                               T.C. Memo. 2017-77



                        UNITED STATES TAX COURT



   ESTATE OF HUNG-LIANG LYNN LIN, DECEASED, JEFFREY S. LIN,
                 ADMINISTRATOR, Petitioner v.
        COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 211-15.                           Filed May 8, 2017.



      Hung-Liang Lynn Lin,1 pro se.

      Patrick F. Gallagher, for respondent.



            MEMORANDUM FINDINGS OF FACT AND OPINION


      ASHFORD, Judge: Respondent determined a deficiency of $11,711 in

petitioner’s Federal income tax and an accuracy-related penalty pursuant to section


      1
        Hung-Liang Lynn Lin died after trial of this case, and the caption was
changed by order dated February 17, 2017, pursuant to Rule 63(a). Hereafter, for
ease, references to petitioner shall denote Hung-Liang Lynn Lin.
                                           -2-

[*2] 6662(a) of $2,342 for the 2012 taxable year.2 The issues for decision are: (1)

whether petitioner was required to report as income $56,889.95 received from a

retirement account during 2012 and (2) whether petitioner is liable for the

accuracy-related penalty.

                                 FINDINGS OF FACT

         Petitioner resided in Rhode Island at the time the petition was filed with the

Court.

         Petitioner began working full time in 1978. He studied geophysics and

received a Ph.D. from the Colorado School of Mines. During the 1980s he was

working for Raytheon in Oklahoma. In 1987 he moved back to Colorado, where

he met an agent for Paine Webber and opened two investment accounts. Over the

years he contributed $24,000 to his investment accounts, which it appears were at

all times treated as deductible contributions to an individual retirement account

(IRA).

         On July 9, 2007, the balances in petitioner’s accounts were transferred to

OppenheimerFunds, where an account was opened as a rollover IRA. His account

remained with OppenheimerFunds until 2012.

         2
      Unless otherwise indicated, all section references are to the Internal
Revenue Code in effect for the year at issue, and all Rule references are to the Tax
Court Rules of Practice and Procedure.
                                        -3-

[*3] On February 10, 2012, a representative for OppenheimerFunds secured

petitioner’s signed authorization and caused his OppenheimerFunds account to be

transferred to ProEquities, where an account was opened as a rollover IRA.

Thereafter, petitioner became angry with the representative because he believed

the representative was “doing [] things” he did not know about and was charging a

commission. Petitioner requested that his ProEquities account be closed; on

March 29, 2012, he executed an IRA distribution request form to withdraw the

$56,889.95 balance in the account. The form also reflects his election not to have

any Federal or State income tax withheld from the distribution and for delivery of

the funds via wire transfer to his bank account at Bank of America.

      There is no dispute that petitioner received these funds. At the close of

2012 petitioner was over 59½ but under 70½ years of age.

      ProEquities sent to the Internal Revenue Service and to petitioner a 2012

Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-

Sharing Plans, IRAs, Insurance Contracts, etc., reporting the $56,889.95

distribution to petitioner as a normal, taxable distribution. The form also reflected

that no Federal or State income tax was withheld. Petitioner prepared his own

Federal income tax return for 2012, but he did not report the distribution.
                                        -4-

[*4] Relying on the ProEquities Form 1099-R, respondent sent a notice of

deficiency to petitioner on December 22, 2014, determining that the entire amount

of the reported distribution was taxable and that he was liable for the substantial

understatement of income tax penalty under section 6662(a) and (b)(2). On

January 5, 2015, petitioner timely petitioned this Court for redetermination of the

deficiency and the penalty.

                                     OPINION

I.    Taxability of Retirement Distribution

      Section 408(d)(1) provides that amounts paid or distributed out of an

individual retirement plan shall be included in gross income by the payee or

distributee, with exceptions not applicable here. The taxability of distributions

coordinates with the exemption from tax of earnings in the account during its

existence. See sec. 408(e)(1). Because petitioner was over 59½ and under 70½ at

the close of 2012, we are not here concerned with an early distribution subject to

section 72(t) or a required minimum distribution under sections 408(a)(6) and

401(a)(9).

      Petitioner conceded at trial that the $24,000 he contributed to his IRA and

included in the 2012 distribution is taxable. Implicitly he acknowledged that his

contributions to the account were deducted during the years that they were made,
                                         -5-

[*5] pursuant to section 219(a). However, he questioned the taxability of the

balance and indicated he was willing to repay that amount to a new IRA he could

open (or to an IRA he had recently opened with Bank of America).3 His argument

is premised on a representative’s transfer of funds as a rollover into an IRA

without his knowledge or consent. However, the IRA records of petitioner that are

in evidence are consistent in treating his funds as invested through an IRA and

indicate that the original contributions and the earnings on them were rolled over

from one institution to another. In particular, petitioner signed papers

acknowledging the IRA rollover from OppenheimerFunds to ProEquities in 2012.

      Although none of petitioner’s Federal income tax returns for earlier years

are in evidence, his original contributions were apparently deducted, and earnings

on his contributions to an IRA normally would not have been taxed until

withdrawn. Thus the statutory provisions require that the full amount of the

distribution be taxed during the year that he received it.




      3
       Petitioner also testified that after receipt of the funds, he sent some of the
funds to his son to pay the balance on a student loan and that some of it remained
in a checking account. Subsequent use of the distribution is irrelevant in this case.
                                        -6-

[*6] II.     Accuracy-Related Penalty Under Section 6662(a)

       We now address whether petitioner is liable under section 6662(a) and

(b)(2) for an accuracy-related penalty on an underpayment due to a substantial

understatement of income tax.

       Section 6662(a) imposes a 20% accuracy-related penalty on any portion of

an underpayment of tax required to be shown on a return if, as provided by section

6662(b)(2), the underpayment is attributable to any substantial understatement of

income tax. The term “substantial understatement” means an understatement of

income tax that exceeds the greater of 10% of the tax required to be shown on the

return or $5,000. Sec. 6662(d)(1)(A). The Commissioner bears the burden of

production regarding a taxpayer’s liability for the accuracy-related penalty and

thus is required to come forward with sufficient evidence indicating that

imposition of the penalty is appropriate. See sec. 7491(c); Higbee v.

Commissioner, 116 T.C. 438, 446 (2001). Once the Commissioner meets his

burden of production, the taxpayer bears the burden of proving, through

persuasive evidence, that the Commissioner’s penalty determination is incorrect.

See Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933); Higbee v.

Commissioner, 116 T.C. at 447. Respondent has discharged his burden of

production by providing sufficient evidence showing that petitioner’s
                                         -7-

[*7] understatement of income tax for 2012 exceeds the greater of 10% of the tax

that was required to be shown on the 2012 return or $5,000.

      Application of the accuracy-related penalty may be avoided with respect to

any portion of an underpayment if it is shown that there was reasonable cause for

such portion and the taxpayer acted in good faith with respect to such portion.

Sec. 6664(c)(1); Higbee v. Commissioner, 116 T.C. at 446-447. The

determination of whether the taxpayer had reasonable cause and acted in good

faith depends upon the pertinent facts and circumstances of a particular case. Sec.

1.6664-4(b)(1), Income Tax Regs. We consider, among other factors, the

experience, education, and sophistication of the taxpayer; however, the principal

consideration is the extent of the taxpayer’s efforts to assess the proper tax

liability. Id.; see also Higbee v. Commissioner, 116 T.C. at 448. Taking into

consideration the taxpayer’s experience, education, and sophistication, an honest

misunderstanding of fact or law may indicate reasonable cause and good faith.

Higbee v. Commissioner, 116 T.C. at 449 (citing Remy v. Commissioner, T.C.

Memo. 1997-72). In addition, reliance on professional advice may indicate

reasonable cause and good faith if, in the light of all the facts and circumstances,

such reliance was reasonable and the taxpayer acted in good faith. Id. at 448-449.
                                         -8-

[*8] Petitioner at trial appeared sincere but confused about the taxability of the

distribution he admitted receiving in 2012 although he did not deny receipt of the

Form 1099-R showing that the distribution was reported as taxable by ProEquities.

He did not consult a tax professional and simply omitted the distribution from his

self-prepared return. We cannot find in the record either evidence of a cognizable

effort to assess his proper tax liability or reasonable cause for the error. Because

the underpayment was by definition substantial, we will sustain the penalty.

      We have considered all of the arguments made by the parties and, to the

extent they are not addressed herein, we find them to be moot, irrelevant, or

without merit.

      To reflect the foregoing,


                                               Decision will be entered for

                                       respondent.
