                  T.C. Summary Opinion 2003-153



                     UNITED STATES TAX COURT



                   JOSEPH JONES, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 12825-02S.            Filed October 20, 2003.


     Joseph Jones, pro se.

     Travis Vance III, for respondent.



     ARMEN, Special Trial Judge:    This case was heard pursuant to

the provisions of section 7463 of the Internal Revenue Code in

effect at the time that the petition was filed.1   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, all subsequent section
references are to the Internal Revenue Code in effect for 1999,
the taxable year in issue, and all Rule references are to the Tax
Court Rules of Practice and Procedure.
                                 - 2 -

      Respondent determined a deficiency in petitioner’s Federal

income tax for the taxable year 1999 in the amount of $5,067.2

      The sole issue for decision is whether petitioner is liable

under section 72(t) for the 10-percent additional tax on an early

distribution from a qualified retirement plan.       We hold that he

is.

Background

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

found.     Petitioner resided in Duluth, Georgia, at the time that

his petition was filed with the Court.

      Petitioner was employed by Ford Motor Co. (Ford) during

1999.     Petitioner has been employed by Ford for 30 years.

      As an employee of Ford, petitioner participated in Ford’s

Tax-Efficient Savings Plan for Hourly Employees (TESPHE).         TESPHE

is a defined contribution plan, qualified under sections 401(a)

and 401(k).     TESPHE is managed by Fidelity Investments

(Fidelity).

      In accordance with TESPHE’s guidelines, Ford employees can

choose to make pretax or after-tax contributions to their TESPHE

account.     Petitioner made pretax contributions to his TESPHE

account.     Pretax contributions cannot be withdrawn from TESPHE

prior to age 59½ unless the participant is terminated or

demonstrates a financial hardship.       However, TESPHE allows


      2
          All numbers are rounded to the nearest dollar.
                                  - 3 -

participants to apply for loans from their TESPHE accounts

subject to the plan’s repayment provisions.        If the participant

does not comply with TESPHE’s loan repayment provisions, then the

outstanding loan balance will be deemed a distribution subject to

Federal income taxes and any applicable early withdrawal

penalties.

     Between 1989 and 1995, petitioner borrowed funds from his

TESPHE account as follows:

                  Date                    Amount

            September 30, 1989            $9,300
            August 31, 1993               16,500
            May 31, 1994                   8,800
            February 28, 1995              5,300
            Total                         39,900

Fidelity did not report any of these loans made to petitioner as

deemed distributions from his TESPHE account subject to Federal

income taxes.    Likewise, petitioner did not include any of the

loan proceeds on his Federal income tax return for the 1989,

1993, 1994, or 1995 taxable year.      Petitioner repaid the loans

according to TESPHE’s loan provisions.

     Prior to residing in Georgia, petitioner lived with his

former wife in their jointly owned residence in Detroit,

Michigan.    Petitioner and his former wife purchased their

Michigan residence in 1985.      During 1997, petitioner separated

from his former wife.    In 1998 petitioner was transferred by Ford

and moved to Georgia.    Petitioner started construction on his
                                - 4 -

Georgia residence in March 1999.   At some time in 1999,

petitioner transferred his ownership interest in the Michigan

residence to his former wife.   Petitioner and his former wife

divorced in November 2002.

     During 1999, petitioner withdrew $50,674 from his TESPHE

account to finance the construction of his Georgia residence.

Petitioner’s 1999 distribution from his TESPHE account was not a

loan.   At the time of the 1999 distribution from TESPHE,

petitioner had not reached age 59½ and was not disabled.

     Fidelity issued to petitioner a Form 1099-R, Distributions

From Pensions, Annuities, Retirement or Profit-Sharing Plans,

IRAs, Insurance Contracts, etc., showing a gross and taxable

distribution from his TESPHE account for 1999 of $50,674.

     Petitioner timely filed a Form 1040, U.S. Individual Income

Tax Return, for 1999.   On his 1999 return, petitioner included in

gross income the $50,674 distribution from his TESPHE account.

Petitioner did not report on his 1999 return the additional 10-

percent tax imposed by section 72(t) with respect to his $50,674

TESPHE distribution.

     In the notice of deficiency, respondent determined that

petitioner is liable for the 10-percent additional tax on the

early distribution from petitioner’s section 401(k) plan.

     Petitioner timely filed a petition with the Court disputing

the deficiency.   Petitioner contends that he qualifies for the
                               - 5 -

first home purchase exception in section 72(t)(2)(F).

Alternatively, petitioner contends that he had a basis in the

amount distributed from his TESPHE account equal to the amount of

his previous loan principal repayments and, therefore, that he is

subject to the 10-percent additional tax only to the extent his

1999 TESPHE distribution exceeded his basis.3

Discussion4

     Generally, section 72(t)(1) imposes an additional tax on

early distributions from qualified retirement plans “equal to 10

percent of the portion of such amount which is includible in

gross income.”5   The section 72(t) additional tax does not apply

to certain distributions.   For example, distributions that are

made on or after the date on which the taxpayer attains the age

of 59½ are not “early” and therefore not subject to the

additional tax.   Sec. 72(t)(2)(A)(i).




     3
        Petitioner contends that if he is subject to the 10-
percent additional tax, then he is subject to the additional tax
only on $10,774 (the $50,674 distribution less the $39,900 total
loan proceeds) as opposed to $50,674.
     4
        We decide the issue in this case without regard to the
burden of proof. See sec. 7491; Rule 142(a); Higbee v.
Commissioner, 116 T.C. 438 (2001).
     5
        As relevant to the present case, a “qualified retirement
plan” includes a qualified pension or profit sharing plan under
sec. 401(a). Sec. 4974(c)(1).
                                - 6 -

First Home Purchase Exception

     Section 72(t)(2)(F) provides, in relevant part, an exception

to the 10-percent additional tax for “Distributions to an

individual from an individual retirement plan which are qualified

first-time homebuyer distributions”.     (Emphasis added.)   A

“qualified first-time homebuyer distribution” is “any payment or

distribution received by an individual to the extent such payment

or distribution is used by the individual * * * to pay qualified

acquisition costs with respect to a principal residence of a

first-time homebuyer who is such individual”.     Sec. 72(t)(8)(A).

A “first-time homebuyer”, in relevant part, “means any individual

if such individual (and if married, such individual’s spouse) had

no present ownership interest in a principal residence during the

2-year period ending on the date of acquisition of the principal

residence”.    Sec. 72(t)(8)(D)(i)(I).   The date of acquisition, as

relevant herein, is the date on which construction of a principal

residence is commenced.    Sec. 72(t)(8)(D)(iii)(II).

     Section 7701(a)(37) defines individual retirement plan for

purposes of the Internal Revenue Code as an individual retirement

account described in section 408(a) and an individual retirement

annuity described in section 408(b).     Retirement plans qualified

under section 401(a) and 401(k) are not included in the

definition of “individual retirement plan” under section

7701(a)(37).    Therefore, because section 72(t)(2)(F) applies only
                                 - 7 -

to a distribution from an individual retirement plan, a

distribution from a section 401(k) plan will not qualify for the

first home purchase exception.

     TESPHE is a defined contribution pension plan qualified

under sections 401(a) and (k).    TESPHE is not an individual

retirement plan as defined in section 7701(a)(37).    Therefore,

the $50,674 TESPHE distribution to petitioner is not subject to

the first home purchase exception in section 72(t)(2)(F).6

Petitioner’s Basis in the Distribution

     Petitioner alternatively contends that he had a basis in the

1999 distribution from his TESPHE account equal to the total

amount of his previously made loan repayments.    In this regard,

petitioner relies on the fact that he made these repayments with

after-tax dollars.

     Preretirement distributions from a qualified retirement plan

are treated as nonannuity distributions.    See sec. 72(e)(1).   If

the distribution is received before retirement, only amounts

allocable to the “investment in the contract” (i.e., basis) are



     6
        Petitioner also fails to qualify as a “first-time
homebuyer” within the definition of sec. 72(t)(8)(D)(i)(I).
Petitioner, as well as his then wife, had an ownership interest
in the Michigan residence in 1999. Petitioner began construction
on his Georgia residence in 1999. Thus, petitioner had an
ownership interest in the Michigan residence within the 2-year
period ending on the date he acquired his Georgia residence. See
sec. 72(t)(8)(D). See also sec. 72(t)(8)(B), which limits the
amount of distributions treated as first-time homebuyer
distributions to $10,000.
                                 - 8 -

excludable from gross income.    Sec. 72(e)(2)(B), (8)(A).

     For purposes of section 72(e), “investment in the contract”

is generally defined as “the aggregate amount of premiums or

other consideration paid for the contract”.    Sec. 72(e)(6)(A).

An employee’s “investment in the contract” includes amounts

contributed by the employer, “but only to the extent that * * *

such amounts were includible in the gross income of the

employee”.    Sec. 72(f).   For purposes of a section 401(k) plan,

“elective contributions * * * are neither includible in an

employee’s gross income at the time the cash or other taxable

amounts would have been includible in the employee’s gross income

* * * nor at the time the elective contributions are contributed

to the plan.”    Sec. 1.401(k)-1(a)(4)(iii), Income Tax Regs.

Therefore, in the context of this case, a taxpayer’s “investment

in the contract” includes only the amount of after-tax

contributions and does not include pretax contributions.     See

sec. 72(f).

     Petitioner’s contributions to his TESPHE account prior to

the 1999 distribution were pretax contributions.    As a result,

petitioner’s TESPHE account contributions were not included in

his gross income at the time of the contributions, and petitioner

had no “investment in the contract” equal to these pretax

contributions.
                                - 9 -

     Petitioner’s loan repayments are also not included in his

“investment in the contract”.    Petitioner’s prior loans from his

TESPHE account were not deemed distributions and were not

includable in his taxable income for any of the respective

taxable years.    See sec. 72(p).   Therefore, petitioner’s loan

repayments merely restored petitioner’s TESPHE account to the

same status it had prior to the loan transactions; i.e.,

receiving the loan amounts and repaying the loan principal

amounts produced a wash with respect to petitioner’s TESPHE

account.   To give petitioner an “investment in the contract” for

the loan repayments would allow petitioner to create an

“investment in the contract” from his previously nontaxable loan

distributions.7   Thus, the effect of petitioner’s contention

would be to allow him to make pretax contributions to his TESPHE

account, and then to exclude from gross income a portion of any

subsequent distribution by merely taking out a nontaxable loan

from his TESPHE account and making subsequent loan repayments.

Unless Congress has clearly provided otherwise, we should not

interpret the Code to result in such a double tax benefit.      Darby

v. Commissioner, 97 T.C. 51, 68 (1991); see also United States v.


     7
        Sec. 1.72(p)-1, Q&A-21, Income Tax Regs., provides that
if a participant repays a loan after a deemed distribution of the
loan under sec. 72(p), then, for purposes of sec. 72(e), the
participant’s investment in the contract increases by the amount
of the cash repayments that the participant makes on a loan after
a deemed distribution. Petitioner’s prior loans were not deemed
distributions under sec. 72(p).
                              - 10 -

Skelly Oil Co., 394 U.S. 678, 684 (1969); Charles Ilfeld Co. v.

Hernandez, 292 U.S. 62, 68 (1934).     Only if the language of the

statute compelled it “would we reach a result apparently so at

odds with accepted tax policy.”   Darby v. Commissioner, supra at

68.

      We find that petitioner did not have a basis in the 1999

distribution from his section 401(k) plan, and that petitioner

properly included the full distribution in his 1999 gross income.

Accordingly, we hold that petitioner is liable for the 10-percent

additional tax under section 72(t) on the $50,674 distribution

from his TESPHE account.

      We have considered all of the other arguments made by

petitioner, and, to the extent that we have not specifically

addressed them, we conclude they are without merit.

      Reviewed and adopted as the report of the Small Tax Case

Division.

      To reflect the foregoing,



                                          Decision will be entered

                                     for respondent.
