Footnotes

¹ Petitioner handwrote the word “Rollover” next to the amount of $49,917.15.

² Petitioner handwrote the word “Disability” next to the amount of $14,676.

³ “Section 8” is a reference to sec. 8 of the United States Housing Authority Act of 1937, ch. 896, 80 Stat. 888, as amended by the Housing and Community Development Act of 1974, Pub. L. 93383, sec. 201(a), 88 Stat. 662, which is codified as 42 U.S.C. sec. 1437f (2000). Generally, “Section 8” refers to assisted public housing. continued through the taxable year in issue. B. Petitioner’s Investment Strategy Petitioner has maintained several IRAs with institutions such as Fidelity Investments. As relevant herein, in 1997 petitioner became dissatisfied with the 8-percent return on his IRA deposits with Fidelity Investments and, therefore, petitioner orchestrated an arrangement between himself and Marlene Hope, Inc. “to get out of Fidelity” in order to increase his investment return. At trial, petitioner described his investment strategy as follows: Years back I had been doing some real estate, buying and selling and mortgaging. I figured that’s the only place I can get a job and go back to work. * * * I came across what I thought was a good deal, a single family house costing $52,450, and I found a tenant, a Section 8 [ 3 ] tenant, who needed five bedrooms. She would gladly occupy the house, providing she got approval from the Section 8 people in Providence. This went through, and ultimately I bought the house for $52,250. I gave a $2,600 deposit, and the balance of $50,000 or thereabouts was to come from Fidelity. I spoke to Fidelity about withdrawing this money. They said as long as it doesn’t come into your hands you could roll it over. I didn’t want to pay taxes on some $50,000 in the state I was in then; have to pay taxes on it and then not have it for the future. I relied on them. The deal went through.

⁴ Petitioner’s daughter, Marlene Hope Kirshenbaum

⁵ (petitioner’s daughter), is the president and sole shareholder of MHI. MHI is engaged in the business of real estate purchasing, selling and development, residential real estate management, and real estate mortgaging. MHI maintains its corporate funds in an account with First Bank & Trust Co. MHI filed a Form 1120-A, U.S. Corporation Short-Form Income Tax Return, for the taxable year 1997 reporting total income of $9,679, total deductions of

⁶ On July 14, 1998, MHI used petitioner’s Fidelity IRA distribution to pay the Veazie property purchase price balance of $49,650. The seller conveyed title to the Veazie property to

⁷ The local Housing Authority pays MHI a monthly rent of $800 (housing payment). The tenant also reimburses MHI directly for utility expenses at $300 per month (plus any excess amount). 3. Petitioner’s Veazie Property-IRA Arrangement At trial, petitioner described his Veazie property-IRA arrangement

⁸ as follows: PETITIONER: * * * [The housing payment] was all designated as income from the Section 8 housing. * * * [The housing payment] was designated as an IRA in my account. THE COURT: * * * How were you benefitting from this then? PETITIONER: I wasn’t. * * * * * * * THE COURT: Well, isn’t an eight percent return better than no return at all? It sounds like you made a gift to your daughter or this corporation? PETITIONER: No, no, no. It’s designated as a corporation that that money is mine eventually. * * * THE COURT: But you’re telling us that this arrangement was designed for your ultimate income security?

⁹ (...continued) an additional IRA investment from me for the year 1998.

¹⁰ On the Form 1040, petitioner reported the following items: Line 7. Wages, salaries, tips, etc. $45,504.70 Line 8a. Taxable interest 328.71 Line 10. Taxable refunds * * * 573.35 Line 13. Capital gain or (loss) (3,000.00) Line 15a. Total IRA distributions [1] $49,917.15 Line 15b. Taxable amount 0 Line 17. Rental real estate * * * (2,774.20) Line 20a. Social security benefits [2] 14,676.00 Line 20b. Taxable amount 0 Line 21. Other income 200.00 Line 22. Add * * * lines 7 through 21 * * * total income 40,832.56 Line 23. IRA deduction 4,000.00 Line 28. Self-employed health insurance deduction 4,776.70 Line 32. Add lines 23 through 31a 8,776.70 Line 33. Subtract line 32 from line 22 * * * adjusted gross income 32,055.86 Line 36. * * * itemized deductions * * * 30,458.37 Line 37. Subtract line 36 from line * * * [33] 1,597.49 Line 38. * * * total number of exemptions * * * 10,800.00 Line 39. Taxable income 0 Line 56. Total tax 0

¹¹ and that she was an active participant in a qualified retirement plan. D. Respondent’s Deficiency Notice In the notice of deficiency, respondent determined that petitioner received a taxable IRA distribution of $49,997.15 on the basis that petitioner did not roll over his IRA distribution. Respondent also determined that petitioner received taxable Social Security benefits of $12,475, which was not disability income. In addition, respondent determined that both petitioner and Mrs. Kirshenbaum were not entitled to IRA contribution deductions because they did not substantiate their IRA deductions. Finally, respondent determined that petitioners are liable for an accuracy-related penalty due to a substantial understatement of income tax. Discussion In general, the determinations of the Commissioner in a notice of deficiency are presumed correct, and the burden is on the taxpayer to show that the determinations are incorrect. Rule 142(a); Welch v. Helvering , 290 U.S. 111, 115 (1933). Under

¹² Higbee v. Commissioner , 116 T.C. 438, 442 (2001) . With respect to a taxpayer’s liability for any penalty, however, section 7491(c) places on the Commissioner the burden of production. A. The IRA Distribution

¹³ Generally, any amount paid or distributed out of an IRA is includable in the recipient’s gross income as provided in section 72. Sec. 408(d)(1); sec. 1.408-4(a), Income Tax Regs. This rule does not apply, however, to any amount distributed from an IRA to the individual for whose benefit the account is maintained if the entire amount is paid into an IRA for the benefit of such individual not later than 60 days after the distribution. Sec. 408(d)(3); Schoof v. Commissioner , 110 T.C. 1, 7 (1998); sec. 1.408-4(b)(1), Income Tax Regs. Moreover, Rev. Rul. 78-406, 1978-2 C.B. 157, provides that a transfer of a participant’s IRA funds directly from one trustee

¹⁴ See Crow v. Commissioner , T.C. Memo. 2002-178; Martin v. Commissioner , T.C. Memo. 1992-331, affd. without published opinion 987 F.2d 770 (5th Cir. 1993). The revenue ruling further states: “This conclusion would apply whether the bank trustee initiates or the IRA participant directs the transfer of funds.” Rev. Rul. 78-406, 1978-2 C.B. at 157-158. In other words, the revenue ruling suggests that a trustee-totrustee transfer is tax free to the IRA owner without the need for the transfer to qualify as a rollover contribution. As relevant to the present case, an IRA is a trust created or organized in the United States for the exclusive benefit of an individual, but only if the written governing instrument creating the trust meets certain statutory requirements. Sec. 408(a); sec. 1.408-2, Income Tax Regs.; see Cobb v. Commissioner , 77 T.C. 1096, 1099 (1981), affd. 680 F.2d 1388 (5th Cir. 1982). Section 1.408-2(b), Income Tax Regs., specifically provides, in part, that the instrument creating the trust must be in writing. See Phelan v. United States , Civil Action No. 83-1997-Z (D.C. Mass. 1984) (deposit of funds in bank not sufficient to constitute an

¹⁵ At trial, petitioner adamantly asserted that his Fidelity IRA was transferred directly to his Veazie property-IRA via a trustee-to-trustee transfer and, therefore, that the transfer was not taxable. We need not, and do not, make a determination whether petitioner’s transaction was either a rollover contribution or a trustee-to-trustee transfer because we conclude that petitioner’s Veazie property-IRA is not a valid IRA within the meaning of section 408(a). In the present case, petitioner directed that his Fidelity IRA distribution be transferred to his Veazie property-IRA. The record is replete with petitioner’s conclusory and self-serving testimony regarding the purported validity of his Veazie property-IRA. However, petitioner candidly admitted at trial that no such written agreement regarding his Veazie property-IRA exists, but that such a designation exists in MHI’s corporate

¹⁶ The statute and regulations are clear that a written governing instrument is required to establish an IRA and, therefore, without a written instrument, petitioner’s purported Veazie property-IRA must fail to qualify as an IRA pursuant to section 408(a). In view of the foregoing, we hold that petitioner received a taxable IRA distribution of $49,997.15. Therefore, we sustain respondent’s determination on this issue. B. Social Security Benefits Section 86 provides for the taxability of Social Security benefits pursuant to a statutory formula. For tax purposes, Social Security disability benefits are treated in the same manner as other Social Security benefits. Sec. 86(d)(1); Thomas v. Commissioner , T.C. Memo. 2001-120. Thus, if a taxpayer’s modified adjusted gross income (MAGI) plus one-half of the

¹⁷ Assuming arguendo that petitioner in fact received Social Security disability benefits, our analysis of whether such payments are includable in petitioner’s gross income remains unchanged. As stated above, Social Security disability benefits are treated the same as other Social Security benefits. Sec. 86(d)(1); Thomas v. Commissioner ,

¹⁸ Rule 142(a)(1); see New Colonial Ice Co. v. Helvering , 292 U.S. 435, 440 (1934); Welch v. Helvering , 290 U.S. 111, 115 (1933); cf. sec. 7491(a)(2). Taxpayers are required to maintain records sufficient to substantiate their claimed deductions. See sec. 6001; sec. 1.6001-1(a), Income Tax Regs. Generally, a taxpayer is entitled to a deduction for qualified retirement contributions. Sec. 219(a); sec. 1.2191(a), Income Tax Regs. As relevant herein, section 219(e) defines a qualified retirement contribution as “any amount paid in cash for the taxable year by or on behalf of an individual to an individual retirement plan for such individual’s benefit.”

¹⁹ (...continued) as an individual retirement annuity described in sec. 408(b). See Cobb v. Commissioner , 77 T.C. 1096, 1099 (1981). Also as relevant to the present case, the maximum allowable deduction in any taxable year for a married individual is $2,000. Sec. 219(c). The amount of the deduction, however, may be limited where the taxpayer or the taxpayer’s spouse was, for any part of the taxable year, an active participant in a qualified retirement plan. Sec. 219(g)(1), (5)(A). Petitioner contends that he and Mrs. Kirshenbaum each contributed $2,000 to an existing traditional IRA for 1998. Petitioner further claims that he is entitled to an IRA deduction even if Mrs. Kirshenbaum is covered by the Pawtucket School’s pension plan because Mrs. Kirshenbaum does not have any vested rights in her pension plan. In addition, petitioner steadfastly claims that he is entitled to an IRA deduction “whether it’s from a rollover or from out of pocket.” However, there is no evidence to support petitioner’s contention that he or Mrs. Kirshenbaum made qualified retirement contributions in 1998 other than his unsubstantiated allegations. At trial, petitioner testified that he contributed to an existing IRA, but he could not clearly articulate whether such contribution was made to Fidelity Investments, another IRA account, or some other qualified retirement account. Most importantly, petitioner did not provide any substantiating

²⁰ However, the taxpayer still has the burden of proving that the Commissioner’s determination of the accuracy-related penalty is erroneous. Rule 142(a); INDOPCO, Inc. v. Commissioner , 503 U.S. 79, 84 (1992) ; Welch v. Helvering , 290 U.S. 111, 115 (1933) ; Higbee v. Commissioner , 116 T.C. 438, 446-448 (2001) ; BJR Corp. v. Commissioner , 67 T.C. 111, 131 (1976); Bebb v. Commissioner , 36 T.C. 170 (1961). Moreover, in evaluating evidence, the Court is not bound to accept as gospel the unverified and undocumented testimony of a taxpayer. Tokarski v. Commissioner , 87 T.C. 74, 77 (1986); Hradesky v. Commissioner , 65 T.C. 87, 90 (1975), affd.