                  T.C. Summary Opinion 2006-11



                     UNITED STATES TAX COURT



                 RICHARD BRADLEY, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 5285-04S.              Filed January 26, 2006.


     Richard Bradley, pro se.

     Anthony J. Kim, for respondent.



     PANUTHOS, Chief 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
                               - 2 -

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 $9,831 deficiency in petitioner’s

2001 Federal income tax and a $1,686 accuracy-related penalty

under section 6662(a).   After concessions1 by the parties, the

issues for decision are:   (1) Whether petitioner must include in

gross income early distributions of $15,322.69 and $7,000 from

separate retirement plans; (2) whether a loan petitioner received

from a retirement plan is taxable as a distribution to the extent

of $7,089.95; and (3) to the extent there were early

distributions as described above, whether the distributions are

subject to the 10-percent additional tax under section 72(t).

                            Background

     Some of the facts have been stipulated, and they are so

found.   The stipulation of facts and the attached exhibits are

incorporated herein by this reference.   At the time of filing his

petition, petitioner resided in San Leandro, California.

     In 2000 and 2001, petitioner was employed by Circle

International Group, Inc. (CIG), as a building manager and

engineer.   During 2000 and 2001, petitioner was a participant in

a CIG-sponsored section 401(k) retirement plan, and he maintained


     1
        Petitioner concedes that he received taxable unemployment
compensation of $3,557 in tax year 2001. Respondent concedes
that petitioner is not liable for a $1,686 accuracy-related
penalty under sec. 6662(a).
                                - 3 -

a section 401(k) account with CIG during both years.     The CIG

plan was administered by Merrill Lynch Trust Co., FSB (Merrill

Lynch).   In July 2000, petitioner borrowed $9,000 against his

section 401(k) account.   Petitioner’s earnings statement for 2000

reflects that petitioner repaid $3,420.42 on a section 401(k)

plan loan.   The record is unclear as to whether the loan payments

were credited to the loan he received in July 2000 or to a loan

he received in a prior year, or whether the payments were applied

to more than one loan.    Further, to the extent there was a loan

in 2001, the terms of the loan and the record of repayments are

not made part of the record.

     In 2001, CIG was acquired by Eagle Global Logistics (Eagle).

Petitioner was employed by Eagle after the merger and remained an

employee with the company for several months in 2001.     Eagle

offered a retirement plan to its employees, and petitioner

maintained a retirement account during his employment.     The Eagle

retirement plan was administered by ING Life Insurance and

Annuity Co. (ING).

     In 2001, petitioner received a distribution of $15,322.69

from a CIG-sponsored retirement plan.   A Form 1099-R,

Distributions From Pensions, Annuities, Retirement or Profit-

Sharing Plans, IRAs, Insurance Contracts, etc., issued to

petitioner by Merrill Lynch reflected the number “1” as the
                                - 4 -

distribution code, indicating that petitioner received an early

distribution subject to a 10-percent additional tax.

     Petitioner received a second distribution in 2001 of $7,000

from the Eagle retirement plan.   ING issued to petitioner a check

for $5,460, representing the net proceeds of the $7,000

distribution (ING withheld $1,400 and $140 from the distribution

for Federal and State taxes, respectively).   A Form 1099-R issued

by ING reflected the number “1” as the distribution code,

indicating that petitioner received an early distribution subject

to a 10-percent additional tax.

     Respondent determined that petitioner received a third

distribution in 2001 of $7,089.95 from a CIG-sponsored retirement

plan.   A Form 1099-R issued to petitioner by Merrill Lynch

reflected the letter “L” as the distribution code, indicating

that petitioner received a loan which was treated as a

distribution, subject to a 10-percent additional tax.

     In December 2001, petitioner suffered physical injuries due

to a cerebral brain hemorrhage, resulting in partial memory loss.

Petitioner had not yet attained 59-1/2 years of age at the time

of the distributions in 2001.

     The Internal Revenue Service (IRS) provided assistance with

the preparation of petitioner’s return.   Petitioner provided the

IRS with the appropriate Form W-2, Wage and Tax Statement, and at

least some of the Forms 1099-R.   Petitioner timely filed the 2001
                                   - 5 -

return.    On line 16a petitioner entered $22,413,2 which is

apparently the sum of the $15,322.69 and $7,089.95 distributions.

He reported $8,613 on line 16b as income.         While it appears that

the $8,613 represents the sum of the $7,089.95 loan distribution

and $1,532 of the $15,322.69 distribution, the total of those two

amounts is $8,621.95.     The record does not explain this

apparently erroneous computation.         However, petitioner does not

dispute receipt of either distribution.

      Petitioner did not report the $7,000 distribution on the

return.    Respondent, however, received an information return from

ING, indicating a $7,000 distribution to petitioner from the

Eagle retirement plan.

      On December 29, 2003, respondent issued a notice of

deficiency.    Petitioner timely filed a petition on April 21,

2004.

      The primary adjustment in dispute as set forth in the notice

of deficiency is the increase in pension and annuity income as

follows:

                                          2001 Return
                       Shown on   Proposed changes      Proposed change
                        return        by IRS               to income
                                      1
  Pension & annuity     $8,613         $29,412            $20,799

  1
     The adjustment includes two distributions from Merrill Lynch and one
  distribution from ING.




      2
          Amount rounded to the nearest dollar.
                               - 6 -


      Petitioner asserts that the IRS’s failure to include the

entire $15,322.69 distribution in gross income on the return

increased his tax liability.   He further argues that he should

not be responsible for the deficiency because of economic

hardship.   Petitioner makes no argument regarding the $7,000

distribution from ING other than asserting that he does not

remember receiving it.   As to the $7,089.95 distribution,

petitioner does not deny that he received a loan from a section

401(k) plan or that the distribution may be includable in gross

income, but argues that the loan balance reflected by Merrill

Lynch is not correct.

      Respondent asserts that the proceeds from each distribution

are includable in petitioner’s gross income and that petitioner

is subject to the 10-percent additional tax as each distribution

was premature and none of the exceptions under section 72(t)(2)

applies.

                            Discussion

I.   Burden of Proof

      Generally, a taxpayer bears the burden of proving the

Commissioner’s determinations incorrect.   See Rule 142(a); Welch

v. Helvering, 290 U.S. 111, 115 (1933).    The burden may shift to

the Commissioner if the taxpayer introduces credible evidence and

satisfies the requirements under section 7491(a)(2) to

substantiate items, maintain required records, and fully
                                 - 7 -

cooperate with the Commissioner’s reasonable requests.     Sec.

7491(a).    Petitioner has neither argued that section 7491 is

applicable to shift the burden of proof to respondent nor

established that he complied with the requirements of section

7491(a)(2).    Therefore, the burden of proof remains with

petitioner.

II.   Distributions of $15,322.69 and $7,000

      A.   General

      Section 408(d)(1) provides that any amount paid or

distributed from a qualified retirement plan generally must be

included in gross income by the distributee in the manner

provided under section 72.     A qualified retirement plan includes

a section 401(k) plan.     Secs. 401(a), (k)(1), 4974(c)(1).

Petitioner’s CIG-sponsored section 401(k) plan is a qualified

retirement plan.

      B.   Distribution of $15,322.69

      In 2001, petitioner received a Form 1099-R from Merrill

Lynch indicating a $15,322.69 distribution from a CIG-sponsored

retirement plan.     Petitioner reported the distribution on line

16a of his return.     The income reported on line 16b should have

included the entire $15,322.69.     Petitioner contends that he

should not be responsible for the difference between the amount

reflected on the return as a distribution ($15,322.69) and the

amount reported on the return as income ($1,532), a difference of
                               - 8 -

$13,790.69, because respondent’s agent made the error and because

petitioner is suffering economic hardship.    Essentially,

petitioner argues that the doctrine of equitable estoppel should

apply against respondent.

     “Equitable estoppel is a judicial doctrine that ‘precludes a

party from denying his own acts or representations which induced

another to act to his detriment.’”     Hofstetter v. Commissioner,

98 T.C. 695, 700 (1992) (quoting Graff v. Commissioner, 74 T.C.

743, 761 (1980), affd. 673 F.2d 784 (5th Cir. 1982)).    It is well

settled, however, that equitable estoppel does not bar or prevent

the Commissioner from correcting a mistake of law, even where a

taxpayer may have relied to his detriment on that mistake.       Dixon

v. United States, 381 U.S. 68, 72-73 (1965); Auto. Club of Mich.

v. Commissioner, 353 U.S. 180, 183 (1957); see also Schuster v.

Commissioner, 312 F.2d 311, 317 (9th Cir. 1962), affg. in part

and revg. in part 32 T.C. 998 (1959); Zuanich v. Commissioner, 77

T.C. 428, 432-433 (1981).   An exception exists only in the rare

case where a taxpayer can prove he or she would suffer an

unconscionable injury because of that reliance.     Manocchio v.

Commissioner, 78 T.C. 989, 1001 (1982), affd. 710 F.2d 1400 (9th

Cir. 1983).   Moreover, equitable estoppel is applied “against the

Government with utmost caution and restraint”.     Schuster v.

Commissioner, supra at 317.
                               - 9 -

     The doctrine of equitable estoppel is not applicable unless

the party relying on it establishes all of the following elements

at a minimum:   (1) A false representation or wrongful, misleading

silence by the party against whom estoppel is invoked; (2) an

error in a statement of fact and not an opinion or statement of

law; (3) ignorance of the facts; (4) adverse effects of acts or

statements of the person against whom an estoppel is claimed; and

(5) detriment suffered by the party claiming estoppel because of

his or her adversary’s false representation or wrongful,

misleading silence.   Norfolk S. Corp. v. Commissioner, 104 T.C.

13, 60 (1995), affd. 140 F.3d 240 (4th Cir. 1998); Estate of

Emerson v. Commissioner, 67 T.C. 612, 617-618 (1977); Megibow v.

Commissioner, T.C. Memo. 2004-41; see also Lignos v. United

States, 439 F.2d 1365, 1368 (2d Cir. 1971).

     The IRS employee made a mistake of law by including only

$1,532 as the taxable portion of the $15,322.69 distribution,

instead of the entire distribution of $15,322.69.   Equitable

estoppel does not bar respondent from correcting a mistake of law

unless petitioner would suffer an unconscionable injury because

of his reliance on respondent’s mistake.   Under these

circumstances, it is not unconscionable to require petitioner to

pay the tax due on income he has admitted receiving.     Petitioner
                               - 10 -

cannot claim an unconscionable injury.3   Petitioner also claims

that economic hardship prevents him from paying the deficiency.

That argument does not affect the taxability of the distribution.

     Respondent’s determination that the $15,322.69 distribution

is includable in gross income is sustained.

     C.    Distribution of $7,000

     Petitioner received a Form 1099-R from ING for tax year 2001

indicating a $7,000 distribution to petitioner from an Eagle-

sponsored retirement plan.    Petitioner received a net amount of

$5,460.    At trial, petitioner testified that he could not

remember receiving a distribution from ING or depositing a check

dated October 26, 2001, for $5,460 into his bank account.

     Respondent, however, received an information return from ING

reflecting petitioner’s name, his Social Security number, the

plan name (Eagle USA Air Freight), and the plan number.    The

check in the amount of $5,460 from ING was issued in petitioner’s

name and deposited or cashed in a bank where petitioner has an

account.    Petitioner has not presented any evidence to indicate

that he did not receive this distribution. Respondent’s

determination that the $7,000 distribution is includable in gross

income is sustained.




     3
        Petitioner also fails to satisfy other elements of
collateral estoppel.
                                - 11 -

III.   Loan of $7,089.95

       A.   General

       Section 402(a) provides that distributions from qualified

plans are taxable to the distributee in the taxable year in which

the distribution occurs, pursuant to the provisions of section

72.    Section 72(p)(1)(A) treats certain loans from a qualified

employer plan to a participant or beneficiary as taxable

distributions.     See generally Plotkin v. Commissioner, T.C. Memo.

2001-71; Patrick v. Commissioner, T.C. Memo. 1998-30, affd. per

curiam without published opinion 181 F.3d 103 (6th Cir. 1999);

Prince v. Commissioner, T.C. Memo. 1997-324; Estate of Gray v.

Commissioner, T.C. Memo. 1995-421.       A “qualified employer plan”

includes a plan described in section 401(a) that includes a trust

exempt from tax under section 501(a).      Petitioner’s section

401(k) plan is a qualified employer plan.       See sec.

72(p)(4)(A)(i)(I).

       Section 72(p)(1)(A) provides that if a participant or

beneficiary receives, directly or indirectly, any amount as a

loan from a qualified employer plan, then that amount shall be

treated as having been received by the individual as a

distribution under the plan.    A loan from a qualified employer

plan gives rise to a deemed distribution that is taxable in the

year in which the loan is received.       Id.
                               - 12 -

      B.   Distribution of $7,089.95

      As indicated, petitioner received a Form 1099-R from Merrill

Lynch for tax year 2001 indicating a $7,089.95 distribution from

a CIG-sponsored retirement plan.    The designation code, “L,”

indicated a loan from a retirement plan.    Petitioner does not

argue that the payment is not a loan or that it should not be

included on his return in gross income.    Petitioner argues that

the balance of the loan as reflected in statements from Merrill

Lynch is incorrect.

      There is nothing in this record that would establish that

the payment did not give rise to a deemed distribution.

Petitioner’s argument that the loan balance reflected by the

employer or plan administrator incorrectly states the balance due

on the loan is not relevant to the issue of the taxability of the

payment.    Nor has petitioner established that he comes within any

of the exceptions relating to deemed distributions.    See sec.

72(p)(2)(A).    Respondent’s determination that the $7,089.95 is

includable in petitioner’s gross income for 2001 is sustained.

IV.   Additional 10-Percent Tax for Early Withdrawal

      Section 72(t)(1) imposes an additional tax on an early

distribution from a qualified retirement plan equal to 10 percent

of the portion of the amount which is includable in gross income.

The 10-percent additional tax does not apply to certain

distributions:    (1) To an employee age 59-1/2 or older; (2) to a
                             - 13 -

beneficiary (or to the estate of the employee) on or after the

death of the employee; (3) on account of the employee’s

disability; (4) as part of a series of substantially equal

periodic payments made for life; (5) to an employee after

separation from service after attainment of age 55; (6) as

dividends paid with respect to corporate stock described in

section 404(k); (7) to an employee for medical care; or (8) to an

alternate payee pursuant to a qualified domestic relations order.

     Petitioner did not present evidence that he comes within any

of the exceptions under section 72(t).     As to petitioner’s claim

of economic hardship, general financial or emotional hardship is

not an exception from the section 72(t) additional tax.     Milner

v. Commissioner, T.C. Memo. 2004-111.

     Therefore, respondent’s determination that petitioner is

liable for the 10-percent additional tax on each distribution is

sustained.

     Reviewed and adopted as the report of the Small Tax Case

Division.

     To reflect the foregoing,


                                      Decision will be entered for

                                 respondent as to the deficiency,

                                 and for petitioner as to the

                                 penalty under sec. 6662(a).
