Robert Ancira v. Commissioner

119 T.C. No. 6

• Court: United States Tax Court
• Decided: September 24, 2002
• Docket: 425-01
• Status: Unknown

Opinion

119 T.C. No. 6

UNITED STATES TAX COURT

ROBERT ANCIRA, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 425-01. Filed September 24, 2002.

P had a self-directed IRA account of which C was the custodian. P requested that C purchase common stock in X for the IRA. Although the investment in X stock was not prohibited, C, as a matter of policy, refused to purchase the stock because X was not publicly traded. P arranged for C to issue a check drawn on the IRA account made payable to X. C sent the check to P, who forwarded it to X. X issued the stock in the name of P’s IRA. P received X’s stock and delivered the stock to C. R determined that there was a distribution from the IRA to P. Held: P was a conduit for C, and there was no distribution from the IRA to P. Lemishow v. Commissioner, 110 T.C. 110 (1998), distinguished.

David Bruce Spizer, for petitioner.

Emile L. Hebert III and Louis John Zeller, Jr., for

respondent. - 2 -

OPINION

DAWSON, Judge: This case was assigned to Special Trial

Judge Carleton D. Powell pursuant to section 7443A(b)(3) and

Rules 180, 181, and 182.1 The Court agrees with and adopts the

opinion of the Special Trial Judge, which is set forth below.

OPINION OF THE SPECIAL TRIAL JUDGE

POWELL, Special Trial Judge: Respondent determined a

deficiency of $17,393 and a section 6662 accuracy-related penalty

of $3,479 in petitioner’s 1998 Federal income tax. After

concessions,2 the issue is whether a transaction involving the

purchase of stock in S.K./R.M.A., Inc. (S.K.),3 constituted a

distribution to petitioner from his individual retirement account

(IRA). At the time the petition was filed, petitioner resided in

New Orleans, Louisiana.

1 Unless otherwise indicated, section references are to the Internal Revenue Code in effect for the year in issue, and Rule references are to the Tax Court Rules of Practice and Procedure. 2 Petitioner concedes that he failed to report $87 of interest income. Respondent concedes that petitioner is not liable for the sec. 6662 penalty. 3 S.K. apparently stands for Smoothie King, which we gather was the trade name of a product. - 3 -

Background

This case was submitted fully stipulated under Rule 122, and

the applicable facts may be summarized as follows.4 During 1998

petitioner maintained a self-directed IRA. Pershing, a division

of Donaldson, Lufkin & Jenrette Securities Corp., was the

custodian of the IRA, and Hibernia Investments, L.L.C.

(Hibernia), was the investment adviser.

Petitioner could request that the funds of the IRA be

invested in specific assets (specific mutual funds, stocks,

etc.). These requests were typically made by telephone to

Hibernia, and Pershing, as custodian, would then execute the

requests. In September 1998, petitioner requested that his IRA

invest $40,000 in the stock of S.K. An employee of Hibernia

informed petitioner that although S.K. stock could be held as an

asset of the IRA, Pershing would not purchase the stock on behalf

of the IRA because the stock was not publicly traded.

Subsequently, petitioner contacted S.K. directly and was informed

that its stock was available for purchase directly from S.K.

Petitioner and Hibernia determined that the IRA could invest in

S.K. if Pershing issued a check payable directly to S.K.

Hibernia furnished petitioner with a “Distribution Request Form”

from Pershing to facilitate the issuance of the check. The form

4 The facts are not in dispute and the issue is primarily one of law. Sec. 7491, concerning burden of proof, has no bearing on this case. - 4 -

stated that “(Use of this form will result in a distribution

reportable to the IRS [Internal Revenue Service] on Form 1099-R

[Distributions From Pensions, Annuities, Retirement or Profit-

Sharing Plans, IRAs, Insurance Contracts, etc.]).”

On September 14, 1998, petitioner executed the form

requesting Pershing to issue a $40,000 check made payable to S.K.

and instructed that the check constituted an investment of his

IRA assets. Pershing sent petitioner a confirmation letter

indicating that a distribution of $40,000 had occurred on

September 15, 1998, and instructed petitioner to contact Pershing

if he had any questions. On the same day, Pershing issued the

$40,000 check payable to S.K. drawn on petitioner’s IRA account.

Pershing sent the check to petitioner. Petitioner did not

negotiate the check. Instead, petitioner forwarded the check

directly to S.K.

A “Memorandum of Corporate Stock Purchase” maintained by

S.K. reflected that, on October 29, 1998, petitioner’s IRA

purchased 714.28 shares of stock for $40,000. On December 1,

1998, S.K. issued stock certificate No. 3. The certificate

stated that “IRA fbo ROBERT ANCIRA, M.D. DLJSC. is the owner” of

714.28 shares. For reasons that are not clear, the stock was not

immediately transferred to Pershing or to petitioner. Petitioner

was unaware that Pershing did not have the stock until much

later. When petitioner learned that the stock had not been - 5 -

transferred to Pershing, which was after the notice of deficiency

was issued, he contacted S.K. and had the certificate sent to

him. Petitioner then delivered the stock to Pershing, and the

stock was accepted by Pershing and placed in petitioner’s IRA

account.

For petitioner’s 1998 Federal income tax year, Pershing

issued petitioner a Form 1099-R, indicating that a $40,000

distribution had been made to petitioner. Petitioner did not

report this $40,000 transaction on his 1998 Federal income tax

return.

Respondent determined that the check issued by Pershing on

September 14, 1998, constituted a distribution from the IRA to

petitioner and was includable in income under sections 408(d) and

72. Respondent also imposed the section 72(t) 10-percent

additional tax.

Discussion

Section 408(d)(1) provides that “any amount paid or

distributed out of an individual retirement plan shall be

included in gross income by the * * * distributee * * * in the

manner provided under section 72.” Respondent argues that

petitioner’s completion of the distribution request form and the

resulting issuance of the $40,000 check constituted a

distribution to petitioner under section 408(d)(1). - 6 -

Neither the Internal Revenue Code nor the applicable

regulations provide specific guidance on whether an amount is

considered to have been “paid or distributed out of an individual

retirement plan” in the circumstances here. If, on petitioner’s

instructions, Pershing had paid the $40,000 to S.K. for its

stock, there simply would have been an investment in an asset of

the IRA, and there would have been no question whether there had

been a distribution to petitioner. Similarly, if Pershing had

delivered the check to a broker who had purchased the shares for

petitioner’s IRA account, there would have been no distribution.

The broker would have been Pershing’s agent. The question then

is whether, when Pershing delivered the check made out to S.K. to

petitioner, who in turn delivered it to S.K. to purchase the

stock for the IRA account, there was a distribution to

petitioner. We point out that the question does not involve

whether there was a nontaxable rollover of the IRA assets within

the period specified by section 408(d)(3).

In Diamond v. Commissioner, 56 T.C. 530, 541 (1971), affd.

492 F.2d 286 (7th Cir. 1974), we noted: “We accept as sound law

the rule that a taxpayer need not treat as income moneys which he

did not receive under a claim of right, which were not his to

keep, and which he was required to transmit to someone else as a

mere conduit.” - 7 -

While the considerations in Diamond may have been different,

we believe that our observation is applicable here. From our

perspective, the soundest view of this case is that petitioner

acted as a conduit for Pershing by both arranging the stock

purchase and ensuring that the check was delivered to S.K. The

IRA was a custodial account, and Pershing was the trustee

thereof, as well as the holder of the assets in the account.

Sec. 408(h); sec. 1.408-2(d), Income Tax Regs. Petitioner

exercised his right, under the IRA agreement, to direct

investments of the IRA assets by requesting that Pershing invest

a portion of his IRA assets in S.K. stock. Because of Pershing’s

policy not to purchase securities that are not publicly traded,

petitioner acted as a conduit for Pershing in arranging the

investment. The check was payable to and negotiated by S.K. The

stock was issued to the IRA account.

Petitioner’s actions as the IRA trustee’s agent consisted of

insuring that the check was delivered to S.K. We are not aware

of any provisions of the Internal Revenue Code, applicable

regulations, or case law that prohibit a taxpayer from acting as

a conduit for an IRA trustee under the circumstances presented

here. We further note that it cannot be argued cogently that

petitioner was in constructive receipt of the assets represented

by the transaction. See Estate of Brooks v. Commissioner, 50

T.C. 585 (1968). “Its essence [of constructive receipt] is that - 8 -

funds which are subject to a taxpayer’s unfettered command and

which he is free to enjoy at his option are constructively

received by him whether he sees fit to enjoy them or not.” Id.

at 592. Specifically, under Louisiana law, petitioner was not a

holder of and could not negotiate the check. La. Rev. Stat. Ann.

secs. 10:1-201 (defining a holder); 10:3-201 (defining

negotiation); 10:3-301 (defining an individual entitled to

enforce an instrument) (West 1993). Petitioner’s actions as a

conduit for the IRA trustee in these limited circumstances

violated no prohibition regarding a taxpayer’s relationship to

his IRA and, therefore, did not result in a distribution.

Respondent argues that this transaction is controlled by

Lemishow v. Commissioner, 110 T.C. 110 (1998). In Lemishow the

taxpayer made withdrawals from retirement accounts, invested the

distributions in stock, and contributed the stock to a new IRA.

We held that this transaction could not qualify as a tax-free

rollover of qualified plan assets because the character of the

property transferred to the new IRA was different from the

character of the property distributed to the taxpayer, and,

therefore, under section 402(c)(1) the transaction did not

qualify as a rollover. Id. at 113. But, in this case, - 9 -

petitioner received no cash. Lemishow, therefore, is not on

point.5

Nor do we find any significance in the fact that S.K. did

not immediately deliver the shares to Pershing. In this regard,

we point out again that we are not dealing directly with the 60-

day limitation on a rollover of a distribution under section

408(d)(3). Rather, we are concerned with whether the delayed

transfer of the stock certificate alters our conclusion that

there was no distribution from the IRA to petitioner. At all

times, the IRA, not the petitioner, was the owner of the shares

even though it may not have been in physical possession of the

stock certificate.

Furthermore, to the extent that this fact is relevant, the

failure of S.K. to deliver the stock certificate would not

invalidate the transaction. In Wood v. Commissioner, 93 T.C. 114

(1989), we held that a bookkeeping error by the trustee of an

IRA, which resulted in a portion of a rollover distribution from

another qualified plan not being credited to the IRA account

within the applicable period, did not preclude the rollover. We

noted that “a bookkeeping error does not alter the rights and

responsibilities between parties to a transaction.” Id. at 121.

While the question here is somewhat different, we believe that

5 Similarly, respondent’s reliance on Bunney v. Commissioner, 114 T.C. 259 (2000), and Darby v. Commissioner, 97 T.C. 51 (1991), is misplaced. - 10 -

the rationale is similar. The failure here did not alter the

ownership of the stock by the IRA and certainly did not transfer

the ownership to petitioner. The worst that could be said is

that there was an oversight from which we draw no adverse

inference.

To reflect the foregoing,

Decision will be entered

under Rule 155.