T.C. Summary Opinion 2005-42
UNITED STATES TAX COURT
JAMES PETERS, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 17514-03S. Filed April 14, 2005.
James Peters, pro se.
Laura A. McKenna, for respondent.
POWELL, Special Trial Judge: This case was heard pursuant
to the provisions of section 74631 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.
1
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 $1,234 deficiency in petitioner’s
2000 Federal income tax. The issues are whether a $4,921
distribution to petitioner from an individual retirement account
(IRA) was includable in his gross income and is subject to the
10-percent additional tax imposed by section 72(t).
At the time the petition was filed, petitioner was a
resident of Deerfield Beach, Florida.
Background
Petitioner was employed by Preferred Respiratory from 1987
through 1999. The company created an IRA for his benefit, and it
was administered by Sterling Trust Company (Sterling Trust). The
IRA had three assets: A cash balance, an OppenheimerFunds
investment, and a participant’s note in a retail shopping center
project called Allen’s Creek.2 During the year at issue these
assets were valued at $96.83, $2,471.23, and $2,353,
respectively. The Allen’s Creek project was managed by BSB
Management Group, Inc., which was owned by Bruce Butler (Mr.
Butler). Petitioner was the only named beneficiary of the IRA.
In a letter dated March 13, 2000, Sterling Trust notified
petitioner of its intention to resign as trustee of his IRA on
April 30, 2000, because it was no longer feasible to administer
accounts holding investments affiliated with Mr. Butler.
2
In the transcript this entity is referred to as Ellen’s
Creek, but all documents refer to this as Allen’s Creek.
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Petitioner was informed that if he wanted Sterling Trust to
transfer the assets and cash directly into another IRA, he would
have to forward to them the appropriate forms of a successor
trustee before April 30, 2000. Sterling Trust explained that a
direct transfer of the IRA’s assets and cash to another IRA
account on or before April 30, 2000, would not be reported to the
Internal Revenue Service. Sterling Trust further explained that
if petitioner did not initiate a direct transfer into a successor
IRA, they would be forced to distribute the assets to him
directly, resulting in a reportable, taxable event that would
subject him to a “10% premature penalty” if he did not then
transfer the assets and cash into another IRA within 60 days of
the distribution.
Petitioner also received a letter regarding Sterling Trust’s
resignation as trustee from Mr. Butler. Mr. Butler suggested JW
Genesis Securities, Inc. (Genesis) as a successor trustee and
told petitioner to contact him for the appropriate forms.
Petitioner did not contact Sterling Trust before their
resignation as his IRA trustee. On May 31, 2000, Sterling Trust
distributed all of the assets in the IRA directly to petitioner.
Ownership of the OppenheimerFunds investment and the Allen’s
Creek note was transferred to petitioner, and Sterling Trust
issued petitioner a check for the cash balance. Petitioner
eventually cashed out the OppenheimerFunds investment and used
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the money, along with the IRA cash balance, for personal
expenses. Mr. Butler filed for bankruptcy in 2004, and
petitioner is currently pursuing a claim for the recovery of his
Allen’s Creek investment as one of Mr. Butler’s creditors.3
Petitioner does not dispute his ownership of the Allen’s Creek
note.
Prior to trial, petitioner agreed and stipulated that he
received and failed to roll over the distributed assets valued at
$96.83 and $2,471.23, representing the cash balance and the
OppenheimerFunds investment respectively. Petitioner disputes
the inclusion of the value of his Allen’s Creek note in income
and the imposition of the 10-percent additional tax.
Discussion
1. Tax Treatment on Distributions
Section 408(d)(1) provides that any amount paid or
distributed out of an IRA shall be included in gross income by
the distributee in the manner provided under section 72. Section
408(d)(3)(A) provides that section 408(d)(1) will not apply if
the entire amount received from an IRA distribution to the
individual for whose benefit the account is maintained is rolled
over into another IRA for the benefit of such individual no later
than 60 days after the receipt of the distribution.
3
Apparently petitioner also invested in another real
estate project with Mr. Butler. This investment was not an asset
of petitioner’s Sterling Trust IRA.
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Under section 408(d)(3)(A), petitioner had until July 31,
2000, to effectuate a tax-free rollover of the entire amount he
received from the distribution of May 31, 2000. Even though
petitioner agrees that he received and failed to roll over the
cash balance and OppenheimerFunds investment, he asserts that he
did roll over the Allen’s Creek note, or at least that he
attempted to. He testified that he signed papers with Mr. Butler
authorizing a rollover into an IRA administered by Genesis.
Unfortunately, petitioner presented nothing other than his own
testimony, which is most unclear, that any rollover occurred on
or before July 31, 2000. As no IRA for petitioner’s benefit with
Genesis appears to exist, the 60-day exception to section
408(d)(1) cannot apply to this distribution.
Petitioner further alleges that his Allen’s Creek note was
misappropriated by Mr. Butler. An alleged misappropriation of
funds still does not qualify as a tax-free rollover, and there is
no exception or waiver of the 60-day rollover time period in
cases of fraud or embezzlement.4 Accordingly, as provided by
section 408(d)(1), the entire $4,921 of the May 31, 2000, IRA
distribution, which includes the Allen’s Creek note, is
includable in petitioner’s 2000 gross income under section 72.
4
Petitioner has not disputed the fair market value of
the Allen’s Creek note at the time of the distribution of the
note from the IRA. It would appear that if there was a theft,
the theft occurred after the distribution.
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2. 10-Percent Additional Tax on Early Distributions
Section 72(t)(1) imposes an additional 10-percent tax on
that portion of a distribution from a qualified retirement plan
that is includable in the taxpayer’s gross income. The 10-
percent additional tax does not apply to certain distributions as
set forth in section 72(t)(2). Generally these exceptions
include distributions made on or after the date the employee
reaches the age of 59-1/2, sec. 72(t)(2)(A)(i), made to a
beneficiary on or after the death of the employee, sec.
72(t)(2)(A)(ii), and when attributable to a disability of the
employee, sec. 72(t)(2)(A)(iii).
Petitioner does not argue that any of the statutory
exceptions under section 72(t)(2) apply to his situation, and
indeed none of them do. Instead, he is seeking relief on the
grounds that because the distribution from his IRA did not cash-
out his Allen’s Creek investment he should not be subject to the
10-percent additional tax. He testified that he is having
financial problems, needs the immediate use of the money he
invested in the Allen’s Creek project, and that if he had
received this amount as a cash distribution he would not object
to paying the tax owed.
However unfortunate petitioner’s situation may be, there is
no exception under section 72(t) for financial hardship. This
principle has been applied consistently in cases dealing with
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premature IRA distributions. See Arnold v. Commissioner, 111
T.C. 250, 255 (1998); Gallagher v. Commissioner, T.C. Memo. 2001-
34; Deal v. Commissioner, T.C. Memo. 1999-352; Pulliam v.
Commissioner, T.C. Memo. 1996-354. Furthermore, there is no
exception regarding in-kind distributions of IRA assets, and this
Court has repeatedly ruled that it is bound by the list of
statutory exceptions enumerated in section 72(t)(2). See, e.g.,
Arnold v. Commissioner, supra at 255; Schoof v. Commissioner, 110
T.C. 1, 11 (1998); Clark v. Commissioner, 101 T.C. 215, 224-225
(1993). As the legislative history of section 408(f), the
predecessor to section 72(t), explains, the purpose of the 10-
percent additional tax was to discourage early distributions from
retirement plans because “Premature distributions frustrate the
intention of saving for retirement”. S. Rept. 93-383, at 134
(1974), 1974-3 C.B. (Supp.) 80, 213. Petitioner is therefore
subject to the 10-percent additional tax under section 72(t) on
the entire amount of the IRA distribution.
Reviewed and adopted as the report of the Small Tax Case
Division.
Decision will be entered
for respondent.