T.C. Summary Opinion 2009-86
UNITED STATES TAX COURT
MICHAEL K. BILLUPS, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 17470-07S. Filed June 1, 2009.
Michael K. Billups, pro se.
Abigail F. Dunnigan and Michael Shelton (student), for
respondent.
DEAN, Special Trial Judge: This case was heard pursuant to
the provisions of section 7463 of the Internal Revenue Code in
effect when 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 section references
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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 deficiency in petitioner’s 2005
Federal income tax of $12,059 and an accuracy-related penalty
under section 6662(a) of $2,412.
The issues for decision are whether: (1) The loan proceeds
received from petitioner’s qualified employer plan are taxable
distributions under section 72(p); (2) petitioner is subject to
the 10-percent additional tax under section 72(t); and (3)
petitioner is liable for the accuracy-related penalty under
section 6662(a)1.
Background
Some of the facts have been stipulated and are so found. The
stipulation of facts and the exhibits received in evidence are
incorporated herein by reference. Petitioner resided in New York
when the petition was filed.
During 2005 petitioner was employed with the New York City
Transit Authority (NYCTA). He had been an NYCTA employee since
1988.
Petitioner participated in the New York City Employees’
Retirement System (NYCERS), a qualified employer plan. On April
1
Adjustments to petitioner’s itemized deductions and child
tax credit are computational and will be resolved consistent with
the Court’s decision. See secs. 24(b), 67(a).
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29, 2005, petitioner replaced a prior loan with a new loan and
received cash proceeds of $12,630 from NYCERS. The replacement
loan was to be amortized over 5 years and repaid in biweekly
installments of $363.34. When petitioner received the $12,630,
the replaced loan had an outstanding balance of $27,012.73. His
receipt of $12,630 increased his outstanding loan balance to
$39,748.06, the amount of the replacement loan.
At the time of the April 29, 2005, loan, petitioner’s annual
annuity account balance was $52,863.38. On the loan application
form for the replacement loan, petitioner selected the
“refinance” option.2
NYCERS advised petitioner at the time he signed the loan
application form that all or part of the outstanding loan amount
might be taxable. The application form notifies the borrower
that more detailed tax information is available from NYCERS.
Petitioner had previously borrowed from NYCERS in 1993, 1995
through 2001, and 2003 through 2005, as follows:
2
In 2005 petitioner had not reached the age of 59-1/2.
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Loan Prior Principal Repayment
Year Amount Amount Term
1993 $5,110 -0- 10 years
1995 6,140 $3,147.01 10 years
1996 5,000 7,694.26 3.77 years
1997 7,370 9,383.36 3.69 years
1998 7,180 12,754.46 5 years
1999 7,240 16,359.31 5 years
2000 7,870 19,482,80 5 years
2001 7,520 22,439.39 5 years
2003 9,000 22,521.97 5 years
2004 9,000 26,140.11 4 years
2005 12,630 27,012.73 5 years
Petitioner’s loans were not in default as of 2005.
Petitioner and his wife purchased a home on June 25, 2004.
On October 11, 2005, petitioner refinanced the mortgage on his
home. Petitioner did not use the loan proceeds from his
retirement plan towards the purchase of his home or the
refinancing of his mortgage.
Petitioner received a Form 1099-R, Distributions From
Pensions, Annuities, Retirement or Profit Sharing Plans, IRAs,
Insurance Contracts, etc., for 2005, reporting a gross
distribution of $29,467.00. On the bottom of petitioner’s Form
1099-R was the word “LOAN” and a distribution code “L1”.
Petitioner’s 2005 Form 1040, U.S. Individual Income Tax
Return, was prepared by Allen S. Lokensky Associates. On the
advice of his accountant, petitioner reported a pension and
annuities distribution of $29,467 on his 2005 Form 1040 but
designated it as a “rollover”. No computation of the 10-percent
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additional tax on early distributions was reported on
petitioner’s return.
Discussion
I. Burden of Proof
The Commissioner’s determinations in a notice of deficiency
are presumed correct, and the taxpayer bears the burden to prove
that the determinations are in error. See Rule 142(a); Welch v.
Helvering, 290 U.S. 111, 115 (1933). But the burden of proof on
factual issues that affect the taxpayer’s tax liability may be
shifted to the Commissioner where the “taxpayer introduces
credible evidence with respect to * * * such issue.” See sec.
7491(a)(1). Petitioner has not alleged that section 7491(a)
applies. However, the Court need not decide whether the burden
shifted to respondent since there is no dispute as to any factual
issue. Accordingly, the case is decided by the application of
law to the undisputed facts, and section 7491(a) is inapplicable.
II. NYCER Loans
Generally, loans from qualified employer plans are treated
as distributions from the plan. Sec. 72(p)(1)(A). Section
402(a) provides that distributions from a qualified employer plan
are taxable to the distributee in the distributee’s taxable year
in which the distribution occurs, pursuant to section 72. Prince
v. Commissioner, T.C. Memo. 1997-324. Section 72(p)(2)(A),
however, provides an exception: a loan will not give rise to a
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deemed distribution to the extent that the loan (when added to
the outstanding balance of all other loans from the plan) does
not exceed the lesser of: (1) $50,000 (reduced by the excess, if
any, of the highest outstanding balance of loans from the plan
during the 1-year period ending on the day before the date on
which the loan was made, over the outstanding balance of loans
from the plan on the date on which the loan was made); or (2) the
greater of one-half of the present value of the participant’s
“nonforfeitable accrued benefit” under the plan or $10,000. But
the exception provided in section 72(p)(2)(A) does not apply
unless: (1) The loan, by its terms, is required to be repaid
within 5 years, sec. 72(p)(2)(B); and (2) “substantially level
amortization of such loan (with payments not less frequently than
quarterly) is required over the term of the loan”, sec.
72(p)(2)(C); see Prince v. Commissioner, supra; see also sec.
72(p)(2)(B)(ii) (providing an exception to the 5-year repayment
requirement for loan proceeds used to “acquire any dwelling unit
* * * within a reasonable time * * * as the principal residence
of the participant”).3
For petitioner to avoid having his loan proceeds treated as
a taxable distribution, petitioner’s $39,642.73 loan (when added
3
At trial petitioner admitted that he did not use the loan
proceeds from his retirement plan to purchase his home or
refinance the mortgage on his home. Therefore, the exception in
sec. 72(p)(2)(B)(ii) does not apply.
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to the outstanding balance of all other loans from the plan,
$27,012.23) could not exceed the lesser of $50,000 (reduced by
the excess, if any, of the highest outstanding balance of loans
from the plan during the 1-year period ending on the day before
the date on which the loan was made, over the outstanding balance
of loans from the plan on the date on which the loan was made) or
the greater of $26,431.69 or $10,000. Sec. 72(p)(2)(A); see also
sec. 1.72(p)-1, Q&A-20(b), Income Tax Regs.4
The evidence in the record does not permit the Court to
determine the highest outstanding balance of loans during the 1-
year period ending the day before the date that the $39,642.73
loan was made. It is necessary to know that amount to determine
the excess, if any, of the highest outstanding balance of loans
from the plan during the 1-year period ending on the day before
the date on which the loan was made, over the outstanding balance
of loans from the plan on the date on which the loan was made.
Neither petitioner nor respondent provided evidence on the issue.
Therefore, the Court cannot determine the exact amount by which
the $50,000 ceiling is reduced pursuant to section
72(p)(2)(A)(i).
4
Sec. 1.72(p)-1, Q&A-20, Income Tax Regs., applies to
assignments, pledges, and loans made on or after Jan. 1, 2004.
Sec. 1.72(p)-1, Q&A-22(d), Income Tax Regs.
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The Court, however, can determine with reasonable certainty
from the evidence that the lesser of the reduced $50,000 ceiling
limitation and one-half of the present value of petitioner’s
nonforfeitable accrued benefit is the latter. Therefore, NYCERS
used the appropriate amount available to petitioner under section
72(p)(2)(A), the greater of one-half of the present value of
petitioner’s “nonforfeitable accrued benefit” under the plan,
$26,431.69, or $10,000. NYCERS followed the correct procedure;
consequently petitioner is taxable on any amount in excess of
one-half of the present value of petitioner’s nonforfeitable
accrued benefit, $26,431.69.
The evidence shows that the sum of the new loan and the loan
it replaced ($39,642.73 + $27,012.73) is $66,655.46, and it
exceeds his applicable limitation of $26,431.69 by $39,748.06.5
Petitioner failed to satisfy the requirements of the exception
under section 72(p)(2)(A), and that is enough to find that he had
a taxable distribution, notwithstanding that each loan provided
for repayment terms of 5 years or less and substantially level
amortization. See Prince v. Commissioner, supra.
5
The Court notes that NYCERS deducted from the sum of the
loans a $475.71 “Cost Allocation” for a “Net Loan For Tax Calc”
of $66,179.75 and credited petitioner with a limitation amount of
$26,435. The Court also notes that NYCERS credited petitioner
with $10,277.29 for “taxes previously reported”, reducing the
$39,748.06 “excess” figure by that amount. NCYERS reported,
therefore, a taxable amount of $29,467.46. Respondent has not
challenged this figure. Petitioner has not alleged or proven any
error with NYCERS’s calculation of his taxable amount.
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In 2005 petitioner refinanced his prior loan from NYCERS.
Because he chose the refinancing option, petitioner effectively
extended the prior loan’s repayment terms. As a result, both the
prior loan and the refinanced loan are treated as outstanding on
the date of the refinancing. Sec. 72(p)(2)(A); sec. 1.72(p)-1
Q&A-20(a)(2), Income Tax Regs. Therefore, the loans collectively
exceed the limitation amount under section 72(p)(2)(A), and the
excess results in a deemed distribution.
III. 10-Percent Additional Tax for Early Withdrawal
Section 72(t)(1) imposes an additional tax on an early
distribution from a qualified retirement plan equal to 10 percent
of the portion of the amount that is includable in gross income.
The 10-percent additional tax does not apply to distributions:
(1) To an employee age 59-1/2 or older; (2) to a beneficiary (or
the employee’s estate) on or after the employee’s death; (3) on
account of the employee’s disability; (4) as part of a series of
substantially equal periodic payments made for life; (5) to an
employee after separation from service after attainment of age
55; (6) as dividends paid with respect to corporate stock
described in section 404(k); (7) to an employee for medical care;
or (8) to an alternate payee pursuant to a qualified domestic
relations order. Sec. 72(t)(2); see also sec. 72(t)(2)(B)-(F)
(setting forth other exceptions not applicable here).
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When petitioner received the loan proceeds, he had not
reached the age of 59-1/2, and he has not alleged or shown that
he comes within any of the other exceptions under section 72(t).6
Therefore, respondent’s determination that petitioner is liable
for the 10-percent additional tax on the distribution is
sustained.
IV. Accuracy-Related Penalty
Section 7491(c) imposes on the Commissioner the burden of
production in any court proceeding with respect to the liability
of any individual for penalties and additions to tax. Higbee v.
Commissioner, 116 T.C. 438, 446 (2001); Trowbridge v.
Commissioner, T.C. Memo. 2003-164, affd. 378 F.3d 432 (5th Cir.
2004). In order to meet the burden of production under section
7491(c), the Commissioner need only make a prima facie case that
imposition of the penalty or addition to tax is appropriate.
Higbee v. Commissioner, supra at 446.
Section 6662(a) and (b)(1) imposes a 20-percent penalty on
the portion of an underpayment attributable to negligence or
disregard of rules or regulations. Negligence includes any
failure to make a reasonable attempt to comply with the
6
Whether or not the sec. 72(t) 10-percent additional tax
is a penalty or additional amount for which respondent would have
the burden of production, under sec. 7491(c), he has met that
burden by showing petitioner was not 59-1/2 when he received the
distribution. See Milner v. Commissioner, T.C. Memo. 2004-111
n.2.
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provisions of the Internal Revenue Code. Sec. 6662(c); sec.
1.6662-3(b)(1), Income Tax Regs. But the section 6662(a) penalty
does not apply to any portion of an underpayment of tax if it is
shown that there was reasonable cause for the taxpayer’s position
and that the taxpayer acted in good faith with respect to that
portion. Sec. 6664(c)(1). The determination of whether a
taxpayer acted with reasonable cause and in good faith is made on
a case-by-case basis, taking into account all the pertinent facts
and circumstances. Sec. 1.6664-4(b)(1), Income Tax Regs. The
most important factor is the extent of the taxpayer’s effort to
assess the taxpayer’s proper tax liability. Id.
A taxpayer who makes full disclosure to an accountant or
other qualified expert and reasonably relies on the expert’s
advice in good faith is not negligent. Conlorez Corp. v.
Commissioner, 51 T.C. 467, 475 (1968); Plotkin v. Commissioner,
T.C. Memo. 2001-71; sec. 1.6664-4(b)(1), (c), Income Tax Regs.
The Court, on the basis of the testimony of petitioner’s
accountant, finds that petitioner was not negligent in filing his
2005 return. Accordingly, the Court rejects respondent’s
determination of the accuracy-related penalty under section
6662(a).
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Other arguments made by the parties and not discussed herein
were considered and rejected as irrelevant, without merit, or
moot.
To reflect the foregoing,
Decision will be entered
for respondent with respect to
the deficiency and for
petitioner with respect to the
accuracy-related penalty under
section 6662(a).