Thompson v. Comm'r , 94 T.C.M. 430 ( 2007 )

T.C. Memo. 2007-327
UNITED STATES TAX COURT
GREGORY EUGENE THOMPSON, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 1182-06. Filed October 31, 2007.
Gregory Eugene Thompson, pro se.
Douglas S. Polsky, for respondent.
MEMORANDUM OPINION
KROUPA, Judge: Respondent determined a $23,027 deficiency
in petitioner’s Federal income tax and a $2,106.80 accuracy-
related penalty under section 66621 for 2004.
There are four issues for decision. We are first asked to
decide whether petitioner should have included a distribution
1
All section references are to the Internal Revenue Code in
effect for 2004, and all Rule references are to the Tax Court
Rules of Practice and Procedure, unless otherwise indicated.
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from his retirement account in his income in 2004. We hold that
he should have included the distribution in income in 2004. The
second issue is whether petitioner is liable for the 10-percent
additional tax on the distribution from his retirement account
under section 72(t). We hold that he is. The third issue is
whether petitioner is liable for the accuracy-related penalty
under section 6662. We hold that he is. The fourth issue is
whether we should impose a penalty on petitioner under section
6673. We hold that we shall not impose a penalty in this case,
but caution petitioner that he is at risk of a penalty if he
brings similar arguments before the Court in the future.
Background
This case was submitted fully stipulated pursuant to Rule
122, and the facts are so found. The stipulation of facts, the
supplemental stipulation of facts, and the accompanying exhibits
are incorporated by this reference. Petitioner resided in
Humansville, Missouri, at the time he filed the petition.
Petitioner was the superintendent of schools for the
Humansville R-IV school district in Humansville, Missouri.
Petitioner had a retirement account with the school district
regarding his employment, which account was administered by the
Public School Retirement System of Missouri (PSRS). The parties
agree that the PSRS retirement plan was a qualified plan under
section 401(a).
Petitioner’s employment was terminated in September 2004.
After the termination, petitioner contacted PSRS to determine how
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long it would take to obtain a distribution from his retirement
account. PSRS advised petitioner that it would take about 60
days. Petitioner planned to use the distribution to live on
during 2005.
Petitioner requested a distribution from his retirement
account in mid-November 2004. The distribution did not take as
long to process as anticipated. Petitioner received $62,467.58
from his retirement account in December 2004. PSRS withheld
$12,493.52 in Federal tax from the distribution. Petitioner was
53 when he received the distribution.
The retirement plan issued petitioner a Form 1099-R,
Distributions From Pensions, Annuities, Retirement or Profit-
Sharing Plans, IRAs, Insurance Contracts, etc., reporting it paid
petitioner the $62,467.58 from his retirement account in 2004 and
that it withheld $12,493.52 in Federal tax from the distribution.
Petitioner did not report the distribution on his tax return for
2004, however. Petitioner crossed out the “taxable amount” on
the line on the return for reporting pension and annuity income,
and wrote in “mistake” and “next year.” Petitioner also attached
a statement to his return for 2004 explaining that he did not
want the funds from his retirement plan in 2004 and asserting
that he would not pay taxes on the funds for 2004. Petitioner
reported the distribution from the retirement account as wages on
his return for 2005.
Respondent issued a deficiency notice for 2004 in which
respondent determined that petitioner should have reported the
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distribution as income in 2004, that petitioner was liable for
the 10-percent additional tax on the distribution under section
72(t), and that petitioner was liable for the accuracy-related
penalty. Petitioner timely filed a petition.
Discussion
We are asked to consider whether petitioner was required to
include the distribution from his retirement account in his
income for 2004, the year he received it, or 2005, the year he
intended to spend it. We are also asked to consider whether
petitioner is liable for the 10-percent additional tax on the
distribution under section 72(t) and whether petitioner is liable
for the accuracy-related penalty. We shall finally consider
whether to impose a penalty on petitioner under section 6673. We
shall consider each of these issues in turn.2
I. Whether the Distribution Is Includable in Income for 2004
We first consider whether petitioner should have included
the distribution from his retirement account in his income for
2004, the year he received the distribution. We begin by
outlining the governing law.
Gross income includes all income from whatever source
derived. Sec. 61(a). This includes items included under section
72 (relating to annuities and retirement accounts). Sec. 61(b).
2
Petitioner does not claim the burden of proof shifts to
respondent under sec. 7491(a). Petitioner also did not establish
he satisfies the requirements of sec. 7491(a)(2). We therefore
find that the burden of proof remains with petitioner as to any
factual issue affecting his liability for the deficiency in his
tax.
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The recipient of amounts paid or distributed out of a
retirement account generally includes the distributions in gross
income under the provisions of section 72. Sec. 408(d)(1); see
also sec. 61(a)(9), (11); Arnold v. Commissioner, 111 T.C. 250,
253 (1998). The amounts distributed from a retirement account
are generally included in the payee’s gross income for the
taxable year in which the distribution is received. Sec. 1.408-
4(a)(1), Income Tax Regs.
The parties agree that the retirement plan was a qualified
retirement plan. The parties also agree that petitioner actually
received the cash distribution in December 2004. Accordingly,
petitioner must include the distribution in his income for 2004,
the year he received it. See secs. 1.408-4(a)(1), 1.446-
1(c)(1)(i), Income Tax Regs.
Petitioner argues that he intended to use the funds in 2005
and thus is not taxable on the funds until 2005. Petitioner is
misguided. He received the distribution in 2004 and was
therefore taxable on the funds in 2004. See secs. 1.408-4(a)(1),
1.446-1(c)(1)(i), Income Tax Regs. Petitioner relies on various
subsections of section 72, such as (a), (b), and (h), to argue
that the distribution should not be included in his gross income
for any year. Petitioner misapplies the subsections of section
72 upon which he relies. The distribution from the retirement
account was not an annuity, and petitioner did not exercise any
option to receive an annuity with respect to the retirement
account.
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Petitioner also makes numerous arguments that his income is
not subject to tax, including arguments that there is no
definition of “income” and “taxable” in the Code, that no person
is liable for the income tax, and arguments based on the
Sixteenth Amendment to the Constitution of the United States.
All of these arguments have been considered by this and other
Courts to be frivolous and groundless. We decline to address
them further. To do so might suggest that these arguments have
some colorable merit. Crain v. Commissioner, 737 F.2d 1417,
1417-1418 (5th Cir. 1984).
II. Does the 10-Percent Additional Tax Apply To the
Distribution?
We next consider whether petitioner is liable for the 10-
percent additional tax on the early distribution from his
retirement account under section 72(t).3
Section 72(t)(1) imposes a 10-percent additional tax on
early distributions from qualified retirement accounts. There
are certain exceptions to the imposition of the 10-percent
additional tax, which include distributions made on or after the
date the employee attains 59-1/2 years old; distributions made to
the employee to the extent such distributions do not exceed
amounts paid for medical care; distributions to unemployed
3
Petitioner states on brief that respondent determined in
the deficiency notice that petitioner is liable for the 10-
percent additional tax under sec. 72(q) for premature
distributions from annuity contracts as well as the additional
tax under sec. 72(t). Petitioner has misunderstood respondent’s
determinations. Respondent did not determine petitioner was
liable for any additional tax under sec. 72(q), only sec. 72(t).
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persons for health insurance premiums; and distributions from
certain plans for first home purchases. Sec. 72(t)(2)(A)(i),
(A)(v), (B), (D), (F). The purpose of the 10-percent additional
tax is to discourage premature distributions from IRAs that
frustrate the intention of saving for retirement. 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.
Petitioner was 53 years old when he received the
distribution from the retirement account. He used the funds for
living expenses after being terminated from his job. Petitioner
has not asserted, and we do not find, that any of the exceptions
under section 72(t)(2) apply to the early distribution from his
retirement plan.
Petitioner also makes several arguments why the 10-percent
additional tax should not apply to the early distribution, all of
which we find to lack merit. For example, petitioner asserts
that section 72(t) does not apply because the retirement account
is not a contract. We disagree. Section 72(t) applies to
qualified retirement plans. The parties do not dispute that the
retirement plan here is a qualified retirement plan. Sec.
401(a). Petitioner also argues that only the interest is taxable
and that the retirement plan itself, not petitioner, is liable
for the tax. Again, we disagree. The recipient of an early
distribution is liable for the 10-percent additional tax, not the
retirement plan. Sec. 72(t)(1). The additional tax is 10
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percent of the amount includable in gross income for the year.
Id.
Petitioner also argues that PSRS’s 20-percent withholding on
the early distribution accounts for the 10-percent additional tax
under section 72(q) and the 10-percent additional tax under
section 72(t) and asserts that no law authorizes this
withholding. Respondent did not determine, nor do we find, that
petitioner is liable under section 72(q). See supra note 3.
Withholding of 20 percent generally is required on any eligible
rollover distribution, such as the distribution to petitioner,
unless the employee elects a direct rollover. Secs.
402(f)(2)(A), (c)(4), 3405(c). The amount withheld as tax may be
credited toward the tax liability, however. Sec. 31(a). In
fact, respondent adjusted the tax respondent determined that
petitioner owed in the deficiency notice by crediting the amount
withheld on the distribution against the amount respondent
determined petitioner owed on the premature distribution.
We therefore sustain respondent’s determination that
petitioner is liable for the 10-percent additional tax on the
early distribution.
III. Accuracy-Related Penalty
We next consider whether petitioner is liable for the
accuracy-related penalty under section 6662(a). Respondent has
the burden of production under section 7491(c) and must come
forward with sufficient evidence that is it appropriate to impose
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the penalty. See Higbee v. Commissioner, 116 T.C. 438, 446-447
(2001).
A taxpayer is liable for an accuracy-related penalty of 20
percent of any portion of an underpayment attributable to, among
other things, a substantial understatement of income tax. There
is a substantial understatement of income tax under section
6662(b)(2) if the amount of the understatement exceeds the
greater of either 10 percent of the tax required to be shown on
the return, or $5,000. Sec. 6662(a), (b)(1) and (2), (d)(1)(A);
sec. 1.6662-4(a), Income Tax Regs.
Petitioner reported he owed $8,169 for 2004 and respondent
determined upon examination that petitioner owed $29,983.4 Thus,
petitioner understated the tax on his return by $21,814, which is
greater than 10 percent of the tax required to be shown on the
return, or $5,000. Accordingly, respondent has met his burden of
production with respect to petitioner’s substantial
understatement of income tax for 2004.
The accuracy-related penalty under section 6662(a) does not
apply to any portion of an underpayment, however, 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); sec. 1.6664-4(b), Income Tax Regs.
The determination of whether a taxpayer acted with reasonable
cause and in good faith is made on a case-by-case basis, taking
4
Respondent adjusted petitioner’s reported tax liability to
$6,956 after examining the taxable income petitioner reported on
the return.
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into account all the pertinent facts and circumstances, including
the taxpayer’s efforts to assess his or her proper tax liability
and the knowledge and experience of the taxpayer. Sec. 1.6664-
4(b)(1), Income Tax Regs. The taxpayer bears the burden of proof
with respect to reasonable cause. Higbee v. Commissioner, supra
at 446.
Petitioner failed to assert any arguments that reasonable
cause existed. Petitioner focused his arguments on why the
distribution should not be treated as income, should not be
subject to the additional tax, as well as tax-protester type
arguments that wages are not income. Specifically, petitioner
did not argue and did not introduce any evidence that he acted
with reasonable cause or in good faith with respect to the
underpayment for 2004.5
After considering all of the facts and circumstances, we
find that petitioner has failed to establish that he had
reasonable cause and acted in good faith with respect to the
underpayment. Accordingly, we sustain respondent’s determination
that petitioner is liable for the accuracy-related penalty for
2004.
5
Petitioner states that the Code is difficult for the IRS to
understand, relying on a case involving the recovery of
attorney’s fees. McKee v. Commissioner, T.C. Memo. 2004-115, as
supplemented T.C. Memo. 2004-169, revd. 209 Fed. Appx. 691 (9th
Cir. 2006). There is no uncertainty about petitioner’s legal
obligations here. See, e.g., Pessin v. Commissioner, 59 T.C.
473, 489 (1972); Rosanova v. Commissioner, T.C. Memo. 1985-306;
Grant v. Commissioner, T.C. Memo. 1980-242.
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IV. Section 6673 Penalty
We now consider whether petitioner should be held liable for
a penalty under section 6673. We take this opportunity to warn
petitioner that we are authorized to impose a penalty of up to
$25,000 on a taxpayer if the Court finds, among other things,
that the taxpayer’s position in proceedings is frivolous or
groundless. A taxpayer’s position is frivolous if it is contrary
to established law and unsupported by a reasoned, colorable
argument for change in the law.6 See Coleman v. Commissioner,
791 F.2d 68, 71 (7th Cir. 1986); see also Hansen v. Commissioner,
820 F.2d 1464, 1470 (9th Cir. 1987); Nis Family Trust v.
Commissioner, 115 T.C. 523, 544 (2000).
The purpose of section 6673 is to compel taxpayers to think
and conform their conduct to settled tax principles. Coleman v.
Commissioner, supra; see also Takaba v. Commissioner, 119 T.C.
285, 295 (2002). The section is a penalty provision intended to
deter and penalize frivolous claims and positions in proceedings
before this Court.
Petitioner makes numerous frivolous arguments on brief.
Petitioner asserts that none of his income is taxable, arguing
that wages are not income and no person is liable for income tax.
Though we do not impose a penalty here, nor does respondent ask
us to impose a section 6673 penalty, we caution petitioner that
should he bring similar arguments before this Court in the
6
We have jurisdiction to hear the case notwithstanding that
we find petitioner’s arguments frivolous. Petitioner’s
assertions to the contrary are incorrect.
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future, he is at risk that the Court is likely to impose such a
penalty, up to $25,000.
We sustain respondent’s determinations in the deficiency
notice. We have considered all remaining arguments the parties
made and, to the extent not addressed, we conclude they are
irrelevant, moot, or meritless.
To reflect the foregoing,
Decision will be entered
for respondent.