T.C. Summary Opinion 2009-139
UNITED STATES TAX COURT
KENNETH L. GRAHAM, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 10108-08S. Filed September 8, 2009.
Kenneth L. Graham, pro se.
E. Abigail Raines, for respondent.
ARMEN, 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.1 Pursuant to section
7463(b), the decision to be entered is not reviewable by any
1
Unless otherwise indicated, all 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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other court, and this opinion shall not be treated as precedent
for any other case.
Respondent determined a deficiency of $6,183 in petitioner’s
Federal income tax for 2006. The sole issue for decision is
whether petitioner is liable for the 10-percent additional tax on
early distributions from qualified retirement plans under section
72(t)(1) and, more particularly, whether the distributions in
question constitute “part of a series of substantially equal
periodic payments (not less frequently than annually) made for
the life (or life expectancy) of the employee” within the meaning
of section 72(t)(2)(A)(iv). We hold that the distributions were
not part of a series of substantially equal periodic payments and
that petitioner is therefore liable for the 10-percent additional
tax.
Background
Some of the facts have been stipulated, and they are so
found. We incorporate by reference the parties’ stipulation of
facts and accompanying exhibits.
Petitioner resided in the State of Illinois when the
petition was filed.
Petitioner was born in 1948. In 1999 he retired after 35
years of employment with a telephone company. Upon retirement,
and at his own election, petitioner received a lump-sum
distribution of a pension that was accumulated during his tenure
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with the telephone company.2 Petitioner then rolled these funds
over into several self-directed individual retirement accounts
(IRAs). During 1999, at age 51, petitioner began receiving
periodic distributions from his IRAs.
The distribution amounts received by petitioner were
determined by his financial advisers. However, the financial
advisors did not provide petitioner with documentation
demonstrating how the distribution amounts were calculated. The
financial advisors led petitioner to believe that the
distributions were in accordance with one of the exceptions under
section 72(t)(2).
During 2006, in which year he turned 58, petitioner received
distributions from four IRAs totaling $61,833. At the close of
the 2006 tax year the combined value of the IRAs was $284,372.3
On his 2006 Federal income tax return petitioner reported
the distributions as income, but he did not report any additional
tax on those distributions. Respondent thereafter determined
that the distributions were subject to the 10-percent additional
tax under section 72(t). Petitioner contends the distributions
2
Petitioner could have received a monthly pension from the
telephone company, but he stated: “It wouldn’t have been enough
to support the bills I had, basically.”
3
During 2004 and 2005 petitioner received distributions
from his IRAs of $51,031 and $61,011, respectively; at the close
of those years the combined values of his accounts were $366,351
and $317,763, respectively. The record does not include
distribution amounts and combined values for any other year.
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were part of a series of substantially equal periodic payments
and, as such, are not subject to the additional tax pursuant to
section 72(t)(2)(A)(iv).
Discussion
In general, the Commissioner’s determination as set forth in
the notice of deficiency is presumed correct, and the taxpayer
bears the burden of proving that the determination is in error.
See Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933).
Pursuant to section 7491(a), the burden of proof as to factual
matters shifts to the Commissioner under certain circumstances.
Petitioner has neither alleged that section 7491(a) applies nor
established his compliance with its requirements.4 Accordingly,
petitioner bears the burden of proof. See Rule 142(a).
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
that are part of a series of substantially equal payments (not
4
Regardless of whether the additional tax under sec. 72(t)
is a penalty or an additional amount to which sec. 7491(c)
applies and regardless of whether the burden of production with
respect to this additional tax would be on respondent, respondent
has satisfied his burden of production with respect to the
distribution. See H. Conf. Rept. 105-599, at 241 (1998), 1998-3
C.B. 747, 995.
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less frequently than annually) made for the life (or life
expectancy) of the employee. Sec. 72(t)(2)(A)(iv).
The Internal Revenue Code and the regulations thereunder do
not elucidate what qualifies as a series of substantially equal
periodic payments under section 72(t)(2)(A)(iv). However, the
Internal Revenue Service has promulgated guidance concerning this
exception in Notice 89-25, Q&A-12, 1989-1 C.B. 662, 666. The
notice provides that payments will be considered substantially
equal periodic payments if the payments are determined by one of
three methods: (1) The required minimum distribution method, (2)
the fixed amortization method, or (3) the fixed annuitization
method. See Rev. Rul. 2002-62, 2002-2 C.B. 710 (reiterating that
payments will be considered to be substantially equal periodic
payments if they are made in accordance with one of the three
methods described in Notice 89-25, supra). Each of the three
methods takes into account the taxpayer’s life expectancy.
The Court is not bound by Notice 89-25, supra, but
conforming to one of its methodologies may relieve a taxpayer of
the 10-percent additional tax. See Arnold v. Commissioner, 111
T.C. 250, 252 n.1 (1998). We find that the record does not
identify which, if any, methodology was used in calculating the
amount of petitioner’s periodic payments. Petitioner did not
provide any documentation demonstrating (or testimony explaining)
how the distribution amounts were determined. See id. at 252.
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In 2006, at age 58, petitioner had a life expectancy of 27.0
years.5 See sec. 1.401(a)(9)-9, Q&A-1, Income Tax Regs.6 The
amount distributed to petitioner during this year, $61,833,
represents more that one-sixth the total value of the IRAs at the
beginning of 2006. The continued receipt of such distributions
by petitioner would exhaust the IRA balances within 7 years.7
Therefore, the distributions could not possibly be substantially
equal periodic payments made for petitioner’s life expectancy.
Although we are sympathetic to petitioner’s position, given
his reliance on his financial advisors, we are constrained to
5
In 1999, at the time of his retirement and when he began
receiving distributions, petitioner was 51 years of age and had a
life expectancy of 33.3 years. However, the record is limited
and provides no indication of the value of the IRAs in 1999 or
documentation of petitioner’s distribution at that time.
Therefore, we confine ourselves to the year in issue as discussed
herein.
6
The single life expectancy table found at sec.
1.401(a)(9)-9 Q&A-1, Income Tax Regs., is used for determining
the life expectancy of an individual for purposes of calculating
required minimum distributions (RMD) under sec. 401(a)(9). As
discussed in the text supra p. 5, the RMD method is one of the
methods prescribed by Notice 89-25, 1989-1 C.B. 662, for
determining whether payments are substantially equal periodic
payments for purposes of sec. 72(t)(2)(A)(iv).
7
Assuming a constant rate of return of 10 percent and
distributions on the last day of each year.
At trial (in April 2009) petitioner implied that exhaustion
of the account balances was merely a consequence of the
precipitous decline in the stock market. However, the market
decline only began in mid-2008, well after the year in issue. In
any event, and as discussed in the text, exhaustion would occur
well within petitioner’s life expectancy even if the market had
not declined so significantly in 2008.
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sustain respondent’s determination on this issue. Thus,
petitioner is subject to the 10-percent additional tax under
section 72(t)(1).
Conclusion
We have considered all of the arguments made by petitioner,
and, to the extent that we have not specifically addressed them,
we conclude that they do not support a holding contrary to that
reached herein.
To reflect the foregoing,
Decision will be entered
for respondent.