T.C. Summary Opinion 2010-44
UNITED STATES TAX COURT
JAMES THOMAS COLEGROVE AND SUSAN JANE COLEGROVE, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 10171-09S. Filed April 13, 2010.
James Thomas Colegrove and Susan Jane Colegrove, pro sese.
Randall B. Childs, 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.
- 2 -
other court, and this opinion shall not be treated as precedent
for any other case.
Respondent determined a deficiency in petitioners’ 2006
Federal income tax of $13,031. After concessions by
petitioners,2 the issues remaining for decision are: (1) Whether
petitioners must include in income as a distribution from an
individual retirement account a withdrawal of $52,132.27; and, if
so, (2) whether petitioners are liable, under section 72(t), for
the 10-percent additional tax on an early distribution from a
qualified retirement plan. We hold that petitioners must include
the $52,132.27 withdrawal in income and that petitioners are
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. Petitioners resided in the
State of Florida when the petition was filed.
In 2006, petitioner husband (Mr. Colegrove) worked as a real
estate agent for 9 months. Market pressures resulted in a
drastic reduction in business, and therefore income, and an
increase in overhead and expenses. Eventually Mr. Colegrove was
2
Petitioners concede they received an additional $722 in
taxable nonemployee compensation and $50 in taxable dividends in
2006.
- 3 -
able to secure full-time employment with Novartis
Pharmaceuticals.
During the period of reduced income, Mr. Colegrove struggled
to pay his business expenses, pay the home mortgage, and provide
for the living expenses for a family of four. To meet those
needs, Mr. Colegrove requested funds from a Rollover Individual
Retirement Account he owned at Charles Schwab (the IRA). Mr.
Colegrove’s intent was that the funds withdrawn would be in the
form of a loan and not a distribution.
During 2006 Mr. Colegrove received six distributions from
the IRA in the following amounts: $8,500; $2,090.61; $10,000;
$10,000; $10,218; and $11,323.66. Under the “Distribution
Summary” section of the Charles Schwab account statements for
2006 is an entry for “premature”. The IRA’s monthly account
statements for 2006 show an increase in the gross amount of the
year-to-date premature distribution to reflect the amount
distributed during that month. The account statement for
December 2006 reflects the gross amount of the premature
distribution year-to-date as $52,132.27. The monthly account
statements also demonstrate that Mr. Colegrove did not make any
contributions to the IRA in 2006.
Petitioners timely filed a Form 1040, U.S. Individual Income
Tax Return, for 2006. On the return, petitioners did not report
the $52,132.27 distribution from the IRA as income and did not
- 4 -
report the 10-percent additional tax on an early distribution
under section 72(t), believing the distribution was a loan from
the IRA and not an early withdrawal. In a notice of deficiency,
respondent determined, inter alia, that the $52,132.27
distribution from the IRA is includable in income and that
petitioners are liable for the 10-percent additional tax on the
early distribution pursuant to section 72(t).
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.
Petitioners have neither alleged that section 7491(a) applies nor
established their compliance with its requirements.3
Accordingly, petitioners bear the burden of proof. See Rule
142(a).
3
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.
- 5 -
A. Distribution From the IRA
Generally, section 408(d)(1) provides that “any amount paid
or distributed out of an individual retirement plan shall be
included in gross income by the payee or distributee * * * in the
manner provided under section 72.” See also Campbell v.
Commissioner, 108 T.C. 54 (1997). Petitioners argue that the
distribution from the IRA was to be in the form of a loan;
however, unlike a loan from a qualified employer plan pursuant to
the limitations in section 72(p), “a loan from an IRA to its
owner is always a prohibited transaction (there is no exception
for loans from an IRA to its beneficiary).”4 Patrick v.
Commissioner, T.C. Memo. 1998-30 n.8, affd. without published
opinion 181 F.3d 103 (6th Cir. 1999); sec. 4975(c)(1)(B);
Employee Retirement Income Security Act of 1974, Pub. L. 93-406,
sec. 408(d), 88 Stat. 885. If such a loan were made, the IRA
would lose its exemption and all assets would be deemed
distributed. Sec. 408(e)(1) and (2); Patrick v. Commissioner,
supra.
The distribution was not received by petitioners as an
annuity; consequently, the provisions of section 72(e) are
4
At trial Mr. Colegrove alluded to a withdrawal from an
IRA in the form of a loan in the 1990s for the purchase of his
first home, but the petition indicates that he previously took
out a loan from his sec. 401(k) plan account. A loan from a sec.
401(k) plan account may be a nontaxable distribution if it
satisfies the limitations in sec. 72(p).
- 6 -
applicable. See Vorwald v. Commissioner, T.C. Memo. 1997-15.
Consistent with the presumption of correctness applicable to
respondent’s determination, see Welch v. Helvering, supra, and
because Mr. Colegrove did not make any contributions to the IRA,
we must assume that his tax basis in the IRA was zero, see sec.
1.408-4(a)(2), Income Tax Regs. Therefore petitioners can be
given no credit for any investment in the IRA, within the meaning
of section 72(e)(3)(A)(ii) and (6). Consequently, the entire
amount of the distribution is allocated to, and must be included
in, petitioners’ income. See sec. 72(e)(3)(A). Accordingly,
respondent’s adjustment increasing petitioners’ income by the IRA
distribution is sustained.
B. Section 72(t) Additional Tax
Section 72(t)(1) imposes a 10-percent additional tax on an
early distribution from a qualified retirement plan unless the
distribution comes within one of the statutory exceptions under
section 72(t)(2). The section 72(t) additional tax is intended
to discourage premature distributions from retirement plans.
Dwyer v. Commissioner, 106 T.C. 337, 340 (1996); see also S.
Rept. 93-383, at 134 (1973), 1974-3 C.B. (Supp.) 80, 213.
Petitioners used the funds withdrawn from the IRA to pay
business and living expenses and a home mortgage. Regrettably
for petitioners, no exception applies for those purposes;
therefore, petitioners’ distribution remains subject to the 10-
- 7 -
percent additional tax. Although petitioners’ financial
circumstances were not unusual during this tumultuous period, the
tax code is sometimes unforgiving in its attempts at
standardization.
If the language of a statute is plain, clear, and
unambiguous, the statutory language is to be applied according to
its terms unless a literal interpretation of the statutory
language would lead to absurd results. Robinson v. Shell Oil
Co., 519 U.S. 337, 340 (1997); Consumer Prod. Safety Commn. v.
GTE Sylvania, Inc., 447 U.S. 102, 108 (1980); United States v.
Am. Trucking Associations, Inc., 310 U.S. 534, 543-544 (1940);
Allen v. Commissioner, 118 T.C. 1, 7 (2002). In the instant
case, the Court sympathizes with petitioners’ financial
predicament, but we are constrained by the statutory language and
unable to create an exception where none exists.
In closing, we think it appropriate to observe that we found
petitioners to be conscientious taxpayers who take their Federal
tax responsibilities seriously. The Tax Court, however, 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). Consequently, our jurisdiction to grant
equitable relief is limited. Woods v. Commissioner, 92 T.C. 776,
784-787 (1989); Estate of Rosenberg v. Commissioner, 73 T.C.
- 8 -
1014, 1017-1018 (1980). This Court is limited by the exceptions
enumerated in section 72(t). See, e.g., Arnold v. Commissioner,
111 T.C. 250, 255-256 (1998); Schoof v. Commissioner, 110 T.C. 1,
11 (1998). Although we acknowledge that Mr. Colgrove used his
distribution for entirely reasonable purposes, absent some
constitutional defect we are constrained to apply the law as
written, see Estate of Cowser v. Commissioner, 736 F.2d 1168,
1171-1174 (7th Cir. 1984), affg. 80 T.C. 783 (1983), and we may
not rewrite the law because we may “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)).
Accordingly, we must sustain respondent’s determination that
petitioners are liable for the section 72(t) 10-percent
additional tax.
Conclusion
We have considered all of the arguments made by petitioners,
and, to the extent that we have not specifically addressed them,
we conclude that they do no support a result contrary to that
reached herein.
To reflect the foregoing,
Decision will be entered
for respondent.