                               T.C. Memo. 2020-101



                         UNITED STATES TAX COURT



          TAMECCA SERIL, a.k.a. TAMECCA TILLARD, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 4491-19.                           Filed July 8, 2020.



      Tamecca Seril, a.k.a. Tamecca Tillard, pro se.

      Marissa J. Savit and Thomas A. Deamus, for respondent.



            MEMORANDUM FINDINGS OF FACT AND OPINION


      LAUBER, Judge: The Internal Revenue Service (IRS or respondent) deter-

mined for petitioner’s 2016 taxable year a deficiency of $9,191 and an accuracy-

related penalty of $1,838. The issues remaining for decision are whether petition-

er is: (1) taxable on distributions from her retirement account, (2) liable under
                                         -2-

[*2] section 72(t)1 for the 10% additional tax on early distributions from that

account, and (3) liable for an accuracy-related penalty.2 We hold that petitioner is

taxable on the distributions and that a portion of her distributions is subject to the

additional tax. But we hold that she is not liable for any penalty.

                                FINDINGS OF FACT

      At trial the parties stipulated a number of exhibits which are incorporated by

this reference. Petitioner resided in New York when she filed her petition.

      Petitioner is the mother of two boys, the elder of whom was scheduled to

graduate from high school in 2016 and matriculate at Morehouse College (More-

house) that fall. During this period petitioner and her family experienced stress.

Petitioner had filed for a divorce, which involved claims of domestic violence and

child neglect. Her elder son had encountered problems at school that threatened

his ability to graduate on time.




      1
        All statutory references are to the Internal Revenue Code (Code) in effect
for the year in issue, and all Rule references are to the Tax Court Rules of Practice
and Procedure. All dollar amounts are rounded to the nearest dollar.
      2
        The IRS determined in the notice of deficiency that petitioner was taxable
on a $747 payment she received from the New York State College Choice Tuition
Program Trust Fund. Respondent has conceded that issue, as well as petitioner’s
liability for any additional tax or accuracy-related penalty with respect to that $747
payment.
                                        -3-

[*3] On the basis of a letter from Morehouse, petitioner anticipated that the cost

of her son’s tuition and living expenses (absent receipt of a scholarship) would be

about $54,000 annually. During 2016 she made two withdrawals totaling $54,500

from her individual retirement account (IRA): a distribution of $16,500 on Janu-

ary 8 and a distribution of $38,000 on July 25. She was not age 59-1/2 or older

when she received these distributions. From the latter distribution the brokerage

firm withheld Federal income tax of $3,800. Petitioner did not roll over any por-

tion of these distributions within 60 days. See sec. 408(d)(3).

      During 2016 petitioner also made withdrawals totaling $15,099 from her

New York 529 College Savings Program Account (529 account). Two distribu-

tions totaling $5,816 were paid to her. A third distribution, of $9,283, was made

directly to Morehouse.

      Petitioner prepared and filed a timely return for 2016. She reported the

entire $54,500 of IRA distributions but reported only $39,500 as being taxable.

She included with her return Form 5329, Additional Taxes on Qualified Plans.

She reported $24,664 of her distributions as being subject to the 10% additional

tax and reported additional tax of $2,466.

      The IRS’ automated underreporter (AUR) unit flagged petitioner’s return

because of a mismatch between her reported income and the amounts shown on
                                        -4-

[*4] the Forms 1099-R, Distributions From Pensions, Annuities, Retirement or

Profit-Sharing Plans, IRAs, Insurance Contracts, etc., that the brokerage firm had

supplied to the IRS. On September 17, 2018, the AUR unit sent petitioner a

Notice CP2000 indicating that she (1) had failed to report $15,000 of taxable

distributions, (2) had underreported the 10% additional tax due, and (3) was

subject to an accuracy-related penalty. The letter instructed her to file a response

by October 17, 2018, if she did not agree with these proposed adjustments.

      Petitioner did not file a timely response to the Notice CP2000 and, on

December 10, 2018, the IRS issued her a notice of deficiency determining the ad-

justments previously proposed. In January 2019 petitioner sent the IRS a belated

response to the Notice CP2000, indicating that she had withdrawn the $54,500 to

cover her son’s education expenses. She stated that she intended to redeposit

$15,000 of that sum (the portion she had not reported), explaining that her $15,099

withdrawal from the 529 account would cover that part of the cost of his educa-

tion. She requested a waiver of the 60-day rollover period to enable her to re-

deposit the $15,000 free of tax, urging as justification that she had moved fol-

lowing her divorce and was involved in related litigation. She contended that the

$38,000 distribution she had received on July 25 should be exempt from the
                                          -5-

[*5] section 72(t) additional tax because she had used that money to pay for her

son’s expenses at Morehouse.

      On March 4, 2019, petitioner filed a timely petition reiterating the content-

ions advanced in her response to the Notice CP2000. She also contended that the

$3,800 withheld by the brokerage firm from her July 25 distribution should be

refunded because she had spent the $38,000 on qualified education expenses.

      On January 7, 2019, petitioner wrote the brokerage firm that holds her IRA,

representing that she intended to apply for a waiver of the 60-day rollover require-

ment on the ground that a postal error occurred. The firm responded that she

would need to provide substantiation of a postal error. She did not provide that

substantiation to the firm or to the Court at trial.

      Trial was held on January 14, 2020, in New York City. At trial petitioner

submitted evidence that her son had qualified to receive Federal education loans

and Pell grants up to approximately $24,000 per semester. Petitioner testified that

she declined to take any loans, resolving to pay the tuition herself. She produced

bank statements establishing payments of $9,809 to Morehouse during 2016; this

sum was in addition to the $9,283 distributed directly to Morehouse from her 529

account.
                                         -6-

[*6] At the close of trial the Court instructed the parties to file seriatim briefs.

Respondent filed his opening brief on March 27, 2020. Petitioner filed on April

27, 2020, as her answering brief, a document indicating that she had made a

$15,000 deposit into her IRA account that day.

                                      OPINION

A.    Taxability of Retirement Account Distributions

      The Commissioner’s determination of tax liability is generally presumed

correct. See Rule 142(a). For the presumption to attach in a case of unreported in-

come, “the evidence of record must at least link the taxpayer with some tax-

generating acts.” Llorente v. Commissioner, 649 F.2d 152, 156 (2d Cir. 1981),

aff’g in part, rev’g in part 74 T.C. 260 (1980). “Once the Commissioner makes the

required threshold showing, the burden shifts to the taxpayer to prove by a pre-

ponderance of the evidence that the Commissioner’s determinations are arbitrary

or erroneous.” Walquist v. Commissioner, 152 T.C. 61, 67-68 (2019) (citing

Helvering v. Taylor, 293 U.S. 507, 515 (1935)); Tokarski v. Commissioner, 87

T.C. 74 (1986).

      Petitioner reported on her 2016 return that she had received distributions of

$54,500 from her IRA. Respondent has thus met his threshold showing. The bur-

den accordingly shifts to petitioner to show that the distributions were not subject
                                         -7-

[*7] to tax. Petitioner does not contend that the burden of proof shifts to

respondent under section 7491(a) as to any issue of fact.

      Section 61(a) provides that “gross income means all income from whatever

source derived.” Section 408(d)(1) provides that, “[e]xcept as otherwise provided

in this subsection, any amount paid or distributed out of an individual retirement

plan shall be included in gross income by the payee or distributee.” Section

408(d) provides several exceptions to this rule--e.g., for rollover contributions,

transfers incident to divorce, and distributions for charitable purposes. See sec.

408(d)(3), (6), (8).3

      For a distribution to be excluded from gross income under the rollover ex-

ception, the funds must generally be deposited into an eligible retirement account

no later than 60 days after the taxpayer receives the distribution. Sec.

408(d)(3)(A). The Secretary may waive the 60-day requirement “where the failure

to waive such requirement would be against equity or good conscience, including

casualty, disaster, or other events beyond the reasonable control of the * * *

[taxpayer].” Sec. 408(d)(3)(I). In determining whether waiver is appropriate, the

IRS considers all relevant factors including:

      3
       Petitioner does not contend that any of her contributions to her IRA
account were not deductible on contribution and not taxable on distribution. See
sec. 408A(c) and (d).
                                        -8-

[*8] (1) errors committed by a financial institution * * *; (2) inability to
     complete a rollover due to death, disability, hospitalization, incar-
     ceration, restrictions imposed by a foreign country or postal error;
     (3) the use of the amount distributed (for example, in the case of
     payment by check, whether the check was cashed); and (4) the time
     elapsed since the distribution occurred. [Rev. Proc. 2003-16, sec.
     3.01, 2003-1 C.B. 359, modified by Rev. Proc. 2016-47, 2017 I.R.B.
     346.]

This Court has applied the same factors in determining whether it would be

against equity or good conscience to deny a waiver. See Trimmer v. Commis-

sioner, 148 T.C. 334, 363 (2017) (addressing analogous hardship waiver under

section 402(c)(3)(B)).

      Applying these factors, we do not believe the IRS erred in declining to

waive the 60-day rollover requirement. Petitioner has not alleged any error by a

financial institution that prevented her from effecting a timely rollover. She did

not substantiate her contention that a postal error caused the delay, and she has

alleged no disability or the like as a contributing cause. While she contends that it

was always her intention to roll over the $15,000, she produced no evidence that

she set the money aside (e.g., in a separate account) for that purpose. Cf. ibid.

(finding that taxpayers had not used or profited from the distributed funds while

holding them for rollover). Petitioner produced no evidence to establish what she

did with the funds or how she used them.
                                          -9-

[*9] Finally, we find it important that nearly four years elapsed between petition-

er’s receipt of the final distribution and her redeposit of the $15,000 to her IRA.

Petitioner does not appear to have made any effort to roll over the funds before the

notice of deficiency was issued to her. See Rev. Proc. 2016-47, sec. 3.02(3),

2016-37 I.R.B. 346, 347 (requiring self-certification that the rollover contribution

was made “as soon as practicable” after the obstacle preventing the rollover was

removed). Under these facts, declining to waive the 60-day requirement is not

against equity or good conscience, and petitioner is therefore taxable on the full

$54,500 that was distributed to her.

B.    Section 72(t) Additional Tax

      Where (as here) a taxpayer receives distributions from a qualified retirement

plan, section 72(t)(1) generally provides that the tax shall be increased “by an

amount equal to 10 percent of the portion of such amount which is includible in

gross income.” There are several exceptions to this rule, e.g., where the taxpayer

receiving the distribution has attained the age of 59-1/2 or is disabled. See sec.

72(t)(2)(A)(i), (iii). Petitioner qualifies for neither of these exceptions.

      Another exception applies “to the extent such distributions do not exceed

the qualified higher education expenses * * * of the taxpayer for the taxable year.”

Sec. 72(t)(2)(E). “Qualified higher education expenses” include expenses for
                                       - 10 -

[*10] tuition, fees, books, supplies, and (to some degree) room and board, and

include expenses that a taxpayer incurs on behalf of a child. See secs. 72(t)(7),

529(e)(3). In order to qualify, educational expenses must be incurred in the

taxable year in which the distribution is received. See Duronio v. Commissioner,

T.C. Memo. 2007-90; Lodder-Beckert v. Commissioner, T.C. Memo. 2005-162.

Petitioner relies on this exception and has the burden of production with respect to

that issue. See El v. Commissioner, 144 T.C. 140, 148 (2015).

      Petitioner asserted in her response to the Notice CP2000 that the total yearly

cost of her son’s attendance at Morehouse was $54,000. But she presented no evi-

dence that she actually incurred expenses of that magnitude. Morehouse appears

to have provided that figure as an estimate of the cost of attendance before any

grant or scholarship was applied. And that figure reflected the estimated cost of

full-year attendance, whereas the relevant figure here is the amount petitioner

actually paid during calendar 2016.

      On her return petitioner reported that $24,660 of her distributions was

subject to the 10% additional tax under section 72(t). By negative implication this

suggests that the expenses she believed to be exempt from the 10% additional tax

totaled $29,840 ($54,500 ! $24,660). But she was not able to substantiate educa-

tional costs or payments that large during 2016.
                                       - 11 -

[*11] Petitioner substantiated that she paid Morehouse $19,092 during 2016, con-

sisting of $9,283 distributed to Morehouse from her 529 account and $9,809 in

payments separately documented by her bank statements. We find that $5,816 of

the latter sum represented the balance of her withdrawals from the section 529

account (viz., the portion distributed to her rather than to Morehouse). This leaves

$3,993 (viz., $9,809 ! $5,816) as the amount that petitioner paid Morehouse using

proceeds of her IRA withdrawals.

      In sum, we find that $3,993 of the $54,500 that petitioner withdrew from her

IRA account was used during 2016 for “qualified higher education expenses”

within the meaning of section 72(t)(2)(E). We find that she has failed to meet her

burden to show that any exception applies to the balance of her IRA withdrawals.

She is thus liable for additional tax of $5,051 (10% × $50,507) under section 72(t).

C.    Accuracy-Related Penalty

      The Code imposes a 20% penalty upon the portion of any underpayment of

tax that is attributable to (among other things) “[a]ny substantial understatement of

income tax.” Sec. 6662(a), (b)(2). An understatement of income tax is “substan-

tial” if it exceeds the greater of $5,000 or 10% of the tax required to be shown on

the return. Sec. 6662(d)(1)(A). Section 7491(c) generally provides that “the
                                         - 12 -

[*12] Secretary shall have the burden of production in any court proceeding with

respect to the liability of any individual for any penalty.”4

      Section 6664(c)(1) provides that no accuracy-related penalty shall be im-

posed with respect to any portion of an underpayment “if it is shown that there was

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

respect to * * * [it].” The taxpayer bears the burden of showing reasonable cause

and good faith. See Higbee v. Commissioner, 116 T.C. 438, 446 (2001). The de-

cision whether a taxpayer has met this burden is made on a case-by-case basis, tak-

ing into account all pertinent facts and circumstances. See sec. 1.6664-4(b)(1),

Income Tax Regs. Circumstances that may signal reasonable cause and good faith

“include an honest misunderstanding of fact or law that is reasonable in light of all


      4
       The Commissioner’s burden of production includes showing compliance
with section 6751(b)(1), which requires that the initial determination of any penal-
ty assessment be “personally approved (in writing) by the immediate supervisor of
the individual making such determination.” This requirement does not apply to
any penalty “automatically calculated through electronic means.” Sec.
6751(b)(2)(B). This Court has held that substantial understatement penalties de-
termined by an IRS computer program without human review are “automatically
calculated through electronic means” and are thus exempt from the written super-
visory approval requirement. See Walquist v. Commissioner, 152 T.C. 61, 73
(2019). Although the penalty in Walquist was calculated by the IRS’ Correspon-
dence Examination Automated Support program, respondent contends that the
same result should follow where (as here) the penalty is calculated by the AUR
program. Since we hold on the merits that petitioner is not liable for any penalty,
we need not decide whether respondent has met his burden of production.
                                        - 13 -

[*13] of the facts and circumstances, including the experience, knowledge, and

education of the taxpayer.” Ibid.

        Petitioner prepared her 2016 return during a very tumultuous time in her

life. We found credible her testimony that she attempted to report her tax liability

correctly. She reported the full amount of the IRA distributions she received

($54,500), but treated $15,000 as nontaxable because she intended to roll over that

amount. She reported $24,660 of her distributions as subject to the 10% addition-

al tax, correctly believing that she was entitled to some exemption for qualified

education expenses. Although she did not calculate the exemption amount cor-

rectly, we find that she exercised good faith in her reporting. Considering all these

facts, we find that petitioner has demonstrated reasonable cause for her underpay-

ment.

        To reflect the foregoing,


                                                 Decision will be entered under Rule

                                       155.
