Michael Leon Tilley et ux. v. Commissioner; T.C. Summ. Op. 2008-86; No. 26450-06S July 21, 2008
Company Plan Loan Wipes Out 401(k) Plan Balance

Income tax was owed on deemed distribution

10% early withdrawal penalty applied

Four years of interest and penalties on the income tax and 10% penalty owed on the deemed distribution

20% negligence penalty (the accuracy related penalty)

“…they relied on the Fidelity representative’s assertion that the distribution was not taxable…”

“Reliance on professional advice, standing alone, is not an absolute defense to negligence, but rather a factor to be considered.”

“Petitioners did not have reasonable cause to believe that the $108,026.92 distribution they received from Ms. Tilley’s plan account was not taxable. In fact, they received three Forms 1099-R that year, and we are not persuaded by petitioners’ allegation that they believed this distribution alone was not taxable.”

“Further, it was not reasonable for petitioners to rely on a Fidelity call- center representative for tax advice.”