                        T.C. Memo. 1996-267



                      UNITED STATES TAX COURT



          G. RICHARD AND SARA B. CHILDS, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 7442-94.                        Filed June 11, 1996.



     G. Richard Childs and Sara B. Childs, pro sese.

     Alan R. Peregoy, for respondent.


             MEMORANDUM FINDINGS OF FACT AND OPINION


     DAWSON, Judge:   This case was assigned to Special Trial

Judge Robert N. Armen, Jr., pursuant to the provisions of section

7443A(b)(4) of the Internal Revenue Code of 1986, as amended, and

Rules 180, 181, and 183.1   The Court agrees with and adopts the

Opinion of the Special Trial Judge, which is set forth below.

     1
       Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for 1990, the taxable year in
issue, and all Rule references are to the Tax Court Rules of
Practice and Procedure.
                               - 2 -

                OPINION OF THE SPECIAL TRIAL JUDGE

     ARMEN, Special Trial Judge:   Respondent determined a

deficiency in petitioners' Federal income tax for the taxable

year 1990 in the amount of $29,434.

     The only issue for decision is whether the distribution

received by petitioner Sara B. Childs from her individual

retirement account in 1990 is taxable under sections 408(d)(1)

and 72 or whether such distribution qualifies for relief pursuant

to section 408(d)(4).

                         FINDINGS OF FACT

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

found.   Petitioners resided in Forest Hill, Maryland, at the time

that their petition was filed with the Court.

     Petitioner Sara B. Childs (petitioner) was a teacher in the

Baltimore County Public Schools until she retired on November 1,

1989.

Petitioner's Transfer Refund Distribution

     As an employee of the Baltimore County Public Schools,

petitioner was originally a member of the Maryland State

Teachers' Retirement System (the Retirement System).   However, on

September 29, 1989, petitioner elected to transfer to the

Maryland State Teachers' Pension System (the Pension System).
                               - 3 -

Petitioner's election to transfer from the Retirement System to

the Pension System was effective October 1, 1989.2

     As a result of her election to transfer to the Pension

System, petitioner received a distribution (the Transfer Refund)

from the Retirement System in the amount of $342,956.85.

Petitioner received the Transfer Refund in the form of a check

dated October 31, 1989, from Maryland State Retirement Systems.

     Petitioner's Transfer Refund consisted of $31,422.04 in

previously taxed contributions made by petitioner during her

employment tenure with the public schools, $2,169.77 in taxable

employer "pick-up contributions",3 and $309,365.04 of taxable

earnings in the form of interest.   The earnings and "pick-up

contributions", which total $311,534.81, constitute the taxable

portion of the Transfer Refund.

Rollover of Petitioner's Transfer Refund

     Within 60 days of receiving the Transfer Refund, petitioner

deposited the taxable portion thereof, i.e., $311,534.81, into

three individual retirement accounts (IRA's), as follows:

     Petitioner deposited $221,534.81 of the Transfer Refund into

an IRA with Fidelity Investment Mutual Funds (the Fidelity IRA).

     2
       For a discussion of the Retirement System and the Pension
System, see generally Hylton v. Commissioner, T.C. Memo. 1995-27;
Hoppe v. Commissioner, T.C. Memo. 1994-635; Hamilton v.
Commissioner, T.C. Memo. 1994-633; Conway v. United States, 908
F. Supp. 292 (D. Md. 1995); Maryland State Teachers Association
v. Hughes, 594 F. Supp. 1353, 1357-1358 (D. Md. 1984).
     3
         See sec. 414(h)(2).
                                - 4 -

       On December 6, 1989, petitioner opened two IRA's with First

American Bank (the First American IRA's) and deposited $45,000 in

each account.    In opening the First American IRA's, petitioner

read the "terms and conditions" for such accounts that were

enumerated on the IRA application form.    The terms and conditions

did not set forth any procedure for withdrawing funds from an

IRA.

Distribution of the First American IRA's

       Before she retired, petitioner sought advice from the

Internal Revenue Service (IRS) and the Maryland State Retirement

Agency (MSRA) regarding the taxability of a Transfer Refund.

Employees from the IRS advised petitioner that the Transfer

Refund would be considered a lump-sum distribution and that it

would qualify for tax-free treatment if the distribution were

rolled over into an IRA within 60 days of receipt.    Petitioner's

contact with the MSRA also led petitioner to believe that the

Transfer Refund was eligible for tax-free rollover treatment.

Thus, at the time petitioner received the Transfer Refund, she

thought that the taxable portion qualified for tax-free rollover

treatment.

       On March 28, 1990, the MSRA mailed a letter to all Transfer

Refund recipients, including petitioner, indicating that the

Transfer Refund was probably a taxable distribution.    The letter

advised the Transfer Refund recipients to contact a tax adviser

or the IRS if they had any questions.
                                - 5 -

     In response to the March 28, 1990, letter, petitioner

Richard Childs requested tax advice from Martin F. Malarkey III,

Chief of the Quality Assurance Branch of the IRS.    In

anticipation of a forthcoming ruling concerning the tax

consequences of the Transfer Refund, Mr. Malarkey advised

petitioners to apply for an extension of time to file their 1989

Federal income tax return.   Mr. Malarkey further advised

petitioners to withdraw all funds from their IRA's prior to the

extended due date for filing and to include the amounts withdrawn

in their gross income for 1989.

     On April 12, 1990, petitioners applied for and received an

automatic, 4-month extension of time to file their 1989 income

tax return.   Petitioners' return for that year was therefore due

on or before August 15, 1990.

     On July 10, 1990, the IRS issued a ruling (the IRS ruling)

in which the IRS concluded that Transfer Refunds did not

generally qualify for tax-free rollover treatment.

     Petitioners were aware that the IRS ruling required them to

include the taxable portion of petitioner's Transfer Refund,

i.e., $311,534.81, in their gross income for 1989.    Petitioners

were also aware that if they did not withdraw the funds from

petitioner's IRA's on or before August 15, 1990, then the IRS

would also seek to tax such amount upon distribution from the

IRA's.
                                - 6 -

     Petitioners frequently observed advertisements encouraging

customers of various financial institutions to conduct their

banking by telephone.   Petitioners assumed that they could

withdraw funds from petitioner's IRA's by requesting

telephonically that such accounts be converted into nonqualified

(non-IRA) accounts.

     During the last week of July 1990, petitioner telephoned

First American Bank and requested that her First American IRA's

be converted into non-IRA accounts prior to August 15, 1990.

Petitioner explained to the First American Bank employee with

whom she spoke (the First American employee) why such a

conversion was necessary.   The First American employee told

petitioner that she, the employee, would be glad to convert

petitioner's accounts and assured petitioner that petitioner's

request would be carried out.   Based on the representations made

by the First American employee, petitioner concluded that all of

the steps necessary to withdraw her funds from the First American

IRA's had been completed.

     Contrary to what petitioner had been told by the First

American employee, First American Bank required IRA owners to

execute various documents when transferring funds out of an IRA.

The First American employee, in assuring petitioner that

petitioner's IRA's would be converted to non-IRA accounts with no

further action on petitioner's part, misrepresented the bank's

internal procedure of converting an IRA into a non-IRA account.
                               - 7 -

     Petitioner, unaware that she was required to execute various

documents in order to accomplish the desired conversion, did not

execute these documents prior to August 15, 1990.    Thus, the

funds in petitioner's First American IRA's were not distributed

to and received by petitioner prior to August 15, 1990.

     First American Bank distributed and petitioner received the

account balance of petitioner's IRA's, i.e., $97,227.74, on or

about November 6, 1990.

Distribution of the Fidelity IRA

     Petitioners were accustomed to dealing with Fidelity by

telephone.   On August 14, 1990, petitioner Richard Childs

telephoned Fidelity and requested that the account balance in

petitioner's Fidelity IRA be transferred into a non-IRA account.

Fidelity permitted customers to convert IRA's into non-IRA

accounts by instructions given over the telephone.    Thus,

Fidelity effected the requested conversion, and the account

balance in petitioner's Fidelity IRA was constructively withdrawn

and received by petitioner on August 14, 1990.

Petitioners' 1989 Return

     On their Federal income tax return (Form 1040) for 1989,

filed August 15, 1990, petitioners included the taxable portion

of the Transfer Refund in gross income.
                               - 8 -

Petitioners' 1990 Return

     On their Federal income tax return (Form 1040) for 1990,

petitioners disclosed the receipt of a distribution from

petitioner's IRA's in the amount of $317,917.    Of this amount,

petitioners reported the earnings on petitioner's First American

IRA's, i.e., $7,228, as the taxable amount.4

The Notice of Deficiency

     In the notice of deficiency, respondent determined that

$90,000 of the amount distributed in November 1990 from

petitioner's First American IRA's was the return of an excess

contribution to an IRA and, as such, was includable in

petitioners' gross income for 1990 pursuant to sections 408(d)(1)

and 72.

                              OPINION

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

includable in gross income by the taxpayer in the manner provided

by section 72.5   Sec. 408(d)(1).   As relevant herein, section

72(e)(2)(B) provides that amounts received before the annuity

starting date are includable in income to the extent allocable to




     4
       Petitioners also filed an amended return (Form 1040X) for
1990; however, the entries made therein do not affect our
disposition of the disputed issue.
     5
       For purposes of sec. 72, all IRA's of an individual are
treated as one contract, and all distributions during a taxable
year are treated as one distribution. Sec. 408(d)(2).
                                - 9 -

income on the contract and not includable in income to the extent

allocable to the investment in the contract.6

     Section 408(d)(4) sets forth an exception to the foregoing

general rule.    As applicable to the present case, section

408(d)(4) provides that if an excess contribution is distributed

to and received by the contributor on or before the due date of

the return (including extensions) for the year of the excess

contribution, then such excess contribution is not includable in

the contributor's gross income.7

     Petitioner made total excess contributions to her three

IRA's in the amount of $309,534.81 (i.e., $311,534.81 less

     6
       Under sec. 72(c)(4), "annuity starting date" is defined as
the first day of the first period for which an amount is received
as an annuity under the contract. Petitioner received a single
payment in the amount of $97,227.74 from her First American IRA's
prior to drawing annuity payments from her First American IRA's.
Thus, the distribution was received by petitioner before the
annuity starting date and, accordingly, sec. 72(e)(2)(B) applies.
     7
         Sec. 408(d)(4) provides:

          (4) Contributions Returned Before Due Date of
     Return.-- * * * [section 72] does not apply to the
     distribution of any contribution paid during a taxable
     year to an individual retirement account * * * if--

               (A) such distribution is received on or
     before the day prescribed by law (including extensions
     of time) for filing such individual's   return for such
     taxable year,

                 (B) no deduction is allowed under section 219
            with respect to such contribution, and

               (C) such distribution is accompanied by the
     amount of net income attributable to such
     contribution.
                              - 10 -

$2,000) in 1989.   See sec. 219(a), (g); sec. 4973(b).    The

contribution to petitioner's Fidelity IRA in the amount of

$221,534.81 was distributed to and received by petitioner on

August 14, 1990, and is not at issue in this case.     Sec.

408(d)(4).

     At issue in this case is whether the distribution of

petitioner's excess contributions from her First American IRA's

made on November 6, 1990, in the amount of $88,000 (i.e.,

$309,534.81 less $221,534.81) qualifies for relief pursuant to

section 408(d)(4).

     In order to qualify for relief under section 408(d)(4), the

excess contributions made by petitioner to her First American

IRA's must have been received by petitioner on or before August

15, 1990, the extended due date for petitioners' 1989 income tax

return.   Petitioner received the excess contributions on or about

November 6, 1990, almost 3 months after the time prescribed by

section 408(d)(4).   Thus, respondent contends that petitioners do

not satisfy the requirement in section 408(d)(4)(A) that the

distribution of an excess contribution must be received on or

before the due date for filing the taxpayer's return for the

taxable year of the contribution.8     To the contrary, petitioners

contend that they are entitled to relief under section 408(d)(4)

based on Wood v. Commissioner, 93 T.C. 114 (1989).

     8
       Respondent does not contend that petitioners failed to
satisfy any of the remaining requirements of sec. 408(d)(4).
                               - 11 -

       Wood v. Commissioner, supra, involved a distribution of cash

and stock from a profit-sharing plan to a taxpayer, who then

established an IRA.    In that case, the taxpayer was aware that

his distribution was required to be rolled over into an IRA

within 60 days of receipt.   Acting with such knowledge, the

taxpayer did everything that he could reasonably be expected to

do in order to roll over his lump-sum distribution as required by

law.    Thus, for example, the taxpayer met with an IRA trustee,

instructed the IRA trustee to open an IRA, executed the documents

necessary to open such IRA, and transferred the entire

distribution to the IRA trustee for deposit in his IRA.      The IRA

trustee assured the taxpayer that the taxpayer's request would be

carried out.

       However, because of a bookkeeping error by the IRA trustee,

certain of the trustee's records indicated that part of the

distribution had not been transferred to the IRA account within

the requisite 60-day period.    We held that the financial

institution's bookkeeping error did not preclude rollover

treatment because, in substance, the taxpayer had satisfied the

statutory requirements.   We think that the circumstances in the

present case are comparable to those in Wood v. Commissioner,

supra.

       Petitioners, like the taxpayer in Wood, acted with knowledge

of the law.    The record demonstrates that petitioners were

extremely attentive to the tax consequences of petitioner's
                              - 12 -

Transfer Refund, its rollover into petitioner's IRA's, and the

subsequent distributions from petitioner's IRA's.    Thus,

petitioners were acutely aware of the requirement of the

operative law; namely, that they actually or constructively

withdraw and receive petitioner's excess contributions from the

IRA's on or before August 15, 1990, in order to avoid the

inclusion of such amounts in petitioners' gross income for 1990.

     Petitioner, also like the taxpayer in Wood, did everything

that she could reasonably be expected to do in order to comply

with the law.   Although First American Bank's internal procedures

did not provide for the conversion of an IRA into a non-IRA

account by telephone, the First American employee did not advise

petitioner of that policy.   Instead, she assured petitioner that

she, the employee, would convert petitioner's accounts within the

requested time frame.   Further, the First American employee

assured petitioner that petitioner had done all that was

necessary to accomplish such a conversion.

     We found petitioner's testimony concerning petitioner's

instructions to the First American employee and the employee's

agreement to follow those instructions to be credible.     The First

American employee represented that petitioner had done everything

necessary to convert her IRA into a non-IRA account, and that the

bank would carry out petitioner's instructions.    Petitioner

reasonably relied on that representation.    Under these

circumstances, we conclude that petitioner took all steps that
                             - 13 -

one might reasonably expect her to have taken in order to convert

her IRA's into non-IRA accounts by August 15, 1990, and was

entitled to have her instructions carried out immediately.

     We also note that events independent of petitioner's

conversation with the First American employee support

petitioners' assumption that the conversion of petitioner's First

American IRA's could be effected by telephone.   First,

petitioners were able to withdraw and receive the account balance

from the Fidelity IRA by telephone.   Second, petitioners

frequently observed advertisements encouraging customers to

conduct their banking telephonically.   Third, the terms and

conditions governing petitioner's First American IRA's did not

set forth a procedure for closing an IRA, and thus did not put

petitioner on notice that she could not close her First American

IRA's by telephone.

     In reasonably relying on the First American employee's

representation, petitioner did everything that she could

reasonably be expected to do in order to comply with the relief

provision of section 408(d)(4).   We therefore hold that

petitioners are not precluded from relief under that section

because of the error made by the First American employee.

Accordingly, petitioners are not liable for income tax on the

distribution of the excess contributions from petitioner's First

American IRA's in 1990.
                        - 14 -

In order to reflect the foregoing,



                                     Decision will be entered

                              for petitioners.
