                        T.C. Memo. 2004-287



                      UNITED STATES TAX COURT



                MICHAEL J. BARKLEY, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 7610-02.              Filed December 28, 2004.


     Michael J. Barkley, pro se.

     Katheryn Vetter and Christian A. Speck, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     MARVEL, Judge:   Respondent determined a deficiency in

petitioner’s 1998 Federal income tax of $47,049 and additions to
                                 - 2 -

tax under section 6651(a)(1)1 of $2,481, section 6651(a)(2) in an

undetermined amount, and section 6654 of $582.

     After concessions,2 the issues for decision are:   (1)

Whether petitioner may deduct from his gross income under section

402 one-half of the retirement distribution he received in 1998;

(2) whether petitioner is liable for the 10-percent additional

tax on early distributions from qualified retirement plans under

section 72(t); and (3) whether petitioner is liable for the

addition to tax under section 6651(a)(1) for failure to file a

timely 1998 income tax return.




     1
      Unless otherwise indicated, all 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.
     2
      In the notice of deficiency, respondent determined that
petitioner had unreported income in 1998 from the following
sources: $5,008 of wages, $25 of interest income, $13 of
dividend income, $13 of capital gain, $3,139 of rental income,
and $147,492 of pension distribution. Petitioner conceded in the
stipulation of facts that he and Mrs. Barkley received the
following amounts of income for 1998: $5,009 of wages, $3,865 of
interest income, $95 of dividend income, $5,042 of capital gain,
$198,405 of rental income, and $2,144 of trust income.

     On brief, respondent made the following concessions: (1)
Petitioner is not liable for additions to tax under secs.
6651(a)(2) and 6654; (2) petitioner is entitled to deduct
expenses relating to his apartment rental activity; (3)
petitioner’s 1998 filing status is married filing jointly; and
(4) petitioner’s payment of $2,000, made on or about Mar. 7,
2001, was incorrectly credited as $340, and records will be
corrected to accurately reflect the payment.
                                - 3 -

                          FINDINGS OF FACT

     Some of the facts have been stipulated.    We incorporate the

stipulated facts into our findings by this reference.    Petitioner

resided in Manteca, California, when his petition in this case

was filed.

     Petitioner was married to M. Jeanne Barkley (Mrs. Barkley)

at all relevant times.    Petitioner was born on October 27, 1945,

and Mrs. Barkley was born on September 17, 1945.    On or about

June 4, 1998, Mrs. Barkley was diagnosed with multiple sclerosis,

and she has been confined to a wheelchair since the beginning of

1998.

     At all relevant times, petitioner and Mrs. Barkley owned and

managed a 43-unit apartment complex, which consisted of five

buildings.    Petitioner and Mrs. Barkley resided in one of the

apartments and managed the remaining apartments on a daily basis

year round.   Mrs. Barkley screened and interviewed applicants,

while petitioner prepared vacant units for new tenants, performed

general outdoor maintenance, hired independent contractors to

address specific maintenance issues, and collected rent payments.

     In addition to operating the rental property, petitioner

worked as a computer programmer for Pacific Bell.    On December

30, 1997, petitioner retired from Pacific Bell, after 13 years of

service.
                                - 4 -

     On January 26, 1998, petitioner received a retirement

distribution of $147,492.46 (the 1998 distribution), his entire

beneficial interest in the Pacific Telesis Group Pension Plan

(the plan).3    Both petitioner and Mrs. Barkley were 52 years old

when petitioner received the 1998 distribution.

     In the documents he executed to receive the 1998

distribution, petitioner, as the plan participant, elected to

receive the distribution in a single payment.    Although

petitioner also elected not to have State or Federal income tax

withheld from the 1998 distribution, $29,498.49 of Federal income

tax (20 percent of the distribution) was withheld.    Mrs. Barkley

consented to petitioner’s receipt of the 1998 distribution and

waived her right to joint and survivor annuity payments.

     After petitioner retired from Pacific Bell, he started

attending a local college to pursue a teaching certificate in

music and drama.    In 1998 petitioner took only one voice class,

but in 1999 he was enrolled in several courses that required him

to spend time reading, writing papers, and studying for

examinations.    By February 2001, petitioner had dropped out of

school completely because of the pressures of caring for Mrs.

Barkley and managing the apartment complex.



     3
      We assume, and the parties have not disputed, that the
Pacific Telesis Group Pension Plan was a qualified plan within
the meaning of sec. 401(a).
                               - 5 -

     Petitioner did not file a timely 1998 Federal income tax

return, and the record does not indicate that petitioner

requested an extension of time to file.   Petitioner also did not

file timely income tax returns for years before and after 1998.

Petitioner filed his 1994 return on August 8, 1996, his 1995

return on February 13, 1998, his 1996 return on November 23,

1998, his 1997 return on February 4, 2001, and his 1999 return on

June 6, 2002.

     On January 14, 2002, respondent mailed to petitioner a

notice of deficiency with respect to petitioner’s 1998 taxable

year.   In the notice of deficiency, respondent determined that

the full amount of the 1998 distribution was includable in his

income.   Respondent also determined that petitioner was liable

for an addition to tax under section 6651(a)(1) for failure to

file a timely 1998 income tax return.

     On April 8, 2002, petitioner and Mrs. Barkley filed a joint

Form 1040, U.S. Individual Income Tax Return, for 1998.    On the

Form 1040, petitioner included the 1998 distribution in gross

income.   Petitioner also reported that he owed an additional 10-

percent tax of $14,749 for receiving an early distribution from

the plan.
                               - 6 -

      On April 22, 2002, petitioner’s petition in this case was

filed.4   On September 1, 2002, petitioner and Mrs. Barkley filed

a joint Form 1040X, Amended U.S. Individual Income Tax Return,

for the taxable year 1998.   On the Form 1040X, petitioner

reported as gross income only half of the 1998 distribution from

the plan, thus reducing his taxable income by $73,746.

Petitioner also reported that he owed an additional 10-percent

tax for early distributions, in the amount of $7,374, on only

one-half of the 1998 distribution.     Petitioner prepared an

amended petition in this case asserting the same position with

respect to the 1998 distribution as that taken on his 1998

amended income tax return; the amended petition was filed on

January 7, 2003.

                              OPINION

I.   Burden of Proof

      Ordinarily, a taxpayer has the burden of proving that the

Commissioner’s determination is in error.     Rule 142(a).   If,

however, a taxpayer produces credible evidence with respect to

any factual issue relevant to ascertaining the tax liability of

the taxpayer, the burden of proof shifts to the Secretary, but

only if the taxpayer has complied with substantiation




      4
       Petitioner’s petition was mailed on Apr. 13, 2002.
                                 - 7 -

requirements, maintained all required records, and cooperated

with reasonable requests by the Secretary for witnesses,

information, documents, meetings, and interviews.     Sec. 7491(a).5

         Petitioner does not contend that section 7491(a) applies to

this case.     In addition, petitioner has not established that the

requirements of section 7491(a)(2) have been satisfied.

Consequently, we hold that petitioner has the burden of proof as

to any disputed factual issue.     See Rule 142(a).

     Although section 7491(c) does not alter the general burden

of proof rule established by section 7491(a), it does require the

Commissioner to assume the burden of production with respect to

penalties and additions to tax.6    Respondent has the burden of

production with respect to the addition to tax under section

6651(a)(1).    If respondent introduces sufficient credible

evidence to show that petitioner is liable for the section

6651(a)(1) addition to tax, then petitioner has the burden of

proving that he is not liable for the addition to tax.     See

Higbee v. Commissioner, 116 T.C. 438, 446-447 (2001).


     5
      Sec. 7491(a) generally applies to court proceedings arising
in connection with examinations commencing after July 22, 1998.
Internal Revenue Service Restructuring & Reform Act of 1998, Pub.
L. 105-206, sec. 3001(a), 112 Stat. 726.
     6
      Sec. 7491(c) provides that “Notwithstanding any other
provision of this title, the Secretary shall have the burden of
production in any court proceeding with respect to the liability
of any individual for any penalty, addition to tax, or additional
amount imposed by this title.”
                                  - 8 -

II.   The Proper Tax Treatment of the 1998 Distribution

      Gross income includes income from whatever source derived,

including income from pensions and annuities.    Sec. 61(a)(9),

(11).   A distribution from a qualified retirement plan is

includable in the distributee’s gross income in the taxable year

of distribution.   Sec. 402(a).    The distribution is includable in

gross income in the same manner as an annuity under section 72,

id., unless the distribution qualifies for special tax treatment

under section 402(d) or is excluded under another provision.

      Petitioner argues that, when he received the 1998

distribution, Mrs. Barkley became entitled to one-half of the

distribution under California community property law.     Although

petitioner admits that “both halves” of the 1998 distribution are

includable in gross income under section 402(a), and that no part

of section 402(d) is applicable to his half of the 1998

distribution, petitioner contends that under section 402(d)(3),

he is entitled to deduct Mrs. Barkley’s community property

interest, equal to half of the 1998 distribution, from his gross

income.   Petitioner reasons that, because section 402(d)(4)(E)

provides that “The provisions of this subsection, other than

paragraph (3), shall be applied without regard to community

property laws”, all provisions of section 402(d) relating to

computing and qualifying for lump-sum averaging “disappear” with

regard to Mrs. Barkley’s community property interest in the 1998
                               - 9 -

distribution, leaving only the deduction authorized by section

402(d)(3).

     Respondent, on the other hand, contends that petitioner must

include the entire amount of the 1998 distribution in his gross

income.   Respondent also contends that petitioner and Mrs.

Barkley are not eligible to claim the benefit of forward

averaging under section 402(d) because petitioner did not elect

the application of section 402(d) and because neither petitioner

nor Mrs. Barkley had attained the age of 59½ when petitioner

received the 1998 distribution.   Respondent further contends that

section 402(d) does not allow a deduction unless the amount

deducted is also included in gross income and is subject to the

separate tax imposed by section 402(d)(1) and that, because Mrs.

Barkley is not a “distributee”, she is not liable for any tax on

the distribution.

     The parties’ arguments are difficult to understand, given

petitioner’s admissions that the entire 1998 distribution is

includable in income on his 1998 joint Federal income tax return

and that section 402(d) does not apply to his share of the 1998

distribution.   Even if we assume, for the sake of discussion,

that Mrs. Barkley had a community property interest in the 1998

distribution as petitioner contends, the entire 1998 distribution

must still be included in the income reported on the 1998 joint

return.   As we understand petitioner’s arguments, what he is
                              - 10 -

really contending is that he is entitled to deduct Mrs. Barkley’s

community property interest (equal to one-half of the 1998

distribution) under section 402(d)(3) and (4)(E).   We shall

assume, without deciding, that Mrs. Barkley had a community

property interest in the 1998 distribution and direct our

analysis to the operation of section 402(d)(3) and (4)(E).

     As in effect for 1998, section 402(d)7 affords more

favorable tax treatment to a qualified recipient of a

distribution that meets the definition of “lump sum distribution”

by enabling the recipient to elect to calculate a separate income

tax on the distribution, using the special tax computation

authorized by section 402(d)(1)(B) (hereinafter referred to as

forward averaging).   Under section 402(d)(1)(B), a distribution

that qualifies as a lump-sum distribution eligible for forward

averaging is taxed as if it were paid over 5 years rather than in

a single taxable year.   If the taxpayer is eligible to elect and

elects forward averaging, section 402(d)(1)(A) imposes a separate

tax on the distribution, which is computed under section

402(d)(1)(B) and is added to the income tax on the taxpayer’s

other income.   The separate tax under section 402(d) is equal to

five times the tax, computed using the rate for unmarried

individuals, on one-fifth of the “total taxable amount of the

     7
      Sec. 402(d) was repealed by the Small Business Job
Protection Act of 1996, Pub. L. 104-188, sec. 1401, 110 Stat.
1787, for taxable years beginning after Dec. 31, 1999.
                              - 11 -

lump sum distribution” less the “minimum distribution allowance.”

Sec. 402(d)(1)(B).

     In order to qualify for forward averaging under section

402(d)(1), the distribution must be a lump-sum distribution

within the meaning of section 402(d)(4)(A), and the recipient

must satisfy the requirements of section 402(d)(4)(B).     Section

402(d)(4) defines lump-sum distribution, in pertinent part, as

follows:

          (A) Lump sum distribution.-–For purposes of this
     section and section 403, the term “lump sum
     distribution” means the distribution or payment within
     1 taxable year of the recipient of the balance to the
     credit of an employee which becomes payable to the
     recipient--

                (i) on account of the employee’s death,

                (ii) after the employee attains age 59½,

                (iii) on account of the employee’s separation
           from the service, or

                (iv) after the employee has become disabled
           (within the meaning of section 72(m)(7)),

     from a trust which forms a part of a plan described in
     section 401(a) and which is exempt from tax under
     section 501 or from a plan described in section 403(a).
     Clause (iii) of this subparagraph shall be applied only
     with respect to an individual who is an employee
     without regard to section 401(c)(1), and clause (iv)
     shall be applied only with respect to an employee
     within the meaning of section 401(c)(1). * * *

   Section 402(d)(4)(B) provides that the separate tax authorized

by section 402(d)(1)(A) shall apply to a lump-sum distribution

with respect to an employee only if the amount is received on or
                              - 12 -

after the date on which the employee has attained age 59½, and

the taxpayer elects for the taxable year to have all such amounts

received during such taxable year so treated.    Petitioner, the

employee in question, had not attained age 59½ when he received

the 1998 distribution, and neither he nor Mrs. Barkley made the

election required by section 402(d)(4)(B)(ii).

     Despite these hurdles, petitioner nevertheless maintains

that he is entitled to deduct one-half of the 1998 distribution

under section 402(d)(3).   Section 402(d)(3) allows a taxpayer to

deduct from gross income “The total taxable amount of a lump sum

distribution for any taxable year * * *, but only to the extent

included in the taxpayer’s gross income for such taxable year.”

Petitioner argues that the deduction must be allowed because

section 402(d)(4)(E) provides that section 402(d), other than

section 402(d)(3), shall be applied without regard to community

property laws.

     Petitioner cites no authority to support his interpretation

of section 402(d), and his argument is without merit for several

reasons.   Section 402(d)(3) unambiguously provides that a
                              - 13 -

deduction for the total taxable amount8 of a lump-sum

distribution shall be allowed only to the extent the lump-sum

distribution is included in the taxpayer’s gross income in the

taxable year.   For purposes of section 402(d), the term “lump sum

distribution” is a term of art referring to a distribution that

meets the requirements of section 402(d) and qualifies for the

special tax treatment afforded thereby.   Because the 1998

distribution was not received on or after petitioner attained the

age of 59½, see sec. 402(d)(4)(A) and (B), it was not a lump-sum

distribution eligible for forward averaging, and, consequently,

the special rules of section 402(d) simply do not apply.

     For the aforementioned reasons, therefore, we hold that

petitioner may not deduct any portion of the 1998 distribution

under section 402(d).

     8
      “Total taxable amount” is defined by sec. 402(d)(4)(D) as
follows:

          (D) Total taxable amount.-–For purposes of this
     section and section 403, the term “total taxable
     amount” means, with respect to a lump sum distribution,
     the amount of such distribution which exceeds the sum
     of--

               (i) the amounts considered contributed
          by the employee (determined by applying
          section 72(f)), reduced by any amounts
          previously distributed which were not
          includible in gross income, and

               (ii) the net unrealized appreciation
          attributable to that part of the distribution
          which consists of the securities of the
          employer corporation so distributed.
                               - 14 -

III. Ten-Percent Additional Tax on Early Distributions

     Section 72(t)(1) imposes an additional tax of 10 percent on

the portion of a distribution from a qualified retirement plan

that is includable in gross income, unless the distribution falls

under one of the exceptions in section 72(t)(2).   Section

72(t)(2)(A)(iii) provides the additional 10-percent tax does not

apply to a distribution that is attributable to the employee’s

being disabled within the meaning of section 72(m)(7).   For

purposes of section 72(t) as relevant here, the term “employee”

includes any participant.   Sec. 72(t)(5).

     Petitioner argues that the 10-percent additional tax should

not apply to Mrs. Barkley’s half of the distribution because she

was a vested plan participant by virtue of State community

property law, and she received the distribution on account of her

disability.    According to petitioner, section 72(t)(5) “broadens

the definition of employee to include a plan participant who is

otherwise not an employee”.   Petitioner relies on the definitions

of “vested participant” and “inactive participant” in sections

417(f)(1) and 418D(e) to support his contention that Mrs. Barkley

was a plan participant.

     Respondent does not address whether Mrs. Barkley was a

participant.   Rather, he argues that although Mrs. Barkley may

have been disabled, she was not an employee for purposes of the

exception in section 72(t)(2)(A)(iii).   Therefore, respondent
                             - 15 -

argues, no part of the distribution is exempt from the 10-percent

additional tax.

     We agree with respondent that petitioner’s distribution does

not qualify for any exception to the 10-percent additional tax,

and we reject petitioner’s argument that Mrs. Barkley was a

participant for purposes of section 72(t)(5).   The term

“participant” is defined by Employee Retirement Income Security

Act of 1974 (ERISA),9 Pub. L. 93-406, sec. 3(7), 88 Stat. 834, 29

U.S.C. sec. 1002(7) (2000) as:

     any employee or former employee of an employer, or any
     member or former member of an employee organization,
     who is or may become eligible to receive a benefit of
     any type from an employee benefit plan which covers
     employees of such employer or members of such
     organization, or whose beneficiaries may be eligible to
     receive any such benefit.

See also Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101, 117

(1989) (the Supreme Court, quoting Saladino v. I.L.G.W.U. Natl.

Retirement Fund, 754 F.2d 473, 476 (2d Cir. 1985), defined

“participant” for ERISA purposes to mean “‘employees in, or

reasonably expected to be in, currently covered employment’”).

     Mrs. Barkley was not an employee of Pacific Bell.

Petitioner was the Pacific Bell employee and plan participant.

     9
      The definitions in tit. I of the Employee Retirement Income
Security Act of 1974, Pub. L. 93-406, sec. 4(a), 88 Stat. 839, 29
U.S.C. sec. 1003(a) (2000), apply to any employee benefit plan
maintained by an employer engaged in interstate commerce, whether
or not the plan is a qualified plan for purposes of the Internal
Revenue Code.
                               - 16 -

Petitioner’s “Application for Pension Benefit” identifies him as

the plan participant and distinguishes between petitioner as the

“participant” and Mrs. Barkley as his “spouse”.    Petitioner has

offered no evidence that Mrs. Barkley was considered a

participant under the terms of the plan.

     Petitioner’s reliance on sections 417(f)(1) and 418D(e) to

support his argument that Mrs. Barkley was a participant is

misplaced.   Section 417(f)(1) defines the term “vested

participant” for purposes of sections 417 and 401(a)(11) as “any

participant who has a nonforfeitable right (within the meaning of

section 411(a)) to any portion of such participant’s accrued

benefit” but does not define the term “participant”.    Section

411(a) sets forth the various requirements by which an employee’s

retirement benefit becomes nonforfeitable.    The definition of

“inactive participant” contained in section 418D(e) refers to a

person not in covered service under a plan who is in pay status

under the plan or who has a nonforfeitable right to plan

benefits.    The definition is relevant only for purposes of

section 418D, which is completely inapplicable to this case.

Petitioner has taken these provisions out of context, and they do

not support his contention that Mrs. Barkley was a participant in

the plan.    We conclude, therefore, that Mrs. Barkley was not an

employee of Pacific Bell or a participant in the plan.
                              - 17 -

      The record demonstrates that petitioner was the covered

employee and plan participant.   The record also demonstrates that

the 1998 distribution was attributable to petitioner’s retirement

and not to any disability of his.   Because section

72(t)(2)(A)(iii) requires that a distribution be attributable to

the employee’s being disabled in order for the exception to the

10-percent additional tax to apply, we hold that petitioner does

not qualify for the section 72(t)(2)(A)(iii) exception.

IV.   Section 6651(a)(1) Addition to Tax

      Section 6651(a) imposes an addition to tax for failure to

file a return in the amount of 5 percent of the tax liability

required to be shown on the return for each month during which

such failure continues, but not exceeding 25 percent in the

aggregate, unless it is shown that such failure is due to

reasonable cause and not due to willful neglect.   See sec.

6651(a)(1); United States v. Boyle, 469 U.S. 241, 245 (1985);

United States v. Nordbrock, 38 F.3d 440, 444 (9th Cir. 1994);

Harris v. Commissioner, T.C. Memo. 1998-332.   A failure to file a

timely Federal income tax return is due to reasonable cause if

the taxpayer exercised ordinary business care and prudence and

nevertheless was unable to file the return within the prescribed

time.   See sec. 301.6651-1(c)(1), Proced. & Admin. Regs.   Willful

neglect means a conscious, intentional failure to file or

reckless indifference.   See United States v. Boyle, supra at 245.
                                - 18 -

     Respondent has met his burden of production under section

7491(c) because petitioner admits, and the record clearly

establishes, that petitioner failed to file his 1998 tax return

by the due date.    Consequently, petitioner was obligated to prove

that he was not liable for the addition to tax under section

6651(a)(1).    This he failed to do.

     Petitioner testified that he did not prepare and file his

1998 return timely because he had fallen behind in maintaining

his books and records.    Petitioner attributed this to the burden

of coping with Mrs. Barkley’s physical deterioration and mental

lapses, the overtime that Pacific Bell required him to work, the

time he spent operating the apartment, and his own depression.

While caring for Mrs. Barkley certainly required a significant

portion of petitioner’s time, we note that petitioner no longer

worked for Pacific Bell during 1998.     During 1998, petitioner

began to attend school in addition to managing the apartment

complex and caring for his spouse.

     Proof that a taxpayer worked long hours and was too busy to

file a timely return is insufficient to establish reasonable

cause under section 6651(a).     Howe v. Commissioner, T.C. Memo.

2000-291.     Moreover, petitioner has a history of filing

delinquent income tax returns that predates the diagnosis of his

spouse’s disability.     Because petitioner introduced no evidence

of any legally sufficient reason for his failure to file a timely
                             - 19 -

return, we hold that he did not have reasonable cause for his

failure to file as required by section 6651(a)(1) and that,

therefore, petitioner is liable for the addition to tax

respondent determined.

     We have considered the remaining arguments of both parties

for results contrary to those expressed herein and, to the extent

not discussed above, find those arguments to be irrelevant, moot,

or without merit.

     To reflect the foregoing,


                                        Decision will be entered

                                   under Rule 155.
