The opinion
T.C. Memo. 2004-287
UNITED STATES TAX COURT
MICHAEL J. BARKLEY, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 7610-02. Filed December 28, 2004.
Michael J. Barkley, pro se.
Katheryn Vetter and Christian A. Speck, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
MARVEL, Judge: Respondent determined a deficiency in
petitioner’s 1998 Federal income tax of $47,049 and additions to
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tax under section 6651(a)(1)1 of $2,481, section 6651(a)(2) in an
undetermined amount, and section 6654 of $582.
After concessions,2 the issues for decision are: (1)
Whether petitioner may deduct from his gross income under section
402 one-half of the retirement distribution he received in 1998;
(2) whether petitioner is liable for the 10-percent additional
tax on early distributions from qualified retirement plans under
section 72(t); and (3) whether petitioner is liable for the
addition to tax under section 6651(a)(1) for failure to file a
timely 1998 income tax return.
1
Unless otherwise indicated, all section 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.
2
In the notice of deficiency, respondent determined that
petitioner had unreported income in 1998 from the following
sources: $5,008 of wages, $25 of interest income, $13 of
dividend income, $13 of capital gain, $3,139 of rental income,
and $147,492 of pension distribution. Petitioner conceded in the
stipulation of facts that he and Mrs. Barkley received the
following amounts of income for 1998: $5,009 of wages, $3,865 of
interest income, $95 of dividend income, $5,042 of capital gain,
$198,405 of rental income, and $2,144 of trust income.
On brief, respondent made the following concessions: (1)
Petitioner is not liable for additions to tax under secs.
6651(a)(2) and 6654; (2) petitioner is entitled to deduct
expenses relating to his apartment rental activity; (3)
petitioner’s 1998 filing status is married filing jointly; and
(4) petitioner’s payment of $2,000, made on or about Mar. 7,
2001, was incorrectly credited as $340, and records will be
corrected to accurately reflect the payment.
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FINDINGS OF FACT
Some of the facts have been stipulated. We incorporate the
stipulated facts into our findings by this reference. Petitioner
resided in Manteca, California, when his petition in this case
was filed.
Petitioner was married to M. Jeanne Barkley (Mrs. Barkley)
at all relevant times. Petitioner was born on October 27, 1945,
and Mrs. Barkley was born on September 17, 1945. On or about
June 4, 1998, Mrs. Barkley was diagnosed with multiple sclerosis,
and she has been confined to a wheelchair since the beginning of
1998.
At all relevant times, petitioner and Mrs. Barkley owned and
managed a 43-unit apartment complex, which consisted of five
buildings. Petitioner and Mrs. Barkley resided in one of the
apartments and managed the remaining apartments on a daily basis
year round. Mrs. Barkley screened and interviewed applicants,
while petitioner prepared vacant units for new tenants, performed
general outdoor maintenance, hired independent contractors to
address specific maintenance issues, and collected rent payments.
In addition to operating the rental property, petitioner
worked as a computer programmer for Pacific Bell. On December
30, 1997, petitioner retired from Pacific Bell, after 13 years of
service.
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On January 26, 1998, petitioner received a retirement
distribution of $147,492.46 (the 1998 distribution), his entire
beneficial interest in the Pacific Telesis Group Pension Plan
(the plan).3 Both petitioner and Mrs. Barkley were 52 years old
when petitioner received the 1998 distribution.
In the documents he executed to receive the 1998
distribution, petitioner, as the plan participant, elected to
receive the distribution in a single payment. Although
petitioner also elected not to have State or Federal income tax
withheld from the 1998 distribution, $29,498.49 of Federal income
tax (20 percent of the distribution) was withheld. Mrs. Barkley
consented to petitioner’s receipt of the 1998 distribution and
waived her right to joint and survivor annuity payments.
After petitioner retired from Pacific Bell, he started
attending a local college to pursue a teaching certificate in
music and drama. In 1998 petitioner took only one voice class,
but in 1999 he was enrolled in several courses that required him
to spend time reading, writing papers, and studying for
examinations. By February 2001, petitioner had dropped out of
school completely because of the pressures of caring for Mrs.
Barkley and managing the apartment complex.
3
We assume, and the parties have not disputed, that the
Pacific Telesis Group Pension Plan was a qualified plan within
the meaning of sec. 401(a).
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Petitioner did not file a timely 1998 Federal income tax
return, and the record does not indicate that petitioner
requested an extension of time to file. Petitioner also did not
file timely income tax returns for years before and after 1998.
Petitioner filed his 1994 return on August 8, 1996, his 1995
return on February 13, 1998, his 1996 return on November 23,
1998, his 1997 return on February 4, 2001, and his 1999 return on
June 6, 2002.
On January 14, 2002, respondent mailed to petitioner a
notice of deficiency with respect to petitioner’s 1998 taxable
year. In the notice of deficiency, respondent determined that
the full amount of the 1998 distribution was includable in his
income. Respondent also determined that petitioner was liable
for an addition to tax under section 6651(a)(1) for failure to
file a timely 1998 income tax return.
On April 8, 2002, petitioner and Mrs. Barkley filed a joint
Form 1040, U.S. Individual Income Tax Return, for 1998. On the
Form 1040, petitioner included the 1998 distribution in gross
income. Petitioner also reported that he owed an additional 10-
percent tax of $14,749 for receiving an early distribution from
the plan.
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On April 22, 2002, petitioner’s petition in this case was
filed.4 On September 1, 2002, petitioner and Mrs. Barkley filed
a joint Form 1040X, Amended U.S. Individual Income Tax Return,
for the taxable year 1998. On the Form 1040X, petitioner
reported as gross income only half of the 1998 distribution from
the plan, thus reducing his taxable income by $73,746.
Petitioner also reported that he owed an additional 10-percent
tax for early distributions, in the amount of $7,374, on only
one-half of the 1998 distribution. Petitioner prepared an
amended petition in this case asserting the same position with
respect to the 1998 distribution as that taken on his 1998
amended income tax return; the amended petition was filed on
January 7, 2003.
OPINION
I. Burden of Proof
Ordinarily, a taxpayer has the burden of proving that the
Commissioner’s determination is in error. Rule 142(a). If,
however, a taxpayer produces credible evidence with respect to
any factual issue relevant to ascertaining the tax liability of
the taxpayer, the burden of proof shifts to the Secretary, but
only if the taxpayer has complied with substantiation
4
Petitioner’s petition was mailed on Apr. 13, 2002.
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requirements, maintained all required records, and cooperated
with reasonable requests by the Secretary for witnesses,
information, documents, meetings, and interviews. Sec. 7491(a).5
Petitioner does not contend that section 7491(a) applies to
this case. In addition, petitioner has not established that the
requirements of section 7491(a)(2) have been satisfied.
Consequently, we hold that petitioner has the burden of proof as
to any disputed factual issue. See Rule 142(a).
Although section 7491(c) does not alter the general burden
of proof rule established by section 7491(a), it does require the
Commissioner to assume the burden of production with respect to
penalties and additions to tax.6 Respondent has the burden of
production with respect to the addition to tax under section
6651(a)(1). If respondent introduces sufficient credible
evidence to show that petitioner is liable for the section
6651(a)(1) addition to tax, then petitioner has the burden of
proving that he is not liable for the addition to tax. See
Higbee v. Commissioner, 116 T.C. 438, 446-447 (2001).
5
Sec. 7491(a) generally applies to court proceedings arising
in connection with examinations commencing after July 22, 1998.
Internal Revenue Service Restructuring & Reform Act of 1998, Pub.
L. 105-206, sec. 3001(a), 112 Stat. 726.
6
Sec. 7491(c) provides that “Notwithstanding any other
provision of this title, the Secretary shall have the burden of
production in any court proceeding with respect to the liability
of any individual for any penalty, addition to tax, or additional
amount imposed by this title.”
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II. The Proper Tax Treatment of the 1998 Distribution
Gross income includes income from whatever source derived,
including income from pensions and annuities. Sec. 61(a)(9),
(11). A distribution from a qualified retirement plan is
includable in the distributee’s gross income in the taxable year
of distribution. Sec. 402(a). The distribution is includable in
gross income in the same manner as an annuity under section 72,
id., unless the distribution qualifies for special tax treatment
under section 402(d) or is excluded under another provision.
Petitioner argues that, when he received the 1998
distribution, Mrs. Barkley became entitled to one-half of the
distribution under California community property law. Although
petitioner admits that “both halves” of the 1998 distribution are
includable in gross income under section 402(a), and that no part
of section 402(d) is applicable to his half of the 1998
distribution, petitioner contends that under section 402(d)(3),
he is entitled to deduct Mrs. Barkley’s community property
interest, equal to half of the 1998 distribution, from his gross
income. Petitioner reasons that, because section 402(d)(4)(E)
provides that “The provisions of this subsection, other than
paragraph (3), shall be applied without regard to community
property laws”, all provisions of section 402(d) relating to
computing and qualifying for lump-sum averaging “disappear” with
regard to Mrs. Barkley’s community property interest in the 1998
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distribution, leaving only the deduction authorized by section
402(d)(3).
Respondent, on the other hand, contends that petitioner must
include the entire amount of the 1998 distribution in his gross
income. Respondent also contends that petitioner and Mrs.
Barkley are not eligible to claim the benefit of forward
averaging under section 402(d) because petitioner did not elect
the application of section 402(d) and because neither petitioner
nor Mrs. Barkley had attained the age of 59½ when petitioner
received the 1998 distribution. Respondent further contends that
section 402(d) does not allow a deduction unless the amount
deducted is also included in gross income and is subject to the
separate tax imposed by section 402(d)(1) and that, because Mrs.
Barkley is not a “distributee”, she is not liable for any tax on
the distribution.
The parties’ arguments are difficult to understand, given
petitioner’s admissions that the entire 1998 distribution is
includable in income on his 1998 joint Federal income tax return
and that section 402(d) does not apply to his share of the 1998
distribution. Even if we assume, for the sake of discussion,
that Mrs. Barkley had a community property interest in the 1998
distribution as petitioner contends, the entire 1998 distribution
must still be included in the income reported on the 1998 joint
return. As we understand petitioner’s arguments, what he is
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really contending is that he is entitled to deduct Mrs. Barkley’s
community property interest (equal to one-half of the 1998
distribution) under section 402(d)(3) and (4)(E). We shall
assume, without deciding, that Mrs. Barkley had a community
property interest in the 1998 distribution and direct our
analysis to the operation of section 402(d)(3) and (4)(E).
As in effect for 1998, section 402(d)7 affords more
favorable tax treatment to a qualified recipient of a
distribution that meets the definition of “lump sum distribution”
by enabling the recipient to elect to calculate a separate income
tax on the distribution, using the special tax computation
authorized by section 402(d)(1)(B) (hereinafter referred to as
forward averaging). Under section 402(d)(1)(B), a distribution
that qualifies as a lump-sum distribution eligible for forward
averaging is taxed as if it were paid over 5 years rather than in
a single taxable year. If the taxpayer is eligible to elect and
elects forward averaging, section 402(d)(1)(A) imposes a separate
tax on the distribution, which is computed under section
402(d)(1)(B) and is added to the income tax on the taxpayer’s
other income. The separate tax under section 402(d) is equal to
five times the tax, computed using the rate for unmarried
individuals, on one-fifth of the “total taxable amount of the
7
Sec. 402(d) was repealed by the Small Business Job
Protection Act of 1996, Pub. L. 104-188, sec. 1401, 110 Stat.
1787, for taxable years beginning after Dec. 31, 1999.
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lump sum distribution” less the “minimum distribution allowance.”
Sec. 402(d)(1)(B).
In order to qualify for forward averaging under section
402(d)(1), the distribution must be a lump-sum distribution
within the meaning of section 402(d)(4)(A), and the recipient
must satisfy the requirements of section 402(d)(4)(B). Section
402(d)(4) defines lump-sum distribution, in pertinent part, as
follows:
(A) Lump sum distribution.-–For purposes of this
section and section 403, the term “lump sum
distribution” means the distribution or payment within
1 taxable year of the recipient of the balance to the
credit of an employee which becomes payable to the
recipient--
(i) on account of the employee’s death,
(ii) after the employee attains age 59½,
(iii) on account of the employee’s separation
from the service, or
(iv) after the employee has become disabled
(within the meaning of section 72(m)(7)),
from a trust which forms a part of a plan described in
section 401(a) and which is exempt from tax under
section 501 or from a plan described in section 403(a).
Clause (iii) of this subparagraph shall be applied only
with respect to an individual who is an employee
without regard to section 401(c)(1), and clause (iv)
shall be applied only with respect to an employee
within the meaning of section 401(c)(1). * * *
Section 402(d)(4)(B) provides that the separate tax authorized
by section 402(d)(1)(A) shall apply to a lump-sum distribution
with respect to an employee only if the amount is received on or
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after the date on which the employee has attained age 59½, and
the taxpayer elects for the taxable year to have all such amounts
received during such taxable year so treated. Petitioner, the
employee in question, had not attained age 59½ when he received
the 1998 distribution, and neither he nor Mrs. Barkley made the
election required by section 402(d)(4)(B)(ii).
Despite these hurdles, petitioner nevertheless maintains
that he is entitled to deduct one-half of the 1998 distribution
under section 402(d)(3). Section 402(d)(3) allows a taxpayer to
deduct from gross income “The total taxable amount of a lump sum
distribution for any taxable year * * *, but only to the extent
included in the taxpayer’s gross income for such taxable year.”
Petitioner argues that the deduction must be allowed because
section 402(d)(4)(E) provides that section 402(d), other than
section 402(d)(3), shall be applied without regard to community
property laws.
Petitioner cites no authority to support his interpretation
of section 402(d), and his argument is without merit for several
reasons. Section 402(d)(3) unambiguously provides that a
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deduction for the total taxable amount8 of a lump-sum
distribution shall be allowed only to the extent the lump-sum
distribution is included in the taxpayer’s gross income in the
taxable year. For purposes of section 402(d), the term “lump sum
distribution” is a term of art referring to a distribution that
meets the requirements of section 402(d) and qualifies for the
special tax treatment afforded thereby. Because the 1998
distribution was not received on or after petitioner attained the
age of 59½, see sec. 402(d)(4)(A) and (B), it was not a lump-sum
distribution eligible for forward averaging, and, consequently,
the special rules of section 402(d) simply do not apply.
For the aforementioned reasons, therefore, we hold that
petitioner may not deduct any portion of the 1998 distribution
under section 402(d).
8
“Total taxable amount” is defined by sec. 402(d)(4)(D) as
follows:
(D) Total taxable amount.-–For purposes of this
section and section 403, the term “total taxable
amount” means, with respect to a lump sum distribution,
the amount of such distribution which exceeds the sum
of--
(i) the amounts considered contributed
by the employee (determined by applying
section 72(f)), reduced by any amounts
previously distributed which were not
includible in gross income, and
(ii) the net unrealized appreciation
attributable to that part of the distribution
which consists of the securities of the
employer corporation so distributed.
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III. Ten-Percent Additional Tax on Early Distributions
Section 72(t)(1) imposes an additional tax of 10 percent on
the portion of a distribution from a qualified retirement plan
that is includable in gross income, unless the distribution falls
under one of the exceptions in section 72(t)(2). Section
72(t)(2)(A)(iii) provides the additional 10-percent tax does not
apply to a distribution that is attributable to the employee’s
being disabled within the meaning of section 72(m)(7). For
purposes of section 72(t) as relevant here, the term “employee”
includes any participant. Sec. 72(t)(5).
Petitioner argues that the 10-percent additional tax should
not apply to Mrs. Barkley’s half of the distribution because she
was a vested plan participant by virtue of State community
property law, and she received the distribution on account of her
disability. According to petitioner, section 72(t)(5) “broadens
the definition of employee to include a plan participant who is
otherwise not an employee”. Petitioner relies on the definitions
of “vested participant” and “inactive participant” in sections
417(f)(1) and 418D(e) to support his contention that Mrs. Barkley
was a plan participant.
Respondent does not address whether Mrs. Barkley was a
participant. Rather, he argues that although Mrs. Barkley may
have been disabled, she was not an employee for purposes of the
exception in section 72(t)(2)(A)(iii). Therefore, respondent
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argues, no part of the distribution is exempt from the 10-percent
additional tax.
We agree with respondent that petitioner’s distribution does
not qualify for any exception to the 10-percent additional tax,
and we reject petitioner’s argument that Mrs. Barkley was a
participant for purposes of section 72(t)(5). The term
“participant” is defined by Employee Retirement Income Security
Act of 1974 (ERISA),9 Pub. L. 93-406, sec. 3(7), 88 Stat. 834, 29
U.S.C. sec. 1002(7) (2000) as:
any employee or former employee of an employer, or any
member or former member of an employee organization,
who is or may become eligible to receive a benefit of
any type from an employee benefit plan which covers
employees of such employer or members of such
organization, or whose beneficiaries may be eligible to
receive any such benefit.
See also Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101, 117
(1989) (the Supreme Court, quoting Saladino v. I.L.G.W.U. Natl.
Retirement Fund, 754 F.2d 473, 476 (2d Cir. 1985), defined
“participant” for ERISA purposes to mean “‘employees in, or
reasonably expected to be in, currently covered employment’”).
Mrs. Barkley was not an employee of Pacific Bell.
Petitioner was the Pacific Bell employee and plan participant.
9
The definitions in tit. I of the Employee Retirement Income
Security Act of 1974, Pub. L. 93-406, sec. 4(a), 88 Stat. 839, 29
U.S.C. sec. 1003(a) (2000), apply to any employee benefit plan
maintained by an employer engaged in interstate commerce, whether
or not the plan is a qualified plan for purposes of the Internal
Revenue Code.
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Petitioner’s “Application for Pension Benefit” identifies him as
the plan participant and distinguishes between petitioner as the
“participant” and Mrs. Barkley as his “spouse”. Petitioner has
offered no evidence that Mrs. Barkley was considered a
participant under the terms of the plan.
Petitioner’s reliance on sections 417(f)(1) and 418D(e) to
support his argument that Mrs. Barkley was a participant is
misplaced. Section 417(f)(1) defines the term “vested
participant” for purposes of sections 417 and 401(a)(11) as “any
participant who has a nonforfeitable right (within the meaning of
section 411(a)) to any portion of such participant’s accrued
benefit” but does not define the term “participant”. Section
411(a) sets forth the various requirements by which an employee’s
retirement benefit becomes nonforfeitable. The definition of
“inactive participant” contained in section 418D(e) refers to a
person not in covered service under a plan who is in pay status
under the plan or who has a nonforfeitable right to plan
benefits. The definition is relevant only for purposes of
section 418D, which is completely inapplicable to this case.
Petitioner has taken these provisions out of context, and they do
not support his contention that Mrs. Barkley was a participant in
the plan. We conclude, therefore, that Mrs. Barkley was not an
employee of Pacific Bell or a participant in the plan.
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The record demonstrates that petitioner was the covered
employee and plan participant. The record also demonstrates that
the 1998 distribution was attributable to petitioner’s retirement
and not to any disability of his. Because section
72(t)(2)(A)(iii) requires that a distribution be attributable to
the employee’s being disabled in order for the exception to the
10-percent additional tax to apply, we hold that petitioner does
not qualify for the section 72(t)(2)(A)(iii) exception.
IV. Section 6651(a)(1) Addition to Tax
Section 6651(a) imposes an addition to tax for failure to
file a return in the amount of 5 percent of the tax liability
required to be shown on the return for each month during which
such failure continues, but not exceeding 25 percent in the
aggregate, unless it is shown that such failure is due to
reasonable cause and not due to willful neglect. See sec.
6651(a)(1); United States v. Boyle, 469 U.S. 241, 245 (1985);
United States v. Nordbrock, 38 F.3d 440, 444 (9th Cir. 1994);
Harris v. Commissioner, T.C. Memo. 1998-332. A failure to file a
timely Federal income tax return is due to reasonable cause if
the taxpayer exercised ordinary business care and prudence and
nevertheless was unable to file the return within the prescribed
time. See sec. 301.6651-1(c)(1), Proced. & Admin. Regs. Willful
neglect means a conscious, intentional failure to file or
reckless indifference. See United States v. Boyle, supra at 245.
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Respondent has met his burden of production under section
7491(c) because petitioner admits, and the record clearly
establishes, that petitioner failed to file his 1998 tax return
by the due date. Consequently, petitioner was obligated to prove
that he was not liable for the addition to tax under section
6651(a)(1). This he failed to do.
Petitioner testified that he did not prepare and file his
1998 return timely because he had fallen behind in maintaining
his books and records. Petitioner attributed this to the burden
of coping with Mrs. Barkley’s physical deterioration and mental
lapses, the overtime that Pacific Bell required him to work, the
time he spent operating the apartment, and his own depression.
While caring for Mrs. Barkley certainly required a significant
portion of petitioner’s time, we note that petitioner no longer
worked for Pacific Bell during 1998. During 1998, petitioner
began to attend school in addition to managing the apartment
complex and caring for his spouse.
Proof that a taxpayer worked long hours and was too busy to
file a timely return is insufficient to establish reasonable
cause under section 6651(a). Howe v. Commissioner, T.C. Memo.
2000-291. Moreover, petitioner has a history of filing
delinquent income tax returns that predates the diagnosis of his
spouse’s disability. Because petitioner introduced no evidence
of any legally sufficient reason for his failure to file a timely
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return, we hold that he did not have reasonable cause for his
failure to file as required by section 6651(a)(1) and that,
therefore, petitioner is liable for the addition to tax
respondent determined.
We have considered the remaining arguments of both parties
for results contrary to those expressed herein and, to the extent
not discussed above, find those arguments to be irrelevant, moot,
or without merit.
To reflect the foregoing,
Decision will be entered
under Rule 155.