Sadberry v. Commissioner

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that this opinion should not be published and is not precedent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