                         T.C. Memo. 2008-93



                       UNITED STATES TAX COURT



       BLAKE SIME ATKIN AND SUSAN M. ATKIN, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 5266-05.               Filed April 10, 2008.



     Blake Sime Atkin and Susan M. Atkin, pro sese.

     Richard W. Kennedy, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     VASQUEZ, Judge:    Respondent determined a $10,096 deficiency

in petitioners’ 2002 Federal income tax and a $2,019 section
                                   - 2 -

6662(a) penalty.1      After a concession,2 the issues remaining for

decision are:       (1) Whether a $25,000 Simplified Employee Pension

Individual Retirement Account (SEP-IRA) distribution received by

Blake S. Atkin (Mr. Atkin) in 2002 is includable in income in

2002 (the distribution), (2) whether the 10 percent additional

tax pursuant to section 72(t) applies to the distribution, and

(3) whether petitioners are liable for an accuracy-related

penalty pursuant to section 6662(a) for 2002.

                             FINDINGS OF FACT

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

The stipulation of facts and the attached exhibits are

incorporated herein by this reference.       At the time they filed

the petition, petitioners resided in Utah.

       In December 2002 Mr. Atkin was 45 years old when he

requested and received the distribution of $25,000 from his SEP-

IRA.       Mr. Atkin, the sole shareholder of an incorporated law

firm, deposited the distribution into his law firm’s operating

account.       On January 17, 2003, within 60 days of depositing the

distribution, Mr. Atkin instructed his law firm’s bookkeeper to

write a $25,000 check and mail it to Scott Barben (Mr. Barben), a


       1
        Unless otherwise indicated, all section references are to
the Internal Revenue Code, and all Rule references are to the Tax
Court Rules of Practice and Procedure.
       2
        Petitioners concede that $270 in wages Mr. Atkin received
from the State of Utah in 2002 are taxable.
                               - 3 -

broker who Mr. Atkin instructed to roll the funds over into a new

individual retirement account (IRA).    Mr. Barben never received

the funds.   Consequently, Mr. Barben never opened a new IRA for

Mr. Atkin.

     Petitioners did not report the distribution on their timely

filed 2002 Form 1040, U.S. Individual Income Tax Return, or their

2002 Form 1040X, Amended U.S. Individual Income Tax Return.     In

2006, Mr. Atkin segregated $25,000 from his law firm’s operating

account into a separate non-interest-bearing account.   As of the

date of trial, petitioners had not deposited the distribution

into an IRA.   Petitioners did not spend any of the distribution

on any expense that qualifies as an exception pursuant to section

72(t)(2).

                              OPINION

     Petitioners have neither claimed nor shown that they

satisfied the requirements of section 7491(a) to shift the burden

of proof to respondent with regard to any factual issue.

Accordingly, petitioners bear the burden of proof.   See Rule

142(a).
                                 - 4 -

I.   IRA Distribution Includable In Gross Income

      A.    60-Day Requirement

      Petitioners stipulated that they received a SEP-IRA

distribution of $25,000 in 2002.3     Generally, a distribution from

an IRA is includable in the distributee’s income in the year of

distribution as provided in section 72.     Sec. 408(d)(1); Schoof

v. Commissioner, 110 T.C. 1, 7 (1998).     Section 408(d)(3)

provides an exception to this rule for rollover contributions.

To qualify as a rollover contribution, an IRA distribution must

be rolled over pursuant to section 408(d)(3) within 60 days of

receipt (the 60-day requirement).     Sec. 408(d)(3); Smithsi v.

Commissioner, T.C. Memo. 1981-652; Handy v. Commissioner, T.C.

Memo. 1981-411.

      Petitioners argue that they were unaware that they did not

roll over the SEP-IRA distribution within the 60-day requirement

until they received the deficiency notice from respondent on

January 24, 2005.     Upon becoming aware of the failed rollover,

Mr. Atkin requested that his law firm’s current bookkeeper, Ms.

Heidi Atkin4 (Ms. Atkin) inquire into the status of the $25,000

check that Mr. Atkin’s prior bookkeeper had written.     In an

affidavit Ms. Atkin stated that a $25,000 check was written but



      3
        For purposes of this case, the distinctions between a
SEP-IRA and an IRA are not relevant.
      4
           Ms. Atkin is petitioners’ daughter-in-law.
                                  - 5 -

never cashed.   In an affidavit Mr. Barben stated that he never

received any funds from Mr. Atkin.

     Petitioners rely on Wood v. Commissioner, 93 T.C. 114

(1989), in arguing that the distribution is excludable from their

gross income even though they failed to meet the 60-day

requirement.    In Wood, the Court held that the taxpayers’

rollover of stock into an IRA was timely even though the IRA

trustee recorded the stock in the wrong account and did not

correct this error until approximately 4 months after the 60-day

requirement had expired.    Id.    In holding that the taxpayers had

effected a rollover of the distribution within the 60-day

requirement, the Court noted that within 60 days of the

distribution, the taxpayers had opened the IRA, delivered the

stock to the trustee, instructed the trustee to roll over the

stock into the IRA, and been assured by the trustee that the

rollover would be consummated as instructed.      Id.   In Wood the

failed rollover occurred as a result of a clerical error on the

part of the broker.   The facts in this case are distinguishable

from those in Wood.    Mr. Atkin waited over 2 years before

inquiring into the status of the distribution.     Mr. Atkin claims

that the check was lost in the mail and thus the failed rollover

was not his fault.    Whether the check was lost in the mail is not

dispositive.    Mr. Atkin should have been alert to the fact that

he never received a statement regarding the IRA account he
                                - 6 -

thought he had opened, never discussed investment strategies with

Mr. Barben, and never noticed that the $25,000 had not been

withdrawn from his law firm’s operating account.

     B.    Amendment Allowing Waiver of 60-Day Requirement

     After petitioners discovered the $25,000 check was not

cashed, they asked Internal Revenue Service (IRS) representatives

what options were available to correct the failed rollover.

According to petitioners, the IRS representatives told them that

nothing could be done to correct the failed rollover and their

only recourse would be to petition the Court regarding the

deficiency.    During petitioners’ research for trial they

discovered that section 408(d)(3)(I)5 granted the Secretary the

authority to waive the 60-day requirement.    However, as of the

date of trial, petitioners had not applied to the Secretary for a

waiver of the 60-day requirement.

     C.    Advice of IRS Representatives

     The fact that petitioners may have received inaccurate

advice from IRS representatives after the 60-day rollover period

does not alter the result herein.    See Smithsi v. Commissioner,

supra.    It is the statute which governs the determination of


     5
        Sec. 408(d)(3)(I) provides: “[t]he Secretary may waive
the 60-day requirement [on rollovers and partial rollovers] where
the failure to waive such requirement would be against equity or
good conscience, including casualty, disaster, or other events
beyond the reasonable control of the individual subject to such
requirement.”
                                   - 7 -

petitioners’ substantive tax liability, and the statements of IRS

representatives, while understandably nettlesome to petitioners,

do not alter this rule.    See Demirjian v. Commissioner, 54 T.C.

1691, 1701 (1970), affd. 457 F.2d 1 (3d Cir. 1972).

       Accordingly, we conclude the distribution petitioners

received in 2002 is taxable as ordinary income.

II.    Section 72(t)

       Section 72(t) provides for a 10-percent additional tax on

early distributions from a qualified retirement plan.

Petitioners stipulated that they did not spend the distribution

on any expense that qualifies for an exception under section

72(t) and that Mr. Atkin was only 45 at the time of the

distribution.    Accordingly, the distribution to petitioners is

subject to the 10-percent additional tax pursuant to section

72(t)(1).

III.    Accuracy-Related Penalty

       Respondent determined petitioners are liable for an

accuracy-related penalty pursuant to section 6662(a) of $2,019

for 2002.    Respondent determined that petitioners’ entire

underpayment of tax for 2002 was attributable to negligence or

disregard of rules or regulations, and/or a substantial

understatement of income tax.

       Pursuant to section 6662(a) and (b)(1) and (2), taxpayers

may be liable for a penalty of 20 percent of the portion of an
                                - 8 -

underpayment of tax (1) due to negligence or disregard of rules

or regulations, or (2) attributable to a substantial

understatement of income tax.   The term “negligence” in section

6662(b)(1) includes any failure to make a reasonable attempt to

comply with the Internal Revenue Code and any failure to keep

adequate books and records or to substantiate items properly.

Sec. 6662(c); sec. 1.6662-3(b)(1), Income Tax Regs.      Negligence

has also been defined as the failure to exercise due care or the

failure to do what a reasonable person would do under the

circumstances.   See Allen v. Commissioner, 92 T.C. 1, 12 (1989),

affd. 925 F.2d 348, 353 (9th Cir. 1991); Neely v. Commissioner,

85 T.C. 934, 947 (1985).   The term “disregard” includes any

careless, reckless, or intentional disregard.    Sec. 6662(c).     The

term “understatement” means the excess of the amount of tax

required to be shown on a return over the amount of tax imposed

which is shown on the return, reduced by any rebate (within the

meaning of section 6211(b)(2)).    Sec. 6662(d)(2)(A).   Generally,

an understatement is a “substantial understatement” when the

understatement exceeds the greater of $5,000 or 10 percent of the

amount of tax required to be shown on the return.     Sec.

6662(d)(1)(A).

     The Commissioner has the burden of production with respect

to the accuracy-related penalty.    Sec. 7491(c).   To meet this

burden, the Commissioner must produce sufficient evidence
                               - 9 -

indicating that it is appropriate to impose the penalty.    See

Higbee v. Commissioner, 116 T.C. 438, 446 (2001).     Once the

Commissioner meets this burden of production, the taxpayers must

come forward with persuasive evidence that the Commissioner’s

determination is incorrect.   Rule 142(a); see Higbee v.

Commissioner, supra at 447.   The taxpayers may meet this burden

by proving that they acted with reasonable cause and in good

faith with respect to the underpayment.    See sec. 6664(c)(1); see

also Higbee v. Commissioner, supra at 447; sec. 1.6664-4(b)(1),

Income Tax Regs.

     Respondent satisfied the burden of production.    Petitioners’

2002 income tax return contains an understatement of tax greater

than $5,000 and greater than 10 percent of the amount of tax

required to be shown on the return.    See sec. 6662(d)(1)(A).

Petitioners bear the burden of proving that with respect to the

resulting underpayment they acted with reasonable cause and in

good faith.   See sec. 6664(c)(1); Higbee v. Commissioner, supra

at 447.

     Petitioners argue that the accuracy-related penalty should

not be imposed because they were unaware that the check was not

cashed and that the IRA was not opened.    We disagree and find

that petitioners failed to exercise due care or to act as a

reasonable person would under the circumstances.    Petitioners

were allegedly unaware that the $25,000 check was not cashed
                              - 10 -

until respondent brought it to their attention after years had

passed.   Petitioners never received monthly statements from the

IRA and never followed up with Mr. Barben to make sure that he

had opened the IRA.   Further, Mr. Atkin should have been aware

that his law firm’s operating account had $25,000 more than he

thought it should have.   After Mr. Atkin told his bookkeeper to

write a check to open an IRA, he took no steps to follow up in

over 2 years.   Accordingly, we sustain respondent’s determination

as to the accuracy-related penalty pursuant to section 6662(a)

for 2002.

     In reaching all of our holdings herein, we have considered

all arguments made by the parties, and to the extent not

mentioned above, we conclude they are irrelevant or without

merit.

     To reflect the foregoing,


                                         Decision will be entered

                                    for respondent.
