Richard and Arline Muller - Page 5

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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.                                               
               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),                     
               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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