                        T.C. Memo. 2010-186



                      UNITED STATES TAX COURT



                   KWAME OWUSU, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 5389-08.                 Filed August 23, 2010.



     Kwame Owusu, pro se.

     Wendy D. Gardner, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     GALE, Judge:   Respondent determined a deficiency of $962 and

an addition to tax under section 6651(a)(1) of $145 in

petitioner’s 2005 Federal income tax.1   Petitioner subsequently


     1
      All section references are to the Internal Revenue Code of
1986, as in effect for the year in issue, and all Rule references
are to the Tax Court Rules of Practice and Procedure.
                                - 2 -

averred in an amended petition that he erroneously reported as

gross income on his 2005 Federal income tax return a $9,627

distribution from a qualified pension plan.   After a concession,2

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

in income the $9,627 balance of certain loans from a qualified

plan as a deemed distribution under section 72(p); (2) whether

petitioner is liable for the 10-percent additional tax under

section 72(t) on a deemed distribution arising from the foregoing

loan balance; and (3) whether petitioner is liable for an

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

file his 2005 return.

                          FINDINGS OF FACT

     Some of the facts have been stipulated and are incorporated

by this reference.   At the time he filed the petition, petitioner

resided in New Jersey.

     Before 2005 petitioner was employed as a senior actuary with

the New York State Department of Insurance.   In 1993 petitioner

commenced participation in the New York State and Local

Retirement System (NYSLRS), and by March 1998 his contribution

balance had reached $4,482.    At that time petitioner requested a

loan from the NYSLRS.    Under NYSLRS rules petitioner was allowed

to borrow up to 75 percent of his contribution balance.


     2
      Respondent conceded that $567 of wages reported on a Form
W-2, Wage and Tax Statement, do not constitute income to
petitioner.
                                 - 3 -

Petitioner requested a loan in the maximum allowable amount, and

after reduction by a $15 service charge he was granted a loan of

$3,346.   The NYSLRS required repayment within 5 years.

Petitioner obtained additional loans from the NYSLRS in each

subsequent year, through 2004.    The amounts of the NYSLRS loans

to petitioner were as follows:

           Date of Loan                        Amount
          Mar. 31, 1998                        $3,361
          Mar. 31, 1999                         1,581
          Apr. 6, 2000                          2,207
          Apr. 6, 2001                          2,402
          Apr. 8, 2002                          2,755
          Apr. 8, 2003                          3,162
          Nov. 29, 2004                         2,941

     Before 2004 the NYSLRS did not permit a participant to hold

multiple loans from the plan.    Therefore, each time petitioner

requested a new loan, the balance of his previous loans was

consolidated with his new loan.    As a result, until 2004

petitioner had only one loan from the NYSLRS at any one time,

though the balance of the loan increased with each additional

amount petitioner requested.    Each time he took out a new loan

and refinanced the old loan, the consolidated loan extended the

repayment period to 5 years from the inception of the new loan.

The NYSLRS changed its policy with respect to multiple loans at

some point after petitioner obtained the 2003 loan.     As a result,
                               - 4 -

the loan made to petitioner in 2004 was not consolidated with his

previous loans.

     Petitioner elected to repay his loans through payroll

deductions.   After taking into account the payroll deduction

payments, the outstanding loan balances on his consolidated loan

after each new loan were as follows:

               Date                    Outstanding Loan Balance
         Mar. 31, 1998                         $3,361
         Mar. 31, 1999                             4,683
         Apr. 6, 2000                              5,793
         Apr. 6, 2001                              7,146
         Apr. 8, 2002                              8,613
                                               1
         Apr. 8, 2003                           10,228
     1
      The $3,162 loan by the plan to petitioner on Apr. 8, 2003,
caused his outstanding loan balance to reach $10,228. The NYSLRS
took the position that the $228 excess over $10,000 was a taxable
distribution. The NYSLRS consequently issued to petitioner a
Form 1099-R, Distributions From Pensions, Annuities, Retirement
or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.,
reflecting a $228 taxable distribution in 2003.

     At the time petitioner took out the 2004 loan his balance on

the 1998-2003 borrowings was $7,058.    Taking into account the

2004 loan, petitioner’s outstanding loan balance in November 2004

was $9,999.

     As of the end of December 2004, petitioner was treated by

his employer as being in “suspended without pay” status.

Petitioner ceased receiving paychecks from the New York State

Department of Insurance, and as a result, no further payroll
                                - 5 -

deductions were made with respect to petitioner’s loans and no

repayments in any form were made after December 2004.    However,

the NYSLRS’ records erroneously reflected that petitioner made

three further payroll deduction payments during January and

February 2005.    When no payment had been received by May 31,

2005, the NYSLRS sent petitioner a letter giving him until June

30, 2005, to make a payment.    The letter stated that if no

payment were received by June 30, 2005, the NYSLRS would consider

petitioner’s loans in default and the entire amount of the

outstanding loans, less any amount previously reported, would be

reported to the Internal Revenue Service as a distribution from a

qualified plan.    Petitioner did not make any payment in response

to the letter.

     When petitioner made no payments by June 30, 2005, the

NYSLRS treated the loans as deemed distributions and issued to

petitioner two Forms 1099-R, Distributions From Pensions,

Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance

Contracts, etc., for 2005, one for the 1998-2003 consolidated

loan and one for the 2004 loan.    The former reported a gross

distribution amount of $6,792, consisting of a taxable amount of

$6,693 and a nontaxable amount of $99.    The latter reported a
                               - 6 -

gross distribution of $2,977, consisting of a taxable amount of

$2,933 and a nontaxable amount of $43.3

     Petitioner was under the age of 55 during 2005.

     In December 2005 the NYSLRS discovered that petitioner’s

loans had been credited with three payments through payroll

deductions in January and February 2005 even though no paychecks

had been issued to petitioner during those periods.    The NYSLRS

reversed these payments in its records but did not issue

petitioner corrected Forms 1099-R for 2005 reflecting deemed

distributions of the higher loan balance that resulted.4

     Petitioner filed his 2005 return on July 6, 2006.

Petitioner did not request an extension of time to file his 2005

return.   Petitioner reported gross pension income of $9,769 and

taxable pension income of $9,627 but did not report a 10-percent

additional tax under section 72(t).    On December 3, 2007,

respondent issued petitioner a notice of deficiency which

determined a deficiency of $962 as a result of petitioner’s

failure to report the 10-percent additional tax under section



     3
      The nontaxable amounts presumably reflect that a portion of
the 1998-2003 consolidated loan had been treated as taxable in
2003. See supra p. 4, table note 1.
     4
      Because the Forms 1099-R issued by the NYSLRS erroneously
reflected loan payments that had not occurred, the Forms 1099-R
understated the gross and taxable deemed distributions to
petitioner in 2005. Respondent has not sought to amend his
answer to assert that petitioner had larger deemed distributions
than those reflected in the Forms 1099-R.
                                 - 7 -

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

to timely file the return.5   Petitioner filed a timely petition

with this Court.   The Court allowed petitioner to amend his

petition to include the claim that the $9,627 petitioner reported

as a taxable distribution on his 2005 return was not taxable.

                                OPINION

     Respondent argues that petitioner bears the burden of proof

and that the burden has not shifted under section 7491(a).     Since

we decide this case on the preponderance of the evidence, the

allocation of the burden of proof does not affect the outcome and

need not be decided.   See Knudsen v. Commissioner, 131 T.C. 185,

189 (2008); see also Blodgett v. Commissioner, 394 F.3d 1030 (8th

Cir. 2005), affg. T.C. Memo. 2003-212.

1.   Treatment of Petitioner’s Loans as Distributions

      A distribution from a qualified plan such as petitioner’s

pension plan is generally includable in income of the distributee

in the year of distribution.6    Sec. 402(a).   If a participant or

beneficiary of a qualified plan receives a loan from the plan,

that amount is treated as a distribution in the year received,

unless:   (1) The loan is evidenced by a legally enforceable


      5
      Respondent assessed the $2,054 tax reported as due on the
return on July 31, 2006, and erroneously assessed the $962
deficiency on Aug. 4, 2008. Respondent abated the premature
assessment on Jan. 5, 2009.
      6
      Respondent concedes that petitioner’s pension plan is a
qualified plan within the meaning of secs. 401(a) and 402(a).
                                - 8 -

agreement, sec. 1.72(p)-1, Q&A-3, Income Tax Regs.; (2) the

amount does not exceed a specified maximum amount, sec.

72(p)(2)(A); (3) the loan is to be repaid within 5 years, unless

it is a home loan, sec. 72(p)(2)(B); and (4) except as provided

in regulations, the loan has substantially level amortization

over the term of the loan with payments not less frequently than

quarterly, sec. 72(p)(2)(C).    If a plan fails to satisfy these

requirements, a deemed distribution will occur at the first time

those requirements are not satisfied, either in form or in

operation.   Sec. 1.72(p)-1, Q&A-4(a), Income Tax. Regs.

     Respondent concedes that the loans to petitioner from the

NYSLRS plan satisfied the foregoing requirements when they were

made and through the end of 2004, but he contends that the loans

failed to meet the level amortization requirement when petitioner

ceased making repayments in 2005.

     If a loan initially satisfies all four requirements, but one

or more installment payments is not made when due in accordance

with the terms of the loan, the failure to make such payments

violates the level amortization requirement.    Therefore, a deemed

distribution occurs at the time of the failure.    Sec. 1.72(p)-1,

Q&A-10(a), Income Tax Regs.    The amount of the deemed

distribution equals the entire outstanding balance of the loan at

the time of the failure to make the required payment.     Sec.

1.72(p)-1, Q&A-10(b), Income Tax Regs.    However, the plan
                               - 9 -

administrator may grant the participant a cure period.   If the

administrator does so, section 72(p)(2)(C) is not considered

violated until the last day of the cure period.   Sec. 1.72(p)-1,

Q&A-10(a), Income Tax Regs.   The cure period may not extend past

the last day of the calendar quarter following the calendar

quarter in which the required installment payment was due.     Id.

     When petitioner failed to make payments on his loans during

the first quarter of 2005, the loans ceased to satisfy the level

amortization requirement.   As permitted by the regulations, the

NYSLRS gave petitioner a cure period through June 30, 2005; i.e.,

the last day of the quarter following the quarter in which

petitioner defaulted.   Petitioner concedes that he made no

payments with respect to his loans after he was placed in

suspended without pay status by his employer in December 2004.7



     7
      Petitioner argues that taxation in his case is
unconstitutional because sec. 72(p) permits respondent to tax an
individual on notional or perceived income rather than actual
income. Petitioner is mistaken. The amounts contributed to
petitioner’s qualified plan were compensation for services and
would have been taxable when earned if not for the congressional
decision to defer taxation on contributions to retirement plans
in order to encourage retirement savings. Congress may
constitutionally impose a tax on loans from retirement plans in
furtherance of the goal of encouraging retirement savings. See
Furlong v. Commissioner, 36 F.3d 25, 28 (7th Cir. 1994), affg.
T.C. Memo. 1993-191.
     Petitioner’s second argument is that he was wrongfully
terminated from his employment, causing his payments on his loans
through payroll deductions to cease, and that his former employer
must therefore be liable for any tax attributable to a deemed
distribution from petitioner’s qualified plan. This argument is
without merit.
                              - 10 -

      We accordingly hold that petitioner’s failure to comply with

the repayment terms for his loans in 2005 caused a deemed

distribution from the plan under section 72(p).   Consequently, we

reject petitioner’s contention that he erroneously reported a

$9,627 pension plan distribution in gross income for 2005.

2.   Section 72(t)

      When a distribution is made from a qualified retirement plan

before the distributee is 59-1/2 years old, section 72(t) imposes

an additional 10-percent tax on the distribution.   The 10-percent

tax applies when the distribution is a deemed distribution under

section 72(p).   Sec. 1.72(p)-1, Q&A-11(b), Income Tax Regs.   The

10-percent additional tax does not apply to distributions from

plans other than individual retirement plans if one of several

exceptions are met, including:   (1) Distributions made on the

death or disability of the participant, sec. 72(t)(2)(A)(ii) and

(iii); (2) distributions that are part of a series of

substantially equal periodic payments over the life of the

participant or the joint lives of the participant and the

beneficiary, sec. 72(t)(2)(A)(iv); (3) distributions after

separation from service, if the separation occurred during or

after the calendar year in which the participant reached age 55,

sec. 72(t)(2)(A)(v); (4) certain distributions by employee stock

ownership plans of dividends on employer’s securities, sec.

72(t)(2)(A)(vi); (5) payments made on account of a levy under
                              - 11 -

section 6331, sec. 72(t)(2)(A)(vii); (6) distributions not

exceeding deductible medical expenses, sec. 72(t)(2)(B); (7)

distributions to a nonparticipant under a qualified domestic

relations order, sec. 72(t)(2)(C); and (8) certain distributions

to individuals called to active duty, sec. 72(t)(2)(G).

     Petitioner has not claimed that any of these exceptions

applies to him, and the preponderance of the evidence shows that

none does.   The evidence establishes that the distribution was a

deemed distribution as a result of petitioner’s default on loans

from his pension plan.   It was therefore not prompted by

petitioner’s death or disability, was not made under a qualified

domestic relations order, was not made on account of a levy under

section 6331, was not made to an individual called to active

duty, and was not a distribution of dividends on an employer’s

securities by an employee stock ownership plan.   Further, the

deemed distribution occurred only once; it was therefore not part

of a series of substantially equal periodic payments over the

life of petitioner.   There is also no evidence in the record that

petitioner had any deductible medical expenses in 2005.     Finally,

the exception exempting a taxpayer from the 10-percent additional

tax if the distribution occurred after separation from service if

the separation occurred during or after the calendar year in

which the taxpayer reached age 55 does not apply because the

parties stipulated that petitioner was younger than 55 in 2005.
                               - 12 -

Accordingly, petitioner is liable for the 10-percent additional

tax under section 72(t).

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

      Under section 7491(c), respondent has the burden of

production with respect to petitioner’s liability for the section

6651(a)(1) addition to tax.   In order to meet that burden,

respondent must offer sufficient evidence to indicate that it is

appropriate to impose the addition.     See Higbee v. Commissioner,

116 T.C. 438, 446 (2001).   Once respondent meets his burden of

production, petitioner bears the burden of proving error in the

determination, including evidence of reasonable cause or other

exculpatory factors.   See id. at 446-447.

      Section 6651(a)(1) provides for an addition to tax for a

taxpayer’s failure to file a required return on or before the due

date, including extensions.   Because petitioner admits that his

2005 return was due on April 15, 2006, that he did not request an

extension, and that he filed his return on July 6, 2006,

respondent has met his burden of production under section

7491(c).

      Petitioner testified at trial that he had instructed his

accountant to request an extension of time to file his 2005

return.    Petitioner stated he had done so instead of filing his

return by April 15, 2006, because he had received an erroneous

Form W-2, Wage and Tax Statement, and was attempting to get the
                                 - 13 -

error corrected before filing.     Petitioner stated that when he

discovered that his accountant had not requested an extension,

petitioner filed his 2005 return as soon as he could.      Even if

petitioner believed that his accountant had requested an

extension on his behalf, his reliance on the accountant would not

constitute reasonable cause so as to avoid a section 6651(a)(1)

addition.    Reliance on an agent is not reasonable cause for late

filing of a tax return.      United States v. Boyle, 469 U.S. 241,

252 (1985).    The duty to timely file a return is not delegable to

an accountant, and reliance on an accountant does not provide

reasonable cause for petitioner’s failure to timely file his

return.     See id.   Accordingly, petitioner is liable for the

addition to tax under section 6651(a)(1).

     To reflect the foregoing,


                                          Decision will be entered

                                    under Rule 155.
