Murillo v. Commissioner

T.C. Memo. 1998-13

UNITED STATES TAX COURT

FRANCISCO A. MURILLO, Petitioner v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 18163-96. Filed January 12, 1998.

Francisco A. Murillo, pro se.

Andrew J. Mandell and Lewis J. Abrahams, for respondent.

MEMORANDUM OPINION

TANNENWALD, Judge: Respondent determined a deficiency in

petitioner's Federal income tax in the amount of $94,759 for the

taxable year 1992. The issues for decision are:

(1) Whether petitioner is entitled to a loss deduction for

money forfeited to the United States;

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(2) if not, whether imposing a liability for taxes on

forfeited money without allowing a loss deduction violates the

Double Jeopardy Clause of the Fifth Amendment or the Excessive

Fines Clause of the Eighth Amendment to the U.S. Constitution;

and

(3) whether petitioner is subject to the tax on early

distributions from his individual retirement accounts (IRA's)

under section 72(t).1

This case was submitted fully stipulated under Rule 122.

The stipulation of facts and the attached exhibits are

incorporated herein by this reference. Petitioner resided in

Mineola, New York, at the time he filed the petition in this

case.

Background

In April of 1987, after a 29-year career with Bank of

America, petitioner's job was eliminated in the course of a

corporate reorganization and his services terminated. During

1987, petitioner received a lump-sum payment of $207,050 from his

retirement plan which he rolled over into a retirement account at

Merrill Lynch. He also received a net payment of $43,194.99 from

1

Unless otherwise indicated, all statutory 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.

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Bank of America which he rolled over into various accounts he

opened with Fidelity Investments.

Between January 19, 1988, and August 23, 1989, approximately

$596,736 in U.S. currency was deposited in five of petitioner's

bank accounts in the New York City metropolitan area, all in

amounts of less than $10,000. An indictment was filed against

petitioner on May 23, 1991, and a superseding indictment on

August 6, 1991. The superseding indictment charged petitioner

with: (1) Conspiracy to structure cash deposits into bank

accounts in the New York area for the purpose of avoiding Federal

currency transaction reporting requirements; (2) 22 substantive

structuring counts relating to approximately $1,026,855 in U. S.

currency deposited into various bank accounts during the period

January 19, 1988, through August 23, 1989, in violation of 31

U.S.C. sections 5324(3) and 5322(a) (1988); and (3) 10 counts

alleging violations of customs reporting requirements.

On January 9, 1992, petitioner entered into a plea agreement

whereby he agreed to plead guilty to 10 of the 22 substantive

structuring counts contained in the superseding indictment. In a

related civil proceeding, all funds on deposit in a number of

petitioner's accounts were forfeited to the United States

pursuant to 18 U.S.C. section 981 (1988 and Supp. II 1990). The

Consent Decree of Forfeiture and Order of Delivery in that

proceeding was issued on January 9, 1992. In the plea agreement,

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the U.S. Attorney's Office recommended that, because of the

Decree of Forfeiture, the imposition of a fine was not warranted.

The sentencing court agreed with the recommendation and, on

June 23, 1992, petitioner was ordered to pay a special assessment

of $500 and was sentenced to 38 months' imprisonment for each of

the counts, with the terms of imprisonment to run concurrently

for a total of 38 months' imprisonment.

Among the accounts forfeited were petitioner's IRA's at

Merrill Lynch and Fidelity Investments (the IRA's). The total

amount forfeited from the IRA's (the IRA distributions) was

$230,161. Petitioner was 57 years old at the time of the IRA

distributions.

Petitioner reported the IRA distributions as taxable income

on his 1992 Federal income tax return. He did not include the

10-percent additional tax on early distributions from qualified

retirement plans pursuant to section 72(t) (the section 72(t)

tax). Petitioner does not meet any of the exceptions to the

section 72(t) tax provided in section 72(t)(2).2 Petitioner

claimed a Schedule C loss, that respondent disallowed, in the

amount of $273,417.47, attributed to the forfeiture.

2

The exception for distributions set forth in subparagraph

(A)(v) of sec. 72(t)(2) does not apply to IRA distributions.

Sec. 72(t)(3)(A).

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Discussion

Loss Deduction

Section 165(a) allows a deduction for "any loss sustained

during the taxable year and not compensated for by insurance or

otherwise." In the case of an individual, the deduction is

limited to losses incurred in a trade or business or in any

transaction entered for profit or to certain theft or casualty

losses. Sec. 165(c). Courts consistently have disallowed loss

deductions where the deduction would frustrate a sharply defined

Federal or State policy. Wood v. United States, 863 F.2d 417

(5th Cir. 1989); Fuller v. Commissioner, 213 F.2d 102 (10th Cir.

1954), affg. 20 T.C. 308 (1953); Holmes Enterprises v.

Commissioner, 69 T.C. 114 (1977). The test of nondeductibility

is the severity and immediacy of the frustration resulting from

allowance of the deduction. Stephens v. Commissioner, 905 F.2d

667, 670 (2d Cir. 1990), revg. on other grounds 93 T.C. 108

(1989); Wood v. United States, supra.

Petitioner pleaded guilty to 10 counts of structuring cash

transactions in violation of Federal statutes, including 31

U.S.C. section 5324(3) (1988). The civil forfeiture of

petitioner's accounts was pursuant to 18 U.S.C. section 981 (1988

and Supp. II 1990) which provides that "Any property, real or

personal, involved in a transaction or attempted transaction in

violation of 5313(a) or 5234 of title 31, * * * , or any property

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traceable to such property" is subject to forfeiture to the

United States. 18 U.S.C. sec. 981(a)(1)(A). The title 31

sections establish the Federal Government's policy against

structuring. See Stephens v. Commissioner, 905 F.2d at 670. To

allow petitioner a deduction for losses arising out of illegal

activities would undermine public policy by permitting a portion

of the forfeiture to be borne by the Government, thus taking the

"sting" out of the forfeiture. See Tank Truck Rentals, Inc. v.

Commissioner, 356 U.S. 30, 35 (1958); Wood v. United States,

supra at 422; Holt v. Commissioner, 69 T.C. 75, 81 (1977), affd.

611 F.2d 1160 (5th Cir. 1980); Farris v. Commissioner, T.C. Memo.

1985-346, affd. without published opinion 823 F.2d 1552 (9th Cir.

1987). Petitioner seeks to draw a line between his situation and

the cases denying deductions for forfeitures on the ground that

such cases involved drug dealers whose activities involve much

more serious violations of law than his structuring of bank

deposits. We think this distinction is without merit. The

Congress, by its enactment of the antistructuring statutory

provisions, established a declared public policy. Taking into

account the "presumption against congressional intent to

encourage violation of declared public policy", Tank Truck

Rentals, Inc. v. Commissioner, supra at 35, and that the

antistructuring provisions constituted subtitle H of the Anti-

Drug Abuse Act of 1986, Pub. L. 99-570, 100 Stat. 3207, 3207-22,

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we think it clear that allowance of petitioner's claimed

deduction would frustrate a clearly defined national policy.

We hold that petitioner is not entitled to a loss deduction.

Constitutional Arguments

Petitioner argues that taxing the IRA distributions without

allowing a loss deduction for the forfeiture violates the Double

Jeopardy Clause of the Fifth Amendment3 and the Excessive Fines

Clause of the Eighth Amendment4 to the U.S. Constitution.

Petitioner cites Department of Revenue v. Kurth Ranch, 511 U.S.

767 (1994); Austin v. United States, 509 U.S. 602 (1993); and

United States v. Halper, 490 U.S. 435, 440 (1989).

Both the Double Jeopardy Clause and the Excessive Fines

Clause protect individuals against punishment. United States v.

Alt, 83 F.3d 779, 784 (6th Cir. 1996). The imposition of

liability for a Federal income tax deficiency has a remedial

intent and is not a punishment. Id.; McNichols v. Commissioner,

13 F.3d 432 (1st Cir. 1993), affg. T.C. Memo. 1993-61; Ianniello

v. Commissioner, 98 T.C. 165, 180 (1992); cf. Helvering v.

Mitchell, 303 U.S. 391, 397 (1938) (holding that the addition to

tax for fraud is remedial). Courts have considered the cases

3

U.S. Const. amend. V provides "nor shall any person be

subject for the same offence to be twice put in jeopardy of life

or limb".

4

U.S. Const. amend. VIII provides "Excessive bail shall

not be required, nor excessive fines imposed".

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cited by petitioner in the Federal income tax arena and found

that these cases did not apply for purposes of the Double

Jeopardy Clause or the Excessive Fines Clause. United States v.

Alt, supra; Thomas v. Commissioner, 62 F.3d 97 (4th Cir. 1995),

affg. T.C. Memo. 1994-128; McNichols v. Commissioner, supra; see

United States v. Ursery, 518 U.S. ___, 116 S.Ct. 2135 (1996)

(which considered the cases petitioner cites in the context of a

civil forfeiture under 18 U.S.C. sec. 981, the same statute under

which petitioner forfeited his funds, and held that such civil

forfeiture was not punishment for purposes of the Double Jeopardy

Clause); see also Hudson v. United States, 522 U.S. (Dec. 10,

1997) (which provides a further analysis of the cases which

petitioner cites).

We hold that the denial of the loss deduction while imposing

a liability for Federal income tax on the forfeited money does

not violate the Double Jeopardy Clause or the Excessive Fines

Clause.

Section 72(t) Tax

Section 72(t)(1) provides:

If any taxpayer receives any amount from a qualified

retirement plan (as defined in section 4974(c)), the

taxpayer's tax under this chapter for the taxable year

in which such amount is received shall be increased by

an amount equal to 10 percent of the portion of such

amount which is includible in gross income.

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IRA's are qualified retirement plans as defined in section

4974(c). Sec. 4974(c)(4). Section 72(t)(2) provides for certain

exceptions, none of which apply to petitioner.

Petitioner argues that the IRA distributions should not be

subject to the section 72(t) tax because he personally did not

receive the funds or receive a benefit therefrom and the

withdrawals were involuntary. Respondent counters with the

assertion that, unless one of the exceptions applies, statutory

language requires the imposition of the addition to tax,

irrespective of actual receipt by or benefit to the taxpayer or

the "voluntary" nature of the distribution.

Petitioner constructively received the IRA distributions

when his accounts were forfeited and cannot escape taxation on

the basis that the funds were disbursed to a third party.

Larotonda v. Commissioner, 89 T.C. 287, 291 (1987) (Keogh plan

withdrawal pursuant to respondent's income tax levy)5; Vorwald v.

Commissioner, T.C. Memo. 1997-15 (IRA garnished to pay child

support); cf. Kochell v. United States, 804 F.2d 84 (7th Cir.

1986) (trustee in bankruptcy, who succeeded to rights of IRA

beneficiary, was held taxable on distribution used to satisfy

creditors of the beneficiary).

5

See also Pilipski v. Commissioner, T.C. Memo. 1993-461

(to the same circuit).

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The purpose of the early withdrawal penalty is to prevent

the diversion of IRA funds to nonretirement uses and to recapture

a measure of the tax benefits that have been provided. S. Rept.

99-313, 1986-3 C.B. (Vol. 3) 1, 612-613; H. Rept. 99-426, 1986-3

C.B. (Vol. 2) 1, 728-729; see also Aronson v. Commissioner, 98

T.C. 283, 290-291 (1992) (discussing former sec. 408(f), the

predecessor of sec. 72(t)). The language of section 72(t) does

not differentiate between voluntary and involuntary withdrawals.

Thus, we have held the section 72(t) tax to be applicable where

the taxpayer did not initiate the distribution. Clark v.

Commissioner, 101 T.C. 215 (1993) (pension plan distribution due

to termination of plan); Aronson v. Commissioner, supra (IRA

distribution followed insolvency of financial institution);

Vorwald v. Commissioner, supra. On the other hand, in Larotonda

v. Commissioner, 89 T.C. at 292, we recognized the same

legislative purpose in respect of the addition to tax on

distributions from Keogh plans under section 72(m)(5), but held

that that section did not apply where the proceeds of such a plan

were levied upon to satisfy respondent's income tax levy. We

reaffirmed our holding in Larotonda in Aronson v. Commissioner,

supra at 292, pointing out that in Larotonda: "The IRS notice of

levy triggered the taxable event, and we were concerned that

Congress did not intend the additional tax to apply to such a

situation. Consequently, we ruled for the taxpayers and

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concluded that they were not liable for the 10-percent additional

tax".

We think that the instant case falls within Larotonda.

Here, the decree of forfeiture not only triggered but was itself

the event which constituted the IRA withdrawals. In this

context, the presence of an obligation on the part of the

taxpayer is less clearly defined in the case of a forfeiture than

when there is a levy to satisfy a previously determined tax

liability. Moreover, unlike the taxpayer in Aronson, petitioner

herein neither received nor had control of the use of the IRA

distributions. We are not persuaded by respondent's argument

that the instant situation falls within the ambit of Aronson

because, by virtue of the plea agreement, his consent to the

forfeiture, and his avoidance of a fine or potentially longer

prison sentence, petitioner should be treated as having

voluntarily made a premature withdrawal and therefore should be

liable for the 10-percent addition to tax under section 72(t).

We do not believe the circumstances surrounding the plea

agreement were such as to impart a "voluntary" patina to the IRA

withdrawals. In the final analysis, petitioner had no realistic

choice. See Waldman v. Commissioner, 88 T.C. 1384, 1389 (1987),

affd. in a published order 850 F.2d 611 (9th Cir. 1988), where a

plea agreement did not avoid characterization of a payment as a

fine or penalty.

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We hold that petitioner is not liable for the section 72(t)

tax with respect to the IRA distributions.

To implement our holding herein, decision will be entered

for respondent in respect of the basic deficiency in income tax

but for petitioner in respect of the 10-percent addition to tax

under section 72(t).

An appropriate decision will

be entered.