Doby v. Comm'r

T.C. Summary Opinion 2006-90

UNITED STATES TAX COURT

JUANITA DOBY, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 17756-03S. Filed May 25, 2006.

Juanita Doby, pro se.

Noelle C. White, 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 all 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 of $2,739 for the taxable year 2000.

After concessions,1 the issues for decision are: (1)

Whether petitioner is liable for tax on payments in the amount of

$3,146.04 received from The Equitable Benefits Payment Services

pursuant to her deceased husband’s PEPCO pension plan; and (2)

whether petitioner is liable for tax on individual retirement

account (IRA) distributions received during taxable year 2000

totaling $11,400. The amount of petitioner’s Social Security

benefits received during 2000 that must be included in her gross

income is a computational matter and will be resolved by the

parties after taking into account the concessions and our

decision on the other issues in this case.

Background

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

1
At trial and in the stipulation of facts, petitioner
conceded: (1) She received $12 of interest income from
Educational Systems Federal Credit Union during the 2000 tax
year; (2) she received $10 interest income from Household Bank
during the 2000 tax year; and (3) she was liable for tax on
discharge of indebtedness income in the amount of $1,137, which
was the result of Worldwide Financial Services’ canceling a debt
owed by petitioner during taxable year 2000. Also at trial,
respondent conceded that petitioner was entitled to claim a child
care credit and a child tax credit.
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Lanham, Maryland, on the date the petition was filed in this

case.

In taxable year 2000, petitioner received $3,146 in survivor

annuity payments from the “General Retirement Plan for Employees

of Potomac Electric Power Company”. The financial institution

distributing the annuity payments, The Equitable Benefits Payment

Services, issued a Form 1099-R, Distributions From Pensions,

Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance

Contracts, Etc., to petitioner with respect to the annuity

payments. The Form 1099-R reported $3,146 in fully taxable

benefits paid to petitioner during the 2000 tax year. In

addition, the Form 1099-R reported no employee contributions.

Petitioner’s spouse did not make any contributions to the plan.

Furthermore, the “General Retirement Plan for Employees of

Potomac Electric Power Company” states that employee

contributions to the plan are not allowed.

Also during taxable year 2000, petitioner received IRA

distributions from Educational Systems Employees Credit Union

totaling $11,400. Educational Systems Employees Credit Union

issued to petitioner a Form 1099-R with respect to the IRA

distributions. The Form 1099-R reported $11,400 in fully taxable

distributions dispensed to petitioner during the 2000 tax year.

Petitioner filed a Form 1040, U.S. Individual Income Tax

Return, for the 2000 taxable year. In the 2000 return,
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petitioner filed as a “qualifying widow with dependent child”.

Petitioner’s spouse died in 1999. On her 2000 Form 1040,

petitioner did not report the $3,146.04 payments received from

The Equitable Benefits Payment Services pursuant to her deceased

husband’s PEPCO pension plan, nor did she report the IRA

distributions received from Educational Systems Employees Credit

Union totaling $11,400.

Discussion

In general, the Commissioner’s determination set forth in a

notice of deficiency is presumed correct. Welch v. Helvering,

290 U.S. 111, 115 (1933). In pertinent part, Rule 142(a)(1)

provides the general rule that “The burden of proof shall be upon

the petitioner”. In certain circumstances, however, if the

taxpayer introduces credible evidence with respect to any factual

issue relevant to ascertaining the proper tax liability, section

7491 places the burden of proof on the Commissioner. Sec.

7491(a)(1); Rule 142(a)(2). Credible evidence is “‘the quality

of evidence which, after critical analysis, * * * [a] court would

find sufficient * * * to base a decision on the issue if no

contrary evidence were submitted’”.2 Baker v. Commissioner, 122

T.C. 143, 168 (2004) (quoting Higbee v. Commissioner, 116 T.C.

2
We interpret the quoted language as requiring the
taxpayer’s evidence pertaining to any factual issue to be
evidence the Court would find sufficient upon which to base a
decision on the issue in favor of the taxpayer. See Bernardo v.
Commissioner, T.C. Memo. 2004-199.
 - 5 -

438, 442 (2001)). Section 7491(a)(1) applies only if the

taxpayer complies with substantiation requirements, maintains all

required records, and cooperates with reasonable requests by the

Commissioner for witnesses, information, documents, meetings, and

interviews. Sec. 7491(a)(2). Although neither party alleges the

applicability of section 7491(a), we conclude that the burden of

proof has not shifted to respondent with respect to any of the

issues in the present case.

1. Pension Plan Payments

Section 61(a) specifies that, “Except as otherwise

provided”, gross income includes “all income from whatever source

derived”. The construction of section 61 is broad, and any

“‘exclusions to income must be narrowly construed.’”

Commissioner v. Schleier, 515 U.S. 323, 328 (1995)(quoting United

States v. Burke, 504 U.S. 229, 248 (1992)(Souter, J., concurring

in judgment)). Taxpayers seeking an exclusion from gross income

must demonstrate that they are eligible for the exclusion and

bring themselves “within the clear scope of the exclusion”.

Dobra v. Commissioner, 111 T.C. 339, 349 n.16 (1998).

Section 61(a)(9) and (11) provides that annuities and

pensions are among the forms of income within the purview of

section 61(a). Section 72 pertaining to annuities and pensions

(section 61(a)(9) and (11)) sets forth specific rules applicable

to taxation of, inter alia, annuities and distributions from
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qualified employer retirement plans. See also sec. 402(a).

Section 72(a) reiterates the general rule of inclusion in gross

income, unless otherwise provided. Section 72(b),3 however,

provides that portions of annuity payments may be excludable from

income. The excludable portion of a payment generally is that

portion which bears the same ratio to such payment as the

“investment in the contract” bears to the expected return under

the contract, determined at the time the annuity payments begin.

Sec. 72(b)(1). While the term “investment in the contract” is

defined generally as “the aggregate amount of premiums or other

consideration paid for the contract”, sec. 72(c)(1)(A),

contributions made by an employer on behalf of an employee-

taxpayer which were not includable in the taxpayer’s gross income

generally are not part of the taxpayer’s investment in the

contract, sec. 72(f).

In 2000, petitioner received $3,146 in survivor annuity

payments from the “General Retirement Plan for Employees of

3
SEC. 72. ANNUITIES; CERTAIN PROCEEDS OF ENDOWMENT AND LIFE
INSURANCE CONTRACTS.

* * * * * * *

(b) Exclusion Ratio.--
(1) In general.--Gross income does not include
that part of any amount received as an annuity under an
annuity, endowment, or life insurance contract which
bears the same ratio to such amount as the investment
in the contract (as of the annuity starting date) bears
to the expected return under the contract (as of such
date).
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Potomac Electric Power Company”. The Form 1099-R issued to

petitioner by Equitable Benefits Payment Services with respect to

the annuity payments shows that the $3,146 benefits paid to

petitioner are fully taxable, and there were no employee

contributions. Furthermore, the “General Retirement Plan for

Employees of Potomac Electric Power Company” provides that

employee contributions to the plan are not allowed, and

petitioner testified that her spouse did not make any

contributions to the plan.

Petitioner did not report the annuity payments as income on

her 2000 Federal income tax return. Instead, petitioner argues

that the annuity payments are under the purview of section 101(b)

and therefore are not taxable.

Prior to repeal, section 101(b) read as follows:

(b) EMPLOYEES’ DEATH BENEFITS.--

(1)General Rule.--Gross income does not include amounts
received (whether in a single sum or otherwise) by the
beneficiaries or the estate of an employee, if such amounts
are paid by or on behalf of an employer and are paid by
reason of the death of the employee. * * *

However, this subsection does not apply to the case at hand

because it was repealed by the Small Business Job Protection Act

of 1996, Pub. L. 104-188, sec. 1402(a), 110 Stat. 1789. The

death benefit exclusion applies only to beneficiaries of

decedents that died prior to August 21, 1996. See Small Business

Job Protection Act of 1996, Pub. L. 104-188, sec. 1403(b), 110
 - 8 -

Stat. 1791. Petitioner’s spouse died in 1999. Therefore, the

present annuity payments are not subject to the death benefit

exclusion provided by section 101(b).

Furthermore, petitioner has not provided any evidence that

she or her spouse had an “investment in the contract”. Also,

petitioner has not demonstrated that the annuity payments she

received are within any exclusion. Therefore, the present

annuity payments are taxable, and respondent’s determination on

this issue is sustained.

2. IRA Distributions

As previously stated, 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

and IRAs).

As a general rule, amounts paid or distributed out of

individual retirement plans, including IRAs, are included in

gross income when received by the payee or distributee under

provisions of section 72. Sec. 408(d)(1). The regulations

provide in relevant part as follows:

Except as otherwise provided in this section, any amount
actually paid or distributed or deemed paid or distributed
from an individual retirement account or individual
retirement annuity shall be included in the gross income of
the payee or distributee for the taxable year in which the
payment or distribution is received.
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Sec. 1.408-4(a)(1), Income Tax Regs.

In 2000, petitioner received IRA distributions from

Educational Systems Employees Credit Union totaling $11,400. The

Form 1099-R issued to petitioner by Educational Systems Employees

Credit Union with respect to the IRA distributions shows that the

distributions totaling $11,400 are fully taxable. Petitioner

does not dispute that she received the IRA distributions.

Petitioner did not report the IRA distributions as income on

her 2000 Federal income tax return. Instead, petitioner claims

that the distributions received during 2000 are from amounts

rolled over during taxable year 1999 from her deceased spouse’s

sec. 401(k) plan into her IRA with Educational Systems Employees

Credit Union. Further, petitioner claims that these amounts can

be traced to after-tax contributions. Therefore, petitioner

argues, a portion of the amount distributed from her IRA in 2000

may be exempt from tax pursuant to section 643(a) of the Economic

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

115 Stat. 38.4

4
The Economic Growth and Tax Relief Reconciliation Act of
2001 Pub. L. 107-16, sec. 643(a), 115 Stat. 122, provides:

(a) Rollovers From Exempt Trusts.--Paragraph (2) of
section 402(c) (relating to maximum amount which may be
rolled over) is amended by adding at the end the following:
“The preceding sentence shall not apply to such distribution
to the extent--
(continued...)
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Petitioner has not provided any documentary evidence to

substantiate her claim as to the origins of the IRA

distributions. During petitioner’s testimony she was unable to

identify or recall any specific transfers from her deceased

spouse’s section 401(k) plan into her IRA. Further, the

statutory provisions permitting the rollover of after-tax

contributions from a section 401(k) plan to an IRA was not

allowed until the Economic Growth and Tax Relief Reconciliation

Act of 2001, Pub. L. 107-16, 115 Stat. 123, was made effective on

January 1, 2002. The rollover in this case would have occurred

during 1999. Therefore, under the law in effect at that time,

petitioner could not have rolled over after-tax contributions

from a section 401(k) plan into her IRA. Thus, the total amount

of the IRA distributions, $11,400, made during taxable year 2000

by Educational Systems Employees Credit Union to petitioner is

required to be reported in petitioner’s 2000 gross income.

Respondent’s determination on this issue is sustained.

4
(...continued)
“(A) such portion is transferred in a direct
trustee-to-trustee transfer to a qualified trust which
is part of a plan which is a defined contribution plan
and which agrees to separately account for amounts so
transferred, including separately accounting for the
portion of such distribution which is includible in
gross income and the portion of such distribution which
is not so includible, or

“(B) such portion is transferred to an eligible
retirement plan described in clause (i) or (ii) of
paragraph (8)(B).”.
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Reviewed and adopted as the report of the Small Tax Case

Division.

Decision will be entered

under Rule 155.