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Petitioners' 1989 Income Tax Return
On their income tax return for 1989, petitioners disclosed
the receipt of the taxable portion of the Transfer Refund; i.e.,
$227,812. Of this amount, petitioners reported that $77,812 was
taxable and that the balance, or $150,000, had been rolled over
tax-free into an IRA.
Petitioners attached Form 5329 "Return for Additional Taxes
Attributable to Qualified Retirement Plans (Including IRAs)
Annuities, and Modified Endowment Contracts" to their 1989
return. In Part II of this form, petitioners reported liability
in the amount of $7,781 for the additional tax under section
72(t); i.e., 10 percent of $77,812, the amount of the Transfer
Refund that petitioners had included in gross income.
Respondent's Deficiency Determination For 1989
In the notice of deficiency for 1989, respondent determined
that petitioner's Transfer Refund was not eligible for tax-free
rollover treatment under section 402(a)(5). Respondent also
determined that, by virtue of sections 402(a)(1) and 72, the
taxable portion of the Transfer Refund (i.e., $227,812.11) was
includable in petitioners' gross income for 1989. Accordingly,
because petitioners had previously reported that $77,812 of such
amount was taxable and had attempted to roll over only the
balance (i.e., $150,000), respondent increased petitioners'
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