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CCH® PENSION — 7/18/08

Taxpayer Was Required To Include SEP Distribution In Gross Income, According To Tax Court

From Spencer's Benefits Reports: A taxpayer was required to include in his gross income a $25,000 distribution from his individual retirement account-based simplified employee pension (SEP) that the taxpayer failed to roll over to another IRA. In addition, the taxpayer was liable for the IRC Sec. 72(t) 10% additional tax on premature distributions. These were the conclusions of the U.S. Tax Court in Atkin v. Commissioner (Docket No. 5266-05. T.C. Memo. 2008-93).

At the age of 45, Blake Sime Atkin requested and received a distribution of $25,000 from his SEP-IRA. Mr. Atkin, who was the sole shareholder of an incorporated law firm, deposited the distribution into his law firm’s operating account. On Jan. 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, a broker, whom Mr. Atkin instructed to roll the funds over into a new IRA. However, the broker never received the funds and, as a result, a new IRA was never opened for Mr. Atkin.

Mr. Atkin did not report the distribution on his 2002 federal income tax return, nor did he report liability for the Sec. 72(t) 10% additional tax. In 2006, Mr. Atkin segregated $25,000 from his law firm’s operating account into a separate non-interest-bearing account, but he never deposited the distribution into an IRA. Thereafter, the Internal Revenue Service assessed a tax deficiency against Mr. Atkin in the amount of $10,096, asserting that the $25,000 SEP distribution was includible in Mr. Atkin’s gross income for 2002, and that he was liable for the Sec. 72(t) 10% tax. Mr. Atkin contested the assessments in the Tax Court, but the court ruled in favor of the IRS.

In rendering its decision, the Tax Court initially explained, “Generally, a distribution from an IRA is includible in the distributee’s income in the year of distribution as provided in section 72. 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. Upon becoming aware of the failed rollover, Mr. Atkin requested that his law firm’s current bookkeeper, Heidi 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 never cashed. In an affidavit Mr. Barben stated that he never received any funds from Mr. Atkin.”

With respect to the Sec. 72(t) 10% tax, the Tax Court concluded, “Section 72(t) provides for a 10% additional tax on early distributions from a qualified retirement plan. [Mr. Atkin] stipulated that [he] 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 [Mr. Atkin] is subject to the 10% additional tax pursuant to section 72(t)(1).”

For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer's Benefits Reports.

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