                       114 T.C. No. 17



                UNITED STATES TAX COURT



           MICHAEL G. BUNNEY, Petitioner v.
     COMMISSIONER OF INTERNAL REVENUE, Respondent



Docket No. 20713-97.                     Filed April 10, 2000.


     Petitioner (H) and his former wife (W) were
divorced in 1992. H and W were residents of
California, a community property State. The judgment
dissolving the marriage ordered that H’s IRA’s, which
were funded with contributions that were community
property, be divided equally between H and W. In 1993,
H withdrew $125,000 from his IRA’s and transferred
$111,600 to W. Held: sec. 408(g), I.R.C., precludes
characterization of W as a 50-percent “distributee” of
H’s IRA’s under sec. 408(d)(1), I.R.C.; accordingly, H,
not W, is taxable on the distributions. Held, further,
no portion of the $111,600 paid to W is excludable from
H’s income under sec. 408(d)(6), I.R.C. Held, further,
H is liable for the sec. 72(t), I.R.C., additional tax
on the IRA distributions. Held, further, petitioner
had a reasonable basis for his position, and thus the
accuracy-related penalty for negligence under sec.
6662(a), I.R.C., applies only with respect to the
adjustments conceded by H.
                                 - 2 -



     Lawrence J. Kaplan, for petitioner.

     Christine V. Olsen, for respondent.



                                OPINION



     LARO, Judge:   This case is before the Court fully

stipulated.   See Rule 122.    Petitioner petitioned the Court to

redetermine respondent’s determination of an $84,080 deficiency

in Federal income tax for 1993 and a $16,816 accuracy-related

penalty for negligence under section 6662(a).

     After concessions,1 we must decide the following issues with

respect to 1993:

     1.   Whether petitioner’s gross income includes the entire

$125,000 in distributions he received from his individual

retirement accounts (IRA’s).    We hold it does.




     1
      Petitioner concedes the following: (1) His gross income
includes a $64,054 gain on the sale of his home; (2) he may
deduct only $1,476 of the $11,735 claimed for legal and
professional fees paid; (3) he may not deduct the $11,000 claimed
with respect to the purchase of a horse, but may take a Schedule
F, Profit or Loss From Farming, depreciation deduction in the
amount of $393; and (4) he may not deduct the $5,178 claimed for
repair expenses paid. Petitioner also concedes that he should be
taxed on one-half of the $125,000 in IRA distributions he
received in 1993, but he challenges whether he is liable for tax
on the other half.
                                - 3 -

     2.   Whether petitioner is subject to the 10-percent

additional tax for early distributions under section 72(t).       We

hold he is.

     3.   Whether petitioner is liable for the negligence

accuracy-related penalty.   We hold he is, but only as to the

conceded items.

     Unless otherwise indicated, section references are to the

Internal Revenue Code in effect for the year in issue.     Rule

references are to the Tax Court Rules of Practice and Procedure.

Dollar amounts are rounded to the nearest dollar.

                            Background

     The stipulation of facts and the exhibits submitted

therewith are incorporated herein by this reference.   Petitioner

was born on August 23, 1944.    He resided in California when the

petition in this case was filed.

     Petitioner was formerly married.    He and his former spouse

were granted a Judgment of Dissolution of Marriage (dissolution

judgment) on August 17, 1992.   The dissolution judgment stated:

“IT IS FOUND that all of MICHAEL BUNNEY’S retirement valued at

approximately $120,000 was accumulated by the parties prior to

their separation and ordered to be divided equally between the

parties.”

     Petitioner’s retirement savings consisted of several IRA

accounts.   The money used to fund petitioner’s IRA’s had been
                                - 4 -

community property.    During 1993, petitioner withdrew $125,000

from his IRA’s and deposited the proceeds in his money market

savings account.    During the same year, petitioner transferred

$111,600 to his former spouse in a transaction in which he

acquired her interest in the family residence.     Petitioner

reported only the remaining $13,400 of the distributions on his

1993 Federal income tax returns.

                             Discussion

Issue 1.    Taxability of IRA Distributions

     A.     Allocation of Tax Liability

     We pass for the first time on the question of whether one-

half of community funds contributed to an IRA account established

by an IRA participant are, upon distribution, taxable to the

participant’s former spouse by virtue of the fact that the former

spouse has a 50-percent ownership interest in the IRA under

applicable community property law.      Section 408(g), as discussed

below, provides explicitly that section 408 (the statutory

provision governing IRA requirements and the taxability of IRA

distributions) “shall be applied without regard to any community

property laws”.    Thus, at first blush, it appears that the answer

to our question is that the husband is taxable on 100-percent of

the distribution notwithstanding the fact that his former wife

owned and was entitled to receive 50 percent of the distributed

proceeds.    As petitioner observes, however, the Commissioner
                               - 5 -

administratively has recognized that section 408(g) does not

preclude taking community property rights into account in

allocating the tax consequences of IRA distributions.   See Priv.

Ltr. Rul. 80-401-01 (Jul. 15, 1980) (distribution of decedent’s

community property interest in surviving spouse’s IRA is taxable

to decedent’s legatees).   But see Priv. Ltr. Rul. 93-440-27 (Aug.

9, 1993) (distribution of wife’s community property interest in

husband’s IRA under a separation agreement is taxable to

husband).2   Additionally, the courts of at least two community

property States have concluded that section 408(g) does not

preempt recognition of community property rights in an IRA for

State law purposes.3   See In re Mundell, 857 P.2d 631, 633 (Idaho

1993) (community property interest in wife’s IRA is includable in



     2
      We recognize that private letter rulings have no
precedential value but merely represent the Commissioner’s
position as to a specific set of facts. See sec. 6110(j)(3)
(redesignated sec. 6110(k)(3) under the IRS Restructuring and
Reform Act of 1998, Pub. L. 105-206, sec. 3509(b), 112 Stat. 743,
772); Lucky Stores, Inc. v. Commissioner, 153 F.3d 964, 966 n.5
(9th Cir. 1998), affg. 107 T.C. 1 (1996); Fowler v. Commissioner,
98 T.C. 503, 506 n.5 (1992); Estate of Jalkut v. Commissioner, 96
T.C. 675, 684 (1991); First Chicago Corp. v. Commissioner, 96
T.C. 421, 443 (1991), affd. 135 F.3d 457 (7th Cir. 1998). We
mention these rulings merely to set forth the Commissioner’s
administrative practice as to sec. 408(g). See Rowan Cos. v.
United States, 452 U.S. 247, 261 n.17 (1981); First Chicago Corp.
v. Commissioner, 96 T.C. 421, 443 (1991).
     3
      We address a somewhat narrower issue, i.e., whether for
Federal income tax purposes petitioner is the sole “distributee”
and thus taxable on the distributions he received from his IRA’s.
We do not address, as did these State cases, whether sec. 408(g)
preempts community property interests in IRA’s altogether.
                                - 6 -

husband’s estate); Succession of McVay v. McVay, 476 So. 2d 1070,

1073-1074 (La. Ct. App. 1985) (IRA to be accounted for in

division of community property at divorce).

     Our analysis of this issue begins with section 408(d)(1).

Pursuant to that section, “any amount paid or distributed out of

an individual retirement plan shall be included in gross income

by the payee or distributee, as the case may be, in the manner

provided under section 72.”   Neither the Code nor applicable

regulations define the terms “distributee” or “payee” as used in

section 408(d)(1).   In construing a parallel provision governing

the taxation of distributions from pension plans under section

402,4 we have held that a distributee is generally “the

participant or beneficiary who, under the plan, is entitled to

receive the distribution”.    Darby v. Commissioner, 97 T.C. 51, 58

(1991); see also Estate of Machat v. Commissioner, T.C. Memo.

1998-154.   Under this definition, petitioner would be the

distributee and the payee because he was the IRA participant and

received the distributions according to the terms of his IRA’s.

Similarly, petitioner’s former spouse would not be a distributee

because she was not the IRA participant and did not receive the

funds as a designated beneficiary.      Thus, unless the community


     4
      Sec. 402(b)(2) provides that “The amount actually
distributed or made available to any distributee by * * * [an
employee’s trust] shall be taxable to the distributee, in the
taxable year in which so distributed or made available, under
section 72”.
                                 - 7 -

property interest of petitioner’s former spouse is recognizable

for Federal income tax purposes, the distributions are taxable to

petitioner.

     Petitioner acknowledges that section 408(g) requires that

section 408 be applied without regard to community property laws,

but he contends that his former spouse’s community property

interest in his IRA’s arose ab initio and thus may be taken into

account to determine the taxability of the distributions.

Respondent takes no position in this case on the effect of

section 408(g).    Instead, respondent contends that petitioner is

the sole taxable distributee because he was the sole recipient of

the distributions.

     We disagree with respondent’s assertion that the recipient

of an IRA distribution is automatically the taxable distributee.

We have held that in the context of a distribution from a pension

plan the term “distributee” is not necessarily synonymous with

“recipient”.     Estate of Machat v. Commissioner, T.C. Memo. 1998-

154 (citing Darby v. Commissioner, 97 T.C. 51, 64-66 (1991)).     We

nevertheless find that petitioner was the sole distributee in

this case.     The IRA’s were established by petitioner in his name,

and, by reason of section 408(g), his wife is not treated as a

distributee of any portion of the IRA for Federal income tax

purposes despite her community property interest therein.
                                - 8 -

     Recognition of community property interests in an IRA for

Federal income tax purposes would conflict with the application

of section 408 in several ways.    As an initial matter, an account

imbued with a community property characterization would have

difficulty meeting the IRA qualifications.    Section 408(a)

defines an IRA as a trust created or organized “for the exclusive

benefit of an individual or his beneficiaries”.    (Emphasis

added.)    An account maintained jointly for a husband and wife

would be created for the benefit of two individuals and would not

meet this definition.    See Rodoni v. Commissioner, 105 T.C. 29,

33 (1995) (“as its name suggests, the essence of an IRA is that

it is a retirement account created to provide retirement benefits

to ‘an individual’”).

     Secondly, recognition of community property interests would

jeopardize the participant’s ability to roll over the IRA funds

into a new IRA.    Section 408(d)(3)(A)(i) provides that

distributions out of an IRA “to the individual for whose benefit

the account * * * is maintained” are not taxable under section

408(d)(1) if the entire amount received is paid into an IRA “for

the benefit of such individual” within 60 days.    (Emphasis

added.)    The rollover of a community-owned IRA would doubly fail

because both the distribution and contribution would involve two

persons.
                               - 9 -

     Thirdly, recognition of community property interests would

affect the minimum distribution requirements for IRA’s.   Section

408(a)(6) requires that distributions from an IRA account meet

the requirements of section 401(a)(9).   Among those requirements

is that the individual for whom an IRA is maintained withdraw the

balance in the IRA or start receiving distributions from the IRA

by April 1 of the year following the year in which such

individual reaches 70-1/2.   See sec. 401(a)(9)(c).   Recognition

of a nonparticipant spouse’s community property interest in the

IRA might require the age of the nonparticipant spouse to be

taken into account in determining the commencement date for the

required distributions.

     In addition, treating a nonparticipant spouse as a 50-

percent distributee would create an asymmetry.   Section 219(f)(2)

provides that the deductibility of a contribution to an IRA is to

be determined without regard to any community property laws.      See

Medlock v. Commissioner, T.C. Memo. 1978-464.    Section 408(g)

appropriately balances that provision by disregarding community

property laws when the IRA funds are later distributed.   These

sections work in tandem to insure that an IRA participant who

lives in a community property State is treated as both the sole

contributor and the sole distributee of IRA funds.

     In Powell v. Commissioner, 101 T.C. 489, 496 (1993), we

indicated that the distribution of a community property interest
                              - 10 -

in a retirement plan is taxed one-half to each spouse except

where Congress has specified otherwise; e.g., in sections

219(f)(2), 402(e)(4)(G), and 408(g).   In Karem v. Commissioner,

100 T.C. 521, 529 (1993), we held that a pension distribution

subject to section 402(e)(4)(G) was taxable entirely to the

participant even though his former spouse was considered a one-

half owner under State community property law.   Unlike the

taxpayer in Powell, the taxpayer in Karem had elected the multi-

year averaging method then available under former section 402(e)

for computing the tax due on lump-sum distributions.   As a

result, the distributions were subject to former section

402(e)(4)(G), which provided that “the provisions of this

subsection * * * shall be applied without regard to community

property laws.”   Consistent with these opinions, we hold that

section 402(g) precludes taxation of petitioner’s former spouse

as a distributee in recognition of her State community property

interest in petitioner’s IRA’s.   Accordingly, the distributions

from petitioner’s IRA’s are wholly taxable to petitioner.

     B.   Nonrecognition Under Section 408(d)(6)

     Petitioner alternatively contends that the distribution and

transfer of his IRA proceeds pursuant to the dissolution judgment
                               - 11 -

was a nonrecognition event for him under section 408(d)(6).5       We

disagree.

     There are two requirements that must be met for the

exception of section 408(d)(6) to apply:     (1) There must be a

transfer of the IRA participant’s “interest” in the IRA to his

spouse or former spouse, and (2) such transfer must have been

made under a section 71(b)(2) divorce or separation instrument.

     The transaction at issue does not meet the first

requirement.    Petitioner did not transfer any of his interest in

his IRA’s to his former spouse.    Rather, he cashed out his IRA’s

and paid her some of the proceeds.6     The distribution itself was




     5
      Sec. 408(d)(6) provides:

            Transfer of account incident to divorce.--The
            transfer of an individual’s interest in an
            individual retirement account or an individual
            retirement annuity to his spouse or former spouse
            under a divorce or separation instrument described
            in subparagraph (A) of section 71(b)(2) is not to
            be considered a taxable transfer made by such
            individual notwithstanding any other provision of
            this subtitle, and such interest at the time of
            the transfer is to be treated as an individual
            retirement account of such spouse, and not of such
            individual. Thereafter such account or annuity for
            purposes of this subtitle is to be treated as
            maintained for the benefit of such spouse.
     6
      IRS Publication 590 describes two commonly used methods of
transferring an interest in an IRA: (1) Changing the name on the
IRA to that of the nonparticipant spouse or (2) directing the
trustee of the IRA to transfer the IRA assets to the trustee of
an IRA owned by the nonparticipant spouse.
                                - 12 -

a taxable event for petitioner that was not covered by section

408(d)(6).7   See Czepiel v. Commissioner, T.C. Memo. 1999-289.

Issue 2.   Section 72(t)(1) Additional Tax

     Respondent determined that the distributions made to

petitioner out of his IRA’s were subject to the 10-percent

additional tax on early withdrawals from an IRA imposed by

section 72(t).8   Section 72(t)(1) imposes a 10-percent additional

tax on early distributions from qualified retirement plans.       A

qualified retirement plan includes an IRA.     Secs. 408(a),

4974(c)(4).

     Section 72(t)(2)(A) lists the types of distributions to

which the additional tax does not apply.     Petitioner has the

burden of proving his entitlement to any of these exceptions.

See Matthews v. Commissioner, 92 T.C. 351, 361-362 (1989), affd.

907 F.2d 1173 (D.C. Cir. 1990).    Petitioner has not produced any


     7
      Sec. 408(d)(6) governs the transfer of an “individual’s
interest” in an IRA. It does not address distributions. In
contrast, distributions from a qualified pension plan pursuant to
a qualified domestic relations order may be reallocated to a
spouse (designated as the “alternate payee” and considered a plan
“beneficiary”). See sec. 402(e)(1)(A); 29 U.S.C. sec.
1056(d)(3)(J) (1993).
     8
      Sec. 72(t)(1) provides:

           Imposition of additional tax.--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.
                               - 13 -

evidence that any exception applies in this case.    Accordingly,

we sustain respondent’s determination as to the section 72(t)

additional tax.

Issue 3.   Addition to Tax for Negligence.

     Respondent determined that petitioner is liable for the

negligence accuracy-related penalty under section 6662(a).        That

section imposes an accuracy-related penalty equal to 20 percent

of the portion of an underpayment that is attributable to

negligence.    Petitioner will avoid this penalty if the record

shows that he made a reasonable attempt to comply with the

provisions of the Internal Revenue Code, and that he was not

careless, reckless, or in intentional disregard of rules or

regulations.    See sec. 6662(c); Accardo v. Commissioner, 942 F.2d

444, 452 (7th Cir. 1991), affg. 94 T.C. 96 (1990); Drum v.

Commissioner, T.C. Memo. 1994-433, affd. without published

opinion 61 F.3d 910 (9th Cir. 1995).

     Negligence connotes a lack of due care or a failure to do

what a reasonable and prudent person would do under the

circumstances.    See Allen v. Commissioner, 92 T.C. 1 (1989),

affd. 925 F.2d 348 (9th Cir. 1991); Neely v. Commissioner, 85

T.C. 934, 947 (1985).    The negligence accuracy-related penalty is

inapplicable to any portion of an underpayment to the extent that

an individual has reasonable cause for that portion and acts in

good faith with respect thereto.    See sec. 6664(c)(1).   Such
                               - 14 -

penalty is also inapplicable where a taxpayer has a “reasonable

basis” for the return position taken.    See sec. 1.6662-3(b),

Income Tax Regs.   A return position that is “arguable, but fairly

unlikely to prevail in court” satisfies the reasonable basis

standard.   Sec. 1.6662-4(d)(2), Income Tax Regs.   The negligence

accuracy-related penalty is inappropriate where an issue to be

resolved by the Court is one of first impression involving

unclear statutory language.    See Everson v. United States, 108

F.3d 234 (9th Cir. 1997); Lemishow v. Commissioner, 110 T.C. 110

(1998).

     With respect to petitioner’s conceded items, petitioner

claimed deductions to which he was not entitled, duplicated

deductions, and omitted taxable gain from the sale of property.

Petitioner also failed to report income from more than half of

his IRA distributions and failed to pay the 10-percent premature

distribution penalty.    Petitioner contends that he is not liable

for an accuracy-related penalty with respect to these items

because Form 1040 is a “complicated return”, and he utilized a

tax software program to prepare his return.

     On this stipulated record, we conclude petitioner is liable

for the negligence accuracy-related penalty with respect to the

conceded items.    There is no evidence that reasonable cause

existed for these errors or that petitioner was not negligent.

Tax preparation software is only as good as the information one
                               - 15 -

inputs into it.    Petitioner has not shown that any of the

conceded issues were anything but the result of his own

negligence or disregard of regulations.9

     As to the contested adjustment, this Court has not

previously addressed the issue of whether section 408(g)

precludes recognition of a spouse’s community property interest

in allocating the taxability of an IRA distribution.    While we

find the text of section 408(g) to be clear and unambiguous on

its face, we bear in mind that the Commissioner has interpreted

section 408(g) administratively in a manner that is inconsistent

with our holding herein.    Under these circumstances, we conclude

that petitioner had a reasonable basis for his return position

that one-half of his IRA distributions were allocable to his

former spouse.10   Accordingly, we hold the negligence accuracy-


     9
      Petitioner has claimed entitlement to an NOL carryback that
may eliminate some or all of the deficiency determined in this
case. The parties have agreed to address this issue in the
context of their Rule 155 computations. Petitioner is liable for
the negligence accuracy-related penalty regardless of whether the
claimed NOL carryback eliminates the deficiency for the year. A
loss in a later year does not reduce the underpayment for
purposes of imposing the penalty. See C.V.L. Corp. v.
Commissioner, 17 T.C. 812, 816 (1951); McCauley v. Commissioner,
T.C. Memo. 1988-431; sec. 1.6664-2(f), Income Tax Regs.; see also
Estate of Trompeter v. Commissioner, 111 T.C. 57, 59-60 (1998),
and the cases cited therein.
     10
      We note that for returns filed on or after Dec. 2, 1998,
respondent’s view is that a return position “reasonably based on
one or more of the authorities set forth in §1.6662-4(d)(3)(iii)
(taking into account the relevance and persuasiveness of the
authorities, and subsequent developments)” will generally satisfy
                                                   (continued...)
                             - 16 -

related penalty is inapplicable to the taxes and penalties

imposed on one-half of petitioner’s 1993 IRA distributions.

     In reaching our holdings herein, we have considered all

arguments made by the parties, and, to the extent not discussed

above, we find those arguments to be irrelevant or without merit.

     To reflect the foregoing and concessions,


                                        Decision will be entered

                                   under Rule 155.




     10
      (...continued)
the reasonable basis standard. Sec. 1.6662-3(b)(3), Income Tax
Regs., as amended by T.D. 8790, 1998-50 I.R.B. 4. Among the
authorities set forth in sec. 1.6662-4(d)(3)(iii), Income Tax
Regs., are private letter rulings issued after Oct. 31, 1976.
