                        T.C. Memo. 2007-343



                      UNITED STATES TAX COURT



             RAMZY M. AND LENA KOPTY, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 4188-05.                Filed November 21, 2007.



     Ramzy M. and Lena Kopty, pro se.

     Cleve Lisecki, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     WHALEN, Judge:   Respondent determined the following

deficiencies in, and penalties with respect to, petitioners’

Federal income tax for 1999 and 2000:
                                 -2-

                                         Additions to Tax/Penalties
Year             Deficiency            Sec. 6651(a)(1)   Sec. 6662(a)

1999             $94,699.32                $23,674.83     $12,793.13
2000               1,000.00                   None           None

Unless stated otherwise, all section references in this opinion

are to the Internal Revenue Code as in effect during the years in

issue.

       The issues for decision are:    (1) Whether the distributions

received by petitioners during 1999 and 2000 from petitioner

Ramzy M. Kopty’s individual retirement account (IRA) in the

aggregate amounts of $331,500 and $10,000, respectively, are

includable in petitioners’ gross income, pursuant to section

408(d); (2) whether petitioners are subject to the 10-percent

additional tax on early distributions imposed by section 72(t) on

the distributions received by petitioners from Mr. Kopty’s IRA

during 1999 and 2000; (3) whether petitioners are liable for the

addition to tax of $23,674.83 determined by respondent under

section 6651(a)(1) for failure to file a timely return for 1999;

and (4) whether petitioners are subject to the accuracy-related

penalty of $12,793.13 determined by respondent under section

6662(a) with respect to their 1999 return.

                          FINDINGS OF FACT

       Petitioners are husband and wife.    They resided in Waterloo,

Belgium, at the time they filed their petition in this case.     In
                                 -3-

this opinion, references to petitioner are references to Mr.

Ramzy M. Kopty.

       From March 18, 1991, through the end of 1997, petitioner was

employed by a software company, J.D. Edwards & Co.     On or about

July 1, 1992, he began participating in the J.D. Edwards Employee

Stock Ownership Plan (ESOP), a qualified plan under which the

company made contributions of its stock to petitioner’s account

in the plan.    By December 31, 1997, when petitioner left the

employ of J.D. Edwards & Co., the company had contributed

10,323.9064 shares of its stock into petitioner’s ESOP account.

Set out below are the number of shares of J.D. Edwards & Co.

stock, the aggregate value of those shares of stock, the cash

held in petitioner’s ESOP account, and the total value of

petitioner’s account, at the end of each of the years 1992

through and including 1997:

Year            Shares         Value         Cash            Total

1992            20.3100      $3,756.70      ($57.43)        $3,699.27
1993            36.1085       6,818.47     1,608.94          8,427.41
1994            66.0084      15,698.12     1,725.72         17,423.84
1995           108.1071      46,776.86         6.29         46,783.15
1996           144.5164     108,732.69        30.90        108,763.59
            1
1996        10,116.1480
1997        10,323.9064     304,555.24        10.31        304,565.55
1
 Number of shares restated to reflect a 70-to-1 stock split.

       After petitioner left J.D. Edwards & Co. at the end of 1997,

he began working through a sole proprietorship, Kopty Management

Consulting.    In that capacity, he provided management,
                                                -4-

scientific, and technical consulting services to various clients.

The Schedules C, Profit or Loss From Business, for petitioner’s

sole proprietorship that were filed with petitioners’ returns for

1998, 1999, and 2000 are summarized below:
                                            1998                     1999                   2000

Income:
 1 Gross receipts or sales              $114,634                      -0-                    -0-
 2 Returns and allowances                  -0-
 3 Subtract line 2 from line 1           114,634
 4 Cost of goods sold                      -0-
 5 Gross profit, subtract line
     4 from line 3                      114,634
 6 Other income                           -0-
 7 Gross income. Add lines 5 and 6      114,634                       -0-                    -0-

Expenses:
10 Car and truck expenses                2,340                    $2,340.00               $1,270
11 Commissions and fees                  7,900                     8,560.00                5,330
13 Depreciation and section 179          3,756                     3,756.00                1,430
     expense deduction
18 Office expense                         -0-                         667.59                  267
20 Rent or lease
     a Vehicles, machinery, and
          equipment
     b Other business property            1,500                    24,931.51               18,670
24 Travel, meals, and entertainment
     a Travel                            33,288                    10,208.49                2,450
     b Meals and entertainment $5,000                 $3,415.00                  $1,760
     c Enter nondeductible      2,500                  1,707.50                     880
          amount
     d Subtract line 24c from             2,500                     1,707.50                  880
          line 24b
25 Utilities                              -0-                       1,744.96                1,460
26 Wages (less employment credits)        None                     28,916.44               14,320
27 Other expenses
     Telephone                            7,191                    12,588.64                6,380
     Other misc.                          2,300                       -0-                    -0-
       Total expenses                    60,775                    95,421.13               52,457

       Net profit or (loss)              53,859                   -95,421.13              -52,457


       Circa June of 1999, petitioner’s wife and children moved

from Dubai in the United Arab Emirates to Waterloo, Belgium.

Until sometime during 2000, petitioner’s business activities were

based in Dubai, and he retained a residence there.                             Between June

1999 and the latter part of 2000, petitioner traveled between

Belgium, where he and his family resided, and Dubai, where his

business activities were centered.                    Some of the expenses claimed
                                  -5-

on the above Schedules C for 1999 and 2000 reflect Mr. Kopty’s

travel between his home in Belgium and his business in the United

Arab Emirates.

     On or about July 1, 1998, after leaving the employ of J.D.

Edwards & Co., petitioner sent a distribution request form to the

company asking the company to distribute to him the shares of

stock and cash held in his ESOP account.   As completed by

petitioner, the distribution request form states:   “I elect a

payout of all my whole shares of J.D. Edwards stock, plus cash, *

* * payable to me with the applicable taxes withheld for federal

tax.”

     On the following day, petitioner transmitted a facsimile of

the distribution request form to a representative of Norwest

Investment Services, Inc. (hereinafter Norwest).    Several days

later, on or about July 8, 1998, petitioner applied to open a

self-directed IRA with Norwest.    As completed by petitioner, the

application states that petitioner wanted to establish a

“Rollover IRA”.

     On or about July 15, 1998, in response to petitioner’s

distribution request, the ESOP’s trustee, Wells Fargo Bank, sent

10,323 shares of J.D. Edwards & Co. stock to the transfer agent

and registrar of the stock, Harris Trust Co. of California, with

instructions to reissue the stock in petitioner’s name.    In

accordance with those instructions, on or about July 30, 1998,
                                -6-

the transfer agent mailed to petitioner a stock certificate for

10,323 shares of J.D. Edwards & Co. stock.   The stock

certificate, No. JDE1185, was dated July 15, 1998.   The shares

represented by that stock certificate had not been registered

under the Securities Act of 1933, and the stock certificate bore

the following restricted legend:

      THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE
      SECURITIES ACT OF 1933. THEY MAY NOT BE SOLD, OFFERED
      FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN
      EFFECTIVE REGISTRATION STATEMENT UNDER SAID ACT OR
      OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT
      SUCH REGISTRATION IS NOT REQUIRED. * * *

Petitioner received the stock certificate from the transfer

agent, but the record does not reveal precisely when he received

it.

      On August 4, 1998, 5 days after the stock certificate had

been mailed to him by the transfer agent, petitioner hand-

delivered it to Norwest.   In return, a representative of Norwest

gave petitioner a receipt for the stock certificate.     The receipt

states that the purpose of receiving the stock certificate was

“Deposit to account”.   Thus, according to the receipt, Norwest

received the J.D. Edwards & Co. stock certificate from petitioner

for the purpose of depositing the shares into petitioner’s

rollover IRA at Norwest.

      Mr. Kopty’s rollover of the stock distribution from his ESOP

account to his IRA was confirmed by the statement for

petitioner’s IRA which was issued by Norwest for the period
                                -7-

ending August 31, 1998.   That statement records a “stock rollover

DS” on August 24, 1998, consisting of 10,323 shares of J.D.

Edwards & Co. stock valued at $40.50 per share in the aggregate

amount $418,081.50.   It is not clear from the record why the

rollover was not booked into petitioner’s account as of August 4,

1998, the date of the receipt issued by Norwest for petitioner’s

J.D. Edwards & Co. stock certificate.

     A letter to petitioner dated August 11, 1998, written by a

representative of the ESOP’s trustee, Wells Fargo Bank, states as

follows:

     You elected to take a distribution from the J.D.
     Edwards & Company (the “Company”) Employee Stock
     Ownership Plan (the “ESOP”). In accordance with the
     terms of the ESOP and your distribution request form, a
     stock certificate in the amount of 10,323 shares. [sic]
     You will receive your stock certificate from J.D.
     Edwards in the near future.

     You elected not to rollover your ESOP account balance.
     As a result, the cash balance, consisting of your cash
     account and fractional shares, has been withheld for
     tax purposes. You will receive a 1099R in January 1999
     to reflect your distribution. You may be liable for
     additional taxes concerning this distribution.

The above letter is wrong on two important points.   First, as

discussed above, by August 11, 1998, the date of the letter,

petitioner had already received the stock certificate for 10,323

shares of J.D. Edwards & Co. stock from the transfer agent.

Second, by the date of the letter, petitioner had already hand-

delivered the stock certificate to Norwest for deposit into his

rollover IRA.
                                -8-

     Enclosed in the above letter is a “Settlement Statement

(Prepared 8/11/98 with values as of 7/15/98)”.   According to that

statement, the market value of petitioner’s current vested

account balance in the ESOP amounted to $467,817.48.   The

statement says that $467,766.10 of that amount was paid to

petitioner in the form of 10,323 shares of J.D. Edwards & Co.

stock.   The stock was valued as of July 15, 1998, at $45.31 per

share.   The statement also says that the payment to petitioner

was “less withholding” of $51.38 “consisting of your cash account

and fractional shares”.   We note that the value of petitioner’s

fractional share, $41.07 (i.e., 0.90164 x $45.31), plus the cash

balance in his account, $10.31, is $51.38.

     On October 2, 1998, petitioner executed a Norwest form

entitled Self-Directed IRA Rollover/Direct Rollover

Documentation.   According to that form, petitioner’s signature

signified his irrevocable election, “pursuant to IRS regulation

1.402(a)(5)-1T, to treat this contribution [viz. of 10,323 shares

of J.D. Edwards & Co. stock] as a rollover contribution.”

Petitioner’s signature appears on the form a second time in order

to give Norwest the following “Commingling Authorization”:

     The undersigned authorizes the Trustee/Custodian to
     commingle regular IRA contributions with
     rollover/direct rollover contributions pursuant to Part
     II above. I understand that commingling regular IRA
     contributions with rollover/direct rollover
     contributions from employer plans may preclude me from
     rolling over funds in my rollover IRA into another
     qualified plan or 403(b) plan. With such knowledge, I
                                 -9-

       authorize and direct the Trustee/Custodian to place
       regular IRA contributions in my rollover IRA or vice
       versa.

       Sometime after petitioner had hand-delivered his J.D.

Edwards & Co. stock certificate to Norwest, representatives of

Norwest prepared the paperwork necessary to permit the

registration and sale of petitioner’s shares, and they sent the

paperwork to petitioner for completion.      The completed paperwork

was received from petitioner by Norwest’s office in Boulder,

Colorado, on or about October 7, 1998, and was forwarded to

Norwest’s home office in Minneapolis, Minnesota.     The paperwork

and the stock certificate were then sent to the transfer agent on

or about October 20, 1998, and the shares of stock were

registered in unrestricted form on or about November 4, 1998.

       Norwest sold petitioner’s J.D. Edwards & Co. stock on or

about November 16, 1998.    The statement for petitioner’s IRA for

the period ending November 30, 1998, reflects the following sales

of J.D. Edwards & Co. stock:

                                                     Net Proceeds
 Trade Date           Shares        Price        (after Commissions)

Nov.   19,   1998        300       $32.750             $9,786.79
Nov.   19,   1998         23        32.750                750.62
Nov.   19,   1998      8,000        32.625            260,087.75
Nov.   19,   1998      2,000        32.812             65,396.92

                      10,323        32.737            336,022.08

       The above proceeds were invested in a money-market mutual

fund and earned dividend income in the amount $509.90 for the
                                  -10-

remaining 12 days of November and $1,322.35 for the month of

December.   Thus, through the end of 1998, petitioner’s IRA earned

dividend income in the aggregate amount of $1,832.25 on the net

proceeds realized from the sale of his J.D. Edwards & Co. stock.

     In early 1999, the ESOP’s trustee, Wells Fargo Bank, issued

to petitioner a Form 1099-R, Distributions From Pensions,

Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance

Contracts, etc., for tax year 1998.      According to that form,

during 1998, petitioner had received gross distributions from the

J.D. Edwards ESOP of $467,817.48 of which the taxable amount is

$42,695.14, and on which Federal income tax of $51.38 had been

withheld.   Similarly, Norwest Bank Minnesota, N.A., issued to

petitioner a Form 5498, IRA Contribution Information, on behalf

of Norwest Bank MN NA IRA C/F Ramzy Kopty reporting rollover

contributions of $411,629.63 for 1998.      According to that form,

the fair market value of petitioner’s IRA account was

$337,854.33.

     During 1999, petitioner’s IRA earned dividend income in the

aggregate amount of $6,093.21.     During the year, petitioner

caused Norwest to make distributions from his IRA in the

aggregate amount of $331,500, as follows:

                       Date                  Amount

                Jan.   4, 1999              $70,000
                Jan.   4, 1999               20,000
                Feb.   1, 1999               15,000
                Apr.   26, 1999              30,000
                                 -11-

                May 13, 1999              30,000
                May 31, 1999              15,000
                July 19, 1999             20,000
                July 19, 1999             50,000
                Sept. 20, 1999            10,000
                Oct. 18, 1999             20,000
                Oct. 18, 1999             10,000
                Oct. 25, 1999             17,000
                Nov. 15, 1999             10,000
                Nov. 29, 1999             10,000
                Dec. 1, 1999               4,500

                                         331,500

With one exception, all of the distributions that petitioner

requested from his IRA were accompanied by a Norwest form

entitled “Self-Directed IRA Withdrawal Request”.   According to

each such form, the type of withdrawal that petitioner requested

was “Premature Distribution (under age 59½) (no known

exception)”.   Each form also instructed Norwest not to withhold

Federal income tax from the amount distributed.    The form states:

          If I elect not to have Federal income tax
     withheld, I am still liable for payment of Federal
     income tax on the taxable portion of my distribution; I
     also may be subject to tax penalties under the
     estimated tax payment rules, if my payments or
     estimated tax and withholding, if any, are not
     adequate.

Finally, as the source of the funds, each form states that “Funds

will first be withdrawn from the liquid asset portion of my IRA.”

     Subsequently, during the year 2000, Norwest Bank Minnesota,

NA, sent a Form 1099-R to petitioners reporting gross

distributions of $331,500 from petitioner’s IRA during 1999.
                                 -12-

     During 2000, the money invested in petitioner’s IRA earned

mutual fund dividends in the amount of $141.27.   During that

year, petitioner requested distributions of $10,000 from his IRA.

By the end of 2000, the value of petitioner’s IRA was zero.

Wells Fargo Investments, LLC, later issued a Form 1099-R to

petitioners reporting gross distributions of $10,000 from

petitioner’s IRA during the year 2000.   The record of this case

suggests that Wells Fargo Bank acquired Norwest, but it does not

say when the acquisition took place.

     Petitioners filed their Federal income tax return for 1998

on October 18, 2000.   The return had been prepared by Arthur

Anderson.   Consistent with the Form 1099-R issued to petitioners

by Wells Fargo Bank, and the Form 5498, IRA Contribution

Information, issued by Norwest Bank Minnesota, N.A., petitioners’

1998 return reports total pensions and annuities of $467,817.

Petitioners’ 1998 return reports that the taxable amount of the

distribution is “NONE”.   Petitioners’ 1998 return also reports

income tax withholding of $51.    Finally, petitioners’ 1998 return

reports none of the dividend income earned by petitioners’ IRA

during 1998 in the aggregate amount of $1,832.25.

     In passing, we note that by October 18, 2000, when

petitioners filed their return for 1998, and reported that "NONE"

of the ESOP distribution was taxable, they had already withdrawn

most, if not all, of the money from the IRA.   Stated differently,
                                -13-

by October 18, 2000, the distributions received from Mr. Kopty’s

IRA amounted to most, if not all, of the proceeds realized from

the sale of the J.D. Edwards & Co. stock and the income realized

on those proceeds.

     Prior to filing petitioners’ return for 1998, Mr. Kopty had

sent a letter to the Internal Revenue Service dated May 27, 2000,

in which he explained why petitioners’ 1998 return had not been

filed.    Petitioner’s letter, which was mailed on June 6, 2000,

states as follows:

     Please be informed that the 1998 taxes are held up due
     to an error made by my ex-employer J.D. Edwards in the
     preparation of the Form 1099. Please take note of the
     following:

     1.     The 1099 Form of J.D. Edwards indicates that
            the gross distribution is US $467,817.48
            attached.

     2.     J.D. Edwards claims that the calculation for the
            above is based on 10,323 shares x $45.313 per
            share.

     3.     According to the bank statement, Norwest
            Investment Services the shares were $31.00 per
            share when they were finally “free and clear” on
            November 4, 1998. As a matter of fact, the shares
            were sold by Norwest Investment Services on
            November 16, 1998, for a total of $339,203 which
            is an average per share of $32.85. This was put
            in an IRA account.

     4.     I re-addressed this issue again with J.D. Edwards
            and based on their last response they believe that
            their calculation is correct. From what appears
            to be the issue is that J.D. Edwards has made
            their calculation at a much higher price per share
            on July 15, 1998. On the other hand, the shares
                                -14-

           were not “free and clear” on that date of
           preparation which was solely under JDEdwards
           control.

     5.    We are considering to hand this matter over to a
           legal adviser to resolve this matter since it has
           material repercussions on lost amounts and taxable
           income.

     In order to avoid penalties and interests, we have
     forwarded to you earlier a check amount of US
     $13,529.00 to be considered as a pre-payment for the
     time being. Also we would like to request from you any
     suggestions that will help us resolve this matter.
     [Emphasis added.]

     In substance, the above letter states that the filing of

petitioners’ 1998 return was delayed due to an error made by Mr.

Kopty’s ex-employer, J.D. Edwards & Co., in preparing his Form

1099-R for 1998.   Petitioner complains that the gross

distribution shown on the Form 1099-R in the amount of

$467,817.48, valued as of July 15, 1998, greatly exceeds the

proceeds realized from the sale of the shares on November 16,

1998, in the amount of $339,230.   Petitioner complains that the

value of the distribution reported to the Internal Revenue

Service on the Form 1099-R was based upon the higher price per

share on July 15, 1998, when “the shares were not ‘free and

clear’”.   In effect, petitioner’s letter suggests that the Form

1099-R overstates the value of the stock issued to petitioner

and, thus, overstates the amount includable in petitioners’

income.    The letter refers to the fact that petitioner had made a

“pre-payment” of tax of $13,529, and it requests “any suggestions
                                 -15-

that will help us resolve this matter.”

     When petitioner transmitted his 1998 Federal income tax

return to the IRS, he did so with a cover letter dated October 4,

2000, which states as follows:

     Reference - 1998 taxes (Ramzy Kopty - SSN * * *)

     The error in the 1099-R was discovered during the tax
     preparation in December 1999 which would have added an
     additional income of $42,695.14. Immediately I
     contacted JD Edwards for the problem & did not receive
     any correction or attention to this date.

     April, 2000 - with no correction from JD Edwards/their
     bank, and in avoidance of delay of payments I did a
     rough calculation without the $42,695.14 & immediately
     I forwarded a check on April 17, 2000 for the amount of
     $13,529.00 (copy attached)

     June 2000 - and still, with no correction from JD
     Edwards/their bank I sent a detailed explanation to the
     IRS on June 6, 2000 [i.e., above-quoted letter dated
     May 27, 2000] with all the supporting documents
     (Attached) & requested any suggestions that will help
     resolve the matter. I did not get a response from the
     IRS on this issue, and contrary, I received a letter
     dated September 18, 2000 (cover sheet attached for your
     reference) which included name & a contact of Robert
     Stathntan (telephone - 215- * * *)

     Upon Receipt and on September 26, 2000 I called the IRS
     & talked to Ms. Kazlauskas who was very understanding
     to the issues and we agreed that I file the tax return
     (attached) citing the error & the pervious
     correspondence

     Under the circumstance I would like you to consider all
     the above points while reviewing this situation and
     confirm to me your finding. Additionally there was a
     medical factor involved in this time frame (attached
     medical report). In view of my health situation I have
     also applied for long term disability with the Social
     security (Social security confirmation attached).
                                 -16-

     Thus, petitioner’s transmittal letter of October 4, 2000,

again raises the issue discussed in his letter dated May 27,

2000, quoted above.   That issue involves his contention that the

gross distribution reported on the Form 1099-R issued for 1998,

consisting of the stock of J.D. Edwards & Co., is overstated, as

shown by the fact that the amount reported on the Form 1099-R

greatly exceeds the proceeds realized from the sale of the stock.

The transmittal letter expresses petitioner’s concern that the

amount of the gross distribution reported on the Form 1099-R

would cause additional income of $42,695.14 for 1998.

     Petitioners filed their 1999 Federal income tax return on or

about November 21, 2001.   That return does not report any of the

distributions from petitioner’s IRA at Norwest during 1999 in the

aggregate amount of $331,500.    At the same time, the return

reports none of the dividend income in the aggregate amount of

$6,093.21 realized by petitioner’s IRA during the year.

     Petitioners also filed their 2000 Federal income tax return

on or about November 21, 2001.    That return does not report the

distributions of $10,000 received from petitioner’s IRA during

2000.   Furthermore, that return does not report the dividends of

$141.27 realized on the moneys invested in petitioner’s IRA

during 2000.

     In the later part of 1999, petitioner consulted doctors at

the cardiopulmonary department of the American Hospital in Dubai.
                               -17-

He was briefly treated in the emergency room of the American

Hospital in Dubai on November 29, 1999, and approximately one

week later, on December 6, 1999, he returned to the hospital to

engage in a treadmill test.   The interpretation of that test

states the following:

     Exercise EKG positive for Ischemie by EKG criteria. No
     exercise induced chest pains or arrhythmia. Normal BP
     response to exercise. Impaired functional capacity for
     patient’s age achieving 10.6 METS.

     Subsequently, Mr. Kopty was admitted to the American

Hospital in Dubai on March 3, 2000, with the symptoms of a heart

attack.   Approximately 2 weeks later he was transported to the

Universite Catholique De Louvain Cliniques Universitaires Saint-

Luc, a hospital in Belgium, where he underwent coronary bypass

and mitral valve repair on March 25, 2000.   Mr. Kopty was

released on April 10, 2000, but was readmitted from time to time

for further treatment through the end of June 2000.

     The medical records submitted by petitioners make it clear

that Mr. Kopty’s heart attack and related medical problems

between March and June of 2000 were serious.   Mr. Kopty’s

treating physician in Belgium wrote on July 29, 2000, “since

March 3, 2000 Mr. Kopty had to stop his professional activities.

It seems obvious that these activities will have to be strongly

reduced in the future.”

     In November of 2004, after the Internal Revenue Service

audited petitioners’ returns for 1999 and 2000 and issued the
                               -18-

notice of deficiency which is at issue in this case, Mr. Kopty

contacted Wells Fargo and asked the bank to issue a new Form

5498, IRA Contribution Information, for taxable year 1998 and new

Forms 1099-R for taxable years 1999 and 2000.   Pursuant to his

request, Wells Fargo issued a new Form 5498 for 1998 stating that

his IRA contribution for the year was zero, and it issued new

Forms 1099-R reporting gross distributions from his account at

Norwest of zero for 1999 and 2000.

                              OPINION

Taxability of the Distributions From Petitioner’s IRA During 1999
and 2000

     The principal issue in this case is whether petitioners are

subject to tax, as provided by section 408(d)(1), on the

aggregate distributions of $331,500 and $10,000 that they

received from petitioner’s IRA during 1999 and 2000,

respectively.   Petitioners argue that they are not subject to tax

on those distributions because the account from which the

distributions were made was not an IRA.

     Mr. Kopty had established that account with Norwest in 1998,

and he funded it by making a purported rollover contribution of

the stock he had received as a distribution from the J.D. Edwards

ESOP.   According to petitioners, they learned in 2004, during the

audit of their returns for 1999 and 2000, that Mr. Kopty had

failed to complete the rollover contribution within 60 days

following the day on which he had received the stock from the
                                 -19-

ESOP, as required by section 402(c)(3).    We discuss the basis for

petitioners’ assertion that Mr. Kopty failed to make a valid

rollover in more detail below.

     Based on the factual premise that Mr. Kopty failed to make a

valid rollover, petitioners contend that Mr. Kopty’s account at

Norwest was not an IRA within the meaning of section 408(a) and

they are not subject to tax on the distributions from that

account.   Furthermore, petitioners argue that the determination

made by respondent in the notice of deficiency is based upon

Norwest’s incorrect conclusion that Mr. Kopty had made a valid

rollover of his J.D. Edwards & Co. stock in 1998.    They argue

that, because Norwest’s conclusion was wrong, the notice of

deficiency, based thereon, must also be wrong.    According to

petitioners:

     respondents [sic] relied on the erroneous bank
     determination that the 1998 roll over of the ESOP to
     the IRA account * * * was valid and relied on the
     erroneous reporting that followed that determination by
     the bank. * * * Hence, respondent’s determination in
     paragraph 3 [of the notice of deficiency] and
     consequently the deficiency notice is null and void.

     Petitioners do not explain the legal basis, or cite any

authority, for their conclusion that they are not subject to tax

on the distributions from Mr. Kopty’s account at Norwest.     The

general rule is that any amount "paid or distributed out of" an

IRA is subject to tax as prescribed by section 72.    See sec.

408(d)(1).     Petitioners seem to be arguing that Mr. Kopty’s
                               -20-

Norwest account is disqualified from being an IRA because it was

funded by an excess contribution.     To the contrary, an IRA is not

necessarily disqualified by the fact that it accepted excess

contributions, even if it was funded entirely with excess

contributions.   See Orzechowski v. Commissioner, 69 T.C. 750

(1978), affd. 592 F.2d 677 (2d Cir. 1979); see also Boggs v.

Commissioner, 83 T.C. 132 (1984), affd. 774 F.2d 740 (7th Cir.

1985); Benbow v. Commissioner, 82 T.C. 941 (1984).     In another

context we concluded that excess contributions were not subject

to tax when distributed by an IRA.    See Campbell v. Commissioner,

108 T.C. 54 (1997) (holding that the taxpayer received basis to

the extent of his “investment in the contract” under section

72(e)(6)).   Petitioners have not made any such argument in this

case.

     Respondent urges the Court to reject petitioner’s position.

Respondent asserts that “the record clearly reflects that the

position taken by petitioners on their 1998 return was correct”

and that a valid rollover of the distribution received from the

ESOP was made in that year.   Furthermore, respondent points out

that petitioners’ 1998 return reported the receipt of the ESOP

distribution in the amount of $467,817 and reported that the

taxable amount of such distribution was “NONE”.    Respondent

asserts that “petitioners are estopped, pursuant to the duty of

consistency doctrine, from adopting a position on their 1999 and
                               -21-

2000 tax returns inconsistent with the position taken on their

1998 Return.”

     We agree with respondent that, under the facts of this case,

Mr. Kopty made a valid rollover of the stock distribution he

received from the J.D. Edwards ESOP in 1998.    Accordingly, we

reject the factual premise of petitioners’ argument that Mr.

Kopty’s account at Norwest was not an IRA, and we find that the

distributions from that account during 1999 and 2000 are subject

to tax under sections 408(d)(1) and 72(a).    We do not reach

respondent’s second point that petitioners are estopped under the

duty of consistency from taking a different position on their

1999 and 2000 returns.

     In order to fully address petitioners’ argument, we must set

out petitioners’ argument in more detail.    Petitioners

acknowledge that they physically transferred the J.D. Edwards &

Co. stock certificate to Norwest within 60 days of the date on

which they received it, but they contend that they did not

irrevocably elect to make a rollover contribution to the IRA at

that time.   According to petitioners, the stock certificate “was

hand-delivered to Norwest Bank [only] for safekeeping until the

shares become our [sic] unrestricted and eventually sold.”      They

assert that “the bank placed the restricted shares by mistake in

the new account while the bank proceeded with the paperwork to

un-restrict and sell the shares.”
                                -22-

     Petitioners contend that the stock certificate did not

properly become invested in the IRA account until October 2,

1998, when Mr. Kopty executed the Norwest form entitled “Self-

Directed IRA Rollover/Direct Rollover Documentation”.

Petitioners point out that October 2, 1998, is 79 days after Mr.

Kopty had constructively “received” the certificate on July 15,

1998, and is beyond the 60-day period specified in section

402(c)(3) during which a distributee is required to transfer the

property distributed to an eligible retirement plan.    Petitioners

further contend that the form executed on October 2, 1998, was

not properly completed and did not serve to transfer the stock to

Norwest.   In effect, petitioners’ position is that Mr. Kopty did

not elect to treat the contribution of his J.D. Edwards & Co.

stock certificate as a rollover contribution until October 2,

1998, when he executed the Norwest form entitled “Self-Directed

IRA Rollover/Direct Rollover Documentation”.

     According to the regulations promulgated under section 402,

an election to treat a contribution to an IRA as a rollover

contribution is made simply by designating the contribution as a

rollover contribution.    The regulations promulgated under section

402 provide as follows:

          In order for a contribution of an eligible
     rollover distribution to an individual retirement plan
     to constitute a rollover and, thus, to qualify for
     current exclusion from gross income, a distributee
     must elect, at the time the contribution is made, to
     treat the contribution as a rollover contribution. An
                               -23-

     election is made by designating to the trustee, issuer,
     or custodian of the eligible retirement plan that the
     contribution is a rollover contribution. This election
     is irrevocable. Once any portion of an eligible
     rollover distribution has been contributed to an
     individual retirement plan and designated as a rollover
     distribution, taxation of the withdrawal of the
     contribution from the individual retirement plan is
     determined under section 408(d) rather than under
     section 402 or 403. Therefore, the eligible rollover
     distribution is not eligible for capital gains
     treatment, five-year or ten-year averaging, or the
     exclusion from gross income for net unrealized
     appreciation on employer stock. [Sec. 1.402(c)-2, Q&A-
     13, Income Tax Regs.; emphasis added.]

Thus, no particular form is required by the regulations in order

to designate a contribution as a rollover contribution.

     In this case, petitioner opened a “Rollover IRA” at Norwest

on July 8, 1998, and he hand-delivered his J.D. Edwards & Co.

stock certificate to Norwest on August 4, 1998, several days

after the transfer agent had mailed the stock certificate to him.

According to the receipt issued to petitioner by a representative

of Norwest, “Deposit to account” was the purpose for which

Norwest received petitioner’s stock certificate.   Petitioner’s

only account at Norwest was the “Rollover IRA” which he had

opened by submitting an application to Norwest on or about July

8, 1998.   Furthermore, the statement issued by Norwest for

petitioner’s IRA for the period ending August 31, 1998, reflects

a “stock rollover” of 10,323 shares of J.D. Edwards & Co. stock

on August 24, 1998.   Thus, it is evident that Norwest, the

trustee, issuer, or custodian of the IRA, believed that
                                 -24-

petitioner had designated his J.D. Edwards & Co. stock as a

"rollover contribution" to his IRA.     See sec. 1.402(c)-2, Q&A-13,

Income Tax Regs.

     Petitioner’s contribution of J.D. Edwards & Co. stock to his

IRA and his designation of the contribution as a rollover

contribution took place well within 60 days of receipt as

required by section 402(c)(3).    This is true no matter what we

use as the starting date, that is, "the day on which the

distributee received the property distributed."    See sec.

402(c)(3).    In this case, the starting date of the 60-day period

could be the date on which petitioner constructively received the

stock, July 15, 1998.   See generally Rev. Rul. 82-75, 1982-1 C.B.

116 and Rev. Rul. 81-158, 1981-1 C.B. 205 (holding that, for

purposes of section 402, the distributee received shares from an

employer established profit-sharing plan that qualified under

section 401(a) when the trustee of the plan delivered to the

transfer agent stock certificates previously issued in the

trustee’s name, together with written instructions to reissue the

certificates in the name of the distributee).    The starting date

could also be the date on which petitioner actually received the

stock.   Petitioner actually received the stock certificate

between July 30, 1998, when the transfer agent mailed it to him,

and August 4, 1998, when he hand-delivered the stock certificate

to Norwest.
                                 -25-

     Furthermore, in this case, the 60-day period is satisfied

regardless of the date used as the date of the "transfer of a

distribution".    See sec. 402(c)(3).   That date could be August 4,

1998, the day on which petitioner hand-delivered the certificate

to Norwest, or August 24, 1998, the day on which Norwest recorded

the transfer on its statement for petitioner’s IRA for the period

ending August 31, 1998.

     Petitioners do not deny that they intended to rollover the

distribution which Mr. Kopty received in 1998 from the J.D.

Edwards & Co. ESOP.    Further, they do not deny that Mr. Kopty

delivered his J.D. Edwards & Co. stock certificate to Norwest on

August 4, 1998.    What they argue is that when Mr. Kopty hand-

delivered the stock certificate to Norwest on August 4, 1998, he

intended to give the certificate to Norwest only for safekeeping,

pending the reissuance of the stock without restriction and its

sale.   Petitioners assert that Norwest made a mistake by

depositing the stock into petitioner’s IRA before October 2,

1998, the date on which petitioner executed the Norwest form

entitled “Self-Directed IRA Rollover/Direct Rollover

Documentation”.

     One problem we have with this factual contention is that

there is nothing in the record, other than petitioners’

testimony, to substantiate it.    Certainly, Mr. Kopty did nothing

to call this alleged mistake to the attention of the Norwest
                               -26-

representative who issued the receipt for Mr. Kopty’s stock

certificate.   Additionally, Mr. Kopty said nothing about this

alleged mistake when he received the August 1998 statement for

his IRA on which was recorded a “stock rollover DS” on August 24,

1998, consisting of 10,323 shares of J.D. Edwards & Co. stock.

     Furthermore, petitioners’ argument presupposes that no

rollover to Mr. Kopty’s IRA at Norwest could take place for

purposes of section 402(c) unless and until the form entitled

"Self-Directed IRA Rollover/Direct Rollover Documentation" was

submitted to Norwest.   To the contrary, as discussed above, the

regulations promulgated under section 402 merely require the

contribution to be designated a rollover contribution.   The

Norwest form which petitioner executed on October 2, 1998,

entitled “Self-Directed IRA Rollover/Direct Rollover

Documentation” may have been helpful in terms of petitioner’s

relationship with Norwest, to document Mr. Kopty’s wishes, but it

was not essential for purposes of finding a rollover contribution

under section 402(c).

     Finally, petitioners’ assertion that Mr. Kopty transferred

the stock certificate to Norwest only for safekeeping until the

shares could be reissued in unrestricted form and sold is

contradicted by Mr. Kopty’s actions.   The fact is that Mr. Kopty

executed the form on October 2, 1998, well before the shares were

registered in unrestricted form and sold on November 16, 1998.
                              -27-

Indeed, it appears that Mr. Kopty may have executed the form even

before he returned to Norwest the paperwork necessary to permit

the registration and sale of the shares.   As mentioned above, the

completed paperwork to permit the registration and sale of

petitioner’s stock was not received from petitioner by Norwest’s

office in Boulder until October 7, 1998.

     Based on the facts of this case, we find that Mr. Kopty made

an irrevocable election to roll over, to his IRA, the

distribution of stock he had received from the J.D. Edwards ESOP.

We further find that petitioner made this irrevocable election

within the 60-day period required by section 402(c)(3).

Ten Percent Additional Tax on Early Distributions

     The second issue in this case is whether petitioners are

liable for the 10-percent additional tax on early distributions

from qualified retirement plans imposed by section 72(t)(1).

Respondent applied the 10-percent additional tax on the aggregate

distributions of $331,500 made by petitioner’s IRA in 1999 and

the aggregate distributions of $10,000 made by the IRA in 2000.

Accordingly, respondent determined taxes under section 72(t)(1)

for 1999 and 2000 in the amounts of $31,500 and $1,000,

respectively.

     Petitioners argue that section 72(t)(1) does not apply to

any of the subject distributions because all of them qualify

under the exception set forth in section 72(t)(2)(A)(iii) for
                                -28-

distributions “attributable to the employee’s being disabled

within the meaning of subsection (m)(7)”.    Section 72(m)(7)

provides as follows:    "an individual shall be considered disabled

if he is unable to engage in any substantial gainful activity by

reason of any medically determinable physical or mental

impairment which can be expected to result in death or to be of

long-continued and indefinite duration".    See also sec. 1.72-

17A(f)(1), Income Tax Regs.    Whether an impairment constitutes a

disability is to be determined with reference to all of the facts

in the case.    Sec. 1.72-17A(f)(2), Income Tax Regs.   The

regulations provide examples of impairments which would

ordinarily be considered as preventing substantial gainful

activity.    One of those examples is the following:

     Diseases of the heart, lungs, or blood vessels which
     have resulted in major loss of heart or lung reserve as
     evidenced by X-ray, electrocardiogram, or other
     objective findings, so that despite medical treatment
     breathlessness, pain, or fatigue is produced on slight
     exertion, such as walking several blocks, using public
     transportation, or doing small chores * * * [Sec.
     1.72-17A(f)(2)(iii), Income Tax Regs.]

     The regulations point out that the existence of one or more

of the impairments described therein, including the one quoted

above, "will not, however, in and of itself always permit a

finding that an individual is disabled as defined in section

72(m)(7)."    See sec. 1.72-17A(f)(2), Income Tax Regs.

Furthermore, the regulations caution that any impairment must be

evaluated in terms of whether it does in fact prevent the
                                -29-

individual from engaging in his customary or any comparable

substantial gainful activity.    Id.   In order to meet the

requirements of section 72(m)(7), the regulations provide that

“an impairment must be expected either to continue for a long and

indefinite period or to result in death.”    Sec. 1.72-17A(f)(3),

Income Tax Regs.    An impairment which is remediable does not

constitute a disability, and an individual will not be deemed

disabled if it can be diminished to the extent that the

individual can engage in his customary or any comparable

substantial gainful activity.    Sec. 1.72-17A(f)(4), Income Tax

Regs.   Furthermore, a taxpayer may be engaged in a gainful

activity even though he realizes a net loss from that activity

during the year.    See Dwyer v. Commissioner, 106 T.C. 337, 341

(1996).

     In this case, petitioners introduced into evidence certain

medical records involving the medical treatment of Mr. Kopty’s

heart condition.    Based upon those records they claim that "from

1999 onwards, Ramzy Kopty was disabled due to heart failure and

unable to engage in any substantial gainful activity."     According

to petitioners, Mr. Kopty "had no income after 2000 which is

reflected in petitioners[’] tax returns for the years 2001, 2002,

2003, 2004."   Petitioners assert that Mr. Kopty receives long-

term disability benefits from the U.S. Social Security

Administration.    Based upon Mr. Kopty’s heart disease,
                                -30-

petitioners assert that they are not subject to the 10-percent

additional tax on early distributions under section 72(t) because

all of the distributions are attributable to Mr. Kopty’s being

disabled within the meaning of section 72(m)(7).

     As to the distributions made during 1999, we do not accept

petitioners’ assertion that the distributions are attributable to

Mr. Kopty’s being disabled.   According to the medical records

submitted by petitioners, Mr. Kopty was briefly treated in the

emergency room of the American Hospital in Dubai on November 29,

1999, and approximately 1 week later, on December 6, 1999,

returned to engage in a treadmill test.   According to

petitioners’ brief: "petitioner was diagnosed in 1999 with

Pectoris Spasm and Ischemia which limited petitioner’s ability to

have gainful activity from 1999 onwards and that the same disease

led to an myocardial infarction (MI) in March 2000."     That

diagnosis, however, did not even take place until December 6,

1999, at the earliest.    By that time, all of the distributions

for 1999 had been made.   In our view, the record of this case

fails to show that any of the distributions made during 1999 in

the amount of $331,500 were attributable to Mr. Kopty’s being

disabled.

     As to the distributions made during 2000, Mr. Kopty was

admitted to the American Hospital in Dubai on March 3, 2000, with

the symptoms of a heart attack.   Approximately 2 weeks later, he
                               -31-

was transported to a hospital in Belgium where he underwent

coronary bypass and mitral valve repair on March 25, 2000.      Mr.

Kopty was released on April 10, 2000, but was readmitted from

time to time for further treatment through the end of June 2000.

The medical records submitted by petitioners make it clear that

Mr. Kopty’s heart attack and related medical problems between

March and June of 2000 were serious.     Mr. Kopty’s treating

physician in Belgium wrote on July 29, 2000:     “since March 3,

2000 Mr. Kopty had to stop his professional activities.     It seems

obvious that these activities will have to be strongly reduced in

the future.”

     The record in this case, however, makes it difficult to find

that Mr. Kopty was "disabled" within the meaning of section

72(m)(7) by his heart condition.    First, after June of 2000 he

continued to travel between Dubai and Belgium.     He testified at

trial about the steps which he had to take in order to close his

business in Dubai and "relocate" to Belgium.     Furthermore,

petitioners’ income tax return for 2000 includes a Schedule C of

Mr. Kopty’s sole proprietorship which reflects business expenses

of $52,457 for the year.   The expenses claimed on that Schedule C

include travel expenses of $2,450, expenses for meals of $1,760,

and telephone expenses of $6,380.     The business activities

suggested by those expenses belie petitioners’ claim that Mr.

Kopty was “unable to engage in any substantial gainful activity”
                                 -32-

during the year.   See sec. 72(m)(7).   Significantly, petitioners’

return for 2000 also reports that Mr. Kopty received wages of

$22,795.28 from J.D. Edwards World Solutions.    Finally, Mr. Kopty

presented his case at trial.    The Court had an opportunity to

observe him over the course of 2 days.    The Court detected no

medical disability in his presentation of the case to the Court.

Addition to Tax Under Section 6651(a)(1) Determined With Respect
to Petitioners’ 1999 Return

     The time for filing petitioners’ 1999 return was extended to

December 15, 2000.     Petitioners filed their 1999 return on

November 21, 2001, and, thus, they failed to file a timely

return.   Accordingly, respondent determined an addition to tax

under section 6651(a)(1) of $23,674.83 in the notice of

deficiency.   We find that respondent satisfied his burdens of

production under section 7491(c) with respect to the addition to

tax under section 6651(a).     See Higbee v. Commissioner, 116 T.C.

438, 446-447 (2001).

     Petitioners argue that they are not liable for the addition

to tax under section 6651(a)(1) because their failure to file a

timely return for 1999 was due to reasonable cause and not due to

willful neglect.   See sec. 6651(a)(1).   According to petitioners,

reasonable cause for the late filing of their 1999 return is

demonstrated by three points:    First, Mr. Kopty’s medical

history, including his heart attack on March 3, 2000, and his

related medical issues; second, the alleged fact that petitioners
                               -33-

never received the Form 1099-R issued by Norwest for 1999

reporting the distributions from Mr. Kopty’s IRA during the year

totaling $331,500; and third, the fact that petitioners reported

a loss on their 1999 return and did not believe that the filing

of their 1999 return was an urgent matter, especially in light of

Mr. Kopty’s medical problems during that year.

     Petitioners assert the late filing of their 1999 return was

not due to willful neglect.   According to petitioners, they were

“proactive with the ESOP issue” in that they corresponded with

J.D. Edwards & Co. through Mr. Kopty’s letter dated February 9,

2000, and they communicated with the Internal Revenue Service

through Mr. Kopty’s letters dated April 15, 2000, May 27, 2000,

and October 4, 2000, and Mr. Kopty’s telephone call on September

26, 2000.

     We do not believe that petitioners have shown that their

failure to file a timely 1999 return was due to reasonable cause

and not due to willful neglect.   As stated above, we agree that

Mr. Kopty’s heart attack in March of 2000 and his related

surgeries and medical care through June of 2000 were serious.

Nevertheless, the record of Mr. Kopty’s correspondence and other

activities during the year fails to explain why petitioners did

not file, or could not have filed, their return for 1999 on or

before the due date, December 15, 2000.   Indeed, notwithstanding

Mr. Kopty’s medical condition, petitioners filed their 1998
                                 -34-

return on October 18, 2000.   At that point, they had ample time

before the due date of the 1999 return in which to file that

return as well.   Furthermore, we reject petitioners’ assertion

that they should be relieved of the addition to tax under section

6651(a)(1) because they did not receive the Form 1099-R from

Norwest or because they did not think that the filing of that

return was “an urgent matter”.

Imposition of the Accuracy-Related Penalty Under Section 6662(a)
With Respect to Petitioners’ 1999 Return

     Respondent determined petitioners’ liability for the

accuracy-related penalty under section 6662(a) to be $12,793.13.

Respondent determined that a portion of the underpayment of tax

required to be shown on petitioners’ 1999 return is attributable

to negligence or disregard of rules or regulations, or to a

substantial understatement of income tax.   See sec. 6662(b)(1)

and (2).   For this purpose, “the term ‘negligence’ includes any

failure to make a reasonable attempt to comply with the

provisions of this title, and the term ‘disregard’ includes any

careless, reckless, or intentional disregard.”   Sec. 6662(c).    An

understatement of income tax is “substantial” if the amount of

the understatement exceeds the greater of (a) 10 percent of the

tax required to be shown on the return, or (b) $5,000.    Sec.

6662(d)(1)(A).

     We agree with respondent that the portion of the

underpayment of tax on which respondent imposed the accuracy-
                                 -35-

related penalty is attributable to negligence or disregard of

rules or regulations.    Furthermore, we find that respondent has

carried his burden of production with respect to the addition to

tax under section 6662(a).    See Higbee v. Commissioner, supra at

448-449.

     Petitioners’ return for 1998 reported the ESOP distribution

of $467,817 and further reported the taxable amount of that

distribution as “NONE”.     That return is consistent with the Form

5498 issued by Norwest for the year 1998 which shows rollover

contributions of $411,629.63, and it is consistent with the

Norwest statement for petitioner’s IRA for the period ending

August 31, 1998, showing a stock rollover into the account on

August 24, 1998, consisting of 10,323 shares of J.D. Edwards &

Co. stock.   Petitioners’ 1998 return was not filed until October

4, 2000, by which time almost all of the money in Mr. Kopty’s IRA

had been withdrawn.     In filing their 1998 return claiming that

the ESOP distribution was not taxable, petitioners knew, or

should have known, that the distributions from Mr. Kopty’s IRA

during 1999 and 2000 were subject to tax under section 408(d).

Accordingly, when they filed their return for 1999 on November

21, 2001, and reported none of the distributions as income, we

agree with respondent that the portion of the underpayment of tax

resulting therefrom is attributable to negligence or disregard of

rules or regulations.     Furthermore, petitioners not only failed
                                -36-

to report the IRA distributions during 1999 as taxable income,

but they also failed to report any of the dividend income in the

amount of $6,093.21 earned by the IRA during 1999.

     Petitioners assert that they are not liable for the

accuracy-related penalty under section 6662(a) for three reasons.

First, petitioners claim that, at the time they filed their 1999

return, they did not know whether the rollover in 1998 was valid

because “respondents [sic] never answered their several

assistance appeals” and petitioners had not received the Form

1099-R for 1999 from Norwest.   Second, petitioners assert that

respondent has determined their liability for the accuracy-

related penalty “to hide their [sic] [respondent’s] negligence of

not responding to petitioners appeal for assistance with the ESOP

transaction".   Third, petitioners assert that they “exercised

extreme duty of care towards to the ESOP transaction issue under

severe circumstances of being abroad and seriously ill”.

     In summary, petitioners argue that, before they filed their

1999 return, they asked for advice from respondent concerning the

validity of the rollover in 1998, and, when they received no

response from their inquiries from respondent, they did the best

they could under the circumstances of being abroad and with Mr.

Kopty’s health issues.   Petitioners appear to invoke the

reasonable cause exception under section 6664(c) which provides

that no penalty shall be imposed with respect to any portion of
                                 -37-

an understatement if it is shown that there was a reasonable

cause for such portion and the taxpayer acted in good faith with

respect to such portion.

     We agree that petitioners corresponded with representatives

of the Internal Revenue Service prior to filing their 1999 return

(Mr. Kopty’s letter dated May 27, 2000, which was sent on June 6,

2000, and his transmittal letter dated October 4, 2000).    We also

agree that Mr. Kopty engaged in correspondence with Norwest and

J.D. Edwards & Co. during 2000 regarding the distribution from

the ESOP.   That correspondence shows that Mr. Kopty was unhappy

about the fact that his shares of J.D. Edwards & Co. stock were

not sent until July 30, 1998, and were unregistered shares that

could not be immediately sold.    According to one of petitioner’s

letters to J.D. Edwards & Co., the “ESOP shares were supposed to

have been received in April ‘clear for sales’ from J.D. Edwards.”

During the delay, the value of the shares decreased from

$467,766.10, the value on July 15, 1998, to $336,022.08, the

value of the shares on November 16, 1998, when they were sold.

Petitioner was concerned by the fact that the Form 1099-R which

he received from the ESOP was based upon the value of the shares

on July 15, 1998, and showed the taxable amount of such

distribution to be $42,695.14.    When Mr. Kopty stated in his

letter to the Internal Revenue Service dated May 27, 2000:    “also

we would like to request from you any suggestions that will help
                               -38-

us resolve this matter”, he was referring to this valuation

issue.   Similarly, petitioner’s letter dated October 4, 2000,

transmitting petitioners’ 1998 tax return to the Internal Revenue

Service, refers to the same error in the Form 1099-R.

Petitioners’ letter states:   “under the circumstances I would

like you to consider all of the above points while reviewing this

situation and confirm to me your finding.”   Petitioner’s letter

was again asking the Internal Revenue Service to review the Form

1099-R issued by the ESOP on which petitioner’s shares of J.D.

Edwards & Co. stock were valued as of July 15, 1998, in the

amount of $467,766.10, whereas the net proceeds from the sale of

the stock on November 16, 1998, were $336,022.08.

     In none of petitioner’s correspondence with the Internal

Revenue Service does he raise a question about the validity of

the rollover of J.D. Edwards & Co. stock into his IRA or the

Forms 1099-R issued to report the distributions from the IRA in

1999 and 2000.   In fact, petitioners’ opening brief states that

they did not become aware “that the ESOP rollover was invalid in

1998 due to the 60 days rollover rule” until the audit of their

1999 and 2000 returns which took place between April and

September of 2004.   We reject any suggestion that petitioners

raised with respondent, before the audit of their returns, an

issue concerning the validity of the rollover contribution of

J.D. Edwards & Co. stock to Mr. Kopty’s IRA.   In conclusion, we
                                -39-

find that petitioners have not shown that there was reasonable

cause for the understatement of tax required to be shown on their

1999 return or that they acted in good faith with respect

thereto.

Computational Errors

     In their posttrial brief, petitioners allege three

“computational errors” for the first time in these proceedings.

The first computational error involves the amount of the net

operating loss for taxable 2000 that can be carried back to 1999.

According to petitioners, respondent miscalculated the net

operating loss by basing the calculation on adjusted gross income

of -$5,522, rather than on -$15,522, the correct amount.

     Petitioners failed to raise this issue in their petition,

and it is not before the Court.    We do not consider an issue that

has not been pleaded.    See, e.g., Frentz v. Commissioner, 44 T.C.

485, 491 (1965), affd. 375 F.2d (6th Cir. 1967); Sicanoff

Vegetable Oil Corp. v. Commissioner, 27 T.C. 1056, 1066 (1957)

(and the cases cited thereon), revd. on other grounds 251 F.2d

764 (7th Cir. 1958).    This is particularly true in a case like

this where the issue cannot be considered without surprise and

prejudice to the other party.   See Estate of Mandels v.

Commissioner, 64 T.C. 61, 73 (1975).    Furthermore, we note that

the difference of $10,000, about which petitioners complain, is

due to the inclusion in gross income of the distributions of
                                -40-

$10,000 from Mr. Kopty’s IRA during the year.

     The second so-called computational error alleged by

petitioners involves deductions for moving expenses under section

217(a).   Apparently, during the audit of petitioners’ returns,

petitioners submitted a letter in which they claimed moving

expenses in the amount of $5,770 for 1999 and $1,950 for 2000.

In the notice of deficiency, respondent did not determine that

petitioners were allowed moving expenses.   Petitioners ask the

Court “to order the moving expense correction.”

     Petitioners did not raise this matter in their petition.

This is a new issue that was raised for the first time after

trial.    As stated above, we do not consider an issue that has not

been pleaded.   See, e.g., Frentz v. Commissioner, supra; Sicanoff

Vegetable Oil Corp. v. Commissioner, supra.     This is particularly

true in a case like this where the issue cannot be considered

without surprise and prejudice to the other party.    See Estate of

Mandels v. Commissioner, supra.    Accordingly, we will not

consider it.

     Finally, petitioners argue that interest on underpayments

under section 6601(a) should be computed from the date when the

tax return was due, taking into consideration extensions of time

to file, rather than from the original due date of the return.

Petitioners ask the Court to rule that interest on any

underpayment for taxable 1999 should begin on December 15, 2000,
                                 -41-

rather than on April 15, 2000.

     Petitioners are correct when they state in their brief that

this issue is not properly before the Court at this time.

Moreover, we note that, pursuant to section 6601(a), interest

begins to run on “the last date prescribed for payment” of the

tax and, pursuant to section 6151(a), an extension of time for

filing an income tax return does not extend the time for paying

the tax due.

     Based upon the foregoing,


                                        Decision will be entered for

                                 respondent.
