Sadberry v. Commissioner , 153 F. App'x 336 ( 2005 )

United States Court of Appeals
Fifth Circuit
F I L E D
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT November 16, 2005
)))))))))))))))))))))))))) Charles R. Fulbruge III
Clerk
No. 04-61160
))))))))))))))))))))))))))
ANTHONY SADBERRY and DENISE SADBERRY,
Plaintiffs-Appellants,
v.
COMMISSIONER OF INTERNAL REVENUE,
Defendant-Appellee.
Appeal from the United States Tax Court
Before GARWOOD, PRADO, and OWEN, Circuit Judges.
PER CURIAM:*
Plaintiffs-Appellants Anthony Sadberry and Denise Sadberry
(collectively, “Sadberry”) appeal the Tax Court’s decision in
favor of Defendant-Appellee Commissioner of Internal Revenue
(“Commissioner”). In 1999, Sadberry received a series of early
distributions from annuities in order to fund his daughter’s
education. The parties do not dispute that $61,548 of the
distributions were taxable.1 However, Sadberry contends that the
*
Pursuant to 5TH CIRCUIT RULE 47.5, the court has determined
that this opinion should not be published and is not precedent
except under the limited circumstances set forth in 5TH CIRCUIT
RULE 47.5.4.
1
Sadberry does not dispute he received distributions that
exceeded his initial investment in the retirement plans by
1
taxable distributions were eligible for a tax-free rollover, and
that as a result, the $61,548 need not have been included in his
income on his amended tax return. In addition, Sadberry argues
he is not liable for related tax penalties. We disagree.
I
The standard of review for judgments of the Tax Court is the
same standard we apply when reviewing other trial courts. We
review factual determinations for clear error and conclusions of
law de novo. Dunn v. CIR, 301 F.3d 339, 348 (5th Cir. 2002).
II
Only withdrawals from certain retirement plans are eligible
for tax-free rollovers. 26 C.F.R. § 1.402(c)-2. A tax-free
rollover occurs when a distribution from a qualified retirement
plan is deposited into another qualified retirement plan within a
sixty-day time period. See generally id.; 26 C.F.R. § 1.403(b)-
2; 26 C.F.R. § 1.401(a)(31)-1; I.R.C. § 408(d)(3)(A). The issue
is whether the retirement plan from which Sadberry received an
early distribution is a qualified retirement plan for purposes of
a tax-free rollover.
Distributions from pension plans, profit-sharing plans,
annuity plans, individual retirement accounts, and individual
retirement annuities may qualify for a tax-free rollover if the
$61,548.
2
plans meet the definitions set out in the Internal Revenue Code.2
See I.R.C. §§ 402(c)(4),3 403(a)(4), 403(b)(8), 408(d)(3)(A).
Sadberry purchased a Flexible Premium Deferred Annuity Contract4
from Glenbrook Life and Annuity (“FPDAC”) and multiple Flexible
Premium Retirement Annuity policies from Southern Farm Bureau
Life Insurance Co. (“FPRA”). On appeal, Sadberry primarily
disputes the Tax Court’s determination that one FPRA,5 and
2
Unless otherwise noted, all references to the Internal
Revenue Code pertain to the 1999 version.
3
Section 403(a)(4) references section 402(c)(4), which in
1999 stated:
Eligible rollover distribution.--For purposes of this
subsection, the term "eligible rollover distribution"
means any distribution to an employee of all or any
portion of the balance to the credit of the employee in
a qualified trust; except that such term shall not
include--
(A) any distribution which is one of a series of
substantially equal periodic payments (not less
frequently than annually) made--
(i) for the life (or life expectancy) of the employee or
the joint lives (or joint life expectancies) of the
employee and the employee's designated beneficiary, or
(ii) for a specified period of 10 years or more,
(B) any distribution to the extent such distribution is
required under section 401(a)(9), and
(C) any hardship distribution described in section
401(k)(2)(B)(i)(IV).
4
Glenbrook Life and Annuity, Flexible Premium Deferred
Annuity Contract, policy number GA295240.
5
Southern Farm Bureau Life Insurance Co., Flexible Premium
Retirement Annuity, policy number 185128F. The Tax Court found
that Sadberry’s other SFB annuities were in fact qualified for
tax-free rollover treatment: Southern Farm Bureau Life Insurance
Co., Flexible Premium Retirement Annuity, policy number 186618F
and Southern Farm Bureau, Flexible Premium Retirement Annuity,
3
consequently an early distribution from that FPRA, was not
qualified for a tax-free rollover. He argues that the FPRA was
qualified, or alternatively, that the record does not contain
enough information to determine the status of this FPRA. While
the Tax Court determined that the FPRA in question was a
nonqualified annuity, in Sadberry’s brief, he refers to the FPRA
as an “IRA,” although he does not indicate whether he
characterizes the FPRA as an individual retirement annuity or an
individual retirement account. Sadberry contends that the Tax
Court made unjustified assumptions in concluding the FPRA was a
nonqualified annuity.
A.
Because the Tax Court determined that the FPRA at issue was
a nonqualified annuity and Southern Farm Bureau calls it an
annuity,6 we begin by assuming that the FPRA is an annuity.
Operating under this assumption, we must decide whether the FPRA
is one of the qualified annuities under the Internal Revenue
Code: a qualified annuity under I.R.C. § 403(a) or a qualified
individual retirement annuity under I.R.C. § 408(b).
In order to meet the requirements of a qualified annuity,
the FPRA must fit the definition set out in I.R.C. § 403(a)(1).
policy number 200288F (an SEP as defined under I.R.C. § 408(k)).
6
Although, the name of the plan has little bearing on its
characterization under the Internal Revenue Code.
4
I.R.C. § 403(a)(4).7 Section 403(a)(1) defines a qualified
annuity as a contract “purchased by an employer for an employee
under a plan which meets the requirements of section 404(a)(2).”
Section 404(a)(2) is entitled “Employees annuities’” and
incorporates portions of section 401(a), which describes
qualified pension, profit-sharing, and stock bonus plans.8 Thus,
in order to meet the requirements of a qualified annuity, an
employer must have created the FPRA for the benefit of his
employees.9 Sadberry’s employer did not set up the FPRA for
Sadberry’s benefit. Rather, Sadberry funded the FPRA with his own
7
This paragraph states:
Rollover amounts.--
(A) General rule.--If--
(i) any portion of the balance to the credit
of an employee in an employee annuity described in
[section 403(a)(1)] is paid to him in an eligible
rollover distribution (within the meaning of section
402(c)(4)),
(ii) the employee transfers any portion of
the property he receives in such distribution to an
eligible retirement plan, and
(iii) in the case of a distribution of
property other than money, the amount so transferred
consists of the property distributed,
then such distribution (to the extent so transferred)
shall not be includible in gross income for the
taxable year in which paid.
8
In general, qualified pension, profit-sharing, and stock
bonus plans must be created by an employer for the benefit of his
employees. See I.R.C. § 401(a).
9
This is subject to certain exceptions set out section 401
that do not apply to Sadberry.
5
post-tax funds. As a result, the FPRA is not a qualified
annuity.
We next assume the FPRA is an individual retirement annuity
and turn to whether the FPRA is qualified based on that
characterization. Distributions from an individual retirement
annuity qualify for a tax-free rollover if the account meets the
definition in I.R.C. § 408(b). See 408(d)(3)(A). In 1999, to
qualify under this section, the FPRA must have limited the annual
contribution or premium to $2,000. Because the FPRA at issue
does not limit its annual premiums, it does not qualify as an
individual retirement annuity according to the Internal Revenue
Code or for a tax-free rollover. Under section 408(a), in 1999
an individual retirement account was subject to the same $2,000
limit. Therefore, to the extent Sadberry argues the FPRA is an
individual retirement account, we conclude it was not qualified
for a tax-free rollover.
Having determined the FPRA is not a qualified annuity,
individual retirement annuity or individual retirement account,
we next assume the FPRA is a pension or profit-sharing plan.
Distributions from a pension or profit-sharing plan qualify for a
tax-free rollover if the pension or profit-sharing plan meets the
definition in I.R.C. § 401(a).10 Like a qualified annuity, under
10
“Requirements for qualification.--A trust created or
organized in the United States and forming part of a stock bonus,
pension, or profit-sharing plan of an employer for the exclusive
benefit of his employees or their beneficiaries shall constitute
6
section 401(a), the plan must be created by an employer for the
benefit of his employees.11 See also 26 C.F.R. §§ 1.401-1(a)(2),
(b)(1)(i). Retirement benefits of these plans are generally
measured by factors such as years of service and compensation
received by the employee. 26 C.F.R. §§ 1.401-1(b)(1)(i), (ii).
As we have explained, Sadberry’s employer did not set up the FPRA
for Sadberry’s benefit; Sadberry funded the FPRA with his own
post-tax funds. In addition, the FPRA does not measure benefits
by reference to Sadberry’s years of employment or compensation.
Therefore, the Tax Court was correct in concluding that the FPRA
at issue is not a qualified pension or profit sharing plan.
Since Sadberry is not a section 501 organization12 and the
FPRA at issue does not meet the Internal Revenue Code definition
of a pension plan, profit-sharing plan, annuity plan, individual
retirement account, or individual retirement annuity, the Tax
Court correctly determined that the FPRA at issue was not
eligible for a tax-free rollover.
Sadberry contends that the record regarding the FPRA is
incomplete, and that the burden is on the Commissioner to ensure
a qualified trust under this section.” I.R.C. § 401(a).
11
This is subject to certain exceptions set out section 401
that do not apply to Sadberry.
12
Sections 402(c)(4) and 403(b)(8) apply to section 501
organizations, which include certain employer corporations and
recreational clubs, public schools, etc. See I.R.C. §§
402(a),(c); I.R.C. §§ 403(b)(1), (b)(8).
7
the necessary information is available. However, the record
contains enough information to exclude the FPRA from each
category of qualified retirement plan. Therefore, it is adequate
for our purposes. Even if the record did not contain enough
information to determine the status of the FPRA, the taxpayer has
the burden of proof in showing the Commissioner is wrong. See
Welch v. Helvering, 290 U.S. 111, 115 (1933); Affiliated Foods,
Inc. v. CIR., 154 F.3d 527, 530 (5th Cir. 1998). Sadberry has
not met this burden because he has presented no evidence that the
FPRA is qualified for a tax-free rollover under the Internal
Revenue Code.
B.
Sadberry also argues that the Commissioner is equitably
estopped from claiming the FPRA distribution did not qualify for
a tax-free rollover. In order to claim equitable estoppel
against the government, Sadberry must meet the requirements laid
out in Heckler v. Community Health Services, Inc., 467 U.S. 51,
59-61 (1984). See also Norfolk S. Corp. v. CIR, 104 T.C. 13, 60
(1995), modified, 104 T.C. 417 (1995). Equitable estoppel can be
applied against the government only when (1) the government has
made a false representation, (2) the false representation
involves an error in a statement of fact and not in an opinion or
statement of law, (3) the party claiming equitable estoppel is
ignorant of the true facts and reasonably relies on the false
8
representation of the government, and (4) there are adverse
effects due to the false representation. Id.
Sadberry maintains that the 1999 instructions for filling
out a Form 1040 were misleading, and that he relied on these
instructions in filing his taxes when he excluded the taxable
distributions at issue from his income. However, as the Tax
Court correctly concluded, the instructions designated for use in
preparing 1999 returns were not misleading. See, e.g., IRS, DEP’T
OF THE TREASURY, PUBLICATION 575, PENSION AND ANNUITY INCOME 29 (1999) (“If
you withdraw cash or other assets from a qualified retirement
plan in an eligible rollover distribution, you can defer tax on
the distribution by rolling it over to another qualified
retirement plan.”)(emphasis added); IRS, DEP’T OF THE TREASURY,
PUBLICATION 590, INDIVIDUAL RETIREMENT ARRANGEMENTS (IRAS) 4, 14
(1999)(“The trustee or custodian [of a qualified IRA] generally
cannot accept contributions of more than $2,000 a year.”). They
clearly explain that only distributions from qualified plans are
eligible for tax-free rollovers.13
13
The 1999 instructions for lines 16a and 16b read in part:
Rollovers
A rollover is a tax-free distribution of cash or other
assets from one retirement plan that is contributed to
another plan. Use lines 16a and 16b to report a rollover,
including a direct rollover, from one qualified
employer’s plan to another or to an IRA or SEP.
Enter on line 16a the total distribution before income
tax or other deductions were withheld. This amount should
9
It is apparent from Sadberry’s briefing, not that the
instructions are ambiguous, but that Sadberry simply did not
follow them. Sadberry points to the instructions for line 15a
and 15b, rather than the instructions for lines 16a and 16b.
Sadberry contends that the instructions for lines 15a and 15b
directed that he leave line 15b blank. Due to the nature of the
form, if line 15b is blank, the distribution in question would
not be included in Sadberry’s total income.14 As the argument
be shown in box 1 of Form 1099-R. From the total on line
16a, subtract any contributions (usually shown in box 5)
that were taxable to you when made. From that result,
subtract the amount that was rolled over either directly
or within 60 days of receiving the distribution. Enter
the remaining amount, even if zero, on line 16b. Also,
put "Rollover" next to line 16b.
Special rules apply to partial rollovers of property. For
more details on rollovers, including distributions under
qualified domestic relations orders, see Pub. 575.
Lump-Sum Distributions
If you received a lump-sum distribution from a
profit-sharing or retirement plan, your Form 1099-R
should have the "Total distribution" box in box 2b
checked. You may owe an additional tax if you received an
early distribution from a qualified retirement plan and
the total amount was not rolled over. For details, see
the instructions for line 53 that begin on page 36.
Enter the total distribution on line 16a and the taxable
part on line 16b.
(emphasis added).
14
This result occurs because Sadberry not only left line 15b
blank, but he also did not consider line 16b relevant. Therefore
the taxable amount of the distribution in issue was not included
in Sadberry’s income as a taxable IRA distribution on line 15b
nor was it included as a taxable pension or annuity distribution
on line 16b.
10
goes, the Commissioner should therefore be estopped from claiming
that distribution should have been included in Sadberry’s gross
income.
First, we agree with the Tax Court that, based on the 1999
Form 1040 instructions, the FPRA was not an IRA,15 and that the
instructions to line 16a and 16b are more relevant.16 However,
assuming the contrary, the instructions to lines 15a and 15b
plainly indicate that a taxpayer should only refrain from
reporting his total IRA distribution on line 15b if one of five
distinctly numbered exceptions apply.17 None of the five
15
The instructions define an IRA stating:
[A]n IRA includes a traditional IRA, Roth IRA, education
(Ed) IRA, simplified employee pension (SEP) IRA, and a
savings incentive match plan for employees (SIMPLE) IRA.
16
Sadberry specifically elected not to include the FPRA in
an IRA.
17
The five exceptions are:
1. You made nondeductible contributions to any of your
traditional or SEP IRAs for 1999 or an earlier year.
Instead, use Form 8606 to figure the amount to enter on
line 15b; enter the total distribution on line 15a. If
you made nondeductible contributions to these IRAs for
1999, also see Pub. 590.
2. You converted part or all of a traditional, SEP, or
SIMPLE IRA to a Roth IRA in 1999. Instead, use Form 8606
to figure the amount to enter on line 15b; enter the
total distribution on line 15a.
3. You made an excess contribution in 1999 to your IRA
and withdrew it during the period of January 1, 2000,
through April 17, 2000. Enter the total distribution on
line 15a and the taxable part (the earnings) on line 15b.
11
exceptions apply to Sadberry; thus, it is apparent that,
according to the instructions, Sadberry should not have left line
15b blank. In his brief, Sadberry groups together the
instructions from two unrelated paragraphs.18 More specifically,
he argues that the statement regarding a conduit IRA functions as
one of the five exceptions. Any cursory reading of the
instructions establishes that is not the case. Notwithstanding
the standard confusion that confronts us all with respect to the
IRS’s tax forms, the 1999 Form 1040 instructions are unambiguous,
and the Commissioner did not make any false representations.
Furthermore, to the extent Sadberry claims his “detriment is
the inability to retain money that [he] should never have
4. You received a distribution from an Ed or Roth IRA and
the total distribution was not rolled over into another
IRA of the same type. Instead, use Form 8606 to figure
the amount to enter on line 15b; enter the total
distribution on line 15a.
5. You rolled your IRA distribution over into another IRA
of the same type (for example, from one traditional IRA
to another traditional IRA). Enter the total distribution
on line 15a and put "Rollover" next to line 15b. If the
total on line 15a was rolled over, enter zero on line
15b. If the total was not rolled over, enter the part not
rolled over on line 15b. But if item 1 above also
applies, use Form 8606 to figure the taxable part.
18
In a separate paragraph the instructions for lines 15a and
15b state:
If you rolled over the distribution (a) in 2000 or
(b) from a conduit IRA into a qualified plan,
attach a statement explaining what you did.
12
received in the first place,” this argument fails. Heckler, 467
U.S. at 61. Because Sadberry did not include the taxable annuity
proceeds as part of his income on his 1999 tax returns and
amended returns, the government refunded him money to which he
was not entitled.19 This cannot be the basis for estoppel against
the government. Id.
Sadberry also alludes to statements IRS officials made
during a settlement agreement with Sadberry as grounds for
equitable estoppel. However, Sadberry has not shown he relied to
his detriment on any alleged misrepresentations of fact during
this meeting. As the Tax Court accurately held, the elements of
equitable estoppel are absent here. See Graff v. CIR, 74 T.C.
743, 761-65 (1980).
C.
Section 6662 imposes a twenty percent penalty when a
taxpayer substantially underreports his income on his tax return,
measured against the amount of tax imposed on him by the Internal
Revenue Code. I.R.C. §§ 6662(a), (b)(1),(b)(2). However, no
penalty is imposed if the taxpayer shows he acted with reasonable
cause and in good faith. 26 C.F.R. § 1.6664-4. “The
determination of whether a taxpayer acted with reasonable cause
and in good faith is made on a case-by-case basis, taking into
19
Unless an amount received as an annuity is rolled over, in
general, it should be included in gross income. See I.R.C. §§
61(a)(9), 72(a).
13
account all pertinent facts and circumstances.” Id. The Tax
Court found that Sadberry substantially understated his income,20
and without deciding whether he acted in good faith, held that
Sadberry did not act with reasonable cause. The Tax Court
explained that based on Sadberry’s knowledge, education, and
experience as an attorney, in conjunction with the fact that the
1999 Form 1040 instructions did not support his position,
Sadberry did not have reasonable cause to substantially
understate his income.
There is not clear error in the Tax Court’s finding that
Sadberry failed to act with reasonable cause, given all the
pertinent facts and circumstances. See 26 C.F.R. § 1.6664-4;
Srivastava v. CIR, 220 F.3d 353, 367 (5th Cir. 2000), overruled
on other grounds, CIR v. Banks, 125 S. Ct. 826 (2005). We also
agree with the Tax Court that, because the FPRA was not a
qualified plan and no exception applies, Sadberry is liable for
20
Because he left line 15b blank, Sadberry understated his
income by $22,094.51. In his reply, Sadberry implies that the
Tax Court decision is somehow inconsistent in concluding that
Sadberry was both deficient in his 1999 income tax and that there
was also an overpayment in his income tax for that year.
However, after a thorough review of the decision below and the
parties’ briefs, we conclude that no inconsistency is present.
Sadberry was deficient in his income tax because he misstated his
income. However, once the Commissioner determined there was a
deficiency in Sadberry’s income tax, Sadberry made payments to
the IRS that exceeded the deficiency, resulting in an
overpayment. Despite this, Sadberry can still be liable for a
section 6662 penalty for the misstatement of his income.
14
the section 72(q)21 ten percent penalty for premature
distributions from nonqualified plans.
III
As we find that the FPRA was not a qualified pension plan,
profit-sharing plan, annuity plan, individual retirement
account, or individual retirement annuity, we are in agreement
with the rulings of the Tax Court on the points brought forward
to us: the FPRA premature distributions were not eligible for
tax-free rollover treatment, Sadberry is liable for the ten
percent penalty on the FPRA and FPDAC distributions under section
72(q), and Sadberry is also liable for the twenty percent penalty
for a substantial understatement of income tax under section
6662. Sadberry has failed to show he acted with reasonable cause
and in good faith with respect to his failure to report as income
the taxable portion of the FPRA and FPDAC distributions. For the
foregoing reasons, we AFFIRM the judgment of the Tax Court.
AFFIRMED.
21
Section 72(q) provides for a 10 percent penalty for
premature distributions from nonqualified annuity contracts.
15