                     T.C. Summary Opinion 2007-82



                       UNITED STATES TAX COURT



                  RICHARD MARK HILTON, Petitioner v.
             COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 3588-06S.               Filed May 24, 2007.



     Richard Mark Hilton, pro se.

     Matthew A. Houtsma, for respondent.



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

the provisions of section 7463 of the Internal Revenue Code.

Unless otherwise indicated, subsequent section references are to

the Internal Revenue Code as in effect for the year at issue, and

all Rule references are to the Tax Court Rules of Practice and

Procedure.    Pursuant to section 7463(b), the decision to be
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entered is not reviewable by any other court, and this opinion

shall not be treated as precedent for any other case.

     Respondent determined for 2003 a deficiency in petitioner’s

Federal income tax of $26,416 and a section 6662(a) accuracy-

related penalty of $5,283.

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

Whether petitioner failed to report as income a distribution from

an individual retirement account (IRA) in 2003, (2) whether

petitioner received cancellation of indebtedness income in 2003,

and (3) whether petitioner is liable for a section 6662(a)

accuracy-related penalty.

                             Background

     The stipulation of facts and the exhibits received into

evidence are incorporated herein by reference.   At the time the

petition in this case was filed, petitioner resided in Boulder,

Colorado.

     Petitioner and his spouse filed jointly for 2003, a Form

1040, U.S. Individual Income Tax Return.




     1
      Respondent concedes that the distribution of $4,272 from
petitioner’s Medical Savings Account in 2003 is not includable as
income because petitioner substantiated that the distribution was
spent on medical expenses. Petitioner concedes that the
distribution of $22,000 from a traditional IRA managed by Gabelli
Asset Fund in 2003 is income. Petitioner also concedes that the
distribution of $22,000 is subject to a 10-percent additional tax
under sec. 72(t)(1) for early withdrawal.
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     On May 28, 2003, petitioner received a distribution of

$50,000 from a traditional IRA managed by Franklin Templeton Bank

& Trust (distribution).   On October 24, 2003, petitioner

deposited approximately $41,000 of the $50,000 May distribution

back into the same Franklin Templeton account.   Petitioner did

not include any of the distribution as income on the return.

     In 2003, petitioner had $2,136 of debt canceled by American

Express Centurion Bank (American Express).   Petitioner did not

include the amount of the canceled debt as income on the return.

     Respondent subsequently issued to petitioner and his spouse

a statutory notice of deficiency for 2003, determining that they

failed to include in their income the distribution and the amount

of the canceled debt.   Respondent also determined that the

distribution was subject to a 10-percent additional tax under

section 72(t) for early withdrawal.    Respondent indicated on the

deficiency notice that the proposed changes to income would

reduce the amount of itemized deductions on Schedule A, Itemized

Deductions, and the claimed child tax credits.
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                             Discussion

     The Commissioner’s determinations are presumed correct, and

generally taxpayers bear the burden of proving otherwise.2   Rule

142(a)(1); Welch v. Helvering, 290 U.S. 111, 115 (1933).

     Tax deductions are a matter of legislative grace with the

taxpayer bearing the burden of proving entitlement to the

deductions claimed.   Rule 142(a)(1); INDOPCO, Inc. v.

Commissioner, 503 U.S. 79, 84 (1992).

Whether the Distribution Is Includable in Income

     Generally, any amount “paid or distributed out of” an IRA is

includable in gross income in the year received.   Sec. 408(d)(1).

     Petitioner asserts that the distribution is not income,

arguing that the distribution is a “loan-type situation”

permitted under the Code and by the Internal Revenue Service for

self-employed individuals.   Petitioner claims that his “intent”

was to borrow from the IRA for his business venture and to repay

the IRA at a later date.

     Respondent argues that the distribution is income because

petitioner did not roll the distribution into an eligible IRA

within 60 days from receipt as required by section 408(d)(3)(A).

The Court agrees with respondent.


     2
      Petitioner has not raised the issue of sec. 7491(a), which
shifts the burden of proof to the Commissioner in certain
situations. This Court concludes that sec. 7491 does not apply
because petitioner has not produced any evidence that establishes
the preconditions for its application.
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     Pursuant to section 408(d)(3), a distribution to the

individual for whose benefit an IRA is maintained is excluded

from gross income if the entire amount is paid into an IRA, an

individual retirement annuity, or an eligible retirement plan for

the benefit of the same individual within 60 days.

     Petitioner concedes that he knew that there is a 60-day

requirement to make a nontaxable rollover.   Petitioner testified

that his intent, however, was not to roll over the distribution.

Petitioner wanted to transfer the distribution into a type of

retirement investment that would permit him to take the funds out

as a loan and not as a taxable distribution.

     Regardless of petitioner’s intent, the distribution is

treated as income unless it complies with the 60-day rollover

requirement under section 408(d)(3)(A) or with another exception

enumerated under section 408(d).   It was approximately 5 months

from petitioner’s receipt of the distribution before he deposited

$41,000 of the original $50,000 distribution into an IRA.    The

distribution is income because petitioner did not make a rollover

into an IRA of any of the distribution within the 60-day period

required by section 408(d)(3)(A), and no other exceptions apply.

     Moreover, the distribution is subject to a 10-percent

additional tax under section 72(t)(1) for early withdrawal since

petitioner stipulated that none of the exceptions under section

72(t)(2) applies.
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Cancellation of Indebtedness Income

     Gross income includes income from the cancellation of

indebtedness.   Sec. 61(a)(12).    Respondent contends that

petitioner had cancellation of indebtedness income of $2,136 from

American Express.

     Petitioner claims that there was no cancellation of debt

because the debt was already paid.        He contends that American

Express made a miscalculation, implying that the cancellation was

actually a correction to his account.        Petitioner, however,

failed to offer any evidence to show that the debt was paid.

There is also no evidence that any of the exclusions under

section 108(a)(1) applies.

     Therefore, petitioner had cancellation of indebtedness

income of $2,136 in 2003.

Section 6662(a) Accuracy-Related Penalty

     Respondent determined that petitioner is liable for an

accuracy-related penalty under section 6662(a).        Section 6662(a)

imposes a 20-percent penalty on the portion of an underpayment

attributable to any one of various factors, including negligence

or disregard of rules or regulations and a substantial

understatement of income tax.     See sec. 6662(b)(1) and (2).

“Negligence” includes any failure to make a reasonable attempt to

comply with the provisions of the Internal Revenue Code,

including any failure to keep adequate books and records or to
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substantiate items properly.   See sec. 6662(c); sec.

1.6662-3(b)(1), Income Tax Regs.   A “substantial understatement”

includes an understatement of tax that exceeds the greater of 10

percent of the tax required to be shown on the return or $5,000.

See sec. 6662(d); sec. 1.6662-4(b), Income Tax Regs.     The

Commissioner bears the burden of production.    Sec. 7491(c).

     Section 6664(c)(1) provides that the penalty under section

6662(a) shall not apply to any portion of an underpayment if it

is shown that there was reasonable cause for the taxpayer’s

position and that the taxpayer acted in good faith with respect

to that portion.   The determination of whether a taxpayer acted

with reasonable cause and in good faith is made on a case-by-case

basis, taking into account all the pertinent facts and

circumstances.   Sec. 1.6664-4(b)(1), Income Tax Regs.    The most

important factor is the extent of the taxpayer’s effort to assess

his proper tax liability for the year.    Id.   Reliance on the

advice of a professional tax adviser does not necessarily

demonstrate reasonable cause and good faith.     Id.

     For a taxpayer to rely reasonably upon advice so as to

negate a section 6662(a) accuracy-related penalty determined by

the Commissioner, the taxpayer must prove by a preponderance of

the evidence that the taxpayer meets all of the following

requirements:    (1) The adviser was a competent professional who

had sufficient expertise to justify reliance, (2) the taxpayer
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provided necessary and accurate information to the adviser, and

(3) the taxpayer actually relied in good faith on the adviser’s

judgment.   See Neonatology Associates, P.A. v. Commissioner, 115

T.C. 43, 99 (2000), affd. 299 F.3d 221 (3d Cir. 2002); Ellwest

Stereo Theatres, Inc. v. Commissioner, T.C. Memo. 1995-610.

     Petitioner testified that he sought informal tax advice from

a Mr. Randolph, ostensibly a tax professional, at the time he

received the distribution.   Petitioner, however, did not call Mr.

Randolph as a witness, nor did he introduce evidence which would

allow the Court to evaluate Mr. Randolph’s expertise.     Petitioner

has not established that Mr. Randolph was a competent

professional who had sufficient expertise and information to

justify reliance.

     Petitioner substantially understated his tax liability for

2003, since the understatement exceeded the greater of 10 percent

of the tax required to be shown on the return or $5,000.    The

Court concludes that respondent has produced sufficient evidence

to show that the accuracy-related penalty under section 6662 is

appropriate.   Nothing in the record indicates petitioner acted

with reasonable cause and in good faith.   Respondent’s
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determination of an accuracy-related penalty under section

6662(a) is sustained.

     To reflect the foregoing,



                                              Decision will be entered

                                         under Rule 155.
