Texas Man Loses Retirement Loan Tax Fight

February 20, 2004 (PLANSPONSOR.com) - A Texas man has lost his battle to avoid paying taxes and penalties on the proceeds of a $14,500 retirement plan loan.

>The United States Tax Court turned away arguments by James Leonard, an employee with General Electric Railcar Services, that the loan proceeds shouldn’t be treated as a taxable distribution because he had not received the quarterly plan account statements that were mailed to him, a letter asking him to pay the delinquent loan payments, or a Form 1099-R. (For a time, the retirement plan had the wrong address for Leonard.)

>According to the Tax Court judge’s ruling, Leonard received the loan in June 2000 under terms that it would be paid back over five years in bi-weekly payments of $143.59. A month later, Leonard moved from Texarkana, Texas to North Richland Hills, Texas when he accepted a transfer to his employer’s GE Sports Lighting Systems division.

>In November 2000, GE Investment Retirement Services notified Leonard that no loan payments had been made and asked for either the delinquent payments or the whole loan amount. The company issued a 1099-R tax document to Leonard in January 2001, which deemed the entire loan as a taxable distribution.

>Leonard didn’t include the loan amount in his tax year 2000 so the IRS issued a notice of deficiency and tacked on additional taxes, including the customary 10% early distribution penalty.

>In the end, the Tax Court judge ruled that the temporary confusion over Leonard’s address didn’t matter. The key issue, according to the court: that Leonard had not made any loan payments from the time he received the loan through the end of the year, more than two quarters later.

As a result, the quarterly repayment requirement in the tax law had been violated, and the loan was properly considered a distribution. The judge also turned aside Leonard’s efforts to not be hit with the 10% early distribution penalty.

The case is Leonard v. Comm’r, T.C. Summary Opinion 2004-11 (2004). A copy of the ruling is at    http://www.ustaxcourt.gov/InOpHistoric/Leonard.SUM.WPD.pdf .