T.C. Memo. 2008-93
UNITED STATES TAX COURT
BLAKE SIME ATKIN AND SUSAN M. ATKIN, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 5266-05. Filed April 10, 2008.
Blake Sime Atkin and Susan M. Atkin, pro sese.
Richard W. Kennedy, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
VASQUEZ, Judge: Respondent determined a $10,096 deficiency
in petitioners’ 2002 Federal income tax and a $2,019 section
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6662(a) penalty.1 After a concession,2 the issues remaining for
decision are: (1) Whether a $25,000 Simplified Employee Pension
Individual Retirement Account (SEP-IRA) distribution received by
Blake S. Atkin (Mr. Atkin) in 2002 is includable in income in
2002 (the distribution), (2) whether the 10 percent additional
tax pursuant to section 72(t) applies to the distribution, and
(3) whether petitioners are liable for an accuracy-related
penalty pursuant to section 6662(a) for 2002.
FINDINGS OF FACT
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. At the time they filed
the petition, petitioners resided in Utah.
In December 2002 Mr. Atkin was 45 years old when he
requested and received the distribution of $25,000 from his SEP-
IRA. Mr. Atkin, the sole shareholder of an incorporated law
firm, deposited the distribution into his law firm’s operating
account. On January 17, 2003, within 60 days of depositing the
distribution, Mr. Atkin instructed his law firm’s bookkeeper to
write a $25,000 check and mail it to Scott Barben (Mr. Barben), a
1
Unless otherwise indicated, all section references are to
the Internal Revenue Code, and all Rule references are to the Tax
Court Rules of Practice and Procedure.
2
Petitioners concede that $270 in wages Mr. Atkin received
from the State of Utah in 2002 are taxable.
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broker who Mr. Atkin instructed to roll the funds over into a new
individual retirement account (IRA). Mr. Barben never received
the funds. Consequently, Mr. Barben never opened a new IRA for
Mr. Atkin.
Petitioners did not report the distribution on their timely
filed 2002 Form 1040, U.S. Individual Income Tax Return, or their
2002 Form 1040X, Amended U.S. Individual Income Tax Return. In
2006, Mr. Atkin segregated $25,000 from his law firm’s operating
account into a separate non-interest-bearing account. As of the
date of trial, petitioners had not deposited the distribution
into an IRA. Petitioners did not spend any of the distribution
on any expense that qualifies as an exception pursuant to section
72(t)(2).
OPINION
Petitioners have neither claimed nor shown that they
satisfied the requirements of section 7491(a) to shift the burden
of proof to respondent with regard to any factual issue.
Accordingly, petitioners bear the burden of proof. See Rule
142(a).
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I. IRA Distribution Includable In Gross Income
A. 60-Day Requirement
Petitioners stipulated that they received a SEP-IRA
distribution of $25,000 in 2002.3 Generally, a distribution from
an IRA is includable in the distributee’s income in the year of
distribution as provided in section 72. Sec. 408(d)(1); Schoof
v. Commissioner, 110 T.C. 1, 7 (1998). Section 408(d)(3)
provides an exception to this rule for rollover contributions.
To qualify as a rollover contribution, an IRA distribution must
be rolled over pursuant to section 408(d)(3) within 60 days of
receipt (the 60-day requirement). Sec. 408(d)(3); Smithsi v.
Commissioner, T.C. Memo. 1981-652; Handy v. Commissioner, T.C.
Memo. 1981-411.
Petitioners argue that they were unaware that they did not
roll over the SEP-IRA distribution within the 60-day requirement
until they received the deficiency notice from respondent on
January 24, 2005. Upon becoming aware of the failed rollover,
Mr. Atkin requested that his law firm’s current bookkeeper, Ms.
Heidi Atkin4 (Ms. Atkin) inquire into the status of the $25,000
check that Mr. Atkin’s prior bookkeeper had written. In an
affidavit Ms. Atkin stated that a $25,000 check was written but
3
For purposes of this case, the distinctions between a
SEP-IRA and an IRA are not relevant.
4
Ms. Atkin is petitioners’ daughter-in-law.
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never cashed. In an affidavit Mr. Barben stated that he never
received any funds from Mr. Atkin.
Petitioners rely on Wood v. Commissioner, 93 T.C. 114
(1989), in arguing that the distribution is excludable from their
gross income even though they failed to meet the 60-day
requirement. In Wood, the Court held that the taxpayers’
rollover of stock into 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
requirement had expired. Id. In holding that the taxpayers had
effected a rollover of the distribution within the 60-day
requirement, the Court noted that within 60 days of the
distribution, the taxpayers had opened the IRA, delivered the
stock to the trustee, instructed the trustee to roll over the
stock into the IRA, and been assured by the trustee that the
rollover would be consummated as instructed. Id. In Wood the
failed rollover occurred as a result of a clerical error on the
part of the broker. The facts in this case are distinguishable
from those in Wood. Mr. Atkin waited over 2 years before
inquiring into the status of the distribution. Mr. Atkin claims
that the check was lost in the mail and thus the failed rollover
was not his fault. Whether the check was lost in the mail is not
dispositive. Mr. Atkin should have been alert to the fact that
he never received a statement regarding the IRA account he
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thought he had opened, never discussed investment strategies with
Mr. Barben, and never noticed that the $25,000 had not been
withdrawn from his law firm’s operating account.
B. Amendment Allowing Waiver of 60-Day Requirement
After petitioners discovered the $25,000 check was not
cashed, they asked Internal Revenue Service (IRS) representatives
what options were available to correct the failed rollover.
According to petitioners, the IRS representatives told them that
nothing could be done to correct the failed rollover and their
only recourse would be to petition the Court regarding the
deficiency. During petitioners’ research for trial they
discovered that section 408(d)(3)(I)5 granted the Secretary the
authority to waive the 60-day requirement. However, as of the
date of trial, petitioners had not applied to the Secretary for a
waiver of the 60-day requirement.
C. Advice of IRS Representatives
The fact that petitioners may have received inaccurate
advice from IRS representatives after the 60-day rollover period
does not alter the result herein. See Smithsi v. Commissioner,
supra. It is the statute which governs the determination of
5
Sec. 408(d)(3)(I) provides: “[t]he Secretary may waive
the 60-day requirement [on rollovers and partial rollovers] 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.”
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petitioners’ substantive tax liability, and the statements of IRS
representatives, while understandably nettlesome to petitioners,
do not alter this rule. See Demirjian v. Commissioner, 54 T.C.
1691, 1701 (1970), affd. 457 F.2d 1 (3d Cir. 1972).
Accordingly, we conclude the distribution petitioners
received in 2002 is taxable as ordinary income.
II. Section 72(t)
Section 72(t) provides for a 10-percent additional tax on
early distributions from a qualified retirement plan.
Petitioners stipulated that they did not spend the distribution
on any expense that qualifies for an exception under section
72(t) and that Mr. Atkin was only 45 at the time of the
distribution. Accordingly, the distribution to petitioners is
subject to the 10-percent additional tax pursuant to section
72(t)(1).
III. Accuracy-Related Penalty
Respondent determined petitioners are liable for an
accuracy-related penalty pursuant to section 6662(a) of $2,019
for 2002. Respondent determined that petitioners’ entire
underpayment of tax for 2002 was attributable to negligence or
disregard of rules or regulations, and/or a substantial
understatement of income tax.
Pursuant to section 6662(a) and (b)(1) and (2), taxpayers
may be liable for a penalty of 20 percent of the portion of an
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underpayment of tax (1) due to negligence or disregard of rules
or regulations, or (2) attributable to a substantial
understatement of income tax. The term “negligence” in section
6662(b)(1) includes any failure to make a reasonable attempt to
comply with the Internal Revenue Code and any failure to keep
adequate books and records or to substantiate items properly.
Sec. 6662(c); sec. 1.6662-3(b)(1), Income Tax Regs. Negligence
has also been defined as the failure to exercise due care or the
failure to do what a reasonable person would do under the
circumstances. See Allen v. Commissioner, 92 T.C. 1, 12 (1989),
affd. 925 F.2d 348, 353 (9th Cir. 1991); Neely v. Commissioner,
85 T.C. 934, 947 (1985). The term “disregard” includes any
careless, reckless, or intentional disregard. Sec. 6662(c). The
term “understatement” means the excess of the amount of tax
required to be shown on a return over the amount of tax imposed
which is shown on the return, reduced by any rebate (within the
meaning of section 6211(b)(2)). Sec. 6662(d)(2)(A). Generally,
an understatement is a “substantial understatement” when the
understatement exceeds the greater of $5,000 or 10 percent of the
amount of tax required to be shown on the return. Sec.
6662(d)(1)(A).
The Commissioner has the burden of production with respect
to the accuracy-related penalty. Sec. 7491(c). To meet this
burden, the Commissioner must produce sufficient evidence
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indicating that it is appropriate to impose the penalty. See
Higbee v. Commissioner, 116 T.C. 438, 446 (2001). Once the
Commissioner meets this burden of production, the taxpayers must
come forward with persuasive evidence that the Commissioner’s
determination is incorrect. Rule 142(a); see Higbee v.
Commissioner, supra at 447. The taxpayers may meet this burden
by proving that they acted with reasonable cause and in good
faith with respect to the underpayment. See sec. 6664(c)(1); see
also Higbee v. Commissioner, supra at 447; sec. 1.6664-4(b)(1),
Income Tax Regs.
Respondent satisfied the burden of production. Petitioners’
2002 income tax return contains an understatement of tax greater
than $5,000 and greater than 10 percent of the amount of tax
required to be shown on the return. See sec. 6662(d)(1)(A).
Petitioners bear the burden of proving that with respect to the
resulting underpayment they acted with reasonable cause and in
good faith. See sec. 6664(c)(1); Higbee v. Commissioner, supra
at 447.
Petitioners argue that the accuracy-related penalty should
not be imposed because they were unaware that the check was not
cashed and that the IRA was not opened. We disagree and find
that petitioners failed to exercise due care or to act as a
reasonable person would under the circumstances. Petitioners
were allegedly unaware that the $25,000 check was not cashed
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until respondent brought it to their attention after years had
passed. Petitioners never received monthly statements from the
IRA and never followed up with Mr. Barben to make sure that he
had opened the IRA. Further, Mr. Atkin should have been aware
that his law firm’s operating account had $25,000 more than he
thought it should have. After Mr. Atkin told his bookkeeper to
write a check to open an IRA, he took no steps to follow up in
over 2 years. Accordingly, we sustain respondent’s determination
as to the accuracy-related penalty pursuant to section 6662(a)
for 2002.
In reaching all of our holdings herein, we have considered
all arguments made by the parties, and to the extent not
mentioned above, we conclude they are irrelevant or without
merit.
To reflect the foregoing,
Decision will be entered
for respondent.