§402 — Taxability of beneficiary of employees’ trust

Seaborn has not been overturned by Congress or overruled by the U.S.

at 43, we pointed out that - 28 - we have consistently been reluctant to conclude that Congress overruled existing case law when the statutory language does not compel such a conclusion and Congress has not otherwise expressly indicated that such a result should ensue.

Unlike the taxpayer in Powell, the taxpayer in Karem had elected the multi- year averaging method then available under former section 402(e) for computing the tax due on lump-sum distributions.

Thus, we are not convinced that the phrase "investment in the contract" as defined in section 72 is an established term ofart that applies throughout the Code.

Based on the language of the statutory provisions and the legislative history of those provisions, we hold that petitioner’s use of the [cash] distributions from his Keogh and IRA’s [sic] to purchase stock which he then contributed to the Smith Barney IRA does not constitute a tax-free rollover contribution under section 402(c) or 408(d)(3), respectively.

We hold that the Distribution is includable in petitioner's gross income.

We hold that Goyak & Associates may not deduct the payment, as it is not an ordinary and necessary business expense under section 162 (a) ; (2) whether the $1.4 million paid to the Millennium Plan is taxable to Mr.

We must apply them as written.- In the absence of regulatory guidance, we hold that the "amount actually distributed" means the fair market I value of what das actually distributed.

Accordingly, pursuant to section 402(e)(1)(A), petitioner is treated as the distributee of the distribution and, pursuant to section 402(a), the distribution is includable in her income.

ting adjusted gross income, see supra F. 3. The Pre-TRA 1986 Cases. The Ways and Means Committee report to accompany H.R. 3838, H. Rept. 99-426 (1985), 1986-3 C.B. (Vol. 2) 1, states, in pertinent part, as follows: B. Interest Deduction Limitations (Sec. 402 of the bill and sec. 163(d) of the Code) Present Law In general * * * % * * * Under present law, no limitation is imposed under section 163(d) on the deductibility of either interest on indebtedness incurred to purchase or carry consumption

and Adstracts Are Nonqualified Discriminatory Trusts The next step in our analysis is to determine whether Machacek, Inc.'s and Adstracts' respective plans are governed by the provisions ofsection 402(b)(4) as nonqualified discriminatory trusts holding assets ofdeferred compensation plans. Respondent argues that the SBPs for Machacek, Inc. and Adstracts should be governed by section 402(b) because both plans fail to meet the requirements set out in section 410(b). Petitioners, in turn, argue tha

and Adstracts Are Nonqualified Discriminatory Trusts The next step in our analysis is to determine whether Machacek, Inc.'s and Adstracts' respective plans are governed by the provisions ofsection 402(b)(4) as nonqualified discriminatory trusts holding assets ofdeferred compensation plans. Respondent argues that the SBPs for Machacek, Inc. and Adstracts should be governed by section 402(b) because both plans fail to meet the requirements set out in section 410(b). Petitioners, in turn, argue tha

1402(a) to read: "[T]here shall be excluded rentals from real estate and from personal property leased with the real estate (including such rentals paid in crop shares, and including payments under section 1233(2) ofthe Food Security Act of 1985 (16 U.S.C. 3833(2)) to individuals receiving benefits under section 202 or 223 ofthe Social Security Act)". Under sec. 1402(a) as amended, payments made under 16 U.S.C. sec. 3833(2) to individuals who were receiving benefits under sec. 202 or sec. 223 of

SSA sec. 223 provides for the payment of disability insurance benefits. 42 U.S.C. sec. 423 (2012). Petitioner received the payments at issue before December 31, 2007. Furthermore, petitioner does not contend, and he has not introduced any evidence to show, that he was receiving benefits under the SSA. Accordingly, the 2008 amendmen

The disputed parenthetical is not defined in whole or part in section 402 or in the corresponding regulations, nor is any definition supplied by a cross reference to another section in the Code.

3 Whether Petitioner Must Include the Cost of the Life Ínsurance Protection iå His Gross Income Respondent contends thÅt the cost of life insurance proteòtion Keady provided to petitioner during 2004 was an economic benefit and, therefore, should be included in -his gross income under section 402 (b) or section 61. Petitioner contends that neither section is applicable . We agree with respondent that dhe value of the cost of life insurance protection is included in petitioner' s gross income und

that “for purposes of the sale of the policy and the determination of any income related thereto, the policy valuation must be determined on the basis of statutory and regulatory guidance and case precedent in existence at the time of such sale and IRC § 402 is not the sole determinative provision for such determination.” Insofar as the parties have any disagreement about the applicability of the amended section 402(a) regulations, then, it would appear to be a fairly nuanced disagreement as to

ty property rights in his pension because, unlike the spouse in Eatinger, petitioner was not yet receiving pension benefits; (b) not taxing petitioner on payments he was required by California community property law to make to bis former spouse would be contrary to the assignment of income doctrine; and (c) the result in this case is determined by section 402 and the QDRO rules.

After concessions,2 the issues for decision are: (1) Whether petitioner may deduct from his gross income under section 402 one-half of the retirement distribution he received in 1998; (2) whether petitioner is liable for the 10-percent additional tax on early distributions from qualified retirement plans under section 72(t); and (3) whether petitioner is liable for the addition to tax under section 6651(a)(1) for failure to file a timely 1998 income tax ret

In construing a parallel provision governing the taxation of distributions from pension plans under section 402, we have held that a distribu-tee is generally “the participant or beneficiary who, under the plan, is entitled to receive the distribution”.

, PERSONAL REPRESENTATIVE, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent Docket No. 15578-96. Filed April 22, 1998. In 1990, D received a distribution from a qualified pension plan and reported that it was timely rolled over pursuant to sec. 402, I.R.C. In 1993, D received a distribution from the transferee plan. R determined that the 1993 distribution is taxable income to D. The 1990 distribution was not timely rolled over, and the period to assess tax for 1990 is expired. P conten

Petitioners cite section 1.402(a)-1(a)(1)(i), Income Tax Regs., which provides: Section 402 relates to the taxation of the beneficiary of an employees' trust.

For purposes ofsubsection (a) of section 402, Taxability ofBeneficiary ofEmployee's Trust, and sectiòn 72, Annuities, an alternate payee who is the spouse or former spouse ofa participant.

ot an ordinary and necessary business expense under section 162 (a) ; (2) whether the $1.4 million paid to the Millennium Plan is taxable to Mr. Goyak, as either a constructive dividend under section 301 or nonqualified deferred compensat ion under section 402 (b) . We hold that the $1.4 million paymen is taxable to Mr. Goyak as a constructive dividend; and (3) whether Mr . and Mrs . Goyak and Goyak & Associates (collectively, petitioners) are liable for 20-percent accuracy- related penalties un

Under section 402(a), a pension distribution is normally taxed to the distributee .6 Pursuant to section 402 (e)'(1) (A) , the spouse or former spouse is treated as the distributee with respect to distributions allocated to that spouse pursuant to a QDRO and such distributions therefore become taxable income to that spouse .

upport. We find accordingly. The parties appear to agree that the Vanguard distribution was from a tax-exempt employees’ trust described in section 401(a) (an employees’ trust), and, therefore, the taxability of such distribution is determined under section 402. Section - 19 - 402(a) provides, with detail not here relevant, that, unless otherwise provided in section 402, distributions by any employees’ trust are taxable to the distributee. We have held that the distributee of a distribution from

In so holding, the Court of Appeals stated: "As the purpose of the statute [section 402] is to protect and encourage retirement savings, it is plain that a distribution to an employee that occurs incident to his retirement should be entitled to rollover treatment." 86 F.3d at 381.

That ruling addresses a prior version of section 402 (allowing long-term capital gain treatment on lump-sum distributions made within one taxable year of the distributee) and states that, if there is a delay in distribution - 9 - on account of administrative problems, and the total amount of the distribution is made “in one taxable year of the employee as soon as administratively feasibl

Section 402 provides that amounts actually distributed from a qualified plan are taxable to the distributee under section 72 in the year of distribution. Sec. 402(a)(1). The Plan in the instant case is a qualified plan. Sec. 401(a). Section 72 - 4 - relates to the taxation of annuities and certain proceeds of endowment and life insurance contracts

31, 1986, will nevertheless continue to qualify, under certain limited circumstances, for the more generous 10-year (continued...) - 8 - A lump sum distribution, for purposes of section 402, is defined in section 402(e)(4)(A) as follows: (A) Lump Sum Distribution.--For purposes of this section * * * , the term "lump sum distribution" means the distribution or payment within one taxable year of the recipient of the balance to the credit of an employee which becomes payable to the recipient-- (i)

that petitioners are entitled to this preferential method of computing the tax on the Transfer Refund if the Transfer Refund constitutes a "lump sum distribution" within the meaning of section 402(e)(1)(A).10 A lump sum distribution, for purposes of section 402, is defined in section 402(e)(4)(A) as follows: (A) Lump sum distribution.--For purposes of this section * * * , the term "lump sum distribution" means the distribution or payment within one taxable year of 10 The Tax Reform Act of 1986 r

Petitioner received a distribution from a profit sharing plan.3 Since none of the exceptions in section 402 apply, section 72 governs the taxability of the distribution.

But a distributee within the meaning of section 402 is normally a plan participant or the participant’s beneficiary.

Other qualified retirement plans, such as those funded by so- called Roth contributions under section 402A, take the inverse approach to their tax benefit treatment.

324, 648. 5 Petitioners’ four children each held a 1% interest in Six-D, LLP. Petitioners reported 100% of the flowthrough amounts from Six-D, LLP, on their individual return for 2004. Cedar Valley Bird, T.C. Memo. 2013-153, at *3–4. 6 According to IRS guidance, when no petition for readjustment is filed pursuant to section 6226(a)

Section 402 addresses the taxability ofamounts distributed by an employees' trust.2 Subsection (a) ofthat section provides generally that "any amount actually distributed to any distributee by any employees' trust described in section 401(a) which is exempt from tax under section 501(a) shall be taxable to the distributee, in the taxable year ofthe

at 648, do not apply to Treetops. See Howell v. Commissioner, T.C. Memo. 2012-303, at *6 n.3; McKnight v. Commissioner, T.C. Memo. 1991-514, supplementedby 99 T.C. 180 (1992), afCd, 7 F.3d 447 (5th Cir. 1993). As a result, the partnership items reported on the Schedules K-1 Treetops issued to petitioners are subject to redetermin

at 648, do not apply to Treetops. See Howell v. Commissioner, T.C. Memo. 2012-303, at *6 n.3; McKnight v. Commissioner, T.C. Memo. 1991-514, supplementedby 99 T.C. 180 (1992), afCd, 7 F.3d 447 (5th Cir. 1993). As a result, the partnership items reported on the Schedules K-1 Treetops issued to petitioners are subject to redetermin

Section 401(a)(31)(E) and the legislative history associated with the rollover provision of section 402 address this issue in the context oftransfers from other qualified trusts.

See generally Owusu v.

Section 401(a)(31)(E) and the legislative history associated with the rollover provision of section 402 address this issue in the context of transfers from other qualified trusts.

at 648, do not apply to Desert Academy. Desert Academy qualifies as a small partnership under sec. 6231(a)(1)(B)(i) and did not elect, pursuant to sec. 6231(a)(1)(B)(ii),to have TEFRA apply. See Wadsworth v. Commissioner, T.C. Memo. 2007-46, 93 T.C.M. (CCH) 940, 943-944 (2007) ("The small partnership exception permits this Court

Ellis' IRA ceased to be an "eligible retirement plan" under section 402 and the fair market value ofthe IRA was deemed distributed to him on the first day ofthat taxable year under section 408.

at 648. - 9 - partnerships with 10 or fewer partners from the provisions ofTEFRA on an annual basis. Id. The small partnership exception doesnot apply to a partnership for a taxable year ifany partner in the partnership during that taxable year is a "pass-thru" partner as defined in section 6231(a)(9). A "pass-thru partner" mean

c. 414(p)(11) the distribution is treated in the same manner as one made pursuant to a QDRO. 4We note that generally tax-qualified plans are subject to sec. 401(a)(13), which prohibits any assignment or alienation ofthe benefits ofthe plan and that sec. 402 was added to the Code in order to create "an exception to the ERISA preemption provision with respect to these [QDRO] orders". S. Rept. No. 98-575, at 19 (1984), 1984-2 C.B. 447, 456. Sec. 402, under very explicit circumstances, (continued...

at 648, do not apply to Intelemed. Intelemed qualifies as a small partnership under sec. 6231(a)(1)(B)(i) and did not elect, pursuant to sec. 6231(a)(1)(B)(ii), to have TEFRA apply. See Wadsworthv. Commissioner, T.C. Memo. 2007-46 (holding that the designation ofa TMP on the partnership return, coupled with the absence ofany elec

respondent. MEMORANDUMFINDINGS OF FACT AND OPINION VASQUEZ, Judae: This case is a partnership-level proceeding subject to the unified audit and litigation procedures ofthe Tax Equity and Fiscal - 2 - Responsibility Act of 1982, Pub. L. No. 97-248, sec. 402, 96 Stat. at 648.1 The sole issue for decision is whether SAS Investment Partners (SAS) has a valid section 6664(c)(1) reasonable cause defense to the penalties respondent determined as a result ofa Son-of-BOSS transaction in 2001.2 FINDINGS

in 2006 or 2007. Petitioners used the alleged pension plan contributions to pay personal living expenses for themselves 7The unified audit and litigation procedures ofthe Tax Equity and Fiscal ResponsibilityAct of 1982 (TEFRA), Pub. L. No. 97-248, sec. 402, 96 Stat. at 648, do not apply to EMS. EMS qualifies as a small partnership under sec. 6231(a)(1)(B)(i) and did not elect, pursuant to sec. 6231(a)(1)(B)(ii), to have TEFRA apply. See Wadsworthv. Commissioner, T.C. Memo. 2007-46 (holding that

at 648. - 9 - partnerships with 10 or fewer partners from the provisions ofTEFRA on an annual basis. Id. The small partnership exception doesnot apply to a partnership for a taxable year ifany partner in the partnership during that taxable year is a "pass-thru" partner as defined in section 6231(a)(9). A "pass-thru partner" mean

Section 402(e)(1)(A) explicitly provides: “For purposes of subsection (a) [of section 402] and section 72, an alternate payee who is the spouse or former spouse of the participant shall be treated as the distributee of any distribution or payment made to the alternate payee under a qualified domestic relations order”.

Hasan, Michael Y. Chin, and Michael A. Sienkiewicz, for respondent. MEMORANDUM FINDINGS OF FACT AND OPINION LARO, Judge: This case is a partnership-level proceeding under the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), Pub. L. 97-248, sec. 402, 96 Stat. 648, as amended. The *Brief amicus curiae was filed by Kathryn Keneally for Trust for Architectural Easements. %ERVED APR 12 ZQ11 - 2 - TEFRA partnership, 1982 East, LLC (LLC), claimed a $6,570,000 deduction on its 2004 Form 1065, U

648, as amended. Respondent issued a notice of final partnership administrative SERVED OCT 1 9 2011 - 2 - adjustment (FPAA) on April 14, 2004, for the taxable year 2000 (tax year 2000) and issued an FPAA on April 15, 2005, for taxable year 2001 (tax year 2001) to the Heritage Organization, LLC (Heritage) . Respondent disallowed

Scheid, for respondent. MEMORANDUM FINDINGS OF FACT AND OPINION LARO, Judge: This case is a partnership-level proceeding subject to the unified audit and litigation prócedures of the Tax Equity and Fiscal Responsibility Act of 1982, Pub. L. 97-248, sec. 402, 96 Stat. 648. Shant S. Hovnanian (Mr. Hovnanian), as the tax matters partner of Rovakat, LLC (Rovak t) , petitioned the i SERVED £EP 2 0 2011 -2- Court to readjust partnership items that respondent adjusted for Rovakat's 2002 through 2004 ta

under section 6015(c) (separate liability allocation).2 The taxpayers in each of the pending cases were investors in Hoyt cattle partnerships subject to the provisions of the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), Pub. L. 97-248, sec. 402, 96 Stat. 648. The parties in each of the pending cases have agreed that this case and Malsom v. Commissioner, T.C. Memo. 2010-231, also filed today, will be used to present the penalty allocation issue to the Court.3 The parties filed a Stip

648, and amendments to TEFRA by TRA 1997. To better understand the scope of our jurisdiction over.the section 6662 penalty in partnership-level TEFRA cases, an overview of TEFRA and the TRA 1997 amendments is helpful. B. TEFRA Litigation Structure Before 1982 partnership tax issues were raised and litigated at the partner level,

402; Estate of Fournier, 902 .2d at 853. Maine also requires the intention to create a trust. Me. Rev. Stat. Ann. tit. 18-B, sec. 402, Me. cmt. (citing Gower v. Keene, 93 A. $46, 547 (Me. 1915) ("to create a trust the acts or words relied upon must be unequivocal, implying that the person holds the property as trustee for another")). The three

motions. 3EMED OCT 21 2010 -2- liability allocation).2 The taxpayers in each of the pending cases were investors in.Hoyt cattle partnerships subject to the provisions of the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), Pub. L. 97-248, sec. 402, 96 Stat. 648. The parties in each of the pending cases have agreed that this case and Andrews v. Commissioner, T.C. Memo. 2010-230, also filed today, will be used to present the penalty allocation issue to the Court. The parties chose Andrews

Applicability of the Amended Regulation s In his opening brief respondent states that the new rules in the amended section 402 (a) regulations "do not'apply in this case" .

According to the regulations promulgated under section 402, an election to treat a contribution to an IRA as a rollover contribution is made simply by designating the contribution as a rollover contribution .

Collection Agency & Serv., Inc., 486 U.S. 825, 838-839 (1988). - 14 - The parties are in agreement that petitioner’s CWSC 401(k) plan meets the requirements of section 401(a). That being so, distributions from the CWSC 401(k) plan are governed by section 402. Respondent relies on Powell v. Commissioner, 101 T.C. 489 (1993), in arguing that the funds distributed through the QDRO remained community property and should be taxed as an indirect distribution. Interpreting Darby v. Commissioner, supra

nche, for respondent. MEMORANDUM FINDINGS OF FACT AND OPINION HAINES, Judge: This case is a partnership proceeding subject to the unified audit and litigation procedures of the Tax Equity & Fiscal Responsibility Act of 1982 (TEFRA), Pub. L. 97- 248, sec. 402, 96 Stat. 628. Respondent issued a notice of final 2 partnership administrative adjustment (FPAA) to Maged F. Riad, as tax matters partner for Whitman & Ransom (W&R), determining adjustments to W&R’s Form 1065, U.S. Partnership Return of Inc

v. Lanier Collection Agency & Serv., Inc., 486 U.S. 825, 838-839 (1988). The parties are in agreement that Mr. Seidel’s CWSC 401(k) plan meets the requirements of section 401(a). That being so, distributions from the CWSC 401(k) plan are governed by section 402. Petitioner relies on Powell v. Commissioner, 101 T.C. 489 (1993), in arguing that the funds distributed through the QDRO remained community property and should be taxed as an indirect distribution. Interpreting Darby v. Commissioner, sup

ividual not later than the 60th day after the day on which he receives the payment or distribution; (ii) no amount in the account and no part of the value of the annuity is attributable to any source other than a rollover contribution (as defined in section 402) from an employee’s trust described in section 401(a) which is exempt from tax under section 501(a) or from an annuity plan described in section 403(a) (and any earnings on such contribution), and the entire amount received (including pro

648, a statute of limitations defense regarding an adjustment to a “partnership item” must be raised in a partnership level proceeding. Chimblo v. Commissioner, supra at 125; Kaplan v. United States, 133 F.3d 469, 473 (7th Cir. 1998); Crowell v. Commissioner, 102 T.C. 683, 693 (1994); Saso v. - 7 - Commissioner, 93 T.C. 730, 734

670, section 402 “shall apply to partnership taxable years beginning after the date of the enactment of this Act.” TEFRA was enacted on - 10 - September 3, 1982, and the partnership provisions of TEFRA apply to any partnership taxable year beginning after September 3, 1982. See Wolf v. Commissioner, 4 F.3d 709, 714 (9th Cir. 1993), affg. T.C. Memo. 199

941-42) that required the inclusion of the entire amount of community property (both the decedent's and the surviving spouse's shares, except for any portion traceable to the surviving spouse’s personal earnings or separate property) in the taxable estate of the first-dying spouse. The taxpayer argued that insofar as the estate t

402 was amended by sec. 521(a) of the Unemployment Compensation Amendments of 1992, Pub. L. 102-318, 106 Stat. 290, 300-310. The above-quoted language is currently found in sec. 402(e)(3). 7This provision was renumbered as sec. 1.415-2(d)(3)(i), Income Tax Regs., effective for years after Jan. 1, 1987. See T.D. 8361, 1991-2 C.B. 310, 318. - 1

648. TEFRA created a method for uniformly adjusting items of partnership income, loss, deduction, or credit that affect each partner. A partner's tax liability attributable to partnership items is determined at the partnership level, separate from the - 6 - proceedings for determining deficiencies attributable to nonpartnership

ordingly, petitioners must show that the cash distribution in question was rolled over into an eligible retirement plan within 60 days. Petitioner concedes that the $7,005.77 of the Plan distribution that was not deposited and the $50,000 that was 3 Sec. 402 as used in this opinion refers to the section in effect for distributions made prior to Dec. 31, 1992. The Unemployment Compensation Amendments of 1992, Pub. L. 102-318, sec. 521(a), 106 Stat. 290, 300, restructured and reconfigured sec. 402