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In December 1991, petitioner closed his IRA with T. Rowe
Price, Inc., and received a distribution in the amount of
$69,089. On their Federal income tax return for 1991,
petitioners disclosed the receipt of this amount. Specifically,
on line 16b of Form 1040, petitioners entered $69,089 as the
taxable amount of "Total IRA distributions". They included this
amount in taxable income and paid regular income tax thereon.
See sec. 1(a).
Petitioners also attached to their 1991 income tax return
Form 5329 (Additional Taxes Attributable to Qualified Retirement
Plans (Including IRA's), Annuities, and Modified Endowment
Contracts). In Part II of such form, petitioners reported
liability for the 10-percent additional tax imposed by section
72(t) in the amount of $6,909. Petitioners computed the
additional tax by multiplying the statutory rate (10 percent) by
the reported distribution ($69,089).
On December 14, 1992, respondent sent petitioners a notice
of deficiency. In the notice, respondent determined the
deficiencies for 1989 that are in issue in the present case.
Specifically, respondent determined that the Transfer Refund was
not eligible for tax-free rollover treatment under section
402(a)(5). Therefore, respondent determined that, under sections
402(a)(1) and 72, the taxable portion of the Transfer Refund
($154,446.89) was includable in petitioners' gross income for
1989 and not merely the portion thereof reported by petitioners
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