                  T.C. Summary Opinion 2003-45



                     UNITED STATES TAX COURT



               NICK ALLAN PALERMINO, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 6781-01S.              Filed April 28, 2003.


     Nick Allan Palermino, pro se.

     James J. Posedel, for respondent.



     POWELL, Special Trial Judge:    This case was heard pursuant

to the provisions of section 74631 of the Internal Revenue Code

in effect at the time the petition was filed.    The decision to be

entered is not reviewable by any other court, and this opinion

should not be cited as authority.

     Respondent determined a deficiency of $1,568 in petitioner’s


1
    Unless otherwise indicated, subsequent section references are
to the Internal Revenue Code in effect for the year in issue.
                               - 2 -

1998 Federal income tax.   The issue is whether a distribution

from petitioner’s retirement plan is includable in petitioner’s

gross income.2   Petitioner resided in San Diego, California, at

the time the petition was filed.

                            Background

     From 1992 to 1999, petitioner was employed as a buyer for

Smith & Nephew, Inc.   Smith & Nephew established a retirement

plan for its employees, which the parties stipulate qualifies as

a section 401(k) plan.   Fidelity Investments Institutional

Operations Co., Inc. (Fidelity), provided administrative record-

keeping services for petitioner’s retirement plan.   Between 1993

and 1996, petitioner contributed elective tax-deferred amounts--

specifically, $5,520 in matched contributions and $1,692 in

unmatched contributions.

     On May 15, 1998, respondent served a levy on Fidelity for

unpaid taxes and statutory additions of $5,582.03 for the taxable

year 1996 and sent petitioner a “Taxpayer’s Copy of Notice of

Levy”.   Fidelity complied with the levy and distributed $5,582.03

from petitioner’s retirement plan to respondent on June 19, 1998.


2
    Respondent did not assess the 10-percent addition to tax for
early withdrawals from qualified retirement plans. See sec.
72(t)(1) and (2)(A). For distributions made on account of a levy
under sec. 6331 before Dec. 31, 1999, the Commissioner acquiesced
following this Court’s decision in Murillo v. Commissioner, T.C.
Memo. 1998-13, affd. without published opinion 166 F.3d 1201 (2d
Cir. 1998), and no longer assesses the 10-percent addition to tax
under sec. 72(t). See also Larotonda v. Commissioner, 89 T.C.
287 (1987).
                               - 3 -

Petitioner did not include the $5,582 distribution as income on

his 1998 Form 1040EZ.   In the notice of deficiency, respondent

determined that the $5,582 distribution was includable in

petitioner’s 1998 gross income.

                            Discussion

     For a retirement plan to qualify under section 401(k),

amounts held by the plan which are “attributable to employer

contributions made pursuant to the employee’s election”3 are not

distributable earlier than “separation from service, death, or

disability, * * * the attainment of age 59½, or * * * hardship of

the employee”.   Sec. 401(k)(2)(B)(i).   If a distribution to the

employee is made, the amount actually distributed “shall be

taxable to the distributee, in the taxable year of the

distributee in which distributed, under section 72”.   Sec.

402(a).

     Respondent levied on petitioner’s section 401(k) account,

and the compliance with the levy constituted a distribution,

albeit involuntary, from that account to the benefit of

petitioner.   See Larotonda v. Commissioner, 89 T.C. 287 (1987).

     Preretirement distributions from a qualified retirement plan

are treated as nonannuity distributions.   See sec. 72(e)(1).    If




3
    For purposes of sec. 401(k), “elective contributions * * *
are treated as employer contributions.” Sec. 1.401(k)-
1(a)(4)(ii), Income Tax Regs.
                                 - 4 -

the distribution is received before retirement, only amounts

allocable to the “investment in the contract” are excludable from

gross income.    Sec. 72(e)(2)(B), (8)(A).

       The employee’s “investment in the contract” includes amounts

contributed by the employer, “but only to the extent that * * *

such amounts were includible in the gross income of the

employee”.    Sec. 72(f).   For purposes of a section 401(k) plan,

“elective contributions * * * are neither includible in an

employee’s gross income at the time the cash or other taxable

amounts would have been includible in the employee’s gross income

(but for the * * * [section 401(k) plan]), nor at the time the

elective contributions are contributed to the plan.”    Sec.

1.401(k)-1(a)(4)(iii), Income Tax Regs.; see also sec. 1.402(a)-

1(d)(2), Income Tax Regs.

       Petitioner’s entire balance in the retirement plan

constituted elective contributions, and the distribution from

petitioner’s retirement plan occurred before his separation from

service, death, or disability and before he reached the age of

59½.    As a result, the contributions were not included in

petitioner’s gross income at the time of contribution, and

petitioner has no “investment in the contract” which may be

excluded from his gross income.    In short, petitioner contributed

to the retirement plan a portion of his salary that was not taxed

at the time of contribution; the retirement plan cannot later
                              - 5 -

distribute the untaxed cash contributions without petitioner’s

being subject to the income tax.   Accordingly, respondent’s

determination is sustained, and we hold that the entire amount of

the distribution from petitioner’s retirement plan is includable

in his gross income.

     Reviewed and adopted as the report of the Small Tax Case

Division.

                                           Decision will be entered

                                      for respondent.
