We first consider whether the amounts received by petitioners from MDIF constituted "distributions" from their IRA's at First Maryland, as that term is used in section 408(d). We note that whether the payments are distributions within the meaning of section 408(d) or whether the payments constitute 98 T.C. 283">*288 insurance proceeds (as argued by petitioners), such payments constitute taxable income to petitioners. Since petitioners' basis in the accounts was zero (as provided by section 408(d)(1) and section 1.408-4(a), Income Tax Regs.), the proceeds (if they are insurance proceeds) represent gain to petitioners. Thus, while there is no question that the distributions are taxable to petitioners as either an IRA distribution or as insurance proceeds, we need to decide the nature of the payments since our conclusion may affect the applicability1992 U.S. Tax Ct. LEXIS 27">*36 of the additional tax under section 408(f).

State law creates interests and rights; Federal law determines what interests or rights shall be taxed. Morgan v. Commissioner,309 U.S. 78">309 U.S. 78, 309 U.S. 78">80 (1940); Lyeth v. Hoey,305 U.S. 188">305 U.S. 188, 305 U.S. 188">193 (1938); Heiner v. Mellon,304 U.S. 271">304 U.S. 271, 304 U.S. 271">279 (1938); Burnet v. Harmel,287 U.S. 103">287 U.S. 103, 287 U.S. 103">110 (1932). Therefore, we begin by examining the Maryland statutes under which MDIF took control of the funds to determine whether any provisions exist which altered or otherwise changed the character of the accounts.

MDIF was created by Maryland statute to replace the former Maryland Savings Share Insurance Corp. ⁴Md. Fin. Inst. Code Ann. secs. 10-102, 10-101 (1986). Funds are appropriated to MDIF "to the extent necessary to protect holders of savings accounts in member associations", and to enable MDIF "to meet its obligations under a hardship withdrawal plan or partial distribution of assets." Md. Fin. Inst. Code Ann. sec. 10-116 (1986). Section 9-708, Md. Fin. Inst. Code Ann. (1986), authorizes the appointment of a receiver for a savings and1992 U.S. Tax Ct. LEXIS 27">*37 loan association. MDIF has an absolute right to be appointed receiver of a savings and loan association insured by it. Md. Fin. Inst. Code Ann. sec. 9-709 (1986). Under Maryland law, the receiver of a savings and loan association has broad powers to operate the association's business, including all powers necessary or appropriate to liquidate the business and affairs of the savings and loan. Md. Fin. Inst. Code Ann. secs. 9-708(c) and (d), 9-702(b) (1986).

No other Maryland statute makes a more specific reference to the character of payments made by MDIF. Rather, it 98 T.C. 283">*289 appears that the receiver of a financial institution has the same authority and powers to operate the institution as did the board of directors prior to the commencement of the receivership. Cases decided by Maryland State courts interpreting or applying 1992 U.S. Tax Ct. LEXIS 27">*38 these and related provisions do not discuss the character of the payments made to depositors under the statutory scheme, i.e., whether the nature of the accounts is somehow changed due to the failure of the financial institution. The parties have not referred us to any decisions by Maryland courts concerning the character of payments from MDIF. We have not found any such cases on our own inquiry, although we have unearthed Maryland court decisions which make reference to "insurance proceeds". See, for example, Finci v. American Casualty Co.,593 A.2d 1069">593 A.2d 1069 (Md. 1991); United Wire, Metal and Machine Health and Welfare Fund v. State,512 A.2d 1047">512 A.2d 1047 (Md. 1986); Chevy Chase Savings & Loan, Inc. v. State,509 A.2d 670">509 A.2d 670 (Md. 1986). This authority is insufficient to conclude that the Maryland legislature intended to alter the character or nature of deposits in the hands of an institution's receiver. Consequently, we conclude that the nature of the IRA deposits was not converted by operation of Maryland law.

We are also unaware of any provision under Federal law which provides that the character1992 U.S. Tax Ct. LEXIS 27">*39 of the funds held in an IRA account changes under these facts. Statutes and regulations defining accounts eligible for IRA treatment do not appear to disqualify IRA's that have been transferred to State-appointed receivers or conservators following the failure of the trustee banks. See sec. 408; secs. 1.408-1 and 1.408-2, Income Tax Regs. If such were the case, we expect that Congress would have enacted, or the Secretary of the Treasury would have promulgated, provisions to ease administrative burdens caused by such a result. Further, we note that section 408(d)(3)(F) provides relief to persons whose accounts have been frozen due to the bankruptcy or insolvency of a financial institution. The statute provides that the 60-day rollover period shall not include any period during which the transferred amount is a frozen deposit. Secs. 408(d)(3)(F), 402(a)(6)(H)(i). This statute contemplates that a distribution from an IRA eligible for rollover treatment could follow the period during which access to the account was frozen. Thus, this section assumes that the 98 T.C. 283">*290 funds do not change in character since only distributions from a qualified IRA are eligible for rollover 1992 U.S. Tax Ct. LEXIS 27">*40 treatment. Accordingly, we conclude that the character of IRA deposits is not changed by the insolvency of a financial institution.

Since the payments made by MDIF as the receiver of First Maryland to petitioners were in satisfaction of the balances of their IRA's, and since we conclude that the insolvency of a financial institution and the operation of Maryland law or Federal law does not convert the nature of the IRA deposits, we accordingly hold that the MDIF payments were distributions from petitioners' IRA's and that they are includable in petitioners' income for 1986 pursuant to section 408(d).

Having decided that the amounts which petitioners received from MDIF constitute "distributions" from their IRA's, we next turn to respondent's determination that petitioners are liable for the 10-percent additional tax on early distributions under section 408(f). Section 408(f) imposes the additional tax on distributions from an IRA made before the taxpayer/owner attains the age of 59 1/2, for the year in which the distribution is includable in the taxpayer's income. Amounts which are rolled over into another IRA within 60 days of receipt are not subject to this additional tax since1992 U.S. Tax Ct. LEXIS 27">*41 they are not includable in the taxpayer's income. Sec. 408(d)(3). Petitioners argue that the additional tax should not be imposed against them because the distribution from the accounts to them was involuntary.

Section 408, including subsection (f), was added to the Code by the Employee Retirement Income Security Act of 1974 (ERISA), Pub. L. 93-406, sec. 2002(b), 88 Stat. 829, 959. In this comprehensive legislation, Congress addressed the growing number of employees whose employers did not sponsor qualified retirement plans, and set up a structure under which they could save for retirement in a tax-deferred manner. One goal of the legislation was to equalize the tax treatment of persons covered by qualified retirement plans and those who were not and who were forced to save for retirement from their income after tax. S. Rept. 93-383 (1973), 1974-3 C.B. (Supp.) 80, 106-107.

However, it appears also that Congress was concerned that taxpayers would not retain funds in their IRA's for the intended purpose, i.e., to provide tax-deferred retirement savings. The committee reports address this concern in connection with 98 T.C. 283">*291 the subsection (f) additional1992 U.S. Tax Ct. LEXIS 27">*42 tax. The Senate report states that "Premature distributions frustrate the intention for saving for retirement, and the committee bill, to prevent this from happening, imposes a penalty tax". 305 U.S. 188">Id. at 213. Although this report does not distinguish between voluntary and involuntary distributions as the basis for imposing the additional tax, later discussion confirms that pledging an IRA as security for a loan constitutes a distribution which would then be subject to the additional tax. 305 U.S. 188">Id. at 213-214. Thus, under the committee approach, a taxpayer would not have to receive funds directly from his IRA to nevertheless be subject to the additional tax.

The House committee report takes a similar approach to the purpose of legislation creating individual retirement accounts:

Your committee intends that savings accumulated through an individual retirement account, etc., are to be used for retirement purposes and should not be distributed before the participant reaches age 59 1/2 or is disabled * * *. Under the bill, if there is a premature distribution, the individual's income tax otherwise due is to be increased by 10 percent of the total amount of the premature distribution1992 U.S. Tax Ct. LEXIS 27">*43 that is included in his gross income for the taxable year. * * * [H. Rept. 93-779 (1974), 1974-3 C.B. 244, 379; fn. ref. omitted.]

The House report continues to recognize that the additional tax applies to any "deemed distribution", such as that which would occur in the event the account is pledged as security or a prohibited transaction takes place. Id. at 379, 380. Again, the House report does not discuss the additional tax in terms of "voluntary" or "involuntary" distributions, but it emphasizes the overall goal of encouraging retirement savings. The report mentions tax-free rollovers, which are possible within 60 days of receipt of a distribution, as permitting flexibility with respect to the investment of an IRA. Id. at 380.

We do not believe that the legislative history behind the enactment of ERISA and, more particularly, section 408 supports petitioners' contention that Congress did not intend the additional tax to apply in all cases where a distribution from an IRA was involuntary. What is clear is that Congress intended to encourage retirement savings and the retention of those savings for retirement use. Although petitioners' 1992 U.S. Tax Ct. LEXIS 27">*44 chosen savings institution subsequently failed and was closed, petitioners' investment was returned to them and they had the option of reinvesting in other IRA's. The imposition of the 98 T.C. 283">*292 additional tax on petitioners under these facts does not contravene legislative intent underlying section 408(f).

Petitioners cite Larotonda v. Commissioner,89 T.C. 287">89 T.C. 287 (1987), to support their position that respondent's determination should not be sustained. That case is distinguishable from the facts in this case. In Larotonda, the Internal Revenue Service (IRS) served a notice of levy against the taxpayer's Keogh account for payment of an assessed tax deficiency. In compliance with the notice, the bank withdrew the amount reflected in the notice of levy and mailed a cashier's check in that amount to the IRS. Later, respondent issued a notice of deficiency to the taxpayer determining that the taxpayer understated his income for the year in which the levy took place by not including the withdrawn funds in income, and also that he was liable for the 10-percent additional tax on early distributions from Keogh plans. ⁵ We reviewed the statutory history1992 U.S. Tax Ct. LEXIS 27">*45 behind section 72(m)(5) and concluded that Congress intended to prevent the voluntary withdrawal of funds by taxpayers prior to retirement age during low income or loss years. 89 T.C. 287">Id. at 291. The IRS notice of levy triggered the taxable event, and we were concerned that Congress did not intend the additional tax to apply to such a situation. Consequently, we ruled for the taxpayers and concluded that they were not liable for the 10-percent additional tax. ⁶ Compare Kochell v. United States,804 F.2d 84">804 F.2d 84 (7th Cir. 1986) (withdrawal of funds from debtor's IRA by his bankruptcy trustee determined to be an early distribution and 10-percent additional tax imposed).

1992 U.S. Tax Ct. LEXIS 27">*46 Petitioners here are in different circumstances than the taxpayers in 89 T.C. 287">Larotonda v. Commissioner, supra. While petitioners' receipt of their IRA funds may have been "involuntary" (their financial institution had failed and was being liquidated), petitioners had available to them an alternative: they could have rolled over the amounts into another IRA. Such alternatives did not exist for the taxpayers in 89 T.C. 287">Larotonda v. Commissioner, supra, because the funds were distributed directly to a third party. Petitioners here received the actual 98 T.C. 283">*293 distribution and still possess the funds, but have yet to reinvest them in another IRA.

Petitioners argue that respondent abused her discretion by determining the additional tax against them. To support their argument, petitioners introduced newspaper articles and other documents discussing an agreement between the IRS and the State of Maryland. The agreement permitted employees to transfer funds back into the State retirement system without any penalties. The State employees who benefited from this agreement apparently acted on erroneous information and had withdrawn amounts1992 U.S. Tax Ct. LEXIS 27">*47 from their State retirement plan and deposited them into IRA's; however, the funds were not eligible for rollover treatment and the employees found themselves liable for taxes as well as additions to tax for prohibited transactions. The IRS issued a letter ruling to the Maryland State retirement and pension systems board of trustees. It is not clear that this situation involved the same additional tax for which respondent determined petitioners are liable. It is clear, however, that these facts differ substantially from petitioners' situation. In any event, we are not bound by respondent's informal agreements with nonparty taxpayers. See Rowan Cos. v. United States,452 U.S. 247">452 U.S. 247 (1981).

We find the application of section 408(f) to petitioners proper under these facts. In light of the foregoing, respondent's determination that petitioners are liable for the additional tax under section 408(f) is sustained.

At trial, petitioners claimed that they overreported interest income received from Community Savings & Loan, which they reported as $ 911. They argue that the proper amount is $ 685.82, consisting of $ 183.32 received1992 U.S. Tax Ct. LEXIS 27">*48 from Community Savings & Loan, and $ 502.50 received from Mellon Bank (which took over Community Savings & Loan during 1986).

Petitioners did not produce any documentary evidence, including statements of interest from the banks or Forms 1099 reflecting the proper amount of interest, to substantiate the lower amount of interest income which they claim to have received during 1986. In rendering our opinions, we are unable to go beyond the record created at trial by the parties. 98 T.C. 283">*294 For the lack of supporting documentation, petitioners have failed in their burden of proof. Rule 142(a).

To reflect the foregoing and concessions by the parties,

Decision will be entered under Rule 155.