his withdrawals from his gross income. He

concluded that the 60-day rule required that he pay the $118,000

into another IRA no later than March 20, 2000, in order to

exclude both days’ distributions from his gross income.2

Petitioner used the $118,000 to purchase the house on

February 7, 2000. Shortly thereafter, he contacted a mortgage

broker to finance his purchase through a mortgage loan. He

applied with the mortgage broker for the loan, and the mortgage

broker sent petitioner’s paperwork to a lender for approval. The

lender approved the loan on March 24, 2000, after requesting and

receiving from petitioner additional information. Escrow on the

financing closed on April 3, 2000, and petitioner paid $118,000

of the resulting funds into a second IRA (second IRA) on April 4,

2000.

Nicholas Fund, Inc., issued to petitioner a 2000 Form

1099-R, Distributions from Pensions, Annuities, Retirement or

Profit-Sharing Plans, IRAs, Insurance Contracts, etc. The form

2
Given that 2000 was a leap year, the 60th day after the
first distribution actually fell on Mar. 19, 2000.
 -4-

stated that petitioner had during 2000 received $118,000 in

distributions from the first IRA and that these distribution were

taxable in full. Petitioner did not report the $118,000 on his

2000 Federal income tax return (2000 tax return). The 2000 tax

return was timely received by respondent’s service center for

filing on August 17, 2001.

OPINION

We decide whether petitioner’s receipt of the $118,000 is

excludable from his 2000 gross income. Petitioner argues it is.

Petitioner concedes that he paid these funds into the second IRA

more than 60 days after he received them but asserts that he

meets the 60-day rule by virtue of the “equitable doctrine of

substantial compliance”. Petitioner supports his assertion, for

which he bears the burden of proof,3 see Hamilton v.

Commissioner, T.C. Memo. 1954-118, affd. per curiam 232 F.2d 891

(6th Cir. 1956); cf. Food Lion, Inc. v. United Food & Commercial

Workers Intl. Union, 103 F.3d 1007, 1017 (D.C. Cir. 1997),

primarily with citations to Shotgun Delivery, Inc. v. United

States, 269 F.3d 969 (9th Cir. 2001), Prussner v. United States,

896 F.2d 218 (7th Cir. 1990), Wood v. Commissioner, 93 T.C. 114

3
Given that petitioner makes no claim that respondent bears
the burden of proof under sec. 7491(a), we conclude that sec.
7491(a) has no applicability to this case. See, e.g., sec.
7491(b) (sec. 7491(a) applies with respect to an issue only if
the taxpayer meets certain requirements). We note, however,
that we decide this issue without resort to which party bears the
burden of proof.
 -5-

(1989), Am. Air Filter Co. v. Commissioner, 81 T.C. 709 (1983),

and Tipps v. Commissioner, 74 T.C. 458, 468 (1980).4 Petitioner

notes that section 408 was recently amended to provide that “The

Secretary may waive the [relevant] 60-day requirement * * * where

the failure to waive such requirement would be against equity or

good conscience, including casualty, disaster, or other events

beyond the reasonable control of the individual subject to such

requirement.” Sec. 408(d)(3)(I) as added by the Economic Growth

and Tax Relief Reconciliation Act of 2001, Pub. L. 107-16, sec.

644, 115 Stat. 123.

We disagree with petitioner’s argument that the $118,000 is

excludable from his 2000 gross income. Under section 408(d)(1),

distributions from an IRA are generally includable in the

distributee’s gross income in the year of distribution. Although

an exception to this general rule lies in certain cases where a

distribution is paid into another IRA, see sec. 408(d)(3)(A)(i),

this case is not one of those cases. The exception requires that

the distributed funds be paid into another IRA within 60 days

after the distributee receives them. Id. Petitioner did not

within this 60-day period pay into the second IRA any of the

$118,000 withdrawn from the first IRA.

4
Petitioner also cites Irwin v. VA, 498 U.S. 89 (1990), and
notes that Irwin concerned equitable tolling. In that petitioner
has made no claim of equitable tolling in this case, we do not
decide that issue.
 -6-

Petitioner relies erroneously on Wood v. Commissioner,

supra, in arguing that the distributions are excludable from his

gross income even though he failed to meet the 60-day rule.

There, the Court held that the taxpayers’ rollover of stock to an

IRA was timely even though the IRA trustee recorded the stock in

the wrong account and did not correct this error until

approximately 4 months after the 60-day period expired. In

holding that the taxpayers had effected a rollover of the

distribution within the 60-day period, the Court noted that the

taxpayers had within that period opened up the IRA, delivered the

stock to the trustee, instructed the trustee to roll over the

stock into the IRA, been assured by the trustee that the rollover

would be consummated as instructed, and in fact consummated the

rollover. The Court did not, contrary to petitioner’s assertion,

“disregard” the applicable 60-day period to accommodate a

rollover that was made after the 60-day period.

Nor does petitioner rely appropriately on Shotgun Delivery,

Inc. v. United States, supra, Prussner v. United States, supra,

Am. Air Filter Co. v. Commissioner, supra, and Tipps v.

Commissioner, supra, in arguing that he prevails under the

substantial compliance doctrine. While petitioner observes

correctly that these cases state that substantial compliance with

“regulatory requirements” may suffice in certain circumstances,

the 60-day rule is not regulatory but is found in the statute
 -7-

itself. This Court has applied the doctrine of substantial

compliance to excuse taxpayers from strict compliance with

procedural regulatory requirements such as the manner in which an

election must be made. See Estate of Chamberlain v.

Commissioner, T.C. Memo. 1999-181 (and cases cited therein),

affd. 9 Fed. Appx. 713 (9th Cir. 2001). Other Federal courts

also have applied the doctrine in the setting of regulatory

requirements. See id.

Although neither party has argued that the substantial

compliance doctrine may also apply in the setting of a statutory

requirement, the Court of Appeals for the Ninth Circuit, the

court to which an appeal of this case lies, has indicated that

the doctrine may apply to “statutory prerequisites”. Sawyer v.

County of Sonoma, 719 F.2d 1001, 1008 (9th Cir. 1983). However,

the court stated:

in the context of statutory prerequisites, the doctrine
can be applied only where invocation thereof would not
defeat the policies of the underlying statutory
provisions. * * * In addition, the doctrine of
substantial compliance can have no application in the
context of a clear statutory prerequisite that is known
to the party seeking to apply the doctrine. [Id.]

Petitioner asserts that the choice of 60 days in the 60-day

rule was “arbitrary and procedural” and that the policy of the

statute is to promote the maintenance of funds in a retirement

account. Petitioner concludes that this policy is preserved in

this case, given that he has paid the $118,000 into the second
 -8-

IRA, and that his failure to have met the 60-day rule is of no

consequence. We disagree with petitioner’s suggestion that we

may simply close our eyes to the 60-day period and focus blindly

on the fact that he has paid the withdrawn funds into the second

IRA. In addition to the fact that the 60-day rule is a

“fundamental element of the statutory requirements for an IRA

rollover contribution”, Metcalf v. Commissioner, T.C. Memo.

2002-123, affd. 62 Fed. Appx. 811 (9th Cir. 2003), the 60-day

rule is a “clear statutory prerequisite” that was well known to

petitioner even before he withdrew the funds from the first IRA.

Moreover, an application of the substantial compliance

doctrine to a statutorily prescribed fixed deadline such as the

60-day rule is problematic. By analogy, the Supreme Court has

noted as to filing deadlines that “deadlines, like statutes of

limitations, necessarily operate harshly and arbitrarily with

respect to individuals who fall just on the other side of them,

but if the concept of a filing deadline is to have any content,

the deadline must be enforced.” United States v. Locke, 471 U.S.

84, 100-101 (1985). In addition, as the Court of Appeals for the

Seventh Circuit has noted:

All fixed deadlines seem harsh because all can be
missed by a whisker--by a day (United States v. Locke,
471 U.S. 84, 105 S.Ct. 1785, 85 L.Ed.2d 64 (1985)) or
for that matter by an hour or a minute. They are
arbitrary by nature. * * * The legal system lives on
fixed deadlines; their occasional harshness is redeemed
by the clarity which they impart to legal obligation.
* * * There is no general judicial power to relieve
 -9-

from deadlines fixed by legislatures * * * [Prussner
v. United States, 896 F.2d at 222-223.]

We conclude that we are not at liberty in this case to

ignore the 60-day deadline that Congress has prescribed clearly

and unequivocally in section 408(d)(3)(A)(i). Any modification

to that deadline is a legislative and not a judicial function.

See J.E. Riley Inv. Co. v. Commissioner, 311 U.S. 55, 59 (1940);

Xi v. United States, 298 F.3d 832, 839 (9th Cir. 2002); Prussner

v. United States, supra at 222-223; Kern v. Granquist, 291 F.2d

29, 33 (9th Cir. 1961). In fact, petitioner notes correctly that

Congress has recently amended section 408 to authorize the

Secretary to waive this 60-day period in certain cases. See sec.

408(d)(3)(I), as added by the Economic Growth and Tax Relief

Reconciliation Act of 2001, Pub. L. 107-16, sec. 644(a),

115 Stat. 123. Given that this amendment applies only to

distributions after December 31, 2001, id.; see also Anderson v.

Commissioner, T.C. Memo. 2002-171, it does not apply here. We

sustain respondent’s determination as to the deficiency.5

5
In addition to tax on petitioner’s receipt of the
$118,000, respondent determined as part of this deficiency that
petitioner was liable for the 10-percent additional tax under
sec. 72(t). Petitioner does not in his brief address this
determination, and we consider it conceded. Rybak v.
Commissioner, 91 T.C. 524, 566 (1988); Money v. Commissioner,
89 T.C. 46, 48 (1987). We note, however, that the additional tax
generally applies to all distributions from an IRA, see sec.
72(t)(1), and that the record does not establish that any of the
exceptions to this general rule found in sec. 72(t)(2) are
applicable.
 -10-

Respondent also determined that petitioner is liable for an

accuracy-related penalty under section 6662(a) and (d). Section

6662(a) and (d) imposes an accuracy-related penalty if any

portion of an underpayment is attributable to a substantial

understatement of income tax. An understatement of income tax is

substantial if it exceeds 10 percent of the tax required to be

shown on the return or $5,000. Sec. 6662(d)(1). Respondent

bears the burden of production under section 7491(c) and must

come forward with sufficient evidence indicating that it is

appropriate to impose an accuracy-related penalty. Higbee v.

Commissioner, 116 T.C. 438, 446-447 (2001). Once respondent has

met this burden, the taxpayer must come forward with persuasive

evidence establishing that the accuracy-related penalty does not

apply. Id. The taxpayer may establish, for example, that part

or all of the accuracy-related penalty is inapplicable because it

is attributable to an understatement for which the taxpayer acted

reasonably and in good faith. Sec. 6664(c)(1). Whether a

taxpayer acted in such a fashion is a factual determination, sec.

1.6664-4(b)(1), Income Tax Regs., for which the taxpayer’s effort

to assess the proper tax liability is usually the most important

consideration.

Here, respondent has met his burden of production in that

the understatement on petitioner’s return is “substantial” within

the meaning of section 6662(d)(1). Petitioner argues that he
 -11-

acted reasonably and in good faith towards the subject matter of

the deficiency. Petitioner notes that respondent has

acknowledged through correspondence that petitioner aimed to meet

the 60-day rule but was thwarted from doing so. In addition,

petitioner testified that he stapled to his 2000 tax return a

letter with three exhibits (collectively, letter) explaining that

he had received the Form 1099-R and the $118,000 referenced

therein but that he was of the view that this amount was not

taxable because he had substantially complied with the 60-day

rule. Petitioner testified that respondent’s service center

returned the letter to him on October 1, 2001, with

correspondence.

We disagree with petitioner’s argument that he acted

reasonably and in good faith with respect to the subject matter

of the deficiency. Petitioner is a seasoned attorney who filed

his 2000 tax return with the knowledge and understanding of the

relevant provisions of section 408. The fact that he may have

intended earnestly to meet the 60-day rule did not excuse him

from not reporting the withdrawals as income when he failed to

meet that rule. Nor do we believe that reasonableness and good

faith may be found in petitioner’s litigating position that he

substantially complied with the 60-day rule by paying the amount

of withdrawals into the second IRA contemporaneously with the

closing of his escrow.
 -12-

Although we find petitioner to have been credible when he

testified as to his intent to meet the 60-day rule, we do not

find likewise as to his testimony concerning the letter. The

parties stipulated that Exhibit 1-J was a copy of the “federal

income tax return filed by petitioner for 2000" and that return

contained neither the letter nor any mention thereof. We decline

on the basis of the record at hand to make petitioner’s desired

finding that the letter was the enclosed “IRA Documentation” that

respondent’s service center returned to him on October 1, 2001,

with correspondence. The correspondence states specifically that

it relates to petitioner’s “inquiry of Aug. 27, 2001" and, with

the exception of a reference to December 31, 2000, as that of the

tax period involved, contains no reference to petitioner’s 2000

tax return that was received by respondent on August 17, 2001.

We sustain respondent’s determination as to the accuracy-related

penalty under section 6662(a) and (d).

All arguments made by the parties have been considered, and

those arguments not discussed herein have been found to be

without merit. Accordingly,

Decision will be entered

for respondent.