ASKEW v. COMMISSIONER

T.C. Summary Opinion 2005-108

UNITED STATES TAX COURT

MAGELLEAN ASKEW, JR., Petitioner v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 1486-04S. Filed August 1, 2005.

Magellean Askew, Jr., pro se.

Beth A. Nunnink and Richard C. Grosenick, for respondent.

ARMEN, Special Trial Judge: This case was heard pursuant to

the provisions of section 7463 of the Internal Revenue Code in

effect at the time that the petition was filed.1 The decision to

1

Unless otherwise indicated, all subsequent section

references are to the Internal Revenue Code in effect for 2001,

the taxable year in issue, and all Rule references are to the Tax

Court Rules of Practice and Procedure. All monetary amounts are

rounded to the nearest dollar.

- 2 -

be entered is not reviewable by any other court, and this opinion

should not be cited as authority.

Respondent determined a deficiency in petitioner’s Federal

income tax for the taxable year 2001 of $6,758 and an accuracy-

related penalty under section 6662(a) of $1,187.

The issues for decision are: (1) Whether petitioner

received taxable distributions from his tax-sheltered annuity

policies. We hold that he did. (2) Whether petitioner is liable

under section 6662(a) for an accuracy-related penalty. We hold

that he is.

Adjustments to petitioner’s itemized deductions and child

tax credit are purely computational matters, the resolution of

which is dependent on our disposition of the first disputed

issue.

Background2

Some of the facts have been stipulated, and they are so

found. We incorporate by reference the parties’ stipulation of

2

The evidence introduced at trial was incomprehensible.

Accordingly, we calendared this case for further trial so that

respondent could subpoena specific documentary evidence from

Americo Financial Life and Annuity Insurance Co. (Americo)

concerning the annuity policies at issue. At the subsequent

trial, respondent produced several documents that respondent

received pursuant to the subpoena. Although these documents were

necessary to develop a part of the documentary record, the

documents still failed to adequately describe the details of the

annuity policies and the transactions that occurred during the

life of the annuity policies. We thus are constrained to make

factual findings on the basis of a limited evidentiary record.

- 3 -

facts and accompanying exhibits.

At the time that the petition was filed, petitioner resided

in Memphis, Tennessee.

Petitioner has been employed as a teacher by Memphis City

Schools continually since 1980. In 1985, petitioner became a

participant in an employer-sponsored tax-sheltered account (TSA)

group plan wherein he made biweekly pretax contributions by

payroll deduction.3 Initially, Lincoln Burnett Finance Co.

administered the plan, but the company changed to Fidelity

Finance Co., then to College Life Insurance Co. of America

(College Life), and finally to Americo Financial Life and Annuity

Insurance Co. (Americo). Under the plan, petitioner had the

following annuity policies: (1) Policy No. 7142446 (first

policy); (2) policy No. 7142859 (second policy); and (3) policy

No. 7166534 (third policy).

Because of the changes in the TSA plan’s underwriter,

petitioner became concerned about the financial stability of his

annuity policies. As a result, petitioner submitted to Americo

in 2001 Surrender Request forms concerning his policies.

With regard to the first policy, petitioner submitted to

Americo a Surrender Request form in late April or early May 2001

electing a full cash surrender of this policy because of a

3

A TSA, also known as a sec. 403(b) retirement plan, is

designed exclusively for employees of nonprofit institutions such

as public schools. Sec. 403(b).

- 4 -

“separation from service”. Under this option, the form stated

that “any indebtedness thereon to the company will be deducted

from the cash value.” Petitioner elected, in the section

entitled “Federal Income Tax Withholding Election for ‘Non-

Eligible Rollover Distributions’”, not to have Federal income tax

withheld from the taxable portion of his distribution check. In

response, Americo sent petitioner a letter, dated May 18, 2001,

requesting petitioner to: (1) Clarify whether he wanted a

transfer or a direct distribution; (2) return the policy contract

or submit written acknowledgment that the policy had been lost or

destroyed; and (3) submit written acknowledgment of the reason or

eligibility for a direct distribution under the Technical and

Miscellaneous Revenue Act of 1988 (TAMRA, Pub. L. 100-647, 102

Stat. 3342) (the options listed were: Age 59-1/2; separation

from service with employer; disability; and financial hardship as

defined by the I.R.C.). On the letter, petitioner marked

“separation from service with employer” and “financial hardship

as defined by the I.R.C.” and signed the letter on May 21, 2001.

On June 7, 2001, petitioner submitted to Americo another

Surrender Request form certifying that the policy had been lost

or destroyed.

With regard to the second policy, and similarly with respect

to the first policy, petitioner submitted to Americo a Surrender

Request form electing a full cash surrender of this policy

- 5 -

because of a “separation from service” and electing not to have

Federal income tax withheld from the taxable portion of his

distribution check. In response, Americo sent petitioner a

letter, dated May 9, 2001, requesting petitioner to: (1) Return

the policy contract or submit written acknowledgment that the

policy had been lost or destroyed, and (2) submit written

acknowledgment of the reason or eligibility for a direct

distribution under TAMRA. On the letter, petitioner marked

“financial hardship as defined by the I.R.C.” and signed the

letter on May 14, 2001. Subsequently, Americo sent to petitioner

another letter, dated May 25, 2001, again requesting petitioner

to return the policy contract or submit written acknowledgment

that the policy had been lost or destroyed. On May 30, 2001,

petitioner signed the May 25, 2001 letter acknowledging that the

policy contract had been lost or destroyed. On June 7, 2001,

petitioner also signed the Surrender Request form certifying that

the policy had been lost or destroyed.

With regard to the third policy, and similarly with respect

to the first two policies, petitioner submitted to Americo a

Surrender Request form signed June 2, 2001, electing a full cash

surrender of this policy because of a “separation from service”

and electing not to have Federal income tax withheld from the

taxable portion of his distribution check. On June 7, 2001,

petitioner sent to Americo another Surrender Request form

- 6 -

certifying that the policy had been lost or destroyed.

In June 2001, petitioner received checks in full settlement

of the current cash surrender value of each policy as follows:

Date Accumulated Loan Payoff Cash Surrender Net

Account Paid Cash Value Value Value1 Penalty Distribution2

3

7142446 Jun 11 $12,434 $6,429 $6,005 $2,126 $3,879

4

7142859 Jun 26 10,590 8,896 1,694 858 836

5

7166534 Jun 11 4,700 -0- 4,700 592 3,286

1

Cash value equals accumulated cash value less loan payoff value.

2

Net distribution equals cash value less surrender penalty.

3

On June 14, 1999, College Life sent petitioner a “loan check” of

$4,711. Petitioner deposited this check into his wife’s account at First

South Credit Union (FSCU). Although petitioner claims that his wife’s account

is an annuity account, there is no evidence in the record to support his

claim. Rather, based on the documents in the record, it appears that the

account is a savings account.

4

On June 7, 1999, College Life sent petitioner a “loan check” of

$3,182. Petitioner deposited this check into his wife’s account at FSCU.

5

This computation includes a reduction for Federal income tax withheld

of $822.

At the time of the distributions, petitioner was under 59-1/2

years of age, he was not disabled, and he had been employed with

Memphis City Schools continually since 1980.

Americo issued to petitioner three Forms 1099-R,

Distributions From Pensions, Annuities, Retirement or Profit-

Sharing Plans, IRAs, Insurance Contracts, etc., for 2001

reporting the following amounts as taxable distributions:

Account Distribution1 Withholding Code

2

7142446 $10,308 -0- 3

7142859 9,731 -0- 3

3

7166534 4,107 $822 2

1

Distribution amount equals accumulated cash value less

surrender penalty.

2

Distribution code 3 is defined as a distribution on

account of a disability, which is not subject to the 10-percent

additional tax under sec. 72(t)(2)(A)(iii).

3

Distribution code 2 is defined as an early distribution

with an applicable exception from the 10-percent additional tax

- 7 -

under sec. 72(t).

Petitioner did not report these distributions on his

Federal income tax return for 2001. In the notice of deficiency,

respondent determined that petitioner failed to report the

distributions from Americo of $24,146. Respondent further

determined that petitioner is liable for the accuracy-related

penalty under section 6662(a) for negligence and/or substantial

understatement of income tax.

Petitioner filed a timely petition with this Court.

Paragraph 4 of the petition states:

The request is because-Funds from one IRA were

placed into another IRA. These funds although

reported to you on an 1099, were only transferred.

I believe this request should be granted, I can

provide paperwork supporting this claim.

Discussion

A. Americo Distributions

Generally, the Commissioner’s determinations are presumed

correct, and the taxpayer bears the burden of proving that those

determinations are erroneous.4 Rule 142(a); Welch v. Helvering,

290 U.S. 111, 115 (1933).

4

Sec. 7491(a) does not apply in this case to shift the

burden of proof to respondent because petitioner neither alleged

that sec. 7491(a) is applicable nor introduced credible evidence

with respect to any factual issue relevant to ascertaining his

income tax liability. See Higbee v. Commissioner, 116 T.C. 438,

442 (2001). Sec. 6201(d) also does not apply in this case if for

no other reason than that petitioner failed to cooperate with

respondent.

- 8 -

1. Did petitioner receive the distributions at issue in

2001?

Petitioner first contends that he did not receive any

distributions from Americo in 2001, and, therefore, the Forms

1099-R are incorrect. Therefore, we first address whether

petitioner received the distributions at issue in the taxable

year 2001.

Petitioner denies receiving any distribution from Americo

in 2001. Instead, petitioner argues that he received

distributions from his annuity policies only in 1999 in the

following amounts: (1) $4,711 from the first policy on June 14,

1999;5 (2) $3,182 from the second policy on June 7, 1999; (3)

$12,711; and (4) $9,000.6 The reason for these distributions,

petitioner argues, is because he closed his TSA in 1999.

Petitioner further argues that these amounts were based on the

surrender value of the policies at such time. Petitioner’s

contention strains credulity.

Petitioner presented to the Court, inter alia, only copies

of the checks in the amount of $4,711 and $3,182. Remarkably,

the supporting documentation attached to these checks

5

Petitioner testified at trial, however, that he received

this amount in December 1998. The check, dated June 14, 1999,

clearly contradicts petitioner’s assertion.

6

Petitioner presented no evidence of the latter two

amounts that he claimed to have received from Americo in 1999.

- 9 -

specifically indicated that the disbursements were loans from

petitioner’s respective annuity policies. Other than his bare

assertions that he did not take any loans against the policies,

petitioner presented no documentary evidence to demonstrate that

the 1999 disbursements were anything other than loans against the

policies. Moreover, petitioner presented no evidence, aside from

his self-serving statements, that he did not receive the

distributions as reported in the Forms 1099-R for 2001. See

Tokarski v. Commissioner, 87 T.C. 74, 77 (1986) (“we are not

required to accept the self-serving testimony of petitioner * * *

as gospel”). Indeed, petitioner submitted signed Surrender

Request forms for each policy in or about May and June 2001, the

year in which he received the distributions at issue. Pursuant

to petitioner’s Surrender Request forms, Americo distributed to

petitioner the full cash surrender value of each annuity policy

in June 2001. Thereafter, Americo issued Forms 1099-R indicating

such distributions. Accordingly, we conclude that petitioner

received a total distribution of $24,146 from Americo in 2001.

2. Are the distributions at issue includable in

petitioner’s gross income?

As relevant to the instant case, annuities purchased by a

tax-exempt educational organization for the benefit of its

- 10 -

teachers and other employees receive a special tax advantage.7

The amounts contributed to the annuity are excluded from the

employee’s gross income at the time of the contribution, and

taxation is deferred until such time when the employee receives

payments under the annuity contract. Sec. 403(b)(1). The amount

actually distributed under such contract is taxable to the

distributee in the year in which he or she receives the payments

under the exclusion percentage rule of section 72. Id.

Generally, a tax-sheltered annuity offered by a tax-exempt

organization will lose the section 403(b)(1) tax deferral

advantage unless, under such contract, distributions attributable

to contributions made pursuant to a salary reduction agreement

may be paid only: (1) When the employee: (a) attains age 59-

1/2; (b) separates from service; (c) dies; or (d) becomes

disabled; or (2) in the case of hardship. Sec. 403(b)(11). In

addition, an early distribution satisfying the aforementioned

requirements that is rolled over is not included in income in the

year so distributed if: (1) Any portion of the balance to the

credit of an employee in an annuity contract is paid to him in an

eligible rollover distribution (as defined in section 402(c)(4));

and (2) the employee transfers any portion of such property he

receives in such distribution to an eligible retirement plan (as

7

This includes annuity contracts issued by an insurance

company. Sec. 403(b)(1)(A).

- 11 -

defined in section 402(c)(8)(B)) within 60 days of receipt of the

distributed property. Sec. 403(b)(8). Under section

402(c)(4)(C), an eligible rollover distribution specifically

excludes any hardship distribution. Moreover, an early

withdrawal from a section 403(b) annuity contract that does not

meet the aforementioned distribution requirements is subject to

an early withdrawal penalty of 10 percent of the portion of such

amount that is includable in gross income.8 Sec. 72(t)(1).

As relevant to this case, any amount that is received

under an annuity contract on its complete surrender, which is not

received as an annuity and is not subject to any other income tax

law provision, shall be included in gross income to the extent it

exceeds the investment in the contract. Sec. 72(e)(1)(A),

(5)(A), (E)(ii). The investment in the contract is defined

generally as the aggregate amount of premiums or other

consideration paid for the contract less amounts previously

received under the contract, to the extent such latter amounts

were excludable from gross income. Sec. 72(e)(6).

Petitioner contends that the distributions at issue are

not includable in gross income because he rolled over the

8

An annuity contract under sec. 403(b) is a “qualified

retirement plan” for purposes of sec. 72(t)(1). See sec.

4974(c)(3).

- 12 -

distributions into an individual retirement account or annuity.9

Petitioner’s contention is misplaced.

In the instant case, petitioner did not satisfy the basic

distribution requirements for an early distribution from a tax-

sheltered annuity. Although petitioner indicated in his

Separation Request forms that he separated from service, the

truth of the matter is that he has been employed by Memphis City

Schools continuously since 1980. Consequently, we find that

petitioner did not have a separation from service to permit an

early distribution. In addition, we question petitioner’s

statement with respect to his claim on his Separation Request

forms for the first and second policy that the reason for the

distribution was financial hardship. We question his statement

for two reasons: (1) Petitioner has a history of falsifying the

reasons for distribution under the plan (see discussion, supra);

and (2) clearly, if petitioner was suffering from financial

hardship, he would have used the distribution to relieve that

financial burden rather than simply attempting to roll over tax-

free the early withdrawal into a purported IRA or annuity. The

9

The factual predicate for petitioner’s contention is

rather murky. Petitioner implies that he deposited the

distributions into his annuity account with Aviva Life Insurance

Co. (Aviva), which he opened in 2001. Petitioner, however,

presented no documentary evidence, other than an Oct. 1, 2004

general account summary statement of his Aviva account,

establishing that the distributions at issue were transferred to

this account. This aspect, however, is not dispositive of the

issue before us. See discussion, infra.

- 13 -

underlying reason petitioner surrendered his TSA, however, was

because he was concerned about the financial stability of his

policies due to the changes in the plan’s underwriter rather than

because of a personal financial hardship. In any event, assuming

arguendo that petitioner suffered from a financial hardship, a

hardship distribution from an annuity contract is specifically

excluded as an eligible rollover contribution. Sec.

402(c)(4)(C).

On the basis of the entire record, petitioner did not

satisfy the distribution requirements for an early withdrawal

under section 403(b)(11), and, therefore, petitioner did not

receive an eligible rollover distribution under section

403(b)(8). Accordingly, we conclude that petitioner did not make

a tax-free rollover of the Americo distributions.10

The record is clear that the distributions at issue

resulted from petitioner’s surrender of his annuity policies. As

stated earlier, section 72(e)(5) applies to the surrender of an

annuity contract. See sec. 72(e)(5)(E). Absent exceptions not

applicable in the instant case, the law is well settled that a

distribution upon the complete surrender of an annuity contract

is includable in gross income to the extent the distribution

10

Based on our conclusion, petitioner should be liable for

the sec. 72(t)(1) penalty. We note, however, that this issue is

not before us because respondent did not challenge Americo’s

characterization that sec. 72(t)(1) did not apply.

- 14 -

exceeds the investment in the contract.11 Therefore, the

distribution of $24,146 is includable in petitioner’s gross

income. Accordingly, we sustain respondent’s determination on

this issue.

B. Section 6662(a) Penalty

In the notice of deficiency, respondent determined that

petitioner is liable under section 6662(a) for an underpayment of

tax that is attributable to negligence and/or substantial

understatement of income tax.

Section 6662(a) imposes a penalty equal to 20 percent of

any underpayment of tax that is attributable to either (1)

negligence or disregard of rules or regulations or (2) a

substantial understatement of income tax. See sec. 6662(a) and

(b)(1) and (2).

The term “negligence” includes any failure to make a

reasonable attempt to comply with the provisions of the internal

revenue laws. Sec. 6662(c); sec. 1.6662-3(b)(1), Income Tax

Regs. The term “disregard” includes any careless, reckless, or

intentional disregard. Sec. 6662(c); sec. 1.6662-3(b)(2), Income

Tax Regs.

11

Petitioner’s annuity policies were tax-deferred

annuities, funded with pretax contributions. Because the

contributions to petitioner’s annuity policies were made with

pretax income, such contribution does not constitute an

investment in the contract within the meaning of sec. 72(e)(6).

- 15 -

An understatement of income tax is “substantial” if it

exceeds the greater of 10 percent of the tax required to be shown

on the return, or $5,000. Sec. 6662(d)(1)(A). An

“understatement” is defined as the excess of the tax required to

be shown on the return over the tax actually shown on the return.

Sec. 6662(d)(2)(A).

Whether the accuracy-related penalty is applied because of

negligence or disregard of rules or regulations, or a substantial

understatement of tax, section 6664 provides an exception to

imposition of the accuracy-related penalty if the taxpayer

establishes that there was reasonable cause for the

understatement 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 into account all the pertinent facts and

circumstances. Sec. 1.6664-4(b)(1), Income Tax Regs. Generally,

the most important factor is the extent of the taxpayer’s effort

to assess the proper tax liability for such year. Id.

By virtue of section 7491(c), the Commissioner has the

burden of production with respect to a taxpayer’s liability for

any penalty. To meet this burden, the Commissioner must produce

sufficient evidence indicating that it is appropriate to impose

the relevant penalty. Higbee v. Commissioner, 116 T.C. 438, 446

- 16 -

(2001). Once the Commissioner meets the burden of production,

the taxpayer must come forward with persuasive evidence that the

Commissioner’s determination is incorrect. Id. The taxpayer,

however, bears the burden of proving that he or she acted with

reasonable cause and in good faith. See sec. 6664(c)(1); see

also Higbee v. Commissioner, supra at 446; sec. 1.6664-4(b)(1),

Income Tax Regs.

Respondent satisfied his burden of production under

section 7491(a)(1) because the record demonstrates that

petitioner failed to report annuity income in the amount of

$24,146 and that the understatement was attributable to such

unreported income, which was substantial within the meaning of

section 6662(d)(1)(A)(ii). Accordingly, we hold that respondent

satisfied his burden of production for the accuracy-related

penalty based on both negligence or disregard of rules or

regulations and substantial understatement of income tax.

On the basis of the record, a prima facie case exists for

imposition of the penalty. Petitioner did not present any

evidence or make any showing that respondent’s determination was

in error. Moreover, petitioner did not have reasonable cause,

nor did he act in good faith with respect to the understatement

of income tax. Accordingly, we sustain respondent’s

determination on this issue.

- 17 -

Conclusion

We have considered all of the other arguments made by

petitioner, and, to the extent that we have not specifically

addressed them, we conclude that they are without merit.

Reviewed and adopted as the report of the Small Tax Case

Division.

To reflect our disposition of the disputed issues,

Decision will be entered

for respondent.