                     T.C. Summary Opinion 2009-86



                        UNITED STATES TAX COURT



                   MICHAEL K. BILLUPS, Petitioner v.
             COMMISSIONER OF INTERNAL REVENUE, Respondent



        Docket No. 17470-07S.              Filed June 1, 2009.



        Michael K. Billups, pro se.

        Abigail F. Dunnigan and Michael Shelton (student), for

respondent.



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

the provisions of section 7463 of the Internal Revenue Code in

effect when the petition was filed.      Pursuant to section 7463(b),

the decision to be entered is not reviewable by any other court,

and this opinion shall not be treated as precedent for any other

case.     Unless otherwise indicated, subsequent section references
                                - 2 -

are to the Internal Revenue Code in effect for the year in issue,

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

and Procedure.

     Respondent determined a deficiency in petitioner’s 2005

Federal income tax of $12,059 and an accuracy-related penalty

under section 6662(a) of $2,412.

     The issues for decision are whether:      (1) The loan proceeds

received from petitioner’s qualified employer plan are taxable

distributions under section 72(p); (2) petitioner is subject to

the 10-percent additional tax under section 72(t); and (3)

petitioner is liable for the accuracy-related penalty under

section 6662(a)1.

                             Background

     Some of the facts have been stipulated and are so found.      The

stipulation of facts and the exhibits received in evidence are

incorporated herein by reference.       Petitioner resided in New York

when the petition was filed.

        During 2005 petitioner was employed with the New York City

Transit Authority (NYCTA).     He had been an NYCTA employee since

1988.

     Petitioner participated in the New York City Employees’

Retirement System (NYCERS), a qualified employer plan.      On April


     1
      Adjustments to petitioner’s itemized deductions and child
tax credit are computational and will be resolved consistent with
the Court’s decision. See secs. 24(b), 67(a).
                               - 3 -

29, 2005, petitioner replaced a prior loan with a new loan and

received cash proceeds of $12,630 from NYCERS.    The replacement

loan was to be amortized over 5 years and repaid in biweekly

installments of $363.34.   When petitioner received the $12,630,

the replaced loan had an outstanding balance of $27,012.73.    His

receipt of $12,630 increased his outstanding loan balance to

$39,748.06, the amount of the replacement loan.

     At the time of the April 29, 2005, loan, petitioner’s annual

annuity account balance was $52,863.38.   On the loan application

form for the replacement loan, petitioner selected the

“refinance” option.2

     NYCERS advised petitioner at the time he signed the loan

application form that all or part of the outstanding loan amount

might be taxable.   The application form notifies the borrower

that more detailed tax information is available from NYCERS.

     Petitioner had previously borrowed from NYCERS in 1993, 1995

through 2001, and 2003 through 2005, as follows:




     2
      In 2005 petitioner had not reached the age of 59-1/2.
                                 - 4 -

                  Loan           Prior Principal     Repayment
     Year         Amount             Amount            Term

     1993         $5,110               -0-           10 years
     1995          6,140           $3,147.01         10 years

     1996          5,000            7,694.26         3.77 years
     1997          7,370            9,383.36         3.69 years
     1998          7,180           12,754.46         5 years
     1999          7,240           16,359.31         5 years
     2000          7,870           19,482,80         5 years
     2001          7,520           22,439.39         5 years
     2003          9,000           22,521.97         5 years
     2004          9,000           26,140.11         4 years
     2005         12,630           27,012.73         5 years

Petitioner’s loans were not in default as of 2005.

     Petitioner and his wife purchased a home on June 25, 2004.

On October 11, 2005, petitioner refinanced the mortgage on his

home.   Petitioner did not use the loan proceeds from his

retirement plan towards the purchase of his home or the

refinancing of his mortgage.

     Petitioner received a Form 1099-R, Distributions From

Pensions, Annuities, Retirement or Profit Sharing Plans, IRAs,

Insurance Contracts, etc., for 2005, reporting a gross

distribution of $29,467.00.    On the bottom of petitioner’s Form

1099-R was the word “LOAN” and a distribution code “L1”.

     Petitioner’s 2005 Form 1040, U.S. Individual Income Tax

Return, was prepared by Allen S. Lokensky Associates.    On the

advice of his accountant, petitioner reported a pension and

annuities distribution of $29,467 on his 2005 Form 1040 but

designated it as a “rollover”.    No computation of the 10-percent
                               - 5 -

additional tax on early distributions was reported on

petitioner’s return.

                            Discussion

I. Burden of Proof

     The Commissioner’s determinations in a notice of deficiency

are presumed correct, and the taxpayer bears the burden to prove

that the determinations are in error.    See Rule 142(a); Welch v.

Helvering, 290 U.S. 111, 115 (1933).     But the burden of proof on

factual issues that affect the taxpayer’s tax liability may be

shifted to the Commissioner where the “taxpayer introduces

credible evidence with respect to * * * such issue.”    See sec.

7491(a)(1).   Petitioner has not alleged that section 7491(a)

applies.   However, the Court need not decide whether the burden

shifted to respondent since there is no dispute as to any factual

issue.   Accordingly, the case is decided by the application of

law to the undisputed facts, and section 7491(a) is inapplicable.

II. NYCER Loans

     Generally, loans from qualified employer plans are treated

as distributions from the plan.   Sec. 72(p)(1)(A).   Section

402(a) provides that distributions from a qualified employer plan

are taxable to the distributee in the distributee’s taxable year

in which the distribution occurs, pursuant to section 72.        Prince

v. Commissioner, T.C. Memo. 1997-324.     Section 72(p)(2)(A),

however, provides an exception:   a loan will not give rise to a
                                 -6-

deemed distribution to the extent that the loan (when added to

the outstanding balance of all other loans from the plan) does

not exceed the lesser of:    (1) $50,000 (reduced by the excess, if

any, of the highest outstanding balance of loans from the plan

during the 1-year period ending on the day before the date on

which the loan was made, over the outstanding balance of loans

from the plan on the date on which the loan was made); or (2) the

greater of one-half of the present value of the participant’s

“nonforfeitable accrued benefit” under the plan or $10,000.       But

the exception provided in section 72(p)(2)(A) does not apply

unless:    (1) The loan, by its terms, is required to be repaid

within 5 years, sec. 72(p)(2)(B); and (2) “substantially level

amortization of such loan (with payments not less frequently than

quarterly) is required over the term of the loan”, sec.

72(p)(2)(C); see Prince v. Commissioner, supra; see also sec.

72(p)(2)(B)(ii) (providing an exception to the 5-year repayment

requirement for loan proceeds used to “acquire any dwelling unit

* * *    within a reasonable time * * * as the principal residence

of the participant”).3

     For petitioner to avoid having his loan proceeds treated as

a taxable distribution, petitioner’s $39,642.73 loan (when added



     3
      At trial petitioner admitted that he did not use the loan
proceeds from his retirement plan to purchase his home or
refinance the mortgage on his home. Therefore, the exception in
sec. 72(p)(2)(B)(ii) does not apply.
                                 -7-

to the outstanding balance of all other loans from the plan,

$27,012.23) could not exceed the lesser of $50,000 (reduced by

the excess, if any, of the highest outstanding balance of loans

from the plan during the 1-year period ending on the day before

the date on which the loan was made, over the outstanding balance

of loans from the plan on the date on which the loan was made) or

the greater of $26,431.69 or $10,000.   Sec. 72(p)(2)(A); see also

sec. 1.72(p)-1, Q&A-20(b), Income Tax Regs.4

     The evidence in the record does not permit the Court to

determine the highest outstanding balance of loans during the 1-

year period ending the day before the date that the $39,642.73

loan was made.    It is necessary to know that amount to determine

the excess, if any, of the highest outstanding balance of loans

from the plan during the 1-year period ending on the day before

the date on which the loan was made, over the outstanding balance

of loans from the plan on the date on which the loan was made.

Neither petitioner nor respondent provided evidence on the issue.

Therefore, the Court cannot determine the exact amount by which

the $50,000 ceiling is reduced pursuant to section

72(p)(2)(A)(i).




     4
      Sec. 1.72(p)-1, Q&A-20, Income Tax Regs., applies to
assignments, pledges, and loans made on or after Jan. 1, 2004.
Sec. 1.72(p)-1, Q&A-22(d), Income Tax Regs.
                                -8-

     The Court, however, can determine with reasonable certainty

from the evidence that the lesser of the reduced $50,000 ceiling

limitation and one-half of the present value of petitioner’s

nonforfeitable accrued benefit is the latter.   Therefore, NYCERS

used the appropriate amount available to petitioner under section

72(p)(2)(A), the greater of one-half of the present value of

petitioner’s “nonforfeitable accrued benefit” under the plan,

$26,431.69, or $10,000.   NYCERS followed the correct procedure;

consequently petitioner is taxable on any amount in excess of

one-half of the present value of petitioner’s nonforfeitable

accrued benefit, $26,431.69.

     The evidence shows that the sum of the new loan and the loan

it replaced ($39,642.73 + $27,012.73) is $66,655.46, and it

exceeds his applicable limitation of $26,431.69 by $39,748.06.5

Petitioner failed to satisfy the requirements of the exception

under section 72(p)(2)(A), and that is enough to find that he had

a taxable distribution, notwithstanding that each loan provided

for repayment terms of 5 years or less and substantially level

amortization.   See Prince v. Commissioner, supra.


     5
      The Court notes that NYCERS deducted from the sum of the
loans a $475.71 “Cost Allocation” for a “Net Loan For Tax Calc”
of $66,179.75 and credited petitioner with a limitation amount of
$26,435. The Court also notes that NYCERS credited petitioner
with $10,277.29 for “taxes previously reported”, reducing the
$39,748.06 “excess” figure by that amount. NCYERS reported,
therefore, a taxable amount of $29,467.46. Respondent has not
challenged this figure. Petitioner has not alleged or proven any
error with NYCERS’s calculation of his taxable amount.
                                 -9-

       In 2005 petitioner refinanced his prior loan from NYCERS.

Because he chose the refinancing option, petitioner effectively

extended the prior loan’s repayment terms.    As a result, both the

prior loan and the refinanced loan are treated as outstanding on

the date of the refinancing.    Sec. 72(p)(2)(A); sec. 1.72(p)-1

Q&A-20(a)(2), Income Tax Regs.    Therefore, the loans collectively

exceed the limitation amount under section 72(p)(2)(A), and the

excess results in a deemed distribution.

III.    10-Percent Additional Tax for Early Withdrawal

       Section 72(t)(1) imposes an additional tax on an early

distribution from a qualified retirement plan equal to 10 percent

of the portion of the amount that is includable in gross income.

The 10-percent additional tax does not apply to distributions:

(1) To an employee age 59-1/2 or older; (2) to a beneficiary (or

the employee’s estate) on or after the employee’s death; (3) on

account of the employee’s disability; (4) as part of a series of

substantially equal periodic payments made for life; (5) to an

employee after separation from service after attainment of age

55; (6) as dividends paid with respect to corporate stock

described in section 404(k); (7) to an employee for medical care;

or (8) to an alternate payee pursuant to a qualified domestic

relations order.    Sec. 72(t)(2); see also sec. 72(t)(2)(B)-(F)

(setting forth other exceptions not applicable here).
                                 -10-

      When petitioner received the loan proceeds, he had not

reached the age of 59-1/2, and he has not alleged or shown that

he comes within any of the other exceptions under section 72(t).6

Therefore, respondent’s determination that petitioner is liable

for the 10-percent additional tax on the distribution is

sustained.

IV.   Accuracy-Related Penalty

      Section 7491(c) imposes on the Commissioner the burden of

production in any court proceeding with respect to the liability

of any individual for penalties and additions to tax.      Higbee v.

Commissioner, 116 T.C. 438, 446 (2001); Trowbridge v.

Commissioner, T.C. Memo. 2003-164, affd. 378 F.3d 432 (5th Cir.

2004).    In order to meet the burden of production under section

7491(c), the Commissioner need only make a prima facie case that

imposition of the penalty or addition to tax is appropriate.

Higbee v. Commissioner, supra at 446.

      Section 6662(a) and (b)(1) imposes a 20-percent penalty on

the portion of an underpayment attributable to negligence or

disregard of rules or regulations.      Negligence includes any

failure to make a reasonable attempt to comply with the


      6
        Whether or not the sec. 72(t) 10-percent additional tax
is a penalty or additional amount for which respondent would have
the burden of production, under sec. 7491(c), he has met that
burden by showing petitioner was not 59-1/2 when he received the
distribution. See Milner v. Commissioner, T.C. Memo. 2004-111
n.2.
                                -11-

provisions of the Internal Revenue Code.    Sec. 6662(c); sec.

1.6662-3(b)(1), Income Tax Regs.    But the section 6662(a) penalty

does not apply to any portion of an underpayment of tax 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.   Sec. 6664(c)(1).   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 the taxpayer’s proper tax liability.     Id.

     A taxpayer who makes full disclosure to an accountant or

other qualified expert and reasonably relies on the expert’s

advice in good faith is not negligent.     Conlorez Corp. v.

Commissioner, 51 T.C. 467, 475 (1968); Plotkin v. Commissioner,

T.C. Memo. 2001-71; sec. 1.6664-4(b)(1), (c), Income Tax Regs.

     The Court, on the basis of the testimony of petitioner’s

accountant, finds that petitioner was not negligent in filing his

2005 return.   Accordingly, the Court rejects respondent’s

determination of the accuracy-related penalty under section

6662(a).
                                 -12-

     Other arguments made by the parties and not discussed herein

were considered and rejected as irrelevant, without merit, or

moot.

     To reflect the foregoing,


                                             Decision will be entered

                                        for respondent with respect to

                                        the deficiency and for

                                        petitioner with respect to the

                                        accuracy-related penalty under

                                        section 6662(a).
