Benny Nipps, Petitioner

T.C. Memo. 2011-267 UNITED STATES TAX COURT BENNY NIPyS, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent Docket No. 28387-09.

Filed November 10, 2011.

Benny Nipps , pro se .

William F. Castor, for respondent.

MEMORANDUM OPINION

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PARIS, Judge: Respondent etermined a defica_ency of $13,668 in petitioner's Federal inco e tax for 2007 and an accuracy- related penalty under section 6662(a) and (b) (2) of $2,734 for a 1Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the tax period at and all Rule references are to the Tax Coprt Rules of Practice issue, (continued...)

81BWED NOV 1 0 20 substantial unders:atement of income tax.

The issues for decision are:

(1) Whether petitioner's unreported retirement distribution related to an inherited individual retirement account (IRA) is taxable, (2) whether petitioner had taxable Social Security benefits, and (3) whether petitioner is liable for an accuracy-re ated penalty under section 6662 (a) .

Background This case has been submitted fully stipulated under Rule 122.

The facts and exhibits have been stipulated and are incorporated herein by reference At the time the petition was filed, petitioner's: mailing address was in Oklahoma.

Petitioner waEi a beneficiary of the IRA (inherited IRA) of his cousin, Larry G. Harper, which was maintained by Landmark Bank, N.A.

(Landmark Bank) .

On August 12, 2007, Mr. Harper died.

On November 29, 2007, petitioner opened an IRA account with Landmark Bank to receive the funds from the inherited IRA.

Landmark Bank deposited the funds from the inherited IRA into petitioner' s IRA a count .

When petition r received the distribution from the inherited IRA, he also received a document entitled Beneficiary's Distribution Notice and Certification Form and Payment Instruction (beneficiary notice) .

The beneficiary notice stated 1 ( . and Procedure .

.

. continuedì that by signing, petitioner ceÊtified th t he was aware that distribution was subject to Feåeral inco e tax.

It also stated that Federal income tax would e withhel by the distributor unless an election was made otherwlse.

The bottom portion of the beneficiary notice included a substitute Form W-4P, Withholding Certif cate foÊ Pension or Annuity Payments.

The subs(cid:16)254ituteForm W 4P indicated that the beneficiary had to: Elect not to have i come tax withheld from the IRA distribution, elect to have income tax withheld of 10 percent of the amount distributed, or elect to have a specified amount withheld.² Petitioner signed and returned the substitute Form W-4P to Landmark Bank but did not e ect any of the choices listed on the substitute FoÉm W-4P.

On November 29, 2007, petitioner op ned a certificate of deposit (CD) account at Lan mark Bank.

etitioner then requested that Landmark Bank distribu e the funds n his IRA, payable on the same day, November 29, 2007. Petiti ner received the funds in five separate checks, four³ of which were for $9,000 each and the fifth of which was for $9,496.50.

2The substitute Form W-4P differs greatly from the IRS' form. original consisting of to calculate the appropriate withholding amount.

two pages of The original Form W-4P is a fourtpage document instructions and a twp-page worksheet 3Although the checks from the bank appear tó have been issued on Nov. 29, 2007, Dec. 6, 2007, and Jan. 28, Feb.

5 and 25, 2008.

the checks were not negotiated until Petitioner also received Social Security benefits of $42,198 during 2007.

Petitioner timely filed his individual income tax return for the 2007 taxable year.

On August 31, 2009, respondent issued a notice of deficiency determining a deficiency in income tax and an accuracy-related penalty ugder section 6662(a) and (b) (2).for a substantial underatatement of income tax. Petitioner timely filed a petition with the Court.

Discussion Unreported IRA Distribution.

Gross income includes all income from whatever source derived.

Sec. 61(a).

Amounts distributed from or paid out of an IRA are generally includable in g oss income by.the payee or distributee.

Sec. 408 (d) (1).

However, a distribution is not includable in gross income if the entire amount of the distribution received by an individual is paid into a qualified IRA for the benefit of that individual within 60.days of the distribution.

,This type of recontribution, known as a "rollover contribution", may. occur outside of the 60- day requirement wher failure to waive the requirement would be against equity and good conscience.

Sec. 408(d) (3) (I).

Rollover contributions from inherited.IRAs are.specifically excluded from tax-free rollover treatment.

Sec. 408 (d) (3) (C).

An IRA is considered inherited if the individual for whose benefit the account is maintained acquir d that ccount by reason of the death of another individual who w s not t e individual' s spouse .

Sec . 408 (d) (3) (C) (ii)i. However an ind .vidual. may still avoid being taxed on the inherited IRA if the funds in the IRA are transferred from one account trustee to another account trustee without the IRA owner or benef1clary evei- galn1ng control of the funds.

See Jankelovitz v. Commisbioner, T.C. Memo. 2008- 285; Crow v. Commissioner, T.C. Memo. 2002-178.

Petitioner inherited funds from a nonspousal IRA, transferred the funds into an IRA, and then withdrew the funds from the IRA on the same day.

The Court does not have to determine whether petitioner made a valid trustee-to-trustee transfer of the IRA funds .

rBy withdrawing the funds from his IRA, petitioner is subject tío the standard income tax rules for distributions from an IRA.

IPetitioner must include in income the amount transferred from his||Landmark Bank IRA to his checking account at Landmark Bank.

Social Security Benefits * Section 86 requires the inclusion in gross income of up to 85 percent of Social Security benefits received. Social Security benefits are defined to include any amount received by reason of entitlement to a monthly benefit under title II of the Social Security Act .

Sec . 86 (d) (1) (A) . Petitioner' s Social Security .benefits are there Fore includabl in income to the extent provided in sectio 86.

Accuracy-Related Penalty Under section 6662(a) and.(b) (2), a taxpayer may be liable for a penalty of 2 percent of the portion of an underpayment which is attributa le to a substantial understatement of income tax.

A substantia understateme t of income tax exists for any taxable year if th amount of.the·understatement exceeds the greater of 10 percent of the taxtrequired to be shown on the return or $5,000.

Sec. 6662(d) (1).

The Commissioner bears the burden,of producticn with respect to penalties.

Sec. 7491(c); Higbee v. Commissicner, 116 T.C. 438, 446-447 (2001).. Respondent has met -his burden as petitioner s understatement exceeds both 10 percent of the tax required _to be shown and $5,000.

Section 6664 (c) (1) provides [that no penalty shall be imposed if there was reasonable cause for the underpayment and the taxpayer acted in good faith.

The determination of whether a taxpayer acted with reasonable cause and in good faith depends upon the facts and circumstances. Sec..1.6664-4(b) (1), Income Tax Regs. Circumstances indicating that a taxpayer acted with reasonable cause a d good faith include "an honest misunderstanding of fact or law that is reasonable in light of all the facts.and circumstances, including the experience, knowledge, and education of the taxpayer."

Idm Petitioner, who lacked.knowledge and experience in tax law, reasonably believed that the correct Federal income tax would be withheld by Landmark Bank.

The benef1clary noti e stated that Landmark Bank would withhold Federal income tax unless petitioner elected otherwise. Petitioner did not elect out of this withholding.

He reasonably relied on Landmark Bank's lack of withholding of Federal income tax as bas s for h s position that the distribution was not taxable. While petitioner is liable for the tax, as the payor's withholding obligation does not excuse taxpayers from the duty to report and pay the resulting tax, the Court finds that he had a reaspnable basis to believe that the correct withholding would occur and that absent that withholding, I!

the amount was not taxable.

See Church v. Commissioner, 810 F.2d 19, 20 (2d Cir. 1987); Chenault v. Commissioner, T.C. Memo. 2011- 56. Accordingly, petitioner ijs not liable for t e section 6662(a) accuracy-related penalty to the extent it is related to the inherited IRA, as he acted in good faith although with a misunderstanding of the law.

In reaching the foregoing holdings, the Court has considered the parties' arguments, and, to the extÈnt not ddressed herein, concludes that they are moot, irrelevant, or without merit.

To reflect the foregoing, Decision will be entered under Rule 155.