114 T.C. No. 17 UNITED STATES TAX COURT MICHAEL G. BUNNEY, Petitioner v .

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 20713-97. Filed April 10, 2000.

Petitioner (H) and his former wife (W) were divorced in 1992. H and W were residents of California, a community property State. The judgment dissolving the marriage ordered that H’s IRA’s, which were funded with contributions that were community property, be divided equally between H and W. In 1993, H withdrew $125,000 from his IRA’s and transferred $111,600 to W. Held : sec. 408(g), I.R.C., precludes characterization of W as a 50-percent “distributee” of H’s IRA’s under sec. 408(d)(1), I.R.C.; accordingly, H, not W, is taxable on the distributions. Held , further , no portion of the $111,600 paid to W is excludable from H’s income under sec. 408(d)(6), I.R.C. Held , further , H is liable for the sec. 72(t), I.R.C., additional tax on the IRA distributions. Held , further , petitioner had a reasonable basis for his position, and thus the accuracy-related penalty for negligence under sec. 6662(a), I.R.C., applies only with respect to the adjustments conceded by H.

2. Whether petitioner is subject to the 10-percent additional tax for early distributions under section 72(t). We hold he is.

3. Whether petitioner is liable for the negligence accuracy-related penalty. We hold he is, but only as to the conceded items.

Unless otherwise indicated, section references are to the

Internal Revenue Code in effect for the year in issue. Rule references are to the Tax Court Rules of Practice and Procedure. Dollar amounts are rounded to the nearest dollar.

Background

The stipulation of facts and the exhibits submitted therewith are incorporated herein by this reference. Petitioner was born on August 23, 1944. He resided in California when the petition in this case was filed.

Petitioner was formerly married. He and his former spouse were granted a Judgment of Dissolution of Marriage (dissolution judgment) on August 17, 1992. The dissolution judgment stated: “IT IS FOUND that all of MICHAEL BUNNEY’S retirement valued at approximately $120,000 was accumulated by the parties prior to their separation and ordered to be divided equally between the parties.”

Petitioner’s retirement savings consisted of several IRA accounts. The money used to fund petitioner’s IRA’s had been community property. During 1993, petitioner withdrew $125,000 from his IRA’s and deposited the proceeds in his money market savings account. During the same year, petitioner transferred $111,600 to his former spouse in a transaction in which he acquired her interest in the family residence. Petitioner reported only the remaining $13,400 of the distributions on his 1993 Federal income tax returns.

Discussion

Issue 1. Taxability of IRA Distributions

A. Allocation of Tax Liability

We pass for the first time on the question of whether onehalf of community funds contributed to an IRA account established by an IRA participant are, upon distribution, taxable to the participant’s former spouse by virtue of the fact that the former spouse has a 50-percent ownership interest in the IRA under applicable community property law. Section 408(g), as discussed below, provides explicitly that section 408 (the statutory provision governing IRA requirements and the taxability of IRA distributions) “shall be applied without regard to any community property laws”. Thus, at first blush, it appears that the answer to our question is that the husband is taxable on 100-percent of the distribution notwithstanding the fact that his former wife owned and was entitled to receive 50 percent of the distributed proceeds. As petitioner observes, however, the Commissioner property interest of petitioner’s former spouse is recognizable for Federal income tax purposes, the distributions are taxable to petitioner.

Petitioner acknowledges that section 408(g) requires that section 408 be applied without regard to community property laws, but he contends that his former spouse’s community property interest in his IRA’s arose ab initio and thus may be taken into account to determine the taxability of the distributions. Respondent takes no position in this case on the effect of section 408(g). Instead, respondent contends that petitioner is the sole taxable distributee because he was the sole recipient of the distributions.

We disagree with respondent’s assertion that the recipient of an IRA distribution is automatically the taxable distributee. We have held that in the context of a distribution from a pension plan the term “distributee” is not necessarily synonymous with “recipient”. Estate of Machat v. Commissioner , T.C. Memo. 1998154 (citing Darby v. Commissioner , 97 T.C. 51, 64-66 (1991)). We nevertheless find that petitioner was the sole distributee in this case. The IRA’s were established by petitioner in his name, and, by reason of section 408(g), his wife is not treated as a distributee of any portion of the IRA for Federal income tax purposes despite her community property interest therein.

Recognition of community property interests in an IRA for

Federal income tax purposes would conflict with the application of section 408 in several ways. As an initial matter, an account imbued with a community property characterization would have difficulty meeting the IRA qualifications. Section 408(a) defines an IRA as a trust created or organized “for the exclusive benefit of an individual or his beneficiaries”. (Emphasis added.) An account maintained jointly for a husband and wife would be created for the benefit of two individuals and would not meet this definition. See Rodoni v. Commissioner , 105 T.C. 29, 33 (1995) (“as its name suggests, the essence of an IRA is that it is a retirement account created to provide retirement benefits to ‘an individual’”).

Secondly, recognition of community property interests would jeopardize the participant’s ability to roll over the IRA funds into a new IRA. Section 408(d)(3)(A)(i) provides that distributions out of an IRA “to the individual for whose benefit the account * * * is maintained” are not taxable under section 408(d)(1) if the entire amount received is paid into an IRA “for the benefit of such individual ” within 60 days. (Emphasis added.) The rollover of a community-owned IRA would doubly fail because both the distribution and contribution would involve two persons.

Thirdly, recognition of community property interests would affect the minimum distribution requirements for IRA’s. Section 408(a)(6) requires that distributions from an IRA account meet the requirements of section 401(a)(9). Among those requirements is that the individual for whom an IRA is maintained withdraw the balance in the IRA or start receiving distributions from the IRA by April 1 of the year following the year in which such individual reaches 70-1/2. See sec. 401(a)(9)(c). Recognition of a nonparticipant spouse’s community property interest in the IRA might require the age of the nonparticipant spouse to be taken into account in determining the commencement date for the required distributions.

In addition, treating a nonparticipant spouse as a 50percent distributee would create an asymmetry. Section 219(f)(2) provides that the deductibility of a contribution to an IRA is to be determined without regard to any community property laws. See Medlock v. Commissioner , T.C. Memo. 1978-464. Section 408(g)

appropriately balances that provision by disregarding community property laws when the IRA funds are later distributed. These sections work in tandem to insure that an IRA participant who lives in a community property State is treated as both the sole contributor and the sole distributee of IRA funds. In Powell v. Commissioner , 101 T.C. 489, 496 (1993), we indicated that the distribution of a community property interest in a retirement plan is taxed one-half to each spouse except where Congress has specified otherwise; e.g., in sections 219(f)(2), 402(e)(4)(G), and 408(g). In Karem v. Commissioner , 100 T.C. 521, 529 (1993), we held that a pension distribution subject to section 402(e)(4)(G) was taxable entirely to the participant even though his former spouse was considered a onehalf owner under State community property law. Unlike the taxpayer in Powell , the taxpayer in Karem had elected the multiyear averaging method then available under former section 402(e) for computing the tax due on lump-sum distributions. As a result, the distributions were subject to former section 402(e)(4)(G), which provided that “the provisions of this subsection * * * shall be applied without regard to community property laws.” Consistent with these opinions, we hold that section 402(g) precludes taxation of petitioner’s former spouse as a distributee in recognition of her State community property interest in petitioner’s IRA’s. Accordingly, the distributions from petitioner’s IRA’s are wholly taxable to petitioner. B. Nonrecognition Under Section 408(d)(6)

Petitioner alternatively contends that the distribution and transfer of his IRA proceeds pursuant to the dissolution judgment evidence that any exception applies in this case. Accordingly, we sustain respondent’s determination as to the section 72(t) additional tax.

Issue 3. Addition to Tax for Negligence

.

Respondent determined that petitioner is liable for the negligence accuracy-related penalty under section 6662(a). That section imposes an accuracy-related penalty equal to 20 percent of the portion of an underpayment that is attributable to negligence. Petitioner will avoid this penalty if the record shows that he made a reasonable attempt to comply with the provisions of the Internal Revenue Code, and that he was not careless, reckless, or in intentional disregard of rules or regulations. See sec. 6662(c); Accardo v. Commissioner , 942 F.2d 444, 452 (7th Cir. 1991), affg. 94 T.C. 96 (1990); Drum v. Commissioner , T.C. Memo. 1994-433, affd. without published opinion 61 F.3d 910 (9th Cir. 1995).

Negligence connotes a lack of due care or a failure to do what a reasonable and prudent person would do under the circumstances. See Allen v. Commissioner , 92 T.C. 1 (1989), affd. 925 F.2d 348 (9th Cir. 1991); Neely v. Commissioner , 85 T.C. 934, 947 (1985). The negligence accuracy-related penalty is inapplicable to any portion of an underpayment to the extent that an individual has reasonable cause for that portion and acts in good faith with respect thereto. See sec. 6664(c)(1). Such penalty is also inapplicable where a taxpayer has a “reasonable basis” for the return position taken. See sec. 1.6662-3(b), Income Tax Regs. A return position that is “arguable, but fairly unlikely to prevail in court” satisfies the reasonable basis standard. Sec. 1.6662-4(d)(2), Income Tax Regs. The negligence accuracy-related penalty is inappropriate where an issue to be resolved by the Court is one of first impression involving unclear statutory language. See Everson v. United States , 108 F.3d 234 (9th Cir. 1997); Lemishow v. Commissioner , 110 T.C. 110 (1998).

With respect to petitioner’s conceded items, petitioner claimed deductions to which he was not entitled, duplicated deductions, and omitted taxable gain from the sale of property. Petitioner also failed to report income from more than half of his IRA distributions and failed to pay the 10-percent premature distribution penalty. Petitioner contends that he is not liable for an accuracy-related penalty with respect to these items because Form 1040 is a “complicated return”, and he utilized a tax software program to prepare his return.

On this stipulated record, we conclude petitioner is liable for the negligence accuracy-related penalty with respect to the conceded items. There is no evidence that reasonable cause existed for these errors or that petitioner was not negligent. Tax preparation software is only as good as the information one under Rule 155.