E. Joan Birkey and Larry E. Birkey - Page 3




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          report income relating to 2002.                                             
                                     Background                                       
               In 2002, petitioners received interest income from three               
          banks.  In addition, on December 6, 2002, Ms. Birkey received               
          $40,433 from her Keogh account (i.e., a qualified retirement plan           
          for self-employed individuals).  On that same day, Ms. Birkey               
          used those funds to purchase U.S. Savings Bonds.  Petitioners, on           
          their 2002 joint Federal income tax return, did not include in              
          gross income the interest income and the distribution from the              
          Keogh account.                                                              
               On January 24, 2005, respondent sent petitioners a notice of           
          deficiency relating to 2002.  Respondent determined that                    
          petitioners failed to report the interest income and the                    
          distribution from the Keogh account.  On April 5, 2005,                     
          petitioners, while residing in Osage Beach, Missouri, filed their           
          petition with the Court.                                                    
                                     Discussion                                       
               Pursuant to section 61(a)(4), interest income is included in           
          gross income.  Pursuant to section 72, amounts distributed from a           
          Keogh account are included in gross income in the year of                   
          receipt.  See sec. 402(a).  Petitioners contend that purchasing             
          U.S. Savings Bonds with the distribution from the Keogh account             
          is a “qualified rollover” (i.e., the distribution would not be              
          includable in their gross income).  No such exception exists.               







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