On July 8, 2020, the Tax Court issued a Memorandum Opinion in the case of Tillard v. Commissioner (T.C. Memo. 2020-101). The primary issue before the court in Tillard v. Commissioner was whether the distributions from the petitioner’s retirement account were taxable and subject to the 10% additional tax on early distributions from that account pursuant to IRC § 72(t).
Background to Tillard v. Commissioner
To finance her eldest son’s college tuition, the petitioner made two withdrawals from her IRA totaling $54,500. The petitioner was under 59-1/2 when she received the distributions. The petitioner also made withdrawals totaling $15,000 from her New York § 529 College Savings Program Account, $9,000 of which was paid directly to the college and $6,000 was paid directly to the petitioner.
Petitioner prepared and filed a timely return for 2016. She reported the entire $54,500 of IRA distributions but reported only $39,500 as being taxable. She included Form 5329 (Additional Taxes on Qualified Plans). She reported $25,000 of her distributions as being subject to the 10% additional tax and reported additional tax of $2,500.
The IRS’ automated under-reporter (AUR) unit flagged petitioner’s return because of a mismatch between her reported income and the amounts shown on the Forms 1099-R (Distributions from Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.), that the petitioner’s brokerage firm had supplied to the IRS. The AUR sent the petitioner a Notice CP2000, setting out proposed adjustments. She had 30 days to respond, but she failed to respond at all. The IRS issued a notice of deficiency determining the adjustments previously made. The petitioner finally responded to the Notice CP2000 and then filed a petition with the Tax Court.
Presumption of Determination’s Correctness in Unreported Income Cases
For the presumption of a determination’s correctness to attach in a case of unreported income, the evidence of record must “link the taxpayer with some tax-generating acts.” Llorente v. Commissioner, 649 F.2d 152, 156 (2d Cir. 1981), aff’g in part, rev’g in part 74 T.C. 260 (1980). Once the IRS makes the threshold showing, the burden shifts to the taxpayer to prove by a preponderance of the evidence that the IRS’s determinations are “arbitrary or erroneous.” Walquist v. Commissioner, 152 T.C. 61, 67-68 (2019); Tokarski v. Commissioner, 87 T.C. 74 (1986). The fact that the petitioner reported $54,500 of IRA distributions was enough to carry the day for the IRS’s burden, and the burden, therefore, shifted to the petitioner.
Taxability of Retirement Account Distributions
If a taxpayer receives distributions from a qualified retirement plan, IRC § 72(t)(1) generally provides that the tax shall be increased “by an amount equal to 10 percent of the portion of such amount which is includible in gross income.” There are several exceptions to this rule, such as where the taxpayer receiving the distribution has attained the age of 59-1/2 or is disabled. See IRC § 72(t)(2)(A)(i); IRC § 72(t)(2)(A)(iii).
Another exception applies to the extent such distributions do not exceed “qualified higher education expenses” of the taxpayer for the taxable year. IRC § 72(t)(2)(E). Qualified higher education expenses” include expenses for tuition, fees, books, supplies, and (to some degree) room and board, and include expenses that a taxpayer incurs on behalf of a child. See IRC § 72(t)(7); IRC § 529(e)(3). In order to qualify, however, such educational expenses must be incurred in the taxable year in which the distribution is received. See Duronio v. Commissioner, T.C. Memo. 2007-90; Lodder-Beckert v. Commissioner, T.C. Memo. 2005-162. Petitioner relies on this exception and has the burden of production with respect to that issue. See El v. Commissioner, 144 T.C. 140, 148 (2015).
Although the college advertised the price of attendance as $54,500, the petitioner failed to produce any evidence as to what she actually paid. This failure to substantiate the actual money expended on her son’s education forced the Tax Court to calculate through interpolation what she could prove from the evidence that she did provide; for everything else, the petitioner was liable for a 10% additional tax.
(T.C. Memo. 2020-101) Tillard v. Commissioner
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