                         T.C. Memo. 2009-263



                       UNITED STATES TAX COURT



         JAMES A. AND LINDA A. WILLHITE, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 13816-08.               Filed November 18, 2009.



     James A. and Linda A. Willhite, pro sese.

     Jason M. Kuratnick, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     CHIECHI, Judge:    Respondent determined a deficiency of

$36,969 in petitioners’ Federal income tax (Federal tax) for

taxable year 2004.

     We must decide whether for taxable year 2004 the distribu-

tion in question from the individual retirement account of
                                - 2 -

petitioner James A. Willhite is subject to the additional tax

imposed by section 72(t)(1).1   We hold it is.

                         FINDINGS OF FACT

     All of the facts in this case, which the parties submitted

under Rule 122, have been stipulated by the parties and are so

found.

     Petitioners resided in Pennsylvania at the time they filed

the petition in this case.

     Respondent issued to petitioners a document dated December

10, 2001, with the heading “Urgent!!    We intend to levy on

certain assets.   Please respond NOW” with respect to petitioners’

unpaid Federal tax, penalty, and interest (Federal tax liability)

for taxable year 2000.   That document stated in pertinent part:

     Our records indicate that you haven’t paid the amount
     you owe. The law requires that you pay your tax at the
     time you file your return. This is your notice, as
     required by Internal Revenue Code Section 6331(d), of
     our intent to levy (take) any state tax refunds that
     you may be entitled to if we don’t receive your payment
     in full. In addition, we will begin to search for
     other assets we may levy. * * * To prevent collection
     action, please pay the current balance now. If you’ve
     already paid, can’t pay, or have arranged for an in-
     stallment agreement, it is important that you call us
     immediately * * *.

     Respondent issued to petitioners a document dated March 22,

2004, with the heading “Notice of Intent to Levy, You Defaulted



     1
      All section references are to the Internal Revenue Code
(Code) in effect for the year at issue. All Rule references are
to the Tax Court Rules of Practice and Procedure.
                               - 3 -

on Your Installment Agreement” with respect to petitioners’

unpaid Federal tax liability for taxable year 2002 (March 22,

2004 notice).   That document stated in pertinent part:

     This is a formal notice of our intent to terminate your
     installment agreement 30 days from the date of this
     notice. You defaulted on your agreement because you
     didn’t pay the additional federal tax you owe. The
     agreement states that we may terminate your agreement
     and collect the entire amount of your tax liability if
     you don’t meet all the conditions. This is your no-
     tice, as required by Internal Revenue Code Section
     6331(d), of our intent to levy (take) any state tax
     refunds to which you may be entitled. * * * In addi-
     tion, we will begin to search for other assets we may
     levy. To prevent collection action you must pay in
     full any additional federal taxes you owe. * * * If you
     don’t agree with this decision, you have a right to
     request Appeals consideration * * *.

     Respondent issued to petitioners a document dated July 12,

2004, with the heading “IMPORTANT, Immediate action is required”

with respect to petitioners’ unpaid Federal tax liability for

taxable year 2003.   That document stated in pertinent part:

     We previously wrote to you about your unpaid account,
     but you haven’t contacted us about it. * * * Please pay
     the amount you owe within ten days from the date of
     this notice. If you can’t pay now, call us at the
     number shown below. You may be qualified for an in-
     stallment agreement or payroll deduction agreement. We
     want to help you resolve this bill. However, if we
     don’t hear from you, we will have no choice but to
     proceed with steps required to collect the amount you
     owe. If you already paid your balance in full or
     arranged for an installment agreement, please disregard
     this notice.

     On July 27, 2004, petitioners requested an installment

agreement with respect to their unpaid Federal tax liability for
                                - 4 -

taxable year 2003.   By letter dated August 3, 2004, respondent

granted that request.

     At an undisclosed time during 2004 when petitioner James A.

Willhite (Mr. Willhite) was under 59-1/2 years old, he withdrew

$397,994.60 (2004 IRA distribution) from his individual retire-

ment account (IRA) that he maintained at Cigna Corp. (Mr.

Willhite’s IRA).    Mr. Willhite used $57,172.31 of that distribu-

tion to pay petitioners’ unpaid Federal tax liabilities for

taxable years 2001, 2002, and 2003, respectively.   At a time

during 2004 when Mr. Willhite was unemployed, petitioners paid

health insurance premiums of $16,763.86.   During that year, he

also paid “qualified higher education expenses”, as defined in

section 72(t)(7), of $11,539.76.   Mr. Willhite used the balance

of the 2004 IRA distribution to pay (1) petitioners’ New Jersey,

Pennsylvania, and Delaware tax liabilities (State tax liabili-

ties) and (2) their mortgage liabilities, real estate taxes, and

credit card debt.

     Respondent issued to petitioners a document dated July 4,

2005, with the heading “Notice of Intent to Levy, You Defaulted

On Your Installment Agreement” with respect to taxable year 2003

(July 4, 2005 notice).   That document stated in pertinent part:

     This is a formal notice of our intent to terminate your
     installment agreement 30 days from the date of this
     notice. You defaulted on your agreement because you
     didn’t make your payments as agreed. The agreement
     states that we may terminate your agreement and collect
     the entire amount of your tax liability if you don’t
                              - 5 -

     meet all the conditions. This is your notice, as
     required by Internal Revenue Code Section 6331(d), of
     our intent to levy (take) any state tax refunds to
     which you may be entitled. * * * In addition, we will
     begin to search for other assets we may levy. To
     prevent collection action you must bring your account
     up to date by paying your past due amount, as well as
     any current payments due. * * * If you don’t agree with
     this decision, you have a right to request Appeals
     consideration * * *.

     Petitioners filed Form 1040, U.S. Individual Income Tax

Return, for taxable year 2004 (2004 return).   In that return,

petitioners included in gross income the 2004 IRA distribution of

$397,994.60 that Mr. Willhite received during 2004.   Petitioners

did not report in the 2004 return that they are subject to the

10-percent additional tax imposed by section 72(t) on early

distributions from qualified retirement plans (10-percent addi-

tional tax).

     Respondent issued a notice of deficiency to petitioners for

taxable year 2004 (2004 notice).   In that notice, respondent

determined that petitioners are liable for the 10-percent addi-

tional tax on $369,690.98 of the 2004 IRA distribution that Mr.

Willhite received during 2004.2




     2
      In determining in the 2004 notice the 10-percent additional
tax for which petitioners are liable for taxable year 2004,
respondent reduced the 2004 IRA distribution of $397,994.60 by
the total of the amounts that petitioners used during that year
to pay health insurance premiums (i.e., $16,763.86) and “quali-
fied higher education expenses”, as defined in sec. 72(t)(7)
(i.e., $11,539.76). See sec. 72(t)(2)(D) and (E).
                               - 6 -

     As of the time of the trial in this case, respondent had not

levied any of petitioners’ assets, including Mr. Willhite’s IRA.

                              OPINION

     Petitioners bear the burden of proving that the determina-

tion in the 2004 notice is erroneous.   See Rule 142(a); Welch v.

Helvering, 290 U.S. 111, 115 (1933).    The parties submitted this

case fully stipulated under Rule 122.   That this case was submit-

ted fully stipulated does not change the burden or the effect of

a failure of proof.   See Rule 122(b); Borchers v. Commissioner,

95 T.C. 82, 91 (1990), affd. 943 F.2d 22 (8th Cir. 1991).

     It is the position of petitioners on brief that the portion

(IRA distribution in question) of the 2004 IRA distribution that

they used to pay their unpaid Federal tax liabilities for taxable

years 2001, 2002, and 2003, respectively, i.e., $57,172.31, is

not subject to the 10-percent additional tax.3   In support of

that position, petitioners rely on section 72(t)(2)(A)(vii).

     Section 72(t)(1) provides:

     SEC. 72.   ANNUITIES; CERTAIN PROCEEDS OF ENDOWMENT AND
                LIFE INSURANCE CONTRACTS.

          (t) 10-Percent Additional Tax on Early Distribu-
     tions from Qualified Retirement Plans.--




     3
      Petitioners make no argument on brief that the balance of
the 2004 IRA distribution that petitioners used during 2004 to
pay State tax liabilities, mortgage liabilities, real estate
taxes, and credit card debt is not subject to the 10-percent
additional tax.
                              - 7 -

               (1) 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 per-
          cent of the portion of such amount which is
          includible in gross income.

A “qualified retirement plan” includes an IRA.   See sec.

4974(c)(4).

     Section 72(t)(2) provides certain exceptions to the

10-percent additional tax imposed by section 72(t)(1).   As

pertinent here, section 72(t)(2)(A)(vii) on which petitioners

rely excepts from that tax distributions “made on account of a

levy under section 6331 on the qualified retirement plan.”

     In support of their argument that the exception in section

72(t)(2)(A)(vii) applies to the IRA distribution in question,

petitioners assert:

     The IRS twice sent petitioners formal written Notice of
     Intent to Levy as required by IRC § 6331(d).

          •    Notice of Intent to Levy dated March 22, 2004
               * * * and

          •    Notice of Intent to Levy dated July 4, 2005
               * * *.
     Having received these Notices of Intent to Levy, and
     treating the matter seriously and in good faith and
     believing that the IRS would do in fact what it said it
     intended to do, and observing that they had only one
     asset which could be used by themselves or taken by IRS
     to pay off the past due taxes owing, petitioners paid
     the past due taxes in the amount of $57,172.31 from
     their retirement account. * * *

     * * * Giving Notice of Intent to Levy is the first step
     in the process of “levy and distraint” set out in
                                - 8 -

     section 6331 of the Code. I.R.C. § 6331(d). Once the
     Notice of Intent to Levy is delivered as provided in
     the statute, the process of levying the taxpayer’s
     assets has begun, and, 30 days after giving Notice, the
     agency may seize and continue to seize and sell assets
     until the back tax is paid off. I.R.C. § 6331(c).

     * * * The IRS initiated a levy against petitioners’
     assets, including the retirement account, by issuing
     Notice under section 6331(d).

        *       *        *        *       *       *       *

     * * * Once the IRS decides to levy, it is required by
     law to give Notice of its intent to levy, and the
     reason for the notice is to prompt the taxpayer to take
     action to avoid the levy. Here, the only action which
     could be taken to stop a levy on the retirement account
     after issuance of statutory Notice was to make a with-
     drawal and pay the back taxes. If petitioners did not
     make the withdrawal and pay the back taxes, IRS would.
     There was no choice in the matter. “In the final
     analysis, petitioner[s] had no realistic choice.”
     Murillo v. Commissioner * * * [T.C. Memo. 1998-13,
     affd. without published opinion on other issues 166
     F.3d 1201 (2d Cir. 1998)], citing Larotonda * * * [v.
     Commissioner, 89 T.C. 287 (1987)]. Petitioners did
     exactly what the law, and the IRS, wanted, compelled,
     them to do--use the one asset they had left to pay off
     the back taxes. * * * [Reproduced literally.]

     Petitioners’ arguments are factually and legally flawed, and

petitioners’ reliance on Larotonda v. Commissioner, 89 T.C. 287

(1987), and Murillo v. Commissioner, T.C. Memo. 1998-13, affd.

without published opinion on other issues 166 F.3d 1201 (2d Cir.

1998), is misplaced.

     We turn first to factual flaws in petitioners’ arguments.

Petitioners argue that the July 4, 2005 notice caused Mr.

Willhite to make the withdrawal during 2004 that he received from

Mr. Willhite’s IRA.    However, respondent did not issue that
                               - 9 -

notice to petitioners until the year after Mr. Willhite decided

to make that withdrawal and received the 2004 IRA distribution.

     Petitioners also argue that “The IRS initiated a levy

against petitioners’ assets, including the retirement account, by

issuing Notice under section 6331(d).”   However, the March 22,

2004 notice pertained only to respondent’s “intent to levy (take)

any state tax refunds to which you [petitioners] may be enti-

tled.”   That notice did not pertain to any of petitioners’ other

assets, including Mr. Willhite’s IRA.4

     We turn next to legal flaws in petitioners’ arguments.

Petitioners argue that “Once the Notice of Intent to Levy is

delivered as provided in the statute, the process of levying the

taxpayer’s assets has begun, and, 30 days after giving Notice,

the agency may seize and continue to seize and sell assets until

the back tax is paid off.”   However, as pertinent here, before

levying a taxpayer’s assets in order to satisfy the taxpayer’s

unpaid Federal tax liability, section 6330(a)(1) requires the

Commissioner of Internal Revenue (Commissioner), inter alia, to

notify the taxpayer “in writing of * * * [the taxpayer’s] right

to a hearing under this section before such levy is made.”5


     4
      The July 4, 2005 notice that respondent issued after the
year in which Mr. Willhite received the 2004 IRA distribution
also pertained only to respondent’s “intent to levy (take) any
state tax refunds to which you [petitioners] may be entitled.”
     5
      Exceptions to the notice required by sec. 6330(a) are set
                                                   (continued...)
                             - 10 -

Petitioners do not contend, and the record does not establish,

that during or before 2004 respondent issued to petitioners the

notice of a right to a hearing required by section 6330(a)(1).

Contrary to petitioners’ erroneous argument, section 6330(a)(1)

precluded respondent from being able to “seize and continue to

seize and sell [petitioners’] assets”,6 including Mr. Willhite’s

IRA, “30 days after” respondent sent petitioners the March 22,

2004 notice.7


     5
      (...continued)
forth in sec. 6330(f). Those exceptions include, inter alia, “a
levy on a State to collect a Federal tax liability from a State
tax refund”. Sec. 6330(f)(2).
     6
      See supra note 5 regarding “a levy on a State to collect a
Federal tax liability from a State tax refund”. Sec. 6330(f)(2).
Even if respondent had levied certain State tax refunds of
petitioners to which they were entitled, the exception in sec.
72(t)(2)(A)(vii) on which petitioners rely would not apply to the
IRA distribution in question that they used to pay their
respective unpaid Federal tax liabilities for taxable years 2001,
2002, and 2003. As stated in the conference report that
accompanied the enactment into the Code of the exception in sec.
72(t)(2)(A)(vii),

     The exception applies only if the [qualified
     retirement] plan or IRA is levied; it does not apply,
     for example, if the taxpayer withdraws funds to pay
     taxes in the absence of a levy [on such a plan or IRA],
     in order to release a levy on other interests [of the
     taxpayer].

H. Conf. Rept. 105-599, at 282 (1998), 1998-3 C.B. 755, 1036.
     7
      After the Commissioner issues the notice required by sec.
6330(a)(1) to a taxpayer the taxpayer has the right to request a
hearing before the Commissioner’s Appeals Office (Appeals Of-
fice). See sec. 6330(b). Where such a hearing is held, the
taxpayer “may raise at the hearing any relevant issue relating to
                                                   (continued...)
                              - 11 -

     We turn finally to petitioners’ reliance on Larotonda v.

Commissioner, supra, and Murillo v. Commissioner, supra.     We find

those cases to be materially distinguishable from the present

case and petitioners’ reliance on them to be misplaced.    In the

present case, Mr. Willhite initiated, received, and controlled

the 2004 IRA distribution that he received during 2004,

$57,172.31 of which petitioners used to pay their unpaid Federal

tax liabilities for taxable years 2001, 2002, and 2003, respec-

tively.   In contrast, as we stated in Czepiel v. Commissioner,

T.C. Memo. 1999-289, affd. 86 AFTR 2d 2000-7304, 2001-1 USTC par.

50,134 (1st Cir. 2000):

          In Larotonda v. Commissioner, supra, the Commis-
     sioner’s levy triggered the taxable event without any
     active participation by the taxpayer, and we were
     concerned that Congress did not intend the additional
     tax under former section 72(m)(5) to apply to such a
     situation. In Murillo v. Commissioner, supra, the
     decree of forfeiture that forfeited to the United
     States, inter alia, the taxpayer’s IRA accounts “not
     only triggered but was itself the event which consti-
     tuted the IRA withdrawals.” * * *[8]



     7
      (...continued)
the unpaid tax or the proposed levy, including * * * offers of
collection alternatives”. Sec. 6330(c)(2)(A). If the Appeals
Office were to determine to sustain the proposed collection
action, the taxpayer would have the right to appeal that determi-
nation to this Court. See sec. 6330(d)(1).
     8
      For a fuller discussion of Larotonda v. Commissioner, 89
T.C. 287 (1987), and Murillo v. Commissioner, T.C. Memo. 1998-13,
affd. without published opinion on other issues 166 F.3d 1201 (2d
Cir. 1998), see Czepiel v. Commissioner, T.C. Memo. 1999-289,
affd. 86 AFTR 2d 2000-7304, 2001-1 USTC par. 50,134 (1st Cir.
2000).
                             - 12 -

     On the record before us, we find that petitioners have

failed to establish that the 2004 IRA distribution in question is

not subject to the 10-percent additional tax.   On that record, we

sustain respondent’s determination in the 2004 notice.

     We have considered all of the contentions and arguments of

petitioners that are not discussed herein, and we find them to be

without merit, irrelevant, and/or moot.

     To reflect the foregoing,


                                      Decision will be entered

                                 for respondent.
