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monthly payments of $253.57;4 a 15-year term; and a principal
balance of $20,119.89 at the end of the initial 5 years of the
loan. The same accountant who prepared the amortization schedule
prepared petitioner’s 1994 income tax return.
The loan was secured by petitioner’s principal residence, as
evidenced by a deed of trust which petitioner prepared and
executed in favor of the plan. Although the loan was secured by
petitioner’s residence, petitioner did not use the proceeds of
the loan to acquire his residence.
The plan was terminated during February of 1999. At that
time, petitioner satisfied the loan by recognizing as a
distribution the outstanding balance on the promissory note.
Petitioner reported the distribution together with an early
distribution penalty on his 1999 income tax return.
OPINION
A. Distributions from the Plan
Section 402(a) provides generally that distributions from a
qualified plan are taxable to the distributee, in the taxable
year of the distributee in which distribution occurs, pursuant to
section 72. Section 72(p)(1)(A) provides the general rule that
proceeds of a loan from a qualified employer plan to a plan
participant are treated as a taxable distribution to the
4 The first monthly payment reflected on the amortization
was actually $346.40, due on Jan. 1, 1995.
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