                        T.C. Memo. 2001-299



                      UNITED STATES TAX COURT



   JAMES E. HENDRICKS AND ROBERTA J. HENDRICKS, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 13646-99.                 Filed November 8, 2001.



     James E. Hendricks and Roberta J. Hendricks, pro se.

     Jeanne Gramling, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     COLVIN, Judge:   Respondent determined a $19,420 deficiency

in petitioners’ Federal income tax for 1996 and a $3,884
                                - 2 -

accuracy-related penalty under section 6662(a)(1)1 and (d)(1)

for substantial understatement of tax.

     Following concessions,2 we must decide the following issues:

     1.    Whether $69,500 that James E. Hendricks (petitioner)

withdrew from his individual retirement account (IRA) is taxable

to petitioners in 1996.    We hold that it is.

     2.    Whether petitioners are liable for the accuracy-related

penalty under section 6662(a) and (d) for substantial

understatement of tax.    We hold that they are.

                          FINDINGS OF FACT

     Some of the facts have been stipulated and are so found.

A.   Petitioners

     Petitioners are married and lived in Laurinburg, North

Carolina, when they filed the petition in this case.

B.   Bechtel Trust & Thrift Plan

     Petitioner worked for Bechtel Corp. (Bechtel) from 1977 to

1988, when he resigned, and from 1992 until 1995, when he

retired.    He became a participant in the Bechtel Trust & Thrift



     1
        Unless otherwise stated, section references are to the
Internal Revenue Code in effect in 1996, and Rule references are
to the Tax Court Rules of Practice and Procedure.

     Sec. 6662(a)(1) did not exist in 1996.      We assume that
respondent meant to cite sec. 6662(a).
     2
        Petitioners concede that their 1996 income should be
increased by $500 for unemployment compensation and by $11 for
interest income.
                                - 3 -

Plan, a retirement plan, on January 27, 1992.        The Bechtel Trust

& Thrift Plan included a trust and profit-sharing account, a

section 401(k) account to which Bechtel contributed funds on

behalf of petitioner which he and Bechtel treated as elective

deferrals of petitioner, an account comprising contributions by

Bechtel that matched petitioner’s elective deferrals (the company

matching account), and an after-tax thrift savings account (i.e.,

an account to which petitioner contributed funds on which he had

paid income taxes).   The following table shows petitioner’s

thrift savings account contributions, earnings, losses,

withdrawals, and balances:

     Contributions to, Earnings of, Distributions From, and
         Balances in Petitioner’s Thrift Savings Account
                                        Contributions
                                        (Withdrawals)         Balance

1992 Contributions                        $1,095.98          $1,095.98
1992 Earnings                                 16.38           1,112.36

1993 Contributions                         2,598.91           3,711.27
1993 Earnings                                251.84           3,963.11

1994 1st & 2d qtrs Contributions              -0-             3,963.11
1994 1st & 2d qtrs Distributions          (3,963.11)             -0-

1994 3d qtr Contributions                     799.80            799.80
1994 3d qtr Earnings                          (13.76)           786.04

1994 4th qtr Contributions                       3,715.53
                                          4,501.57
1994 4th qtr Earnings                         (38.35)         4,463.22
1994 4th qtr Withdrawals                   (4,463.22)            -0-

1995 Contributions                                -0-            -0-
                                              1
1995 Refund                                       (52.11)        -0-
     1
       Bechtel refunded the $52.11 loss from the thrift savings
account to petitioner on Nov. 22, 1995, for reasons not apparent in
the record.
                                 - 4 -

     All of the funds in petitioner’s thrift savings account had

been distributed to him by the end of 1994.    He made no

contributions to the thrift savings account in 1995.

C.   Petitioner’s Section 401(k) Account With Bechtel

     Petitioner had a section 401(k) account with Bechtel to

which Bechtel contributed on petitioner’s behalf $8,994 in 1993,

$9,240 in 1994, and $8,355.70 in 1995.    Bechtel issued Forms W-2,

Wage and Tax Statement, for those years.

D.   Rollover From Petitioner’s Bechtel Trust & Thrift Plan to an
     IRA and Withdrawal of IRA Funds

     On November 27, 1995, petitioner received a $69,421.05

distribution from the Bechtel Trust & Thrift Plan.    On December

6, 1995, petitioner deposited that amount in a Nations Bank

Regular Money Market Individual Retirement Account.    Petitioner

withdrew $69,500 ($69,421.05 plus $78.95 in interest) from his

Nations Bank IRA in 1996.

E.   Petitioners’ Income Tax Returns

     Petitioners reported petitioner’s wages as income from 1993

to 1996.   Petitioners did not report as income the $8,994 in

1993, $9,240 in 1994, and $8,355.70 in 1995 that he contributed

to his section 401(k) account.    Petitioners did not attach a

statement to their 1996 income tax return disclosing the $69,500

withdrawal or explaining why they excluded that amount from their

1996 income.
                                    - 5 -

                                   OPINION

A.     Whether Petitioners Must Include in Income $69,500 That
       Petitioner Withdrew From His IRA Account in 1996

       We first decide whether petitioners must include in income

$69,500 that petitioner withdrew from his Nations Bank IRA in

1996.3      Petitioners contend that they need not do so because:

(1) Petitioner had basis in his IRA; (2) petitioner had paid

taxes on the funds that were deposited in the IRA; and (3) the

thrift savings account lost money in its last 2 years.       We

disagree for reasons stated below.

       1.      Whether Petitioner Had Basis in His IRA When He
               Withdrew Funds in 1996

       A taxpayer may exclude from income IRA distributions

attributable to after-tax contributions for which the taxpayer

has basis.       Secs. 72(e)(6), 408(d)(2); Campbell v. Commissioner,

108 T.C. 54, 66-67 (1997).       Petitioners contend that they may

exclude from income $35,317 because petitioner had basis of that

amount in his IRA when he withdrew amounts in 1996.       Petitioners

contend that petitioner had $35,317 in his thrift savings account

on September 30, 1995, and that he rolled over that amount to his

IRA.       We disagree.   Petitioner had no funds in his thrift savings


       3
        The examination in this case began after July 22, 1998.
Petitioners were aware at trial that the Commissioner bears the
burden of proof if conditions stated in sec. 7491 are met.
However, they do not contend that sec. 7491 applies. Thus,
petitioners bear the burden of proof on this issue. Rule 142(a).
However, the burden of proof does not affect our holding on this
issue.
                              - 6 -

account on September 30, 1995, made no contributions to that

account in 1995 or 1996, and did not roll over any funds from

that account to his IRA in 1995 or 1996.

     Bechtel’s records of petitioner’s earnings, distributions,

losses, and balances for his thrift savings account state that

Bechtel had distributed all of the funds in the thrift savings

account to petitioner by the end of 1994, that petitioner made no

contributions to his thrift savings account in 1995 or 1996, and

that petitioner had no balance in his thrift savings account on

September 30, 1995.

     Petitioners point out that the Bechtel quarterly statement

of account as of September 30, 1995, said:   “The maximum amount

you can withdraw from your after-tax Thrift Account and 401(k)

contributions is $35,317.70", and they contend that this

establishes that petitioner had a balance of $35,317.70 in his

thrift savings account on September 30, 1995.   We disagree.   The

quarterly statement states that petitioner’s thrift savings

account balance was zero on September 30, 1995.   Bechtel

contributed on behalf of petitioner a total of $35,317.70 to his

section 401(k) account in 1992, 1993, 1994, and 1995.    Petitioner

had no funds in his thrift savings account to roll over to the

Nations Bank IRA on September 30, 1995, and he made no

contributions to his thrift savings account, nor did he roll over

any amount from that account to his IRA in 1995 or 1996.
                               - 7 -

     As discussed next, petitioner did not pay income tax on

Bechtel’s contributions on his behalf to his section 401(k)

account.   We conclude that petitioner had no basis in his Nations

Bank IRA when he withdrew retirement funds from the IRA.

     2.    Whether Petitioner Paid Income Tax on Funds in His
           Section 401(k) Account That He Rolled Over to the IRA

     Petitioners contend in the alternative that petitioner had

paid income tax on the funds in his section 401(k) account that

he rolled over to the IRA, and as a result, the $69,500 that he

withdrew from his IRA in 1996 is a nontaxable return of

contributions for which he had previously paid income tax and is

not included in income under section 408(d)(1).   We disagree.

     On petitioner’s Forms W-2 for 1993, 1994, and 1995, Bechtel

reported that petitioner did not pay income tax on contributions

to his section 401(k) account in 1993, 1994, and 1995, and that

he deferred tax on compensation contributed to his pension plan.

Bechtel reported on the Forms W-2 that petitioner deferred income

tax on $8,994 in 1993, $9,240 in 1994, and $8,355.70 in 1995.

The difference between the amounts for “Medicare Wages” and the

amounts for “Wages, tips and other compensation” on petitioner’s

Forms W-2 for 1993, 1994, and 1995 equaled $8,994 in 1993, $9,240

in 1994, and $8,355.70 in 1995.   Petitioners did not report the

contributions of $8,994 in 1993, $9,240 in 1994, and $8,355.70 in

1995 to petitioner’s section 401(k) account as income on their
                                 - 8 -

1993, 1994, and 1995 income tax returns.     Thus, petitioners’ tax

returns for 1993, 1994, and 1995 and petitioner’s Forms W-2 for

those years show that petitioners did not include in income the

contributions to his section 401(k) account for those years.

     Bechtel made contributions to petitioner’s section 401(k)

account in 1992.    Petitioners’ 1992 return is not in evidence.

We assume that petitioners and Bechtel treated the 1992

contributions like those made in 1993, 1994, or 1995.

     We conclude that petitioners had not previously included in

income the funds petitioner deposited in his IRA, and that his

IRA distribution is included in petitioners’ income in 1996.

     3.     Petitioners’ Other Contentions

     Petitioners contend that they did not receive $78.95 in

interest as part of the distribution from the IRA in 1996 because

petitioner’s retirement plan had losses in 1995 and 1996.    We

disagree.    The earnings on the accounts exceeded the losses.

Petitioner rolled over $69,421.05 to his IRA in 1995 and received

$69,500 from the IRA in 1996.    Petitioner made no contributions

to the IRA after the rollover.    We conclude that the difference

of $78.95 between the $69,500 distribution in 1996 and the

$69,421.05 rollover in 1995 is taxable interest.

     Petitioners point out that they and respondent had settled a

case involving petitioners’ tax years 1977 through 1988, docket

No. 13027-92S, and contend that settlement binds respondent here.
                                - 9 -

We do not consider that settlement here.    See Fed. R. Evid. 408.

Petitioners also contend that they have paid more tax than their

coworkers, that respondent unreasonably refused to settle this

case, and that respondent has harassed them.   Petitioners state

no details to support these claims, and we do not consider them

further.

     4.    Conclusion

     We conclude that petitioners must include in income the

$69,500 that petitioner withdrew from his IRA in 1996.

B.   Whether Petitioners Are Liable for the Accuracy-Related
     Penalty

     Respondent concedes that respondent bears the burden of

production relating to petitioners’ liability under section

6662(a).   Sec. 7491(c).   The Commissioner satisfies the burden of

production with respect to the accuracy-related penalty under

section 6662 by coming forward with sufficient evidence

indicating that it is appropriate to impose the relevant penalty;

the Commissioner need not introduce evidence regarding reasonable

cause, substantial authority, or similar provisions.     Higbee v.

Commissioner, 116 T.C. 438, 446 (2001); see H. Conf. Rept. 105-

599, at 241 (1998), 1998-3 C.B. 747, 995.

     A substantial understatement of tax exists if the amount of

the understatement is more than 10 percent of the correct amount

of tax or $5,000.   Sec. 6662(d)(1)(A).   Petitioners reported tax
                                - 10 -

liability for 1996 of $5,441.    However, their liability is

$24,861.   Thus, respondent has satisfied the burden of production

under section 7491(c).

     We deem petitioners to have conceded that they are liable

for the accuracy-related penalty under section 6662(a) for

substantial understatement of their 1996 income tax because they

make no argument about the penalty.      See Levin v. Commissioner,

87 T.C. 698, 722-723 (1986) (we deemed the taxpayers to have

abandoned claims in the petition for which they made no

argument), affd. 832 F.2d 403 (7th Cir. 1987); Zimmerman v.

Commissioner, 67 T.C. 94, 104 n.7 (1976) (we deemed the taxpayers

to have conceded an issue they raised in their petition because

they made no argument at trial or on brief relating to that

issue).    We conclude that petitioners are liable for the

accuracy-related penalty under section 6662(a) for substantial

understatement of income tax for 1996.

     For the foregoing reasons,



                                                 Decision will be

                                            entered for respondent.
