                      T.C. Summary Opinion 2008-1



                        UNITED STATES TAX COURT



                SHAWN TIMOTHY HYNES, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



   Docket No. 3897-06S.                  Filed January 2, 2008.



   Shawn Timothy Hynes, pro se.

   Karen A. Rennie and Paul Darcy, for respondent.



   GOLDBERG, Special Trial Judge:     This case was heard pursuant

to the provisions of section 7463 of the Internal Revenue Code in

effect at the time the petition was filed.    Pursuant to section

7463(b), the decision to be entered is not reviewable by any

other court, and this opinion shall not be treated as precedent

for any other case.    Unless otherwise indicated, subsequent
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section references are to the Internal Revenue Code in effect for

the year in issue, and all Rule references are to the Tax Court

Rules of Practice and Procedure.

   Respondent determined a $6,564 deficiency in petitioner’s

2003 Federal income tax and an accuracy-related penalty of $662

pursuant to section 6662(a).

   After concessions,1 the issues for decision are:    (1) Whether

petitioner is liable for the 10-percent additional tax under

section 72(t) for an early withdrawal from a qualified pension

plan, and (2) whether petitioner is liable for an accuracy-

related penalty pursuant to section 6662(a).

                              Background

   The stipulation of facts and the attached exhibits are

incorporated herein by reference.    At the time the petition was

filed, petitioner resided in New York City.

   During taxable year 2003, petitioner was a third-year law

student at the University of Pennsylvania Law School (Penn) in

Philadelphia, Pennsylvania.    Petitioner transferred to Penn after

completing his first year of law school at the University of




     1
      Petitioner concedes that he failed to report $9 of interest
received from Wachovia Bank and that he received a $16,263
taxable distribution from a qualified pension plan, which was not
reported on his income tax return.
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Oregon School of Law in Eugene, Oregon.    Petitioner holds an

undergraduate degree from Duke University.

   Before attending law school, petitioner worked as a paralegal

with the law firm of Cravath, Swaine & Moore, where he

participated in the firm’s qualified pension plan (QRP).

   From December 1, 2002, through July 30, 2003, petitioner

resided in Philadelphia, Pennsylvania.    Petitioner’s monthly rent

during this time was $900.    Petitioner’s expenses during law

school were paid from his savings, wages, and public and private

loans.    The record contains two student loan statements for

petitioner; one statement pertains to his enrollment at the

University of Oregon School of Law, while another statement

relates to his enrollment at Penn.

   On April 22, 2003, as he was preparing to graduate from Penn

and beginning preparation for the bar exam, petitioner deposited

a $13,011 check issued to him from Security Trust Bank, payor, in

his checking account.    The check represented a net distribution

of $16,263 to petitioner from his Cravath, Swaine & Moore QRP

minus income tax withheld of $3,252.    Petitioner did not include

this distribution as income on his 2003 Federal income tax

return.    On the date of this distribution petitioner was not 59-

1/2 years old.
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   After graduating from law school, petitioner moved to New

York City so that he would be able to take a bar preparation

course for the California bar exam.    In September 2003,

petitioner moved from New York City to Palo Alto, California, to

work as a securities associate with the law firm of Simpson

Thacher & Bartlett (STB).   Before starting at STB, petitioner

received an advance from STB to cover the costs associated with

his move from New York City to Palo Alto.

   Petitioner timely filed his 2003 Federal income tax return.

Petitioner reported wages, salaries, and tips on his return.     His

wages of $51,304 were earned from his employment at STB from

September through December of 2003.

   Respondent received the following third party information for

petitioner that was not otherwise reflected on his 2003 income

tax return:   (1) Interest income on Wachovia Bank accounts of $7

and $9, (2) a pension and annuity payment of $16,263 (with income

tax withheld of $3,252), and (3) student loan interest payments

of $1,509 paid to Student Financial Assistance and $1,516 paid to

Duke University.

   Respondent issued to petitioner a notice of deficiency that

explained the changes made to his 2003 Federal income tax based

on the third-party information.   The notice showed that

petitioner had understated his income tax on his 2003 return by
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$6,564, and explained that the deficiency respondent determined

was the result of:   (1) Changes to petitioner’s adjusted gross

income, and (2) an additional tax applied as a result of

petitioner’s distribution from his qualified retirement plan.

   In his “Petition for Redetermination of a Deficiency”,

petitioner disputed respondent’s determination because:    (1) He

was not responsible for the deficiency, (2) he wanted the Court

to give him an opportunity to recalculate and resubmit his 2003

return, (3) the Internal Revenue Service (IRS) had made an error

in calculating the deficiency at issue, and (4) he should not be

responsible for the IRS’s mistake.     The petition is devoid of any

factual explanation as to why petitioner requested and received

the distribution at issue in 2003.

   On June 29, 2005, petitioner submitted a Form 9465,

Installment Agreement Request, before an assessment was made on

his account.   On July 5, 2005, petitioner made a payment of $895.

Between November 28, 2005, and February 23, 2006, he made three

additional payments that totaled $450.

                            Discussion

   In general, the Commissioner’s determination set forth in a

notice of deficiency is presumed correct.     Welch v. Helvering,

290 U.S. 111, 115 (1933).   In pertinent part, Rule 142(a)(1)

provides the general rule that the burden of proof shall be upon
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the taxpayer.   In certain circumstances, however, if the taxpayer

introduces credible evidence with respect to any factual issue

relevant to ascertaining the proper tax liability, section 7491

shifts the burden of proof to the Commissioner.    Sec. 7491(a)(1);

Rule 142(a)(2).   Petitioner did not argue that section 7491 is

applicable, and he did not establish that the burden of proof

should shift to respondent.    Petitioner, therefore, bears the

burden of proving that respondent’s determination in the notice

of deficiency is erroneous.    See Rule 142(a); Welch v. Helvering,

supra at 115.   With respect to any penalty or addition to tax,

however, section 7491(c) places the burden of production on the

Commissioner.

     With respect to the first issue involved in this case,

section 72(t) imposes an additional tax on distributions from a

QRP equal to 10 percent of the portion of such amount that is

includable in gross income unless the distribution comes within

one of several exceptions.    For purposes of the 10-percent

additional tax, a QRP includes both a section 401(k) pension plan

and an individual retirement account.    See secs. 72(t)(1),

401(a), (k)(1), 4974(c)(1), (4), (5).

     Section 72(t)(2) enumerates the exceptions to the 10-percent

additional tax for early distributions from QRPs.    There is no

economic hardship exception to the 10-percent additional tax
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under section 72(t).   The 10-percent additional tax imposed on

early distributions from a QRP does not apply, however, to

distributions from an individual retirement plan used for higher

education expenses to the extent such distributions do not exceed

the amount of qualified education expenses of the taxpayer for

the taxable year.   Sec. 72(t)(2)(E).

     The parties agree that the distribution made to petitioner

in 2003 was from a QRP within the meaning of section 401(k).

Petitioner, however, argues that he should not be held liable for

the 10-percent additional tax on this distribution on the grounds

that his request was based on economic hardship, and an exception

for such a request exists under section 401(k)(2)(B)(i).

Petitioner testified that the costs of his law school education,

coupled with the costs associated with his studying for the bar

exam, left him with no viable alternative other than to take a

premature distribution from his QRP.    Petitioner testified that

he used the disbursement to pay school loans, pay credit card

bills, and provide for his day-to-day living expenses during the

summer of 2003.

     Respondent argues that while section 401(k)(2)(B)(i) does

provide for hardship distributions from qualified pension plans,

that section does not exempt a taxpayer from the 10-percent

additional tax that may apply to such a distribution.   At trial,
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petitioner admitted that he did not research the tax

ramifications that might result from his request for a hardship

distribution beyond looking at section 401(k)(2)(B)(i).

Petitioner also admitted that he could have overlooked and/or

misunderstood the 10-percent additional tax exceptions enumerated

in section 72(t)(2).

     Upon review of section 72(t)(2), we cannot find any

exception that would exempt the distribution made to petitioner

in taxable year 2003.   Moreover, petitioner admits that his

argument that the 10-percent additional tax should not apply is

based on a provision pertaining to the request for disbursement

and not, as we are concerned with here, the taxation of such a

disbursement.   Distributions from an individual retirement plan

used for higher education expenses of the taxpayer are exempt

from the 10-percent additional tax to the extent such

distributions do not exceed the qualified higher education

expenses of the taxpayer for the taxable year.   The qualified

higher education expenses exception applies, however, only in the

case of a distribution from an individual retirement plan (IRA).

Petitioner’s QRP is a section 401(k) plan, not an IRA.

Therefore, the qualified higher education expenses exception is

inapplicable.   Because the distribution made to petitioner from
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his QRP in 2003 does not fall within any of the 10-percent

additional tax exceptions enumerated in section 72(t)(2), we

sustain respondent’s determination on this issue.

     With respect to the accuracy-related penalty, section

6662(a) imposes a 20-percent penalty with respect “to any portion

of an underpayment of tax required to be shown on a return”.

This penalty applies to underpayments attributable to any

substantial understatement of income tax.     Sec. 6662(a), (b)(2).

An “understatement” of income tax is defined as the excess of the

tax required to be shown on the return over the tax actually

shown on the return.   Sec. 6662(d)(2)(A).    An understatement is

“substantial” if it exceeds the greater of 10 percent of the tax

required to be shown on the return, or $5,000.     Sec.

6662(d)(1)(A).

     Section 6664 provides a defense to the accuracy-related

penalty if a taxpayer establishes that there was reasonable cause

for any portion of the underpayment and that he acted in good

faith with respect to that portion.     Sec. 6664(c)(1); sec.

1.6664-4(b), Income Tax Regs.   Although not defined in the Code,

“reasonable cause” is viewed in the regulations as the exercise

of ordinary business care and prudence.     See sec. 301.6651-

1(c)(1), Proced. & Admin. Regs.   Whether a taxpayer acted with

reasonable cause and in good faith is made on a case-by-case
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basis, taking into account all the pertinent facts and

circumstances.   Sec. 1.6664-4(b)(1), Income Tax Regs.   The

taxpayer’s education, experience, and knowledge are considered in

determining reasonable cause and good faith.   And, generally, the

most important factor is the extent of the taxpayer’s effort to

assess his proper tax liability.   Sec. 1.6664-4(b)(1), Income Tax

Regs.

     Respondent determined an accuracy-related penalty to be

applicable in this case because petitioner understated his income

tax by $6,564 on his 2003 income tax return.   Because

petitioner’s understatement of tax was greater than 10 percent of

the tax required to be shown on the return, or $5,000, the

understatement was deemed a substantial understatement of tax

pursuant to section 6662(d)(1)(A)(i) and (ii).   Respondent

contends that petitioner’s failure to report income equaling

approximately 35 percent of his adjusted gross income for 2003

shows a lack of reasonable cause and good faith.

     Petitioner argues that he should not be held liable for the

penalty because:   (1) His failure to include the amount received

from the distribution was due to his move from New York City to

Palo Alto, California, in 2003, which resulted in his failure to

receive a Form 1099-MISC for the distribution, and (2) his

failure to remember to report the distribution was not
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deliberate.    As further evidence of his asserted good faith,

petitioner testified that he submitted an installment payment

request before an assessment was made on his account and that he

made four payments totaling $1,345.

       Receipt of a Form 1099-MISC is not required to remind a

taxpayer of income that must be reported on his or her Federal

income tax return.    Brunsman v. Commissioner, T.C. Memo. 2003-

291.    The gross amount of the distribution, $16,263, represented

approximately 24 percent of petitioner’s total taxable income for

2003.    Petitioner’s argument that he did not remember this

distribution at the time he filed his 2003 return because of the

extraordinary demands of his job as an attorney is without merit.

       Finally, as respondent correctly argued at trial,

petitioner’s contention that his attempt to pay off the tax

through an installment agreement shows his good faith is

irrelevant under these facts and circumstances.      What controls

here is petitioner’s good faith at the time the return was filed,

rather than the action he took after he received the notice of

deficiency.    Sec. 6664(c)(1).    Accordingly, we sustain

respondent’s determination with respect to the accuracy-related

penalty under section 6662(a).
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To reflect the foregoing,

                                Decision will be entered

                            for respondent.
