T.C. Summary Opinion 2008-1
UNITED STATES TAX COURT
SHAWN TIMOTHY HYNES, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 3897-06S. Filed January 2, 2008.
Shawn Timothy Hynes, pro se.
Karen A. Rennie and Paul Darcy, 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. Pursuant to section
7463(b), the decision to be entered is not reviewable by any
other court, and this opinion shall not be treated as precedent
for any other case. Unless otherwise indicated, subsequent
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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.
Respondent determined a $6,564 deficiency in petitioner’s
2003 Federal income tax and an accuracy-related penalty of $662
pursuant to section 6662(a).
After concessions,1 the issues for decision are: (1) Whether
petitioner is liable for the 10-percent additional tax under
section 72(t) for an early withdrawal from a qualified pension
plan, and (2) whether petitioner is liable for an accuracy-
related penalty pursuant to section 6662(a).
Background
The stipulation of facts and the attached exhibits are
incorporated herein by reference. At the time the petition was
filed, petitioner resided in New York City.
During taxable year 2003, petitioner was a third-year law
student at the University of Pennsylvania Law School (Penn) in
Philadelphia, Pennsylvania. Petitioner transferred to Penn after
completing his first year of law school at the University of
1
Petitioner concedes that he failed to report $9 of interest
received from Wachovia Bank and that he received a $16,263
taxable distribution from a qualified pension plan, which was not
reported on his income tax return.
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Oregon School of Law in Eugene, Oregon. Petitioner holds an
undergraduate degree from Duke University.
Before attending law school, petitioner worked as a paralegal
with the law firm of Cravath, Swaine & Moore, where he
participated in the firm’s qualified pension plan (QRP).
From December 1, 2002, through July 30, 2003, petitioner
resided in Philadelphia, Pennsylvania. Petitioner’s monthly rent
during this time was $900. Petitioner’s expenses during law
school were paid from his savings, wages, and public and private
loans. The record contains two student loan statements for
petitioner; one statement pertains to his enrollment at the
University of Oregon School of Law, while another statement
relates to his enrollment at Penn.
On April 22, 2003, as he was preparing to graduate from Penn
and beginning preparation for the bar exam, petitioner deposited
a $13,011 check issued to him from Security Trust Bank, payor, in
his checking account. The check represented a net distribution
of $16,263 to petitioner from his Cravath, Swaine & Moore QRP
minus income tax withheld of $3,252. Petitioner did not include
this distribution as income on his 2003 Federal income tax
return. On the date of this distribution petitioner was not 59-
1/2 years old.
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After graduating from law school, petitioner moved to New
York City so that he would be able to take a bar preparation
course for the California bar exam. In September 2003,
petitioner moved from New York City to Palo Alto, California, to
work as a securities associate with the law firm of Simpson
Thacher & Bartlett (STB). Before starting at STB, petitioner
received an advance from STB to cover the costs associated with
his move from New York City to Palo Alto.
Petitioner timely filed his 2003 Federal income tax return.
Petitioner reported wages, salaries, and tips on his return. His
wages of $51,304 were earned from his employment at STB from
September through December of 2003.
Respondent received the following third party information for
petitioner that was not otherwise reflected on his 2003 income
tax return: (1) Interest income on Wachovia Bank accounts of $7
and $9, (2) a pension and annuity payment of $16,263 (with income
tax withheld of $3,252), and (3) student loan interest payments
of $1,509 paid to Student Financial Assistance and $1,516 paid to
Duke University.
Respondent issued to petitioner a notice of deficiency that
explained the changes made to his 2003 Federal income tax based
on the third-party information. The notice showed that
petitioner had understated his income tax on his 2003 return by
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$6,564, and explained that the deficiency respondent determined
was the result of: (1) Changes to petitioner’s adjusted gross
income, and (2) an additional tax applied as a result of
petitioner’s distribution from his qualified retirement plan.
In his “Petition for Redetermination of a Deficiency”,
petitioner disputed respondent’s determination because: (1) He
was not responsible for the deficiency, (2) he wanted the Court
to give him an opportunity to recalculate and resubmit his 2003
return, (3) the Internal Revenue Service (IRS) had made an error
in calculating the deficiency at issue, and (4) he should not be
responsible for the IRS’s mistake. The petition is devoid of any
factual explanation as to why petitioner requested and received
the distribution at issue in 2003.
On June 29, 2005, petitioner submitted a Form 9465,
Installment Agreement Request, before an assessment was made on
his account. On July 5, 2005, petitioner made a payment of $895.
Between November 28, 2005, and February 23, 2006, he made three
additional payments that totaled $450.
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
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the taxpayer. 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
shifts the burden of proof to the Commissioner. Sec. 7491(a)(1);
Rule 142(a)(2). Petitioner did not argue that section 7491 is
applicable, and he did not establish that the burden of proof
should shift to respondent. Petitioner, therefore, bears the
burden of proving that respondent’s determination in the notice
of deficiency is erroneous. See Rule 142(a); Welch v. Helvering,
supra at 115. With respect to any penalty or addition to tax,
however, section 7491(c) places the burden of production on the
Commissioner.
With respect to the first issue involved in this case,
section 72(t) imposes an additional tax on distributions from a
QRP equal to 10 percent of the portion of such amount that is
includable in gross income unless the distribution comes within
one of several exceptions. For purposes of the 10-percent
additional tax, a QRP includes both a section 401(k) pension plan
and an individual retirement account. See secs. 72(t)(1),
401(a), (k)(1), 4974(c)(1), (4), (5).
Section 72(t)(2) enumerates the exceptions to the 10-percent
additional tax for early distributions from QRPs. There is no
economic hardship exception to the 10-percent additional tax
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under section 72(t). The 10-percent additional tax imposed on
early distributions from a QRP does not apply, however, to
distributions from an individual retirement plan used for higher
education expenses to the extent such distributions do not exceed
the amount of qualified education expenses of the taxpayer for
the taxable year. Sec. 72(t)(2)(E).
The parties agree that the distribution made to petitioner
in 2003 was from a QRP within the meaning of section 401(k).
Petitioner, however, argues that he should not be held liable for
the 10-percent additional tax on this distribution on the grounds
that his request was based on economic hardship, and an exception
for such a request exists under section 401(k)(2)(B)(i).
Petitioner testified that the costs of his law school education,
coupled with the costs associated with his studying for the bar
exam, left him with no viable alternative other than to take a
premature distribution from his QRP. Petitioner testified that
he used the disbursement to pay school loans, pay credit card
bills, and provide for his day-to-day living expenses during the
summer of 2003.
Respondent argues that while section 401(k)(2)(B)(i) does
provide for hardship distributions from qualified pension plans,
that section does not exempt a taxpayer from the 10-percent
additional tax that may apply to such a distribution. At trial,
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petitioner admitted that he did not research the tax
ramifications that might result from his request for a hardship
distribution beyond looking at section 401(k)(2)(B)(i).
Petitioner also admitted that he could have overlooked and/or
misunderstood the 10-percent additional tax exceptions enumerated
in section 72(t)(2).
Upon review of section 72(t)(2), we cannot find any
exception that would exempt the distribution made to petitioner
in taxable year 2003. Moreover, petitioner admits that his
argument that the 10-percent additional tax should not apply is
based on a provision pertaining to the request for disbursement
and not, as we are concerned with here, the taxation of such a
disbursement. Distributions from an individual retirement plan
used for higher education expenses of the taxpayer are exempt
from the 10-percent additional tax to the extent such
distributions do not exceed the qualified higher education
expenses of the taxpayer for the taxable year. The qualified
higher education expenses exception applies, however, only in the
case of a distribution from an individual retirement plan (IRA).
Petitioner’s QRP is a section 401(k) plan, not an IRA.
Therefore, the qualified higher education expenses exception is
inapplicable. Because the distribution made to petitioner from
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his QRP in 2003 does not fall within any of the 10-percent
additional tax exceptions enumerated in section 72(t)(2), we
sustain respondent’s determination on this issue.
With respect to the accuracy-related penalty, section
6662(a) imposes a 20-percent penalty with respect “to any portion
of an underpayment of tax required to be shown on a return”.
This penalty applies to underpayments attributable to any
substantial understatement of income tax. Sec. 6662(a), (b)(2).
An “understatement” of income tax is defined as the excess of the
tax required to be shown on the return over the tax actually
shown on the return. Sec. 6662(d)(2)(A). An understatement is
“substantial” if it exceeds the greater of 10 percent of the tax
required to be shown on the return, or $5,000. Sec.
6662(d)(1)(A).
Section 6664 provides a defense to the accuracy-related
penalty if a taxpayer establishes that there was reasonable cause
for any portion of the underpayment and that he acted in good
faith with respect to that portion. Sec. 6664(c)(1); sec.
1.6664-4(b), Income Tax Regs. Although not defined in the Code,
“reasonable cause” is viewed in the regulations as the exercise
of ordinary business care and prudence. See sec. 301.6651-
1(c)(1), Proced. & Admin. Regs. Whether a taxpayer acted with
reasonable cause and in good faith is made on a case-by-case
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basis, taking into account all the pertinent facts and
circumstances. Sec. 1.6664-4(b)(1), Income Tax Regs. The
taxpayer’s education, experience, and knowledge are considered in
determining reasonable cause and good faith. And, generally, the
most important factor is the extent of the taxpayer’s effort to
assess his proper tax liability. Sec. 1.6664-4(b)(1), Income Tax
Regs.
Respondent determined an accuracy-related penalty to be
applicable in this case because petitioner understated his income
tax by $6,564 on his 2003 income tax return. Because
petitioner’s understatement of tax was greater than 10 percent of
the tax required to be shown on the return, or $5,000, the
understatement was deemed a substantial understatement of tax
pursuant to section 6662(d)(1)(A)(i) and (ii). Respondent
contends that petitioner’s failure to report income equaling
approximately 35 percent of his adjusted gross income for 2003
shows a lack of reasonable cause and good faith.
Petitioner argues that he should not be held liable for the
penalty because: (1) His failure to include the amount received
from the distribution was due to his move from New York City to
Palo Alto, California, in 2003, which resulted in his failure to
receive a Form 1099-MISC for the distribution, and (2) his
failure to remember to report the distribution was not
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deliberate. As further evidence of his asserted good faith,
petitioner testified that he submitted an installment payment
request before an assessment was made on his account and that he
made four payments totaling $1,345.
Receipt of a Form 1099-MISC is not required to remind a
taxpayer of income that must be reported on his or her Federal
income tax return. Brunsman v. Commissioner, T.C. Memo. 2003-
291. The gross amount of the distribution, $16,263, represented
approximately 24 percent of petitioner’s total taxable income for
2003. Petitioner’s argument that he did not remember this
distribution at the time he filed his 2003 return because of the
extraordinary demands of his job as an attorney is without merit.
Finally, as respondent correctly argued at trial,
petitioner’s contention that his attempt to pay off the tax
through an installment agreement shows his good faith is
irrelevant under these facts and circumstances. What controls
here is petitioner’s good faith at the time the return was filed,
rather than the action he took after he received the notice of
deficiency. Sec. 6664(c)(1). Accordingly, we sustain
respondent’s determination with respect to the accuracy-related
penalty under section 6662(a).
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To reflect the foregoing,
Decision will be entered
for respondent.