                  T.C. Summary Opinion 2005-42



                     UNITED STATES TAX COURT



                   JAMES PETERS, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 17514-03S.          Filed April 14, 2005.



     James Peters, pro se.

     Laura A. McKenna, 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.




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

     Respondent determined a $1,234 deficiency in petitioner’s

2000 Federal income tax.   The issues are whether a $4,921

distribution to petitioner from an individual retirement account

(IRA) was includable in his gross income and is subject to the

10-percent additional tax imposed by section 72(t).

     At the time the petition was filed, petitioner was a

resident of Deerfield Beach, Florida.

                            Background

     Petitioner was employed by Preferred Respiratory from 1987

through 1999.   The company created an IRA for his benefit, and it

was administered by Sterling Trust Company (Sterling Trust).       The

IRA had three assets:   A cash balance, an OppenheimerFunds

investment, and a participant’s note in a retail shopping center

project called Allen’s Creek.2    During the year at issue these

assets were valued at $96.83, $2,471.23, and $2,353,

respectively.   The Allen’s Creek project was managed by BSB

Management Group, Inc., which was owned by Bruce Butler (Mr.

Butler).   Petitioner was the only named beneficiary of the IRA.

     In a letter dated March 13, 2000, Sterling Trust notified

petitioner of its intention to resign as trustee of his IRA on

April 30, 2000, because it was no longer feasible to administer

accounts holding investments affiliated with Mr. Butler.



     2
          In the transcript this entity is referred to as Ellen’s
Creek, but all documents refer to this as Allen’s Creek.
                                 - 3 -

Petitioner was informed that if he wanted Sterling Trust to

transfer the assets and cash directly into another IRA, he would

have to forward to them the appropriate forms of a successor

trustee before April 30, 2000.    Sterling Trust explained that a

direct transfer of the IRA’s assets and cash to another IRA

account on or before April 30, 2000, would not be reported to the

Internal Revenue Service.   Sterling Trust further explained that

if petitioner did not initiate a direct transfer into a successor

IRA, they would be forced to distribute the assets to him

directly, resulting in a reportable, taxable event that would

subject him to a “10% premature penalty” if he did not then

transfer the assets and cash into another IRA within 60 days of

the distribution.

     Petitioner also received a letter regarding Sterling Trust’s

resignation as trustee from Mr. Butler.   Mr. Butler suggested JW

Genesis Securities, Inc. (Genesis) as a successor trustee and

told petitioner to contact him for the appropriate forms.

     Petitioner did not contact Sterling Trust before their

resignation as his IRA trustee.    On May 31, 2000, Sterling Trust

distributed all of the assets in the IRA directly to petitioner.

Ownership of the OppenheimerFunds investment and the Allen’s

Creek note was transferred to petitioner, and Sterling Trust

issued petitioner a check for the cash balance.   Petitioner

eventually cashed out the OppenheimerFunds investment and used
                               - 4 -

the money, along with the IRA cash balance, for personal

expenses.   Mr. Butler filed for bankruptcy in 2004, and

petitioner is currently pursuing a claim for the recovery of his

Allen’s Creek investment as one of Mr. Butler’s creditors.3

Petitioner does not dispute his ownership of the Allen’s Creek

note.

     Prior to trial, petitioner agreed and stipulated that he

received and failed to roll over the distributed assets valued at

$96.83 and $2,471.23, representing the cash balance and the

OppenheimerFunds investment respectively.   Petitioner disputes

the inclusion of the value of his Allen’s Creek note in income

and the imposition of the 10-percent additional tax.

                            Discussion

1.   Tax Treatment on Distributions

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

distributed out of an IRA shall be included in gross income by

the distributee in the manner provided under section 72.   Section

408(d)(3)(A) provides that section 408(d)(1) will not apply if

the entire amount received from an IRA distribution to the

individual for whose benefit the account is maintained is rolled

over into another IRA for the benefit of such individual no later

than 60 days after the receipt of the distribution.


     3
          Apparently petitioner also invested in another real
estate project with Mr. Butler. This investment was not an asset
of petitioner’s Sterling Trust IRA.
                                 - 5 -

     Under section 408(d)(3)(A), petitioner had until July 31,

2000, to effectuate a tax-free rollover of the entire amount he

received from the distribution of May 31, 2000.     Even though

petitioner agrees that he received and failed to roll over the

cash balance and OppenheimerFunds investment, he asserts that he

did roll over the Allen’s Creek note, or at least that he

attempted to.   He testified that he signed papers with Mr. Butler

authorizing a rollover into an IRA administered by Genesis.

Unfortunately, petitioner presented nothing other than his own

testimony, which is most unclear, that any rollover occurred on

or before July 31, 2000.   As no IRA for petitioner’s benefit with

Genesis appears to exist, the 60-day exception to section

408(d)(1) cannot apply to this distribution.

     Petitioner further alleges that his Allen’s Creek note was

misappropriated by Mr. Butler.     An alleged misappropriation of

funds still does not qualify as a tax-free rollover, and there is

no exception or waiver of the 60-day rollover time period in

cases of fraud or embezzlement.4    Accordingly, as provided by

section 408(d)(1), the entire $4,921 of the May 31, 2000, IRA

distribution, which includes the Allen’s Creek note, is

includable in petitioner’s 2000 gross income under section 72.



     4
          Petitioner has not disputed the fair market value of
the Allen’s Creek note at the time of the distribution of the
note from the IRA. It would appear that if there was a theft,
the theft occurred after the distribution.
                                 - 6 -

2.   10-Percent Additional Tax on Early Distributions

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

that portion of a distribution from a qualified retirement plan

that is includable in the taxpayer’s gross income.    The 10-

percent additional tax does not apply to certain distributions as

set forth in section 72(t)(2).    Generally these exceptions

include distributions made on or after the date the employee

reaches the age of 59-1/2, sec. 72(t)(2)(A)(i), made to a

beneficiary on or after the death of the employee, sec.

72(t)(2)(A)(ii), and when attributable to a disability of the

employee, sec. 72(t)(2)(A)(iii).

     Petitioner does not argue that any of the statutory

exceptions under section 72(t)(2) apply to his situation, and

indeed none of them do.   Instead, he is seeking relief on the

grounds that because the distribution from his IRA did not cash-

out his Allen’s Creek investment he should not be subject to the

10-percent additional tax.   He testified that he is having

financial problems, needs the immediate use of the money he

invested in the Allen’s Creek project, and that if he had

received this amount as a cash distribution he would not object

to paying the tax owed.

     However unfortunate petitioner’s situation may be, there is

no exception under section 72(t) for financial hardship.    This

principle has been applied consistently in cases dealing with
                               - 7 -

premature IRA distributions.   See Arnold v. Commissioner, 111

T.C. 250, 255 (1998); Gallagher v. Commissioner, T.C. Memo. 2001-

34; Deal v. Commissioner, T.C. Memo. 1999-352; Pulliam v.

Commissioner, T.C. Memo. 1996-354.     Furthermore, there is no

exception regarding in-kind distributions of IRA assets, and this

Court has repeatedly ruled that it is bound by the list of

statutory exceptions enumerated in section 72(t)(2).    See, e.g.,

Arnold v. Commissioner, supra at 255; Schoof v. Commissioner, 110

T.C. 1, 11 (1998); Clark v. Commissioner, 101 T.C. 215, 224-225

(1993).   As the legislative history of section 408(f), the

predecessor to section 72(t), explains, the purpose of the 10-

percent additional tax was to discourage early distributions from

retirement plans because “Premature distributions frustrate the

intention of saving for retirement”.    S. Rept. 93-383, at 134

(1974), 1974-3 C.B. (Supp.) 80, 213.    Petitioner is therefore

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

the entire amount of the IRA distribution.

     Reviewed and adopted as the report of the Small Tax Case

Division.

                                     Decision will be entered

                               for respondent.
