In Uncategorized on 09/28/2016 at 19:58

Football is back, so the metaphors turn toward the gridiron, as an attorney I’ll call Steve, a Tax Court regular, throws what is sometimes known as a “Hail Mary.” But Judge Cohen, playing at the Section 72(p) yardline, bats it down. The case is Dora Marie Martinez and Carlos Garcia, 2016 T. C. Memo. 182, filed 9/28/16, but it’s all about Dona Marie.

Facing foreclosure, Dora Marie borrows from her 401(b). After a couple payments (hi, Judge Holmes) she stops, overwhelmed by family problems. She gets a 1099-R, but never reports it.

Looking at a SNOD plus substantial underpayment chop, Steve argues that because the Plan kept billing Dora Marie for payments, the loan wasn’t in default. Therefore, says Steve, as the statute is clear, IRS’s regs about deemed distributions are out under Mayo.

No, says Judge Cohen: “Petitioners’ brief ignores the first five words of the text of section 72(p)(2)(C): ‘[e]xcept as provided in regulations’. These words plainly express Congress’ intent to have subparagraph (C) clarified through appropriate regulations, and petitioners offer no alternative explanation for that choice of words. See Mayo Found, 562 U.S. at 45 (‘Filling gaps in the Internal Revenue Code plainly requires the Treasury Department to make interpretive choices for statutory implementation[.]’). The regulations under section 72(p) establish the timing and amount of a deemed distribution, and this Court has heeded the final regulations for those determinations.” 2016 T. C. Memo. 182, at pp. 9-10.

But Steve is not daunted. He argues that, since Dora Marie used the money she drew to save her home from foreclosure, she gets the principal residence exception in Section 72(p)(2)(B)(ii). But all that says is that a loan to buy a principal residence need not be paid back within five years. Level payments of principal and interest are still required, and default triggers a deemed distribution. And Dora Marie wasn’t buying a principal residence.

The rationale for all this is that, since the borrower is borrowing their own money from a 401(b) (or any qualified plan), the plan administrator can’t sue them. But since the money is tax-deferred, if taken prematurely it becomes taxable.

I’d like to give Steve a Taishoff “good try,” I really would. But no; all I can do is wish him better luck next time.


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