“separation from service”. Under this option, the form stated that “any indebtedness thereon to the company will be deducted from the cash value.” Petitioner elected, in the section entitled “Federal Income Tax Withholding Election for ‘NonEligible Rollover Distributions’”, not to have Federal income tax withheld from the taxable portion of his distribution check. In response, Americo sent petitioner a letter, dated May 18, 2001, requesting petitioner to: (1) Clarify whether he wanted a transfer or a direct distribution; (2) return the policy contract or submit written acknowledgment that the policy had been lost or destroyed; and (3) submit written acknowledgment of the reason or eligibility for a direct distribution under the Technical and Miscellaneous Revenue Act of 1988 (TAMRA, Pub. L. 100-647, 102 Stat. 3342) (the options listed were: Age 59-1/2; separation from service with employer; disability; and financial hardship as defined by the I.R.C.). On the letter, petitioner marked “separation from service with employer” and “financial hardship as defined by the I.R.C.” and signed the letter on May 21, 2001. On June 7, 2001, petitioner submitted to Americo another Surrender Request form certifying that the policy had been lost or destroyed.

With regard to the second policy, and similarly with respect to the first policy, petitioner submitted to Americo a Surrender Request form electing a full cash surrender of this policy because of a “separation from service” and electing not to have Federal income tax withheld from the taxable portion of his distribution check. In response, Americo sent petitioner a letter, dated May 9, 2001, requesting petitioner to: (1) Return the policy contract or submit written acknowledgment that the policy had been lost or destroyed, and (2) submit written acknowledgment of the reason or eligibility for a direct distribution under TAMRA. On the letter, petitioner marked “financial hardship as defined by the I.R.C.” and signed the letter on May 14, 2001. Subsequently, Americo sent to petitioner another letter, dated May 25, 2001, again requesting petitioner to return the policy contract or submit written acknowledgment that the policy had been lost or destroyed. On May 30, 2001, petitioner signed the May 25, 2001 letter acknowledging that the policy contract had been lost or destroyed. On June 7, 2001, petitioner also signed the Surrender Request form certifying that the policy had been lost or destroyed.

With regard to the third policy, and similarly with respect to the first two policies, petitioner submitted to Americo a Surrender Request form signed June 2, 2001, electing a full cash surrender of this policy because of a “separation from service” and electing not to have Federal income tax withheld from the taxable portion of his distribution check. On June 7, 2001, petitioner sent to Americo another Surrender Request form certifying that the policy had been lost or destroyed. In June 2001, petitioner received checks in full settlement of the current cash surrender value of each policy as follows: Date Accumulated Loan Payoff Cash Surrender Net Account Paid Cash Value Value Value¹ Penalty Distribution² 7142446 Jun 11 $12,434³ $6,429 $6,005 $2,126 $3,879 7142859 Jun 26 10,590⁴ 8,896 1,694 858 836 7166534 Jun 11 4,700 -0- 4,700 592⁵ 3,286¹ Cash value equals accumulated cash value less loan payoff value.² Net distribution equals cash value less surrender penalty.³ On June 14, 1999, College Life sent petitioner a “loan check” of $4,711. Petitioner deposited this check into his wife’s account at First South Credit Union (FSCU). Although petitioner claims that his wife’s account is an annuity account, there is no evidence in the record to support his claim. Rather, based on the documents in the record, it appears that the account is a savings account.⁴

On June 7, 1999, College Life sent petitioner a “loan check” of $3,182. Petitioner deposited this check into his wife’s account at FSCU.⁵ This computation includes a reduction for Federal income tax withheld of $822.

At the time of the distributions, petitioner was under 59-1/2 years of age, he was not disabled, and he had been employed with Memphis City Schools continually since 1980.

Americo issued to petitioner three Forms 1099-R, Distributions From Pensions, Annuities, Retirement or ProfitSharing Plans, IRAs, Insurance Contracts, etc., for 2001 reporting the following amounts as taxable distributions: Account Distribution¹ Withholding Code 7142446 $10,308 -0-²³ 7142859 9,731 -0- 3 7166534 4,107 $822³²¹ Distribution amount equals accumulated cash value less surrender penalty.²

Distribution code 3 is defined as a distribution on account of a disability, which is not subject to the 10-percent additional tax under sec. 72(t)(2)(A)(iii).³

Distribution code 2 is defined as an early distribution with an applicable exception from the 10-percent additional tax specifically indicated that the disbursements were loans from petitioner’s respective annuity policies. Other than his bare assertions that he did not take any loans against the policies, petitioner presented no documentary evidence to demonstrate that the 1999 disbursements were anything other than loans against the policies. Moreover, petitioner presented no evidence, aside from his self-serving statements, that he did not receive the distributions as reported in the Forms 1099-R for 2001. See Tokarski v. Commissioner , 87 T.C. 74, 77 (1986) (“we are not required to accept the self-serving testimony of petitioner * * * as gospel”). Indeed, petitioner submitted signed Surrender Request forms for each policy in or about May and June 2001, the year in which he received the distributions at issue. Pursuant to petitioner’s Surrender Request forms, Americo distributed to petitioner the full cash surrender value of each annuity policy in June 2001. Thereafter, Americo issued Forms 1099-R indicating such distributions. Accordingly, we conclude that petitioner received a total distribution of $24,146 from Americo in 2001. 2. Are the distributions at issue includable in petitioner’s gross income?

As relevant to the instant case, annuities purchased by a tax-exempt educational organization for the benefit of its The amounts contributed to the annuity are excluded from the employee’s gross income at the time of the contribution, and taxation is deferred until such time when the employee receives payments under the annuity contract. Sec. 403(b)(1). The amount actually distributed under such contract is taxable to the distributee in the year in which he or she receives the payments under the exclusion percentage rule of section 72. Id.

Generally, a tax-sheltered annuity offered by a tax-exempt organization will lose the section 403(b)(1) tax deferral advantage unless, under such contract, distributions attributable to contributions made pursuant to a salary reduction agreement may be paid only: (1) When the employee: (a) attains age 591/2; (b) separates from service; (c) dies; or (d) becomes disabled; or (2) in the case of hardship. Sec. 403(b)(11). In addition, an early distribution satisfying the aforementioned requirements that is rolled over is not included in income in the year so distributed if: (1) Any portion of the balance to the credit of an employee in an annuity contract is paid to him in an eligible rollover distribution (as defined in section 402(c)(4)); and (2) the employee transfers any portion of such property he receives in such distribution to an eligible retirement plan (as Petitioner’s contention is misplaced.

In the instant case, petitioner did not satisfy the basic distribution requirements for an early distribution from a taxsheltered annuity. Although petitioner indicated in his Separation Request forms that he separated from service, the truth of the matter is that he has been employed by Memphis City Schools continuously since 1980. Consequently, we find that petitioner did not have a separation from service to permit an early distribution. In addition, we question petitioner’s statement with respect to his claim on his Separation Request forms for the first and second policy that the reason for the distribution was financial hardship. We question his statement for two reasons: (1) Petitioner has a history of falsifying the reasons for distribution under the plan (see discussion, supra );

and (2) clearly, if petitioner was suffering from financial hardship, he would have used the distribution to relieve that financial burden rather than simply attempting to roll over taxfree the early withdrawal into a purported IRA or annuity. The An understatement of income tax is “substantial” if it exceeds the greater of 10 percent of the tax required to be shown on the return, or $5,000. Sec. 6662(d)(1)(A). An “understatement” is defined as the excess of the tax required to be shown on the return over the tax actually shown on the return. Sec. 6662(d)(2)(A).

Whether the accuracy-related penalty is applied because of negligence or disregard of rules or regulations, or a substantial understatement of tax, section 6664 provides an exception to imposition of the accuracy-related penalty if the taxpayer establishes that there was reasonable cause for the understatement and that the taxpayer acted in good faith with respect to that portion. Sec. 6664(c)(1); sec. 1.6664-4(b), Income Tax Regs. The determination of whether a taxpayer acted with reasonable cause and in good faith is made on a case-by-case basis, taking into account all the pertinent facts and circumstances. Sec. 1.6664-4(b)(1), Income Tax Regs. Generally, the most important factor is the extent of the taxpayer’s effort to assess the proper tax liability for such year. Id. By virtue of section 7491(c), the Commissioner has the burden of production with respect to a taxpayer’s liability for any penalty. To meet this burden, the Commissioner must produce sufficient evidence indicating that it is appropriate to impose the relevant penalty. Higbee v. Commissioner , 116 T.C. 438, 446 (2001). Once the Commissioner meets the burden of production, the taxpayer must come forward with persuasive evidence that the Commissioner’s determination is incorrect. Id.

The taxpayer, however, bears the burden of proving that he or she acted with reasonable cause and in good faith. See sec. 6664(c)(1); see also Higbee v. Commissioner , supra at 446; sec. 1.6664-4(b)(1), Income Tax Regs.

Respondent satisfied his burden of production under section 7491(a)(1) because the record demonstrates that petitioner failed to report annuity income in the amount of $24,146 and that the understatement was attributable to such unreported income, which was substantial within the meaning of section 6662(d)(1)(A)(ii). Accordingly, we hold that respondent satisfied his burden of production for the accuracy-related penalty based on both negligence or disregard of rules or regulations and substantial understatement of income tax. On the basis of the record, a prima facie case exists for imposition of the penalty. Petitioner did not present any evidence or make any showing that respondent’s determination was in error. Moreover, petitioner did not have reasonable cause, nor did he act in good faith with respect to the understatement of income tax. Accordingly, we sustain respondent’s determination on this issue.

Conclusion

We have considered all of the other arguments made by petitioner, and, to the extent that we have not specifically addressed them, we conclude that they are without merit. Reviewed and adopted as the report of the Small Tax Case Division.

To reflect our disposition of the disputed issues, Decision will be entered for respondent.