T.C. Summary Opinion 2010-5
UNITED STATES TAX COURT
JOHN C. ARMBRUST, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 8231-08S. Filed January 19, 2010.
John C. Armbrust, pro se.
David S. Weiner, 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
section references are to the Internal Revenue Code (Code) in
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effect for the year in issue, and all Rule references are to the
Tax Court Rules of Practice and Procedure.
Respondent determined a Federal income tax deficiency of
$5,000 for 2006. The sole issue for decision is whether
petitioner is liable for a 10-percent additional tax for a
$50,000 premature distribution from his employer’s qualified
retirement plan.
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
Illinois when he filed his petition.
In 2006 petitioner earned $57,374 working as a traffic
manager for Armbrust Paper Tubes, Inc. (APT), a manufacturer of
paper packaging, shipping, and storage products. Petitioner’s
grandfather started the business.
Tired of living in apartments and paying rent with no equity
to show for the payments, petitioner decided to buy a house. He
found one he liked outside Chicago, settling on a purchase price
of $217,000. However, because of his low credit rating,
petitioner was not able to obtain bank financing. To help,
petitioner’s father closed the purchase on October 12, 2006,
recording the deed and obtaining a mortgage from Citibank in his
own name, Christopher Armbrust. Petitioner promptly moved into
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the house, and the house served from then on as petitioner’s sole
residence, with petitioner making the mortgage payments.
Respondent stipulated that as of December 11, 2008, petitioner
had made mortgage payments to Citibank totaling $26,278.79 with
respect to the house.
About a week after the closing petitioner reimbursed his
father for the closing costs (an amount not in the record) and
for the $21,700 downpayment (10 percent of the $217,000 purchase
price). On April 2, 2008, petitioner’s father executed a
quitclaim deed officially transferring ownership of the house to
petitioner and his wife as tenants by the entirety. The house
was the first residence that petitioner owned.
Petitioner obtained the funds to reimburse his father in
September 2006 by requesting a $50,000 lump-sum distribution from
his retirement plan account. APT maintained a pension plan named
the Armbrust Paper Tubes Pension Trust (APTPT). At the time of
petitioner’s distribution request, APT was converting its pension
plan into a section 401(k) plan.
The value of petitioner’s share of the APTPT as of the
October 2006 distribution date was $70,807. Petitioner had made
no contributions into the plan; APT contributions and market
returns made up the entire balance.
APTPT fulfilled petitioner’s request by withholding $10,000
(20 percent of $50,000) for Federal income tax, distributing
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$40,000 to petitioner, and rolling over the remaining $20,807
($70,807 minus $50,000) into petitioner’s new APT section 401(k)
plan account. Respondent stipulated, and the Court received into
evidence, a letter from Citibank confirming that petitioner’s
father purchased the home on petitioner’s behalf because
petitioner’s credit rating was too low to qualify for a mortgage
and confirming that petitioner used the proceeds from the APTPT
distribution to reimburse his father for the closing costs.
APTPT issued two Forms 1099-R, Distributions From Pensions,
Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance
Contracts, etc., to petitioner for 2006. One Form 1099-R
reported the $50,000 distribution, listing a code indicating that
the distribution was premature. The other Form 1099-R reported
the $20,807 as a rollover distribution.
Petitioner timely filed a 2006 Federal income tax return,
properly reporting the $70,807 in total distributions from the
APT retirement plan and properly including $50,000 of the total
in gross income. The inclusion of $50,000 in gross income put
petitioner into a higher tax bracket, causing him to have a
balance due of $1,999 beyond the $10,000 in Federal income tax
withholding on the distribution and beyond the $10,623 in Federal
income tax withholding on his earnings of $57,374 from APT.
Petitioner had no sources of income other than these two items,
and he claimed the standard deduction. The address petitioner
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listed on his 2006 Form 1040, U.S. Individual Income Tax Return,
is that of the house at issue.
Respondent, after examining petitioner’s 2006 Federal income
tax return, issued a notice of deficiency determining that
petitioner owed an additional $5,000 in Federal income tax for
2006. According to respondent the additional tax arises because
the $50,000 retirement plan distribution was premature and
because the distribution did not qualify for any of the
exceptions to the 10-percent additional tax.
Petitioner agrees that the distribution was premature but
argues that the distribution satisfies the exception to the 10-
percent additional tax for taxpayers who use distribution
proceeds to pay for qualified acquisition costs of a first-time
home purchase.
Discussion
I. Burden of Proof
In general, the Court presumes that the Commissioner’s
determination set forth in a notice of deficiency is correct, and
the taxpayer bears the burden of showing that the determination
is in error. Rule 142(a)(1); Welch v. Helvering, 290 U.S. 111,
115 (1933). The burden may shift to the Commissioner regarding
factual matters if the taxpayer produces credible evidence and
meets the other requirements of the section. Sec. 7491(a). The
Commissioner has the burden of production with respect to any
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penalty, addition to tax, or additional amount that title 26 (the
Internal Revenue Code) imposes. Sec. 7491(c).
The consideration of burden is moot here because no issue of
material fact is in dispute, and we therefore render our decision
entirely by application of the law to undisputed facts.
II. 10-Percent Additional Tax
A. The Law Pertaining to the 10-Percent Additional Tax
To discourage individuals from taking premature
distributions from retirement plans, Congress enacted section
72(t), imposing an additional tax of “10 percent of the portion
of such amount which is includible in gross income.” Sec.
72(t)(1); see also Dwyer v. Commissioner, 106 T.C. 337, 340
(1996) (citing S. Rept. 93-383, at 134 (1973), 1974-3 C.B.
(Supp.) 80, 213 (“Premature distributions frustrate the intention
of saving for retirement, and the committee bill, to prevent this
from happening, imposes a penalty tax” of 10-percent)). Section
4974(c) describes the various types of retirement accounts and
plans whose distributions are subject to the additional 10-
percent tax of section 72(t)(1), including individual retirement
accounts (IRAs) described in section 408(a) and (b) and,
pertinent here, qualified retirement plans described in section
401(a) and (k).
Congress enacted section 72(t)(2) to grant relief in certain
circumstances from the 10-percent additional tax. Examples
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include premature distributions made as a result of the death of
the taxpayer, sec. 72(t)(2)(A)(ii); because of the taxpayer’s
being disabled, sec. 72(t)(2)(A)(iii); and to pay health
insurance premiums for the taxpayer during certain periods of
unemployment, sec. 72(t)(2)(D).
In 1997, as part of the Taxpayer Relief Act of 1997, Pub. L.
105-34, secs. 203, 303, 111 Stat. 809, 829, Congress enacted two
more exceptions to the 10-percent additional tax: Premature
distributions for qualified education expenses, sec. 72(t)(2)(E),
and, pertinent to this case, premature distributions for first-
time home buyers, sec. 72(t)(2)(F). These two exceptions are
available as long as the distribution comes from an individual
retirement plan, defined below. With respect to first-time home
purchases, Congress capped the exemption at a lifetime
distribution limit of $10,000. Sec. 72(t)(8)(B). As a result,
the total lifetime tax savings under this provision is $1,000
($10,000 times 10 percent).
B. Application of the Law to Petitioner’s Facts and
Circumstances
Petitioner asserts that he qualifies for relief from the
10-percent additional tax within the guidelines of section
72(t)(2)(F) because he used the distribution to buy his first
home. Respondent counters that petitioner does not qualify for
the exception of section 72(t)(2)(F) for two reasons. First,
respondent asserts that the exception does not apply because
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petitioner withdrew his funds from an employer-sponsored
qualified retirement plan instead of from an IRA. Secondly,
respondent asserts that petitioner failed to show compliance with
certain technical requirements, including: (1) Purchasing the
residence within 120 days of the distribution; (2) spending the
entire $50,000 for qualified acquisition costs; and (3) having no
ownership in a prior principal residence for at least 2 years
before the current acquisition.
To resolve this matter, we first look to the statute, which
allows an exemption from the 10-percent additional tax as
follows:
(F) Distributions from certain plans for first
home purchases.--Distributions to an individual from an
individual retirement plan which are qualified
first-time homebuyer distributions (as defined in
paragraph (8)). Distributions shall not be taken into
account under the preceding sentence if such
distributions are described in subparagraph (A), (C),
(D), or (E) or to the extent paragraph (1) does not
apply to such distributions by reason of subparagraph
(B). [Sec. 72(t)(2)(F).]
The plain language of the title alerts the reader that only
distributions from “certain plans” are entitled to the exclusion,
and the detail identifies the sole acceptable distribution as
coming from an “individual retirement plan”. The exceptions in
the second sentence apply to situations that are not relevant to
petitioner’s circumstances.
The Code defines an “individual retirement plan” in section
7701(a)(37), stating that “The term ‘individual retirement plan’
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means--(A) an individual retirement account described in section
408(a), and (B) an individual retirement annuity described in
section 408(b).” The definitions in section 408(a) and (b)
include solely IRAs.
Petitioner’s distribution was from a pension plan and
therefore falls outside the protection of section 72(t)(2)(F).
Even if for argument’s sake his distribution was from APT’s
section 401(k) plan, the outcome would be the same. Both
pensions and section 401(k) plans are employer-sponsored
retirement plans qualified under section 401(a) and (k),
respectively. In other words, the definition of IRAs in section
408(a) and (b) simply does not include petitioner’s qualified
retirement plan.
Absent some constitutional defect, conflicting provisions,
or ambiguous language, none of which exist here, our role is
limited to interpreting the plain language of the statute as
Congress enacted it. Barnhart v. Sigmon Coal Co., 534 U.S. 438,
461 (2002). The Supreme Court of the United States has “‘stated
time and again that courts must presume that a legislature says
in a statute what it means and means in a statute what it says
there. When the words of a statute are unambiguous, then, this
first canon is also the last: “judicial inquiry is complete”.’”
Id. at 461-462 (quoting Conn. Natl. Bank v. Germain, 503 U.S.
249, 253-254 (1992)).
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Additionally, more than a decade has passed since Congress
enacted section 72(t)(2)(E) and (F) in 1997, and despite
significant legislation in the retirement plan area, including
the Pension Protection Act of 2006, Pub. L. 109-280, 120 Stat.
780, Congress has not amended the statute. Likewise, this Court
has repeatedly declined to expand the exceptions under
72(t)(2)(E) and (F) to include distributions from qualified
retirement plans. See, e.g., Uscinski v. Commissioner, T.C.
Memo. 2005-124 (education expenses paid from a section 401(k)
plan do not qualify for the exception of section 72(t)(2)(E));
Milner v. Commissioner, T.C. Memo. 2004-111 (no “umbrella
hardship exception” for a distribution from a qualified plan used
to complete remodeling on an existing home, to help purchase a
replacement home, and to cover medical disability).
Thus, petitioner is not entitled to relief under section
72(t)(2)(F) or any other provision from the 10-percent additional
tax on his $50,000 distribution in 2006 from the APT retirement
plan. This result renders irrelevant an analysis of respondent’s
second contention regarding petitioner’s technical compliance
with the statute.
Finally, in applying the statute to the facts of this case,
it appears odd that Congress granted relief to distributions from
IRAs but not from qualified plans in the light of the
circumstance that a taxpayer can transfer or roll over a balance
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from a qualified retirement plan into an IRA. However, the House
report discussing the enactment of section 72(t)(2)(E) and (F)
clearly shows that Congress was focusing solely on IRAs, making
no mention of qualified retirement plans. See H. Rept. 105-148,
at 288-289 (1997), 1997-4 C.B. (Vol. 1) 319, 610-611. Further,
the Tax Court is a court of limited jurisdiction and lacks
general equitable powers. Commissioner v. McCoy, 484 U.S. 3, 7
(1987); Hays Corp. v. Commissioner, 40 T.C. 436, 442-443 (1963),
affd. 331 F.2d 422 (7th Cir. 1964). We may not rewrite a law
simply because we might “‘deem its effects susceptible of
improvement.’” Commissioner v. Lundy, 516 U.S. 235, 252 (1996)
(quoting Badaracco v. Commissioner, 464 U.S. 386, 398 (1984)).
In closing, we note that we found petitioner to be sincere,
credible, and forthright. In the final analysis, however, the
remedy for petitioner and for all taxpayers in his circumstances
lies with Congress, not the judiciary. See, e.g., Prevo v.
Commissioner, 123 T.C. 326, 332 (2004) (a remedy, if any, must
originate with Congress).
To reflect the foregoing,
Decision will be entered
for respondent.