VEGA v. COMMISSIONER

T.C. Summary Opinion 2002-14

UNITED STATES TAX COURT

ARMANDO VEGA, Petitioner v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 1434-01S. Filed February 15, 2002.

Armando Vega, pro se.

Susan Smith Canavello, for respondent.

POWELL, Special Trial Judge: This case was heard pursuant

to section 7463 of the Internal Revenue Code in effect at the

time the petition was filed.1 The decision to be entered in this

case is not reviewable by any other court, and this opinion

should not be cited as authority.

Respondent determined a deficiency in petitioner’s 1998

1

Unless otherwise indicated, subsequent section references

are to the Internal Revenue Code in effect for the year in issue,

and Rule references are to the Tax Court Rules of Practice and

Procedure.

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Federal income tax and an addition to tax under section

6651(a)(1) of $4,398 and $660, respectively. The issues are:

(1) Whether a distribution from a retirement plan of $27,389 is

includable in petitioner’s gross income for the 1998 taxable

year; (2) whether petitioner failed to report interest income of

$117 for 1998; and (3) whether petitioner is liable for the

addition to tax under section 6651(a)(1) for the 1998 taxable

year.2 Petitioner resided in Baton Rouge, Louisiana, at the time

the petition was filed.

The facts may be summarized as follows. In October 1998,

petitioner received a distribution from a retirement plan3 of

$30,389.94.4 Some time prior to this, petitioner had opened a

individual retirement account (IRA) and a cash management account

(CMA) with Merrill Lynch. The distribution from the retirement

plan was deposited into the CMA. Petitioner believed that he had

instructed his broker at Merrill Lynch to put the distribution

2

On his 1998 Federal income tax return petitioner reported

taxable income of $12,325 from a teacher’s retirement system.

Respondent concedes that petitioner overstated this income by

$4,124. In the notice of deficiency, respondent determined that

the addition to tax for late filing under sec. 6651(a)(1) was 15

percent of the amount of tax required to be shown on the return.

Respondent concedes that the correct percentage is 5 percent.

3

The precise nature of this retirement plan is not

contained in the record; the parties agree, however, that the

plan is some type of a deferred income retirement program similar

to a sec. 401(k) plan.

4

The amount of the distribution was $30,389.94.

Respondent agrees that only $27,389 was taxable.

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into the IRA. A statement from Merrill Lynch for the period

ending October 31, 1998, however, clearly shows that the

distribution had been deposited into the CMA.

During 1998, petitioner had a savings account with Hibernia

National Bank. That account generated interest income of $117

that petitioner did not withdraw during the year.

Petitioner obtained extensions of time within which to file

his 1998 Federal income tax return to October 15, 1999. He did

not file his 1998 return until October 19, 1999. Petitioner did

not report income from the distribution from the retirement plan

or the $117 interest income from Hibernia National Bank.

Respondent determined that $27,389 of the retirement plan

distribution and the $117 interest income are includable in gross

income. Respondent also imposed an addition to tax under section

6651(a)(1) for not timely filing the 1998 tax return.

Discussion5

Retirement Plan Distribution

The taxable portion of a distribution from a retirement plan

under section 401(k) is generally taxable in the year of receipt.

See sec. 402(a)(1). Section 402(a)(5)(A) and (C), however,

provides:

5

The facts concerning the retirement plan distribution and

the unreported interest are not in dispute, and sec. 7491(a),

concerning the burden of proof with respect to factual issues, is

not pertinent to the resolution of these issues

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(A) General rule.-–If-–

(i) any portion of the balance to the credit of an

employee in a qualified trust is paid to him,

(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.

* * * * * * *

(C) Transfer must be made within 60 days of receipt.-–

Subparagraph (A) shall not apply to any transfer of a

distribution made after the 60th day following the day on

which the employee received the property distributed.

The distribution from the retirement plan was received by

petitioner on or about October 19, 1998. Petitioner did not

deposit the funds into an IRA, rather the funds were deposited

into a CMA. Accordingly, the exemption of the distribution from

gross income contained in section 402(a)(5)(A) does not apply.

Petitioner’s argument seems based on an overly expansive

reading of our opinion in Wood v. Commissioner, 93 T.C. 114

(1989). Wood involved a distribution from a profit-sharing plan

where the taxpayer established an IRA within the 60-day period

and transferred the distribution to a trustee. Because of a

bookkeeping error by the trustee of the IRA, a portion of the

distribution was not credited to the IRA account within the 60-

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day period. This Court held that the bookkeeping error did not

preclude the rollover. However, in Rodoni v. Commissioner, 105

T.C. 29, 38-39 (1995), we noted that

Where the requirements of a statute relate to the

substance or essence of the statute, they must be rigidly

observed. On the other hand, if the requirements are

procedural or directory in that they do not go to the

essence of the thing to be done, but rather are given with a

view to the orderly conduct of business, they may be

fulfilled by substantial compliance. [Citations omitted.]

See also Schoof v. Commissioner, 110 T.C. 1, 11 (1998); Reese v.

Commissioner, T.C. Memo. 1997-346; Orgera v. Commissioner, T.C.

Memo. 1995-575.

There was no substantial compliance here. While petitioner

maintained an IRA with Merrill Lynch, the distribution was not

transferred to that account, and the monthly statement clearly

shows that this was the fact. This was not a bookkeeping error

on the part of Merrill Lynch. Furthermore, even if there were an

error, that error quickly could have been remedied by petitioner

when he received the monthly statement for either October or

November. Petitioner, however, did not make any effort to remedy

the alleged error. We sustain respondent’s determination.

Unreported Interest Income

Petitioner did not report $117 that was credited to his

savings account by Hibernia National Bank during 1998. As we

understand, petitioner contends that, since the money was not

actually withdrawn by him, it was not taxable. Section 1.451-

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2(a), Income Tax Regs., provides, inter alia:

Income although not actually reduced to a taxpayer’s

possession is constructively received by him in the taxable

year during which it is credited to his account * * *.

However, income is not constructively received if the

taxpayer’s control of its receipt is subject to substantial

limitations or restrictions. * * *

There were no restrictions on petitioner’s ability to withdraw

these funds, and we sustain respondent’s determination.

Failure To File Timely Return

Section 6651(a)(1) provides for an addition to tax where a

return is not timely filed “unless it is shown that such failure

is due to reasonable cause and not due to willful neglect”. The

amount of the addition to tax is “5 percent of the amount * * *

[of the correct tax] if the failure is for not more than 1 month,

with an additional 5 percent for each additional month or

fraction thereof * * * not exceeding 25 percent in the

aggregate”. Sec. 6651(a)(1). Petitioner’s return was filed

October 19, 1999. Respondent initially determined that

petitioner’s return was due August 15, 1999, but now concedes

that the return was due October 15, 1999, and that the maximum

addition to tax is 5 percent. Petitioner does not dispute that

the return was late and offered no evidence or argument with

respect to whether the failure to timely file was due to

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reasonable cause and not due to willful neglect.6 We sustain

respondent’s determination as modified by the concession as to

when the return was due.

Reviewed and adopted as the report of the Small Tax Case

Division.

Decision will be entered

under Rule 155.

6

Sec. 7491(c) provides that respondent has the “burden of

production” for the addition to tax. That burden is satisfied

when respondent shows that the return was not timely filed. It

does not include establishing that there was not reasonable

cause. See Higbee v. Commissioner, 116 T.C. 438, 446 (2001).