                  T.C. Summary Opinion 2004-11



                     UNITED STATES TAX COURT



                 JAMES J. LEONARD, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 20205-02S.                 Filed February 4, 2004.


     James J. Leonard, pro se.

     Michael K. Park, 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.    The decision to be

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

should not be cited as authority.   Unless otherwise indicated,

subsequent section references are to the Internal Revenue Code in

effect for the year in issue.
                                 - 2 -

     Respondent determined a deficiency in petitioner’s Federal

income tax of $5,976 for the taxable year 2000.

     The issues for decision are:    (1) Whether petitioner’s

failure to make payments on a loan from a qualified retirement

plan resulted in a taxable distribution from that plan, and if so

(2) whether petitioner is liable for a section 72(t) additional

tax on the distribution.1

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

The stipulation of facts and the attached exhibits are

incorporated herein by this reference.    Petitioner resided in

North Richland Hills, Texas, on the date the petition was filed

in this case.

     Petitioner began working for General Electric (GE) Railcar

Services (GE Railcar) in 1997.    Petitioner maintained a

retirement account with the GE Railcar Services Investment

Retirement Program (GE Railcar plan).    In June 2000, while

petitioner was still employed at GE Railcar, he withdrew $14,500

from his GE Railcar retirement account as a loan.    Under the

terms of the loan agreement, the loan principal and finance

charges were to be repaid through deductions from each of




     1
      Petitioner does not dispute respondent’s determination that
petitioner received dividend income in the year in issue.
                                - 3 -

petitioner’s biweekly payroll checks through July 8, 2005.    Each

biweekly payment was to be $143.59.2

     By letter dated June 12, 2000, petitioner was offered a

position in another operating division of GE, GE Sports Lighting

Systems, L.P. (GE Lighting).    Petitioner accepted this position

and began working at GE Lighting in the last week of June.    In

July 2000, petitioner changed his residence from Texarkana,

Texas, to North Richland Hills, Texas, in order to be closer to

his workplace.

     By letter dated August 18, 2000, the GE Railcar benefits

administrator notified GE Investment Retirement Services that

petitioner’s employment with GE Railcar had been terminated and

that he had changed his mailing address.    The address listed in

this notification was the address of GE Lighting:    “8713 Airport

Freeway Suite 104, North Star Plaza, N. Richland Hills, TX

76180”.    Petitioner’s quarterly retirement account statements

were sent to this address from September 2000 through March 2001.

In December 2000, GE Lighting changed to a different suite in the

same building, resulting in a change in petitioner’s employment

address.    Petitioner’s new address was not correctly recorded by

the GE Railcar plan, causing petitioner’s quarterly statements



     2
      The promissory note that petitioner signed in order to
obtain the loan states that petitioner “further agrees that the
loan is subject to the loan provisions contained in the Plan”.
These provisions are not in the evidentiary record in this case.
                                - 4 -

from June 2001 through March 2002 to be sent to this address:

“8713 Airport Fwy Sui, North Star Plaza II, N. Richland Hills,

TX”.    Neither of the two addresses above contained the name of

petitioner’s operating division, GE Lighting, and the latter

address omitted petitioner’s suite number.

       From the time that the loan was distributed to petitioner in

June 2000, no loan payments were ever deducted from petitioner’s

paychecks because of petitioner’s transfer to GE Lighting.

Petitioner was aware that no deductions were being made, but he

did not remit any payment to the GE Railcar plan.     During this

same timeframe, certain child support payments which petitioner

was required to make also were not being deducted from his

paychecks.    Petitioner was aware of this fact, and in response he

made payments directly to the appropriate child support

enforcement authority.

       On November 27, 2000, GE Investment Retirement Services sent

a letter to petitioner notifying him that no payments had been

applied against his loan and requesting that petitioner remit to

the GE Railcar plan, by no later than December 29, 2000, either

the delinquent payments or the full amount of the loan.     The

letter stated that failure to do so would result in a deemed

distribution due to a loan default.     In January 2001, a Form

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

Profit-Sharing Plans, IRAs, Insurance Contracts, etc., was issued
                                - 5 -

to petitioner, reporting the full amount of the loan as a taxable

distribution.   The Form 1099-R was mailed to “8713 Airport

Freeway, North Star Plaza II, N. Richland Hills, TX 76118”;

petitioner’s operating division and suite number were again

omitted.

     On petitioner’s Federal income tax return for taxable year

2000, petitioner did not report the $14,500 loan amount as

income.    In the notice of deficiency, respondent determined that

the $14,500 was both includable in petitioner’s income as a

taxable distribution and subject to the section 72(t) additional

tax on early distributions from qualified retirement plans.

     The first issue for decision is whether petitioner’s failure

to make payments on the loan from the qualified retirement plan

resulted in a taxable distribution from the plan.

     Distributions from qualified plans generally are included in

the distributee’s income in the year of the distribution in

accordance with the provisions of section 72.   Sec. 402(a).   As a

general rule, a qualified plan participant who receives a loan

from a plan is treated as having received a distribution from the

plan in the year the loan is received.   Sec. 72(p)(1)(A).

However, paragraph (2) of section 72(p) provides an exception for

certain loans which prevents the inclusion in income.   A

limitation upon this exception is found in subparagraph (C) of

paragraph (2), which provides as follows:
                                - 6 -

     Except as provided in regulations, this paragraph shall not
     apply to any loan unless substantially level amortization of
     such loan (with payments not less frequently than quarterly)
     is required over the term of the loan.

Thus, a loan which does not meet the requirement of section

72(p)(2)(C) by requiring substantially level amortization is

treated as a distribution and is included in income under section

72(p)(1)(A).

     Respondent argues that a deemed distribution to petitioner

was made in 2000 because petitioner defaulted on the loan in that

year.    Specifically, respondent argues that petitioner’s failure

to make the loan payments as required under the terms of the loan

violated the section 72(p)(2)(C) requirement, thereby resulting

in a deemed distribution in the year of the default.   In support

of this argument, respondent in his trial memorandum cites the

final regulations issued under section 72(p).   However, because

petitioner’s loan was made in June 2000, these regulations do not

apply in this case.3


     3
      The final regulations under sec. 72(p) generally apply only
to loans made on or after Jan. 1, 2002. Sec. 1.72(p)-1, Q&A-
22(b), Income Tax Regs. Under these regulations, when a
participant fails to make payments in accordance with the terms
of a loan, the loan is treated as no longer meeting the sec.
72(p)(2)(C) requirement, thereby resulting in a deemed
distribution. Sec. 1.72(p)-1, Q&A-4(a), Income Tax Regs. The
regulations elaborate on the timing and amount of deemed
distributions resulting from loan defaults as follows:

          (a) Timing of deemed distribution. Failure to make any
     installment payment when due in accordance with the terms of
     the loan violates section 72(p)(2)(C) and, accordingly,
                                                   (continued...)
                                 - 7 -

     We agree with respondent’s application of section

72(p)(2)(C) to the facts of this case.   Petitioner did not make

any payments from the time of the loan disbursement in June 2000

through the time that the loan was reported as a distribution by

the plan on December 29, 2000.    Two calendar quarters had passed

since petitioner had obtained the loan, resulting in a violation

of the statutory imperative that the terms of the loan require

that payments be made “not less than quarterly”.    Sec.

72(p)(2)(C).   Furthermore, this was a period of approximately 6

months, or 10 percent of the original 5-year term of the loan.


     3
      (...continued)
     results in a deemed distribution at the time of such
     failure. However, the plan administrator may allow a cure
     period and section 72(p)(2)(C) will not be considered to
     have been violated if the installment payment is made not
     later than the end of the cure period, which period cannot
     continue beyond the last day of the calendar quarter
     following the calendar quarter in which the required
     installment payment was due.
          (b) Amount of deemed distribution. If * * * there is a
     failure to pay the installment payments required under the
     terms of the loan * * * then the amount of the deemed
     distribution equals the entire outstanding balance of the
     loan (including accrued interest) at the time of such
     failure.

Sec. 1.72(p)-1, Q&A-10, Income Tax Regs. Before the issuance of
the final regulations, proposed regulations had been issued
which, for purposes of this case, had the same provisions as the
final regulations. The proposed regulations were to apply only
to loans made a certain period of time after final regulations
had been published. Sec. 1.72(p)-1, Q&A-19, Proposed Income Tax
Regs., 60 Fed. Reg. 66237 (Dec. 21, 1995). In this Court,
proposed regulations generally are afforded no more weight than
that of any other position advanced by the Commissioner at trial.
Gen. Dynamics Corp. & Subs. v. Commissioner, 108 T.C. 107, 120
(1997); Laglia v. Commissioner, 88 T.C. 894, 897 (1987).
                                 - 8 -

Thus, as of December 29, 2000, the terms of the loan could no

longer have required “substantially level amortization * * * over

the term of the loan”.    Id.   Because at that time the loan

violated the terms of section 72(p)(2)(C), it no longer met the

requirements for the section 72(p)(2)(A) exception, and under

section 72(p)(1)(A) the loan amount was treated as having been

distributed to, and received by, petitioner in the taxable year

2000.

     Petitioner argues that he did not receive a deemed

distribution from his retirement plan because he never received

(a) the quarterly retirement account statements that were mailed

to his employment address, (b) the letter dated November 27,

2000, that requested that he remit the delinquent payments, or

(c) the Form 1099-R which was issued to him.    Petitioner admits

that he knew the payments were not being deducted from his

paycheck.   In fact, petitioner asserts that he contacted GE’s

accounting department by e-mail, notifying them that neither his

loan payments nor his child support payments were being deducted

from his paychecks.   Petitioner also admits that he did not make

any loan payments directly to the plan.

     None of the assertions that petitioner offers in support of

his argument, even if accepted as fact, would alter the result

under the statute.    As discussed above, petitioner did not make

the periodic payments required under the terms of the loan and
                               - 9 -

required under section 72(p)(2)(C).     The result was a deemed

distribution to petitioner in 2000.

     The second issue for decision is whether petitioner is

liable for a section 72(t) additional tax on the distribution

from the qualified retirement plan.     Section 72(t)(1) generally

imposes a 10-percent additional tax on certain early

distributions from qualified retirement plans, unless a

distribution comes within one of several statutory exceptions.

See sec. 72(t)(2).   Petitioner does not argue, and nothing in the

record indicates, that any of the exceptions apply to the case at

hand.   We therefore hold that petitioner is liable for the

section 72(t) additional tax as determined by respondent.

     Reviewed and adopted as the report of the Small Tax Case

Division.

                                       Decision will be entered

                               for respondent.
