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penalty upon the ground that the underpayment of tax required to
be shown on petitioners’ 2003 return is a substantial
understatement of income tax.
Discussion
It is clear, and the parties agree, that the IRA
distribution was made from an account described in section
408(a). They further agree that the IRA distribution is subject
to tax as provided in section 72. See sec. 408(d)(1). Section
72(a) requires that the IRA distribution be included in
petitioner’s income to the extent it exceeds petitioner’s
“investment in the contract”. See secs. 72(b)(1), (c),
408(d)(2).
Following trial, the Court held the record open so that any
question regarding petitioner’s investment in the contract in the
IRA account could be resolved. As it turns out, petitioner’s
investment in the contract, within the meaning of the relevant
statutes, was zero as of the close of 2003.
At trial petitioners took the position that $40,000 of the
IRA distribution was excludable from their 2003 income because
that amount was “rolled over” into a different qualifying
account. They are mistaken on the point. Although petitioner
used $40,000 of the IRA distribution to open a time deposit
account, the transaction was not a “rollover contribution” as
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Last modified: March 27, 2008