- 14 -
exceeds the investment in the contract.11 Therefore, the
distribution of $24,146 is includable in petitioner’s gross
income. Accordingly, we sustain respondent’s determination on
this issue.
B. Section 6662(a) Penalty
In the notice of deficiency, respondent determined that
petitioner is liable under section 6662(a) for an underpayment of
tax that is attributable to negligence and/or substantial
understatement of income tax.
Section 6662(a) imposes a penalty equal to 20 percent of
any underpayment of tax that is attributable to either (1)
negligence or disregard of rules or regulations or (2) a
substantial understatement of income tax. See sec. 6662(a) and
(b)(1) and (2).
The term “negligence” includes any failure to make a
reasonable attempt to comply with the provisions of the internal
revenue laws. Sec. 6662(c); sec. 1.6662-3(b)(1), Income Tax
Regs. The term “disregard” includes any careless, reckless, or
intentional disregard. Sec. 6662(c); sec. 1.6662-3(b)(2), Income
Tax Regs.
11 Petitioner’s annuity policies were tax-deferred
annuities, funded with pretax contributions. Because the
contributions to petitioner’s annuity policies were made with
pretax income, such contribution does not constitute an
investment in the contract within the meaning of sec. 72(e)(6).
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