Respondent determined a deficiency in petitioners' Federal income tax for 1994 in the amount of $2,327.
The issues for decision are: (1) Whether petitioners are required to include in their gross income any amount of a distribution from a qualified stock bonus plan; (2) whether the amount of the distribution which must be included in their gross income, if any, is subject to the section 72(t) additional tax; and (3) the amount and character of the gain that petitioners are required to include in their gross income from the subsequent sale of a portion of the distributed stock.
Some of the facts have been stipulated and are so found. The stipulations of fact and attached exhibits are incorporated herein by this reference. Petitioners resided in Terrace Park, Ohio, on the date the petition was filed in this case. All references to petitioner in the singular are to Sheri L. Villarroel.
Petitioner worked as an employee of Oral B Laboratories
(Oral B), a subsidiary of the Gillette Company (Gillette), for at least 5 years as of October 1994. By reason of her length of employment, petitioner was eligible to participate in Gillette's employee stock ownership plan (ESOP) when it was established in 1990. Gillette made automatic contributions to the ESOP on her behalf. She was not permitted to make any contributions to the ESOP on her own behalf. The contributions and the earnings on the contributions were invested in a special class of Gillette petitioners reported the entire proceeds from this sale as capital gain. They did not report the distribution from the ESOP on their 1994 return. In the statutory notice of deficiency, respondent determined that petitioner had received a taxable distribution in the amount of $9,320 which was subject to the section 72(t) 10-percent additional tax on qualified retirement plan distributions.
The first issue for decision is whether petitioners are required to include in their gross income any amount of the distribution of petitioner's ESOP account.
In general, an ESOP is defined as a stock bonus plan which meets the requirements of section 401(a). Sec. 4975(e)(7). Petitioners argue that petitioner's Gillette ESOP account was not a "retirement account" because it was "set up without her knowledge or consent", and she had "no choice in participating" in the plan. However, they introduced no documentary evidence which supports their position. To the contrary, letters received by petitioner as an ESOP participant from the plan as well as other documents submitted as evidence of her account balance convince us that the Gillette ESOP was a qualified stock bonus plan, and we so conclude.
Section 402(a) generally provides that any amount actually distributed from a section 401(a) qualified stock bonus plan shall be taxable to the distributee as provided in section 72.
Under section 72(e), the amount included in gross income equals the amount distributed to the distributee less the amount of any investment (i.e., contributions) made by the distributee. Since petitioner made no contributions to her account, the amount includable under section 72, in the absence of any exceptions, would be equal to the total amount of the distribution. However, section 402(e)(4) provides:
(4) Net Unrealized Appreciation.--(A) Amounts attributable to employee contributions.-- * * * (B) Amounts attributable to employer contributions.--For purposes of * * * [section 402(a)] and section 72, in the case of any lump sum distribution, which includes securities of the employer corporation, there shall be excluded from gross income the net unrealized appreciation attributable to that part of the distribution which consists of securities of the employer corporation. * * * (C) Determination of amounts and adjustments.--For purposes of * * * [section 402(e)(4)(A) and (B)], net unrealized appreciation and the resulting adjustments to basis shall be determined in accordance with regulations prescribed by the Secretary.
(D) Lump sum distribution.--For purposes of * * * [section 402(e)(4)], the term "lump sum distribution" has the meaning given such term by * * * [section 402(d)(4)(A)] (without regard to * * * [section 402(d)(4)(F)]).
The phrase "securities of the employer corporation" includes shares of stock of a parent or subsidiary corporation of the employer corporation. Sec. 402(e)(4)(E). The net unrealized appreciation (NUA) in the securities is the excess of the fair market value of such securities at the time of distribution over The second issue for decision is whether the amount of the distribution which must be included in petitioners' gross income is subject to the section 72(t) additional tax.
Section 72(t)(1) provides:
(1) Imposition of additional tax.--If any taxpayer receives any amount from a qualified retirement plan (as defined in section 4974(c)), the taxpayer's tax under this chapter for the taxable year in which such amount is received shall be increased by an amount equal to 10 percent of the portion of such amount which is includible in gross income.
The term "qualified retirement plan" includes any plan described in section 401(a), which includes qualified stock bonus plans such as the Gillette ESOP. Sec. 4974(c)(1). Section 72(t)(2) provides exceptions to the imposition of the additional tax with respect to certain distributions. Petitioners, however, have not proved that any exception applies in their case. We therefore hold that the portion of the distribution which we held must be included in their gross income is subject to the section 72(t) additional tax.
The third issue for decision is the amount and character of the gain petitioner must recognize from her sale of a portion of the Gillette common stock.
Section 61(a)(3) includes as gross income gains derived from dealings in property such as the sale of stock. The amount of the gain is the excess of the amount realized from the sale over the adjusted basis of the property at the time of the sale. Sec. 1001(a). The entire amount of the gain determined under section Although the precise number of shares that were sold on December 20, 1994, is not revealed in the record, petitioner testified that the fair market value of the shares at the time they were sold was approximately $75 per share. Based on her credible testimony and the fact that the shares were sold only 1 week after the distribution, at which time (i.e., the time of distribution) the fair market value was $73.19 per share, we accept her estimate of the fair market value of Gillette common stock on December 20, 1994. After dividing the proceeds of the sale ($6,114.79) by the fair market value of the stock (approximately $75), we find that petitioner sold 82 shares on December 20, 1994. Therefore, the adjusted basis in the 82