IRA Distribution Issues and Annotations - this is a frequent IRS examination issue
Gregory T. and Kim D. Benz v. Commissioner. Dkt. No. 15867-07 , 132 TC --, No. 15, May 11, 2009.
Held: A distribution for higher education expenses is not a modification of P-W's election to receive a series of substantially equal periodic payments.
OPINION
GOEKE, Judge: Respondent determined a Federal income tax deficiency of $8,959 for 2004. The deficiency results from the imposition of the 10-percent additional tax under section 72(t) on early distributions from an individual retirement account (IRA). 1 The sole issue for decision is whether a distribution for qualified higher education expenses is an impermissible modification of a series of substantially equal periodic payments. We hold that a distribution for qualified higher education expenses is not a modification of a series of substantially equal periodic payments.
Background
This case was submitted to the Court fully stipulated pursuant to Rule 122. The stipulation of facts and the attached exhibits are incorporated herein by this reference. Petitioners resided in Ohio at the time the petition was filed.
While employed by Proctor & Gamble, petitioner wife maintained an IRA. In January 2002 after separating from her employment with Proctor & Gamble, petitioner wife made an election to receive distributions from her IRA in a series of substantially equal periodic payments. This election included an annual fixed distribution of $102,311.50 to be made on January 15 each year for a period based on petitioner wife's life expectancy. On or before January 15, 2004, petitioner wife received a $102,311.50 distribution from her IRA in accordance with her election to receive a series of substantially equal periodic payments. During 2004 petitioner wife received two additional distributions from the IRA: A $20,000 distribution in January 2004 and a $2,500 distribution in December 2004. Petitioner wife had not attained age 59-1/2 when she received these additional distributions. Petitioner wife used the $20,000 and $2,500 distributions for qualified higher education expenses as defined in section 72(t)(7) relating to her son's college expenses. For 2004 petitioners spent $35,221.50 in qualified higher education expenses for their son.
Petitioners timely filed Form 1040, U.S. Individual Income Tax Return, for 2004, reporting the $124,811.50 in distributions from petitioner wife's IRA during 2004. Petitioners did not report the 10-percent additional tax for an early withdrawal from an IRA pursuant to section 72(t) with respect to any portion of the distributions. Petitioners attached Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts, to their return and reported that the withdrawals were not subject to any additional tax under section 72(t)(2).
On June 22, 2007, respondent issued a notice of deficiency to petitioners for 2004, determining a Federal income tax deficiency of $8,959. Respondent determined that $89,590 of the $124,811.50 distributed from petitioner wife's IRA was subject to the 10-percent additional tax imposed by section 72(t)(1) on early distributions. Respondent determined that the exception for qualified higher education expenses under section 72(t)(2)(E) applied to the remaining $35,221.50.
Discussion
In general, amounts distributed from an IRA are includable in gross income as provided in section 72. Sec. 408(d)(1). Section 72(t) provides for a 10-percent additional tax on early distributions from qualified retirement plans, unless the distribution falls within a statutory exception. Sec. 72(t)(1) and (2). Section 72(t)(2)(A)(iv) provides an exception from the 10-percent additional tax for distributions that are "part of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the employee or the joint lives (or joint life expectancies) of such employee and his designated beneficiary". 2 If the series of substantially equal periodic payments is modified within 5 years of the date of the first distribution (other than by reason of death or disability), then the 10-percent additional tax will be imposed retroactively on prior distributions made before the taxpayer attains age 59-1/2 (referred to as the recapture tax), plus interest. Sec. 72(t)(4)(A)(ii)(I). The recapture tax also applies when a modification occurs after the initial 5-year period but before the employee has attained age 59-1/2. Sec. 72(t)(4)(A)(ii)(II).
Independent from the equal periodic payment exception, section 72(t)(2)(E) provides an exception from the 10-percent additional tax for distributions for qualified higher education expenses. Section 72(t)(2)(E) provides:
Distributions from individual retirement plans for higher education expenses. --Distributions to an individual from an individual retirement plan to the extent such distributions do not exceed the qualified higher education expenses (as defined in paragraph (7)) of the taxpayer for the taxable year. Distributions shall not be taken into account under the preceding sentence if such distributions are described in subparagraph (A), (C), or (D) or to the extent paragraph (1) does not apply to such distributions by reason of subparagraph (B).
By specifically creating an exception for distributions used for higher education expenses, Congress recognized "it is appropriate and important to allow individuals to withdraw amounts from their IRAs for purposes of paying higher education expenses without incurring an additional 10-percent early withdrawal tax." H. Rept. 105-148, at 330 (1997), 1997-4 (Vol. 1) C.B. 319, 652. Distributions for qualified higher education expenses serve one of numerous purposes Congress identified as deserving special treatment. Those purposes include paying a tax levy, paying for medical care, paying for health insurance during periods of unemployment, and purchasing a first home. Sec. 72(t)(2)(A)(vii), (B), (C), (D), and (F).
Petitioner wife's two additional distributions for qualified higher education expenses were made within 5 years of the first annual periodic payment and before petitioner wife had attained age 59-1/2. Respondent maintains that the two additional distributions constitute an impermissible modification to the periodic payment election under section 72(t)(4). According to respondent, the substantially equal periodic payment exception is no longer effective for the 2004 distribution. Respondent concedes that $35,221.50 of the total 2004 distributions satisfied the exception for qualified higher education expenses under section 72(t)(2)(E) and is not subject to the 10-percent additional tax.
The sole issue for decision is whether a distribution that qualifies for a statutory exception to the 10-percent additional tax under section 72(t)(1) constitutes a modification of a series of substantially equal periodic payments triggering the recapture tax under section 72(t)(4). Respondent argues that an employee who elects a series of substantially equal periodic payments is not allowed any further distributions within the first 5 years of the election irrespective of whether the distribution would qualify for another statutory exception to the section 72(t) tax unless the employee dies or becomes disabled. Petitioners argue that a distribution used for a purpose that qualifies for a statutory exception is not a modification of a series of substantially equal periodic payments that triggers the recapture tax under section 72(t)(4). In Arnold v. Commissioner, 111 T.C. 250, 255-256 (1998), the Court held that an additional distribution that did not qualify for a statutory exception was an impermissible modification to a series of substantially equal periodic payments. In Arnold, we stated: "In order to avoid the section 72(t) tax, petitioners must show that the November 1993 distribution falls within one of the exceptions provided under section 72(t)(2)(A). They have not done so." Id. at 255. Today we also recognize that distributions under section 72(t)(2)(E), enacted in 1997 and after the year in issue in Arnold, do not trigger the section 72(t) additional tax where the taxpayer receives the distribution within 5 years after the taxpayer begins receiving distributions under a series of substantially equal periodic payments.
The last sentence of section 72(t)(2)(E) recognizes that an employee may qualify for more than one statutory exception to the 10-percent additional tax. It provides that the amount of distributions attributable to higher education expenses does not take into account distributions described in subparagraph (A), (B), (C), or (D). Sec. 72(t)(2)(E). If a distribution qualifies for more than one statutory exception, the employee is exempt from the 10-percent additional tax on the basis of the applicable exception under subparagraph (A), (B), (C), or (D) and need only rely on the higher education expense exception for the additional amount of the distribution. Subparagraph (A) includes the periodic payments exception. Similar language is included in subparagraphs (B) (relating to distributions for medical expenses) and (F) (relating to distributions for first home purchases). Sec. 72(t)(2)(B) and (F). A modification occurs for purposes of section 72(t)(4) when the method of determining the periodic payments changes to a method that no longer qualifies for the exception. The legislative history explains the 5-year prohibition of modifications to a series of substantially equal periodic payments as follows:
if distributions to an individual are not subject to the tax because of application of the substantially equal payment exception, the tax will nevertheless be imposed if the individual changes the distribution method prior to age 59 1/2 to a method which does not qualify for the exception. * * * For example, if, at age 50, a participant begins receiving payments under a distribution method which provides for substantially equal payments over the individual's life expectancy, and, at age 58, the individual elects to receive the remaining benefits in a lump sum, the additional tax will apply to the lump sum and to amounts previously distributed.
In addition, the recapture tax will apply if an individual does not receive payments under a method that qualifies for the exception for at least 5 years, even if the method of distribution is modified after the individual attains age 59 1/2. Thus, for example, if an individual begins receiving payments in substantially equal installments at age 56, and alters the distribution method to a form that does not qualify for the exception prior to attainment of age 61, the additional tax will be imposed on amounts distributed prior to age 59 1/2 as if the exception had not applied.
H. Conf. Rept. 99-841 (Vol. II), at II-457 (1986), 1986-3 C.B. (Vol. 4) 1, 457 (emphasis added). The method of calculating petitioner wife's annual periodic payments will not change as a result of the additional distributions for higher education expenses. Congress enacted the recapture tax under section 72(t)(4) to apply to prior distributions received under a series of periodic payments where the employee fails to adhere to the payment schedule elected for at least 5 years. There is no indication that Congress intended to disallow all additional distributions within the first 5 years of the election to receive periodic payments.
The legislative purpose of the 10-percent additional tax under section 72(t) is that "Premature distributions from IRAs frustrate the intention of saving for retirement, and section 72(t) discourages this from happening." Dwyer v. Commissioner, 106 T.C. 337, 340 (1996) (citing S. Rept. 93-383, at 134 (1973), 1974-3 C.B. (Supp.) 80, 213). This legislative purpose is not frustrated where an employee receives distributions for more than one of the purposes that Congress has recognized as deserving special treatment.
We hold that a distribution that satisfies the statutory exception for higher education expenses is not a modification of a series of substantially equal periodic payments. Because we find that a distribution for higher education expenses is not a modification, the 5-year rule prohibiting modifications except in the case of death or disability is not violated.
To reflect the foregoing,
Decision will be entered for petitioners.
1 Unless otherwise indicated, all section references are to the Internal Revenue Code, and all Rule references are to the Tax Court Rules of Practice and Procedure.
2 The Internal Revenue Service has provided three examples of methods to determine a series of substantially equal periodic payments for purposes of sec. 72(t)(2)(A)(iv). See Notice 89-25, Q&A-12, 1989-1 C.B. 662, 666, modified by Rev. Rul. 2002-62, sec. 2.01, 2002-2 C.B. 710. Rev. Rul. 2002-62, sec. 2.02(e), 2002-2 C.B. at 711, provides specific instances that would cause a modification to occur. They focus on tax-free additions to or distributions from the account and are not applicable here.
Carl Robert Wagenknecht, Jr. v. Commissioner. Dkt. No. 8293-07 , TC Memo. 2008-288, 96 TCM 472, December 22, 2008.
A high school vice principal and licensed attorney who advanced shopworn arguments characteristic of tax-defier rhetoric that has been universally rejected by the courts was liable for a 10-percent additional tax under Code Sec. 72(t)(1) because he received a distribution from a qualified retirement plan. None of the exceptions set forth in Code Sec. 72(t)(2) applied. He was liable for an addition to tax under Code Sec. 6651(a)(1) for failing to file a federal income tax return. His failure to file was not due to reasonable cause and was due to willful neglect. The penalty under Code Sec. 6651(a)(2) for failure to timely pay was also imposed because his failure to pay was not due to reasonable cause. Further, he engaged in behavior warranting the imposition of a penalty under Code Sec. 6673(a). His conduct convinced the court that he maintained the proceeding primarily for delay and to advance his frivolous and groundless arguments.
MEMORANDUM FINDINGS OF FACT AND OPINION
VASQUEZ, Judge: Respondent determined deficiencies of $13,438, $11,533, and $16,014 in petitioner's income tax for 2002, 2003, and 2004, respectively. Respondent also determined additions to tax pursuant to section 6651(a)(1) and (2) for 2004. 1
The issues for decision are: (1) Whether petitioner is liable for the deficiencies; (2) whether petitioner is liable for an addition to tax for failing to file a Federal income tax return for 2004; (3) whether petitioner is liable for an addition to tax for failing to pay Federal income tax for 2004; (4) whether petitioner is liable for a 10-percent additional tax pursuant to section 72(t) for 2004; and (5) whether petitioner engaged in behavior warranting the imposition of a penalty pursuant to section 6673(a).
FINDINGS OF FACT
Some of the facts have been stipulated and are so found. The stipulation of facts and the attached exhibits are incorporated herein by this reference. At the time he filed the petition, petitioner resided in Ohio.
Petitioner did not file a Form 1040, U.S. Individual Income Tax Return, for 2002, 2003, or 2004. On or about December 29, 2004, for 2002 and 2003, respectively, and March 28, 2005, for 2004, petitioner mailed to respondent virtually identical "affidavits", 2 approximately 50 pages long, titled "Notice of Affidavit Statement of :Carl R.: Wagenkneckt, Jr. In Protest of Internal Revenue Code Section 6011 For Year Period Ending December 31," 2002, 2003, or 2004. The aforementioned three affidavits contained frivolous and groundless arguments, including (but not limited to):
1. The frivolous affidavits were submitted to respondent under coercion and duress;
2. petitioner was neither an "employee" nor "personnel" under a contract of employment for personal services with the "United States" or [with] any "regulated public utility" as "employer" as the foregoing quoted terms are specially defined and used under the "Public Salary Tax Act of 1939";
3. petitioner was not a "person," nor "individual," nor "U.S. person," nor "U.S. individual," nor "taxpayer," nor "non-resident alien," nor any other "legal entity" "made liable for" or "subject to" any "internal revenue tax" or "U.S. Individual Income Tax";
4. petitioner received no "wages" includable in "gross income";
5. petitioner was not domiciled "within" the borders and jurisdiction of the "United States;" "a State" or "a political subdivision thereof;" the District of Columbia; any Federal Enclave; or Federal territory or possession;
6. petitioner was not a "United States Person;"
7. arguments regarding the Sixteenth Amendment made petitioner not liable for taxes;
8. Title 26 is not a positive law applicable to the people of the United States;
9. petitioner was born "within" the outer borders and jurisdiction of the compact dejure [sic] state of Ohio, one of the compact states of the United States of America;
10. petitioner is an American national; a national of the grand republic of the United States; a Citizen of the United States as the term "Citizen" is used in Article I, Section 2, Clause b of the Constitution of the United States of America; a Citizen of the compact dejure [sic] state of Ohio, as the term "Citizen" is used in the Constitution compact of the dejure [sic] state of Ohio;
11. petitioner is a natural free-born man in propria persona and consequently of freeman legal character; is one of the sovereign people of America by the grace of his God and Creator, and consequently of sui juris legal character; is a member of the grantor class entitled to grant power to a republican form of government; am a child of God, created by God, not by any government authority;
12. the Christian appellation of petitioner is ":Carl R.: Wagenkneckt, Jr." and any intentional abbreviation or misspelling of said Christian appellation is legally vague and consequently voidable by petitioner, or any "unauthorized capitalization" is in violation of the peonage laws;
13. petitioner was not domiciled in the District of Columbia, a Federal Enclave, or Federal territory or possession of the United States; petitioner was domiciled "without" the "United States"; and petitioner was not a "person," nor "individual," nor "U.S. person," nor "U.S. individual," nor "taxpayer," nor "non-resident alien" nor any other "legal entity" "made liable for" or "subject to" any "internal revenue tax" as used under Title 26 U.S.C. and Title 26 C.F.R.;
14. petitioner was not a "person" required to either "make such returns" or "keep such records" nor made subject to the requirements of Title 26 U.S.C. § 6001;
In summary petitioner claimed that he was not obligated to file a Federal income tax return and that he did not have Federal income tax liabilities for 2002, 2003, and 2004.
During 2002, 2003, and 2004 petitioner was a vice principal of a high school and a licensed attorney. Petitioner earned wages of $67,691, $66,542, and $69,107 from the Akron Public Schools in 2002, 2003, and 2004, respectively. In 2004 petitioner also received $488 in interest and $9,942 from qualified retirement plans.
Pursuant to section 6020(b), respondent filed Federal income tax returns for petitioner for 2002, 2003, and 2004 ( section 6020(b) returns).
OPINION
I. Burden of Proof
As a general rule, the taxpayer bears the burden of proving the Commissioner's deficiency determinations incorrect. Rule 142(a); Welch v. Helvering [ 3 USTC ¶1164], 290 U.S. 111, 115 (1933). Section 7491(a), however, provides that if a taxpayer introduces credible evidence and meets certain other prerequisites, the Commissioner shall bear the burden of proof with respect to factual issues relating to the liability of the taxpayer for a tax imposed under subtitle A or B of the Code.
We found petitioner's testimony to be evasive, vague, conclusory, and/or questionable. Petitioner introduced no credible evidence regarding his income for 2002, 2003, or 2004, and he introduced no evidence to establish that he met the prerequisites of section 7491(a). Accordingly, petitioner bears the burden of proof.
II. Section 61
Section 61(a) defines gross income as all income from whatever source derived.
A. Income From Akron Public Schools
Gross income includes compensation for services. Sec. 61(a)(1). In 2002, 2003, and 2004 petitioner earned wages of $67,691, $66,542, and $69,107, respectively, from the Akron Public Schools.
B. Interest Income
Gross income includes interest. Sec. 61(a)(4). In 2004 petitioner received $488 in interest.
C. Pension/Annuity Income
Gross income includes income from annuities and pensions. Sec. 61(a)(9), (11). In 2004 petitioner received $9,942 from qualified retirement plans.
D. Conclusion
In the petition, a status report, at trial, and on brief, petitioner advanced shopworn arguments characteristic of tax-defier rhetoric, see Custer v. Commissioner, T.C. Memo. 2008-266, that has been universally rejected by this and other courts, Wilcox v. Commissioner [ 88-1 USTC ¶9387], 848 F.2d 1007 (9th Cir. 1988), affg. [ Dec. 43,889(M)], T.C. Memo. 1987-225; Carter v. Commissioner [ 86-1 USTC ¶9279], 784 F.2d 1006, 1009 (9th Cir. 1986). We shall not painstakingly address petitioner's assertions "with somber reasoning and copious citation of precedent; to do so might suggest that these arguments have some colorable merit." Crain v. Commissioner [ 84-2 USTC ¶9721], 737 F.2d 1417, 1417 (5th Cir. 1984). On the basis of the foregoing, we sustain respondent's determination of petitioner's unreported income.
III. Section 72(t)
Section 72(t) provides for a 10-percent additional tax on early distributions from a qualified retirement plan. However, the 10-percent additional tax does not apply to certain distributions. Section 72(t)(2) excepts qualified retirement plan distributions from the 10-percent additional tax if the distributions are, inter alia: (1) Made on or after the date on which the employee attains the age of 59-1/2; (2) made to a beneficiary (or to the estate of the employee) on or after the death of the employee; (3) attributable to the employee's being disabled within the meaning of section 72(m)(7); (4) part of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the employee or joint lives (or joint life expectancies) of such employee and his designated beneficiary; or (5) dividends paid with respect to stock of a corporation which are described in section 404(k). Sec. 72(t)(2)(A). A limited exception is also available for distributions made to an employee for medical care expenses. See sec. 72(t)(2)(B).
Petitioner has the burden of proving his entitlement to any of these exceptions. See Bunney v. Commissioner [ Dec. 53,839], 114 T.C. 259, 265 (2000); see also supra p. 5. The evidence does not establish that any of the exceptions set forth in section 72(t)(2) applies in this case. Thus, the distributions to petitioner in 2004 are subject to the 10-percent additional tax under section 72(t)(1).
IV. Additions to Tax
Section 7491(c) provides that the Commissioner shall bear the burden of production with respect to the liability of any individual for additions to tax. "The Commissioner's burden of production under section 7491(c) is to produce evidence that it is appropriate to impose the relevant penalty". Swain v. Commissioner [ Dec. 54,732], 118 T.C. 358, 363 (2002); see also Higbee v. Commissioner [ Dec. 54,356], 116 T.C. 438, 446 (2001). If a taxpayer files a petition alleging some error in the determination of the penalty, the taxpayer's challenge generally will succeed unless the Commissioner produces evidence that the penalty is appropriate. Swain v. Commissioner, supra at 364-365. The Commissioner, however, does not have the obligation to introduce evidence regarding reasonable cause or substantial authority. Higbee v. Commissioner, supra at 446-447.
A. Section 6651(a)(1)
Respondent determined that petitioner is liable for an addition to tax pursuant to section 6651(a)(1) for 2004. Section 6651(a)(1) imposes an addition to tax for failure to file a return on the date prescribed (determined with regard to any extension of time for filing) unless such failure is due to reasonable cause and not due to willful neglect.
Petitioner stipulated he did not file a return for 2004. Thus, petitioner must come forward with evidence sufficient to persuade the Court that respondent's determination is incorrect or that an exception applies. See Rule 142(a); Welch v. Helvering, 290 U.S. at 115; see also Higbee v. Commissioner, supra at 447. Petitioner presented no evidence that his failure to file was due to reasonable cause and not due to willful neglect. We hold that petitioner is liable for the addition to tax pursuant to section 6651(a)(1).
B. Section 6651(a)(2)
Section 6651(a)(2) provides for an addition to tax where payment of tax is not timely "unless it is shown that such failure is due to reasonable cause and not due to willful neglect". At trial petitioner stipulated a substitute return for 2004 that satisfied section 6020(b). The section 6020(b) return for 2004 shows a $16,014 deficiency and a balance due of $2,615.
On the basis of the evidence, we find that petitioner did not pay on time a portion of his tax for 2004. Petitioner did not present evidence indicating that his failure to pay was due to reasonable cause and not due to willful neglect. See Higbee v. Commissioner, supra at 446-447 (stating that the taxpayer bears the burden of proof regarding reasonable cause). Accordingly, on this issue we sustain respondent's determination.
V. Section 6673(a)(1)
Section 6673(a)(1) authorizes this Court to penalize up to $25,000 a taxpayer who institutes or maintains a proceeding primarily for delay or pursues in this Court a position which is frivolous or groundless.
Petitioner's conduct has convinced us that he maintained this proceeding primarily for delay and to advance his frivolous and groundless arguments. At trial the Court advised petitioner that his arguments were frivolous and groundless.
Petitioner's actions have resulted in a waste of limited judicial and administrative resources that could have been devoted to resolving bona fide claims of other taxpayers. See Cook v. Spillman [ 87-1 USTC ¶9121], 806 F.2d 948 (9th Cir. 1986). Petitioner's insistence on making frivolous tax-defier arguments indicates an unwillingness to respect the tax laws of the United States. Accordingly, we shall require petitioner to pay a penalty of $5,000 to the United States pursuant to section 6673.
To reflect the foregoing,
Decision will be entered for respondent.
1 Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.
2 We use the term "affidavit" for convenience only.
David A. Hughes v. Commissioner. Dkt. No. 4486-07 , TC Memo. 2008-249, 96 TCM 314, November 3, 2008.
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An individual failed to include in income distributions from a qualified retirement plan as required under Code Secs. 61 and 72. Further, he was subject to additional tax on the distribution under Code Sec. 72(t) because he received the distribution while under the age of 59 1/2 and failed to provide any evidence that he was excepted from the additional tax. --CCH.
P claimed numerous deductions on his 2001 Federal income tax return and did not include distribution income in his taxable income. R determined a deficiency, an addition to tax pursuant to sec. 6651(a)(1), I.R.C., and an accuracy-related penalty pursuant to sec. 6662(a), I.R.C.
Held: P is liable for the deficiency, the addition to tax, and the accuracy-related penalty.
MEMORANDUM FINDINGS OF FACT AND OPINION
WHERRY, Judge: This case is before the Court on a petition for redetermination of a Federal income tax deficiency, an addition to tax under section 6651(a)(1), and a penalty under section 6662(a) that respondent determined with respect to petitioner's 2001 tax year. 1 The issues for decision are:
(1) Whether petitioner is entitled to $40,936 of deductions for unreimbursed employee business expenses, tax preparation fees, tax advice, job search expenses, and medical and dental expenses claimed on Schedule A, Itemized Deductions;
(2) whether petitioner is entitled to deductions of $6,410 for expenses related to pension and profit-sharing plans and $2,888 for depreciation and section 179 expenses, claimed on Schedule C, Profit or Loss From Business;
(3) whether the $18,312 in distributions that petitioner received from Wescom Credit Union is includable in his taxable income;
(4) whether petitioner is liable for the 10-percent additional tax under section 72(t);
(5) whether petitioner is liable under section 6651(a)(1) for a $3,161.75 addition to tax; and
(6) whether petitioner is liable under section 6662(a) for a $2,557.80 accuracy-related penalty.
FINDINGS OF FACT
Some of the facts have been stipulated, and the stipulated facts and accompanying exhibits are hereby incorporated by reference into our findings. At the time he filed his petition, petitioner resided in California.
Petitioner filed his 2001 Form 1040, U.S. Individual Income Tax Return, with respondent on March 3, 2004. On his return, petitioner reported receiving $18,312 in distributions from Wescom Credit Union in 2001. Petitioner also claimed deductions on Schedule A and Schedule C.
On Schedule A petitioner deducted, inter alia, (1) $35,256 for unreimbursed employee business expenses, specifically $20,159 for vehicle expenses, $4,450 for nonovernight travel expenses, $7,225 for overnight travel expenses, $1,654 for other business expenses, and $1,768 for meals and entertainment expenses; (2) $625 for tax preparation fees; (3) $1,500 for tax advice; and (4) $2,536 for job search expenses. On Schedule C he deducted, among other things, $6,410 for expenses related to pension and profit-sharing plans and $2,888 for depreciation and section 179 expenses.
On November 28, 2006, respondent issued a notice of deficiency to petitioner for his 2001 tax year. Petitioner filed a timely petition with this Court on February 26, 2007. Therein, he states that (1) "the company I was employed by was purchased by another company and has been unable to supply T & E policy for the year in question"; (2) he "had gone through a divorse [sic] and spouse at the time will not supply copies of important tax info in their care"; and (3) "Several personnal [sic] address changes as well as divorse [sic] and time passed caused some information to be misplaced". He also asserts that "any penalties due for any tax that may be due should be waived since there was no malace [sic] simply errors". A trial was held on May 7, 2008, in Los Angeles, California.
OPINION
I. Whether Petitioner is Entitled to Deductions Claimed on Schedules A and C
Deductions are a matter of legislative grace, and taxpayers bear the burden of proving entitlement to any claimed deductions. INDOPCO, Inc. v. Commissioner [ 92-1 USTC ¶50,113], 503 U.S. 79, 84 (1992). As part of their burden, taxpayers must substantiate the amount of their claimed deductions. A taxpayer is required to maintain records sufficient to establish the amount of any deduction claimed. Sec. 6001; sec. 1.6001-1(a), Income Tax Regs.
Even when a taxpayer is unable to substantiate the amount of a deduction, the Court may still allow the deduction, or a portion thereof, if there is an evidentiary basis for doing so. Cohan v. Commissioner [ 2 USTC ¶489], 39 F.2d 540, 543-544 (2d Cir. 1930); Vanicek v. Commissioner [ Dec. 42,468], 85 T.C. 731, 742-743 (1985). In those instances, the Court may estimate the allowable expense, bearing heavily if appropriate against the taxpayer whose inexactitude is of his or her own making. Cohan v. Commissioner, supra at 544. The Cohan rule does not apply, however, with respect to deductions that are subject to the strict substantiation requirements of section 274. Sec. 1.274-5T(a), Temporary Income Tax Regs., 50 Fed. Reg. 46014 (Nov. 6, 1985).
Petitioner claimed a variety of deductions on his 2001 return, each of which has its own specific rules and requirements. Although we will address each of them in turn, petitioner is ultimately unable to establish entitlement to any of them because he has failed to provide any substantiating evidence.
A. Unreimbursed Employee Business Expenses
Section 162(a) authorizes a deduction for "all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business". An expense is ordinary if it is normal or customary within a particular trade, business, or industry. Deputy v. du Pont [ 40-1 USTC ¶9161], 308 U.S. 488, 495 (1940). An expense is necessary if it is "appropriate and helpful" for the development of the business. Welch v. Helvering [ 3 USTC ¶1164], 290 U.S. 111, 113 (1933). Services performed as an employee generally constitute a trade or business for purposes of section 162(a). O'Malley v. Commissioner [ Dec. 45,008], 91 T.C. 352, 363-364 (1988). However, if an employee's expenses are reimbursable by his or her employer, those expenses are not necessary and cannot be deducted. Orvis v. Commissioner [ 86-1 USTC ¶9386], 788 F.2d 1406, 1408 (9th Cir. 1986), affg. [ Dec. 41,537(M)], T.C. Memo. 1984-533.
As mentioned, certain business expenses described in section 274(d) are subject to strict substantiation rules that supersede the Cohan rule. Sanford v. Commissioner [ Dec. 29,122], 50 T.C. 823, 827-828 (1968), affd. [ 69-2 USTC ¶9491], 412 F.2d 201 (2d Cir. 1969); sec. 1.274-5T(a), Temporary Income Tax Regs., supra. Section 274(d) applies to: (1) Any traveling expense, including meals and lodging away from home; (2) entertainment, amusement, and recreational expenses; (3) any expense for gifts; or (4) the use of listed property, as defined in section 280F(d)(4), including passenger automobiles. To deduct such expenses, the taxpayer must substantiate by adequate records or evidence sufficient to corroborate the taxpayer's own testimony: (1) The amount of the expenditure or use, which includes mileage in the case of automobiles; (2) the time and place of the travel, entertainment, or use; (3) its business purpose; and in the case of entertainment, (4) the business relationship to the taxpayer of each expenditure or use. Sec. 274(d) (flush language).
B. Tax Preparation Fees and Tax Advice
Section 212(3) provides that "there shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year * * * in connection with the determination, collection, or refund of any tax."
C. Job Search Expenses
Section 162(a) allows a taxpayer to deduct expenses incurred in searching for new employment within the same trade or business. See Primuth v. Commissioner [ Dec. 29,985], 54 T.C. 374, 378-379 (1970); see also Murata v. Commissioner [ Dec. 51,448(M)], T.C. Memo. 1996-321. A deduction is not allowed for expenses incurred while seeking employment in a new trade or business. See Frank v. Commissioner [ Dec. 19,702], 20 T.C. 511, 513-514 (1953).
D. Employer Contributions to Pension or Profit-Sharing Plans
An employer's contributions to pension or profit-sharing plans are not deductible under section 404 unless they are deductible under section 162 as ordinary and necessary expenses. See Edwin's, Inc. v. United States [ 74-2 USTC ¶9669], 501 F.2d 675, 679 (7th Cir. 1974); sec. 1.404(a)-1(b), Income Tax Regs. Section 162(a)(1) allows as a deduction "a reasonable allowance for salaries or other compensation for personal services actually rendered".
E. Depreciation and Section 179 Expense
A taxpayer may elect to deduct as a current expense the cost, within certain dollar limitations, of any section 179 property that is used in an active trade or business and placed in service during the taxable year. Sec. 179(a), (b), (d)(1); see sec. 1.179-4(a), Income Tax Regs. The election must specify the total section 179 expense deduction claimed and the portion of that deduction allocable to each specific item. Sec. 179(c)(1); sec. 1.179-5(a), Income Tax Regs. The taxpayer must make a separate election for each taxable year, and such election must be made on the first income tax return for the taxable year to which the election applies. Sec. 179(c)(1)(B); sec. 1.179-5(a), Income Tax Regs. The taxpayer must also maintain records reflecting how and from whom the section 179 property was acquired and when it was placed in service. Sec. 1.179-5(a), Income Tax Regs. A taxpayer who fails to make the election is not entitled to section 179 treatment. See Jackson v. Commissioner, T.C. Memo. 2008-70; Visin v. Commissioner [ Dec. 55,269(M)], T.C. Memo. 2003-246, affd. 122 Fed. Appx. 363 (9th Cir. 2005).
F. Petitioner Failed to Substantiate the Amounts of the Deductions He Claimed on Schedules A and C
There is no evidence of record to substantiate any of petitioner's claimed deductions. Petitioner admits as much. At trial, he claimed that his accountant has the necessary evidence. In his petition, he asserts that his former spouse or the acquirer of his former employer has the evidence or that it was simply misplaced. Even assuming that substantiating evidence exists and is in the possession of third parties, petitioner has had ample time to collect it but has failed to do so. If the third parties were uncooperative, Rule 147 permitted petitioner to issue subpoenas duces tecum that would have required third parties to appear at trial and bring written records. In addition, there is no indication that petitioner made an election under section 179.
Petitioner sought a continuance only days before the trial session ostensibly to permit him to locate the documents necessary to substantiate his deductions. Because petitioner had in respondent's opinion not cooperated in the pretrial process, respondent opposed the continuance. The Court then denied the continuance but set the trial for a date 9 days later to provide petitioner time to locate his documents. Nevertheless, no documents were forthcoming at the trial. Accordingly, our conclusion is inescapable: Petitioner has failed to demonstrate entitlement to any of the deductions at issue. 2
II. Whether the $18,312 in Distributions Petitioner Received from Wescom Credit Union Should be Included in His Taxable Income
Section 63(a) generally defines taxable income as gross income minus deductions. Section 61(a) in turn specifies that, "Except as otherwise provided", gross income includes "all income from whatever source derived". Generally, income from annuities and pensions is included in gross income. Sec. 61(a)(9), (11). Section 72 further provides that distributions from qualified retirement plans are included in gross income. See secs. 72(a), 402(a).
In addition, a taxpayer who receives a distribution from a qualified retirement plan before attaining the age of 59-1/2 is generally subject to an additional 10-percent tax pursuant to section 72(t)(1) on the amount of the distribution unless the taxpayer can prove that an exception under section 72(t)(2) applies. See Bunney v. Commissioner [ Dec. 53,839], 114 T.C. 259, 265-266 (2000).
The Commissioner's determination of a deficiency is generally presumed correct, and the taxpayer bears the burden of proving that the determination is improper. See Rule 142(a); Welch v. Helvering, 290 U.S. at 115. Although section 7491(a) may shift the burden of proof to the Commissioner in specified circumstances, petitioner has not satisfied the prerequisites under section 7491(a)(1) and (2) for such a shift.
Petitioner concedes that he "[received] distributions from pensions and annuities in the amount of $18,312.00 in the 2001 taxable year from Wescom Credit Union." On his Federal income tax return, he reported receiving that amount as "Total IRA distributions", but he did not include it in his gross income. At trial, he stated that he invested the money into his business and that his accountant had told him that he would have losses to offset the distribution income. These are not reasons to exclude the distributions from petitioner's gross income, and petitioner has not otherwise met his burden of proving that respondent's determination of a deficiency is improper. Accordingly, we will sustain the deficiency determined by respondent with respect to the $18,312 in distributions received from Wescom Credit Union in 2001.
We will also sustain respondent's imposition of a 10-percent additional tax under section 72(t) for petitioner's early distributions from a qualified retirement plan. Petitioner does not dispute that he was under the age of 59-1/2 when he received the distributions and has not otherwise disputed the additional tax or shown that an exception under section 72(t)(2) applies.
III. Section 6651(a)(1) Addition to Tax
Respondent determined that petitioner was liable for an addition to tax under section 6651(a)(1). Section 6651(a)(1) imposes an addition to tax for failure to file a timely return unless the taxpayer proves that such failure is due to reasonable cause and not willful neglect. See United States v. Boyle [ 85-1 USTC ¶13,602], 469 U.S. 241, 245 (1985). Pursuant to section 7491(c), respondent has the burden of production with respect to this addition to tax and is therefore required to "come forward with sufficient evidence indicating that it is appropriate to impose the relevant penalty." See Higbee v. Commissioner [ Dec. 54,356], 116 T.C. 438, 446 (2001).
Petitioner concedes that he filed his 2001 Federal income tax return on March 3, 2004 --well beyond the April 15, 2002, due date. Moreover, he has not disputed the addition to tax or presented any evidence to suggest that his failure to file timely was due to reasonable cause. Accordingly, we shall sustain respondent's imposition of the addition to tax under section 6651(a)(1).
IV. Section 6662 Penalty
Respondent determined that petitioner was liable for a penalty under section 6662(a). Respondent bears the burden of production with respect to petitioner's liability for that penalty. See sec. 7491(c). This means that respondent "must come forward with sufficient evidence indicating that it is appropriate to impose the relevant penalty." Higbee v. Commissioner, supra at 446.
Section 6662(a) imposes an accuracy-related penalty of 20 percent of any underpayment that is attributable to one of the causes listed in subsection (b). One such cause is negligence or disregard of rules or regulations, with negligence including "any failure by the taxpayer to keep adequate books and records or to substantiate items properly." Sec. 6662(b)(1); sec. 1.6662-3(b)(1), Income Tax Regs. Another cause is any substantial understatement of income tax, defined for individuals as an understatement that exceeds the greater of (1) 10 percent of the tax required to be shown on the return for the taxable year or (2) $5,000. Sec. 6662(b)(2), (d)(1)(A).
There is an exception to the section 6662(a) penalty when a taxpayer can demonstrate (1) reasonable cause for the underpayment and (2) that the taxpayer acted in good faith with respect to the underpayment. Sec. 6664(c)(1). Regulations promulgated under section 6664(c) provide further that the determination of reasonable cause and good faith "is made on a case-by-case basis, taking into account all pertinent facts and circumstances." Sec. 1.6664-4(b)(1), Income Tax Regs.
Respondent asserts that petitioner is liable for the section 6662 penalty "because there has been a substantial understatement of income tax" and "because he acted with negligence and disregard of the rules." Respondent explains that petitioner "has failed to provide respondent with evidence that he maintained books or records".
On his 2001 return, petitioner indicated that the total tax due was $2,133. Respondent determined a deficiency of $12,789. Petitioner's understatement of tax is substantial under section 6662(d)(1)(A) because it exceeds $5,000 and is greater than 10 percent of the amount required to be shown on the return. Although petitioner argues in his petition that the penalties should be waived because he did not act with malice, he has not shown that he acted with reasonable cause or in good faith, which is the proper statutory test. Accordingly, we sustain respondent's determination that petitioner is liable for the section 6662(a) penalty for the 2001 tax year.
The Court has considered all of petitioner's contentions, arguments, requests, and statements. To the extent not discussed herein, we conclude that they are meritless, moot, or irrelevant.
To reflect the foregoing,
Decision will be entered for respondent.
1 All section references are to the Internal Revenue Code of 1986, as amended an in effect for the tax year at issue. The Rule references are to the Tax Court Rules of Practice and Procedure.
2 At trial, the parties mentioned that petitioner may have reported his $6,410 deduction for pension and profit-sharing plans incorrectly and that he may have intended to claim that amount as a deduction for rental expenses for business, machinery, vehicles, and equipment. There is no evidence to substantiate that deduction either.
In addition, as a result of petitioner's failure to demonstrate entitlement to the deductions described above, a portion of his deduction for medical and dental expenses must be disallowed. Sec. 213(a) allows for the deduction of personal medical and dental expenses to the extent that they exceed 7.5 percent of the taxpayer's adjusted gross income (AGI). In light of our conclusion above, petitioner's AGI and 7.5-percent floor must be adjusted upward, which precludes petitioner from deducting the entire amount of medical and dental expenses reported on his 2001 return
Early distribution, additional tax. --Distributions From Retirement Plans: Early distribution, additional tax
The 10% tax against early withdrawals of pension and profit-sharing plan investments was properly treated as a penalty, not a tax, by the U.S. Bankruptcy Court in a Chapter 11 voluntary bankruptcy proceeding. The penalty was punitive in nature rather than compensatory, making the IRS's claim for payment of the tax from the bankrupt taxpayer ineligible for priority status vis-a-vis the claims of other creditors for payment from the taxpayer.
L.F. Cassidy, Jr., CA-10, 93-1 USTC ¶50,006, 983 F2d 161.
An estate in bankruptcy was liable for the 10% additional tax on amounts distributed to the estate from an IRA and a pension account of the debtor before the debtor reached age 59 1/2. After the petition in bankruptcy was filed, the estate succeeded to the IRA, which was not a taxable event. When the trustee subsequently invaded the IRA, the estate became liable for the penalty as well as for the income tax.
R.L. Kochell, CA-7, 86-1 USTC ¶9757, 804 F2d 84.
There was no premature distribution where instead of transferring funds from one investment fund to another, a bank erroneously transferred the proceeds to the taxpayer, who promptly forwarded the proceeds to the new fund.
K.L. Doing, 58 TC 115, Dec. 31,349 (Acq.).
A taxpayer constructively received the amount in his Keogh account when it was levied upon to pay his tax debt and the amount was includible in his income for that year. However, he was not liable for the premature distribution penalty since the withdrawal was not voluntary.
J. Larotonda, 89 TC 287, Dec. 44,115.
An individual was not liable for the 10% addition to tax despite early withdrawal from his IRA. The withdrawal resulted from a decree of forfeiture, and he never had control over or the use of the IRA distributions. He also had no realistic choice in the matter and did not voluntarily make the withdrawal. The reasoning in J. Larotonda, 89 TC 287, Dec. 44,115, above, was adopted.
F.A. Murillo, 75 TCM 1564, Dec. 52,515(M), TC Memo. 1998-13 (Acq.). Aff'd on another issue, CA-2 (unpublished opinion), 99-1 USTC ¶50,170.
A distribution to a participant in an employer's defined benefit pension plan, which was made solely on account of the plan's termination, was subject to the 10% additional income tax. The distribution was made before the employee reached age 59 1/2, and there was no evidence that it qualified under any other exception to imposition of the additional tax.
K.L. Clark, 101 TC 215, Dec. 49,278.
The transfer of a husband's lump-sum distribution from his qualified profit-sharing plan into individual retirement accounts established in his wife's name did not qualify as a tax-free rollover. The transfer subjected the husband to the 10% tax on an early distribution.
M. Rodoni, 105 TC 29, Dec. 50,765.
A stock trader suffering from clinical depression was not disabled within the definition of Code Sec. 72(m)(7) and was liable for the 10% additional tax on a premature withdrawal from his individual retirement account. The trader did not meet the definition of disabled because he was not prevented by his illness from engaging in any substantial gainful activity. The term substantial gainful activity was equated with an actual and honest objective of making a profit, which the trader was determined to have had, even though he lost a large part of the IRA withdrawal.
R.J. Dwyer, 106 TC 337, Dec. 51,340.
An individual was liable for the 10-percent additional tax on an early pension distribution because he could not establish that he qualified for an exception to the tax on account of being disabled. Although the individual received disability payments from an insurer, his uncorroborated testimony that he suffered from depression was insufficient to prove that he was disabled for purposes of the additional tax. No doctors testified on his behalf and no affidavits from medical professionals were presented.
W. Kowsh, 96 TCM 123, Dec. 57,525(M), TC Memo. 2008-204.
The 10% penalty on premature distributions applied to recipients who had not yet attained the age 59 1/2where the distribution proceeds were not rolled over into a qualified IRA. The IRA was not qualified because the purported trustee was not eligible to serve in that capacity. A letter from the IRS to the individual approved an amendment to the form of the IRA trust; it did not approve him to serve as the IRA trustee. Furthermore, the letter was addressed to a financial services company, not to the individual or the trust.
G.J. Schoof, 110 TC 1, Dec. 52,501.
A married couple failed to carry their burden of proving that the lump-sum distribution they received, upon termination of the 38-year-old account executive's employment, was from a source other than a qualified retirement plan to which a 10% additional tax on early distributions was applicable. The taxpayer did not roll over any part of the distribution received into an IRA or other qualified plan, nor did he introduce evidence to support his contentions that the money came from either a discriminatory plan or an incentive stock option plan.
T.M. Riffey, 64 TCM 289, Dec. 48,379(M), TC Memo. 1992-426.
A laid-off employee who elected to defer distribution of his benefits from a qualified retirement plan was liable for the 10% early distribution penalty. Although he made the irrevocable election before the penalty was enacted, the provision was effective by the time the taxpayer received his deferred distribution. The taxpayer fell outside of the fail-safe period provided by the transitional rules that accompanied the penalty and, therefore, could not avoid the additional 10% tax.
R.V. Panos, 64 TCM 542, Dec. 48,435(M), TC Memo. 1992-474.
Similarly.
H.D. Dean, 65 TCM 2757, Dec. 49,055(M), TC Memo. 1993-326.
The recipient of two distributions from his profit-sharing plan representing his balance in the plan was not subject to the early withdrawal penalty on the first distribution, which was treated as received prior to the effective date of the early withdrawal penalty. However, he was subject to the penalty with respect to the second distribution because it was received after the effective date of the penalty. The first distribution was treated as having been received in the year of the taxpayer's separation from service under a transitional rule.
D.A. Samonds, 66 TCM 235, Dec. 49,175(M), TC Memo. 1993-329.
An individual who suffered from depression was liable for the 10% penalty on premature distributions from qualified plans that he received over a two-year period. Although the individual's depression had diminished his ability to earn a living, he had not established that his condition was irremediable.
P.A. Kovacevic, 64 TCM 1076, Dec. 48,580(M), TC Memo. 1992-609.
An individual who received a distribution from the qualified retirement plan of a company that discontinued its operations was liable for the 10% additional tax on early distributions. The tax applied even though the distribution was subject to the "separate" tax under Code Sec. 402(e). The word "separate" appears under Code Sec. 402(e) to distinguish it from the tax imposed under Code Sec. 402(a). The tax on early distributions under Code Sec. 72(t) is an "additional tax" because it is a tax in addition to the taxes imposed under Code Sec. 402.
G. Bullard, 65 TCM 1844, Dec. 48,845(M), TC Memo. 1993-39.
A couple who utilized funds from their individual retirement account to make a down payment on a home intended for use as a personal residence during their retirement years received a taxable distribution and was liable for the penalty for early withdrawals.
G.M. Harris, 67 TCM 1983, Dec. 49,624(M), TC Memo. 1994-22.
An individual was taxable and subject to the 10% penalty on early distributions on amounts he withdrew from his profit-sharing plan to use as a down payment on a home when he was relocated by his employer. No portion of the withdrawn amount was rolled over into another retirement account. The taxpayer's investment in a house with a 30-year mortgage was not akin to a retirement account.
S.M. Grow, 70 TCM 1576, Dec. 51,056(M), TC Memo. 1995-594.
An individual, who withdrew funds from a qualified retirement plan consisting of his after-tax contributions and earnings on such contributions, had to include in gross income the amount received, except to the extent attributable to his contributions. The taxpayer's investment of the withdrawn funds in a personal residence did not constitute a transfer to an eligible retirement plan pursuant to Code Sec. 402(a)(5)(A)(ii). Accordingly, the taxpayer was liable for the Code Sec. 72(t) 10% additional tax on the portion of the withdrawal includible in gross income because none of the specifically enumerated exceptions applied.
T.W. Coffield, 72 TCM 338, Dec. 51,494(M), TC Memo. 1996-365.
A retiree who made an irrevocable election within the requisite 60-day period to roll over the taxable amount of a qualified total distribution from a qualified pension plan into an individual retirement account, but who then withdrew that amount from the IRA six months later, was liable for the 10% tax on early distributions.
S.O. Barnes, 67 TCM 2341, Dec. 49,707(M), TC Memo. 1994-95.
A couple was liable for an additional amount of tax and penalties because they had not included distributions from their qualified IRA in their gross income for the tax year in question. The amounts withdrawn by the wife to pay household expenses after her husband became disabled did not meet any of the enumerated exceptions of Code Sec. 72(t). Furthermore, the couple failed to produce any evidence to support their contention that the amounts received were not subject to Code Secs. 408(d)(1) and 72(t)(1).
W.P. Boulden, Jr., 70 TCM 216, Dec. 50,788(M), TC Memo. 1995-347. Aff'd, per curiam, CA-4, 96-1 USTC ¶50,127. Cert. denied, 10/7/96.
A married couple who received a lump-sum distribution from the wife's qualified retirement plan was taxable on the distribution in the year of receipt and was liable for the 10% additional tax on early plan distributions. The wife did not roll over the funds into another qualified plan and the couple failed to demonstrate that any exceptions to the penalty applied.
T.L. Hobson, 71 TCM 3172, Dec. 51,396(M), TC Memo. 1996-272.
A self-employed insurance agent who participated in a simplified employee pension plan and a Keogh plan was liable for the 10% additional tax imposed under Code Sec. 72(t) on early distributions from the qualified retirement plans. Even though the taxpayer made the early withdrawals due to financial hardship, none of the exceptions to the Code Sec. 72(t) penalty applied to him. The court rejected the taxpayer's argument that the limited exceptions to the penalty violated his constitutional right of equal protection. The taxpayer failed to prove that the omission in the statute of an exception from the penalty for financial hardships, as opposed to those resulting from death and disability, was not reasonable and, therefore, that the statute was unconstitutional. The Tax Court, a court of limited jurisdiction and lacking equitable powers, rejected the taxpayer's argument that Code Sec. 72(t) was contrary to public policy and inequitable.
B.A. Pulliam, 72 TCM 307, Dec. 51,481(M), TC Memo. 1996-354.
The amount of an individual's withdrawal from a qualified individual retirement account (IRA) was includible in his gross income and he was liable for an additional 10% tax on the early distribution. The individual's alleged transfer of the funds to a foreign bank did not qualify him to exclude the withdrawal as a rollover contribution. He did not prove that the amount transferred included the amount withdrawn from the IRA, and he failed to establish that the transfer was made into another qualified IRA.
D.W. Chiu, 73 TCM 2679, Dec. 52,018(M), TC Memo. 1997-199.
Taxpayers were liable for the 10% additional tax on premature distributions received from qualified retirement plans or IRAs. They did not fall within any of the exceptions to the additional tax.
F.R. Edwards, 64 TCM 728, Dec. 48,505(M), TC Memo. 1992-540. Aff'd, vac'd and rem'd, CA-4 (unpublished opinion 9/21/94).
Similarly.
C. Simmons, 67 TCM 2979, Dec. 49,853(M), TC Memo. 1994-222.
M.E. Huff, 68 TCM 674, Dec. 50,113(M), TC Memo. 1994-451.
J.E. Copley, 70 TCM 1040, Dec. 50,956(M), TC Memo. 1995-501.
K.F. Marason, 71 TCM 1690, Dec. 51,109(M), TC Memo. 1996-7. Aff'd on other issues, CA-9 (unpublished opinion), 97-2 USTC ¶50,590.
A. Malesa, 72 TCM 495, Dec. 51,527(M), TC Memo. 1996-396.
J.A. Robinson, 72 TCM 1320, Dec. 51,661(M), TC Memo. 1996-517.
C. Swaim, 72 TCM 1501, Dec. 51,691(M), TC Memo. 1996-545.
A.P. Duffy, 72 TCM 1552, Dec. 51,702(M), TC Memo. 1996-556.
D.J. Dickerson Est., 73 TCM 2506, Dec. 51,978(M), TC Memo. 1997-165.
W.L. Reese, 74 TCM 232, Dec. 52,175(M), TC Memo. 1997-346.
A.R. Cujas, Jr., 74 TCM 298, Dec. 52,194(M), TC Memo. 1997-363.
W.S. Bach, 75 TCM 1722, Dec. 52,553(M), TC Memo. 1998-47. Aff'd, per curiam, CA-4 (unpublished opinion), 99-1 USTC ¶50,550.
R.E. Dunham, 75 TCM 1739, Dec. 52,561(M), TC Memo. 1998-52.
H.E. Villarroel, 76 TCM 43, Dec. 52,781(M), TC Memo. 1998-247. Aff'd, CA-6 (unpublished opinion), 2000-1 USTC ¶50,176.
D.R. Edmonds, 76 TCM 710, Dec. 52,925(M), TC Memo. 1998-379.
R.H. Schmalzer, 76 TCM 803, Dec. 52,948(M), TC Memo. 1998-399.
D.E. Conway, 111 TC 350, Dec. 53,010.
T.M. Peaslee, 77 TCM 1195, Dec. 53,207(M), TC Memo. 1999-4.
M.J. Roman, CA-11 (unpublished opinion), 99-1 USTC ¶50,458, aff'g, per curiam, an unreported Tax Court decision.
C.L. Udoh, 77 TCM 2056, Dec. 53,392(M), TC Memo. 1999-174.
M.M. Morin, 78 TCM 127, Dec. 53,466(M), TC Memo. 1999-240.
A. Tinsman, 79 TCM 1529, Dec. 53,758(M), TC Memo. 2000-55. Aff'd, per curiam, CA-8 (unpublished opinion), 2001-2 USTC ¶50,572.
P.L. Hart, 79 TCM 1619, Dec. 53,787(M), TC Memo. 2000-78. Aff'd, CA-9 (unpublished opinion), 2001-2 USTC ¶50,584.
R.J. Robertson, 79 TCM 1725, Dec. 53,813(M), TC Memo. 2000-100. Aff'd, CA-9 (unpublished opinion), 2001-2 USTC ¶50,567.
M.G. Bunney, 114 TC 259, Dec. 53,839.
A.F. Emerson, 79 TCM 1921, Dec. 53,854(M), TC Memo. 2000-137.
S.R. Jones, 80 TCM 76, Dec. 53,957(M), TC Memo. 2000-219.
A.P. Gallagher, 81 TCM 1149, Dec. 54,242(M), TC Memo. 2001-34.
C.W. Plotkin, 81 TCM 1395, Dec. 54,285(M), TC Memo. 2001-71.
M.T. Chappell, 81 TCM 1781, Dec. 54,375(M), TC Memo. 2001-146.
W. Machen, FedCl, 2001-2 USTC ¶50,606.
D.A. Rayner, 83 TCM 1161, Dec. 54,635(M), TC Memo. 2002-30. Aff'd, per curiam, on another issue, CA-5 (unpublished opinion), 2003-2 USTC ¶50,552
L.B. Williams, 85 TCM 1113, Dec. 55,105(M), TC Memo. 2003-97. Aff'd on another issue, CA-10 (unpublished opinion), 2005-1 USTC ¶50,163.
M.A. Cabirac, 120 TC 163, Dec. 55,124.
M. Vulic, 87 TCM 1036, Dec. 55,560(M), TC Memo. 2004-51.
R. Wos, 86 TCM 138, Dec. 55,245(M), TC Memo. 2003-223. Aff'd on another issue, CA-7 (unpublished opinion), 2005-1 USTC ¶50,363.
N.A. Cohen, 88 TCM 330, Dec. 55,769(M), TC Memo. 2004-227.
A.F. Millard, 90 TCM 136, Dec. 56,115(M), TC Memo. 2005-192.
S.A. Cole, 91 TCM 888, Dec. 56,450(M), TC Memo. 2006-44.
T.J. Jordan, 91 TCM 1129, Dec. 56,509(M), TC Memo. 2006-95.
D. Cote, 91 TCM 1288, Dec. 56,548(M), TC Memo. 2006-129.
B.K. Bhattacharyya, 93 TCM 711, Dec. 56,820(M), TC Memo. 2007-19.
S.A. Lewis, CA-9, 2008-1 USTC ¶50,317, 523 F3d 1272.
C.L. Belmont, 93 TCM 1034, Dec. 56,873(M), TC Memo. 2007-68.
M.A. Jackson, 93 TCM 1211, Dec. 56,929(M), TC Memo. 2007-116.
G.E. Thompson, 94 TCM 430, Dec. 57,158(M), TC Memo. 2007-327.
M. Cabirac, 95 TCM 1555, Dec. 57,453(M), TC Memo. 2008-142.
H.T. Huynh, 95 TCM 1111, Dec. 57,330(M), TC Memo. 2008-27.
J.R. Banister, 96 TCM 114, Dec. 57,522(M), TC Memo. 2008-201.
The distribution of IRA proceeds from a state agency as receiver of an insolvent financial institution was includible in the taxpayers' gross income as premature IRA distributions. Because the taxpayers were not age 59 1/2when the received the funds and did not reinvest them in other IRAs within 60 days of receipt of the funds, they were liable for the additional 10% tax under Code Sec. 72(t).
A.J. Aronson, 98 TC 283, Dec. 48,076.
Followed.
S.N. Swihart, 76 TCM 855, Dec. 52,956(M), TC Memo. 1998-407.
A distribution from an individual's individual retirement account to his former spouse in satisfaction of a judgment for arrearages in child support payments was subject to the additional tax imposed by Code Sec. 72(t) because the individual failed to establish that any of the statutory exceptions applied.
M.J. Vorwald, 73 TCM 1697, Dec. 51,816(M), TC Memo. 1997-15.
The entire lump-sum distribution from a qualified pension plan to an individual upon his termination of employment was taxable to him because no amounts were excludable as payments made pursuant to a qualified domestic relations order. Therefore, the entire distribution was subject to the 10% tax on early distributions from a qualified retirement plan.
J.L. Burton, 73 TCM 1729, Dec. 51,822(M), TC Memo. 1997-20.
A commercial airline pilot who suffered from respiratory problems and high blood pressure and who voluntarily retired was subject to the additional 10% tax on early distributions from his retirement pension plan because he was not disabled within the meaning of Code Sec. 72(m)(7). The pilot did not attach to his amended return that claimed a refund for the 10% tax a physician's statement substantiating his physical condition.
G. Black, BC-DC Tex., 97-1 USTC ¶50,297, 204 BR 701.
Funds received by an individual from an employer-provided pension plan and an individual retirement account were subject to the 10% additional tax on early distributions absent proof that the distributions were attributable to his being disabled. The taxpayer, who was a Christian Scientist, offered no medical evidence of his disability.
R.C. Fohrmeister, 73 TCM 2483, Dec. 51,971(M), TC Memo. 1997-159.
A distribution from a law firm partnership's salary reduction plan was includible in the income of a terminating attorney. He was subject to the additional 10% tax for early distributions because none of the distribution was rolled over to another qualified pension plan within 60 days of receipt. Also, the distribution represented the attorney's balance in the plan less the amount of unpaid funds borrowed from the plan. Moreover, equitable principles did not entitle the attorney to leniency because he was properly notified of cancellation of the promissory note he executed when he borrowed funds from the plan.
S.E. Scott, 74 TCM 1157, Dec. 52,348(M), TC Memo. 1997-507. Aff'd, per curiam, CA-5 (unpublished opinion), 99-2 USTC ¶50,619.
An additional 10% early withdrawal tax was imposed on an individual who realized taxable income on a lump-sum distribution directly to him from his company's profit-sharing retirement plan because he had not attained the age of 59 1/2at the time of the distribution.
B.L. Moon, FedCl, 97-2 USTC ¶50,668.
Individuals who received loans that were not bona fide from their qualified profit-sharing plan were automatically liable for the 10% additional tax on premature distributions from qualified retirement plans. They offered no evidence or arguments in support of the application of any of the exceptions to the additional tax.
B. Patrick, 75 TCM 1629, Dec. 52,534(M), TC Memo. 1998-30. Aff'd, per curiam, CA-6 (unpublished opinion), 99-1 USTC ¶50,532.
Part of the premature distributions from an individual retirement account made to a member of an American Indian Tribe consisted of nondeductible employee contributions and were nontaxable. However, a portion of the distribution was net income attributable to contributions to the account in the year at issue and was includible in gross income and subject to the premature distribution tax. The remainder of the taxpayer's distribution after determination of the nontaxable amount was income subject to the 10% premature distribution tax and was to be determined in a Rule 155 computation.
R.A. Hall, 76 TCM 473, Dec. 52,881(M), TC Memo. 1998-336.
An additional individual retirement account (IRA) distribution received by a taxpayer less than five years after beginning a series of substantially equal periodic payments was an impermissible modification that triggered application of the 10% recapture tax on early withdrawals. The distribution was received within the five-year period that began on the date of the first payment, in violation of Code Sec. 72(t)(4). In addition, the taxpayer failed to prove that the distribution was part of a permissible cost of living adjustment. Finally, although there was some evidence that the distribution was made as a result of sudden financial hardship, there is no hardship exception to the recapture tax.
R.C. Arnold, 111 TC 250, Dec. 52,888.
The 10% additional assessment against an early withdrawal from a qualified retirement account was not discharged in married debtors' bankruptcy proceeding. Although the assessment was in the nature of a penalty rather than a tax, it was a nondischargeable penalty under Sec. 523(a)(8) of the Bankruptcy Code. Therefore, post-discharge collection efforts by the IRS did not violate the discharge injunction.
D. Mounier, BC-DC Calif., 98-2 USTC ¶50,833.
Lump-sum distributions received by two federal employees under the alternative annuity option of the Civil Service Retirement System were subject to the Code Sec. 72(t) 10% additional tax on early distributions. The distributions were not part of a series of substantially equal periodic payments made for the lives of the employees. Also, they were not payments made as an annuity but, rather, were payments made under an annuity contract. The imposition of the 10% additional tax was not in direct conflict with the statutory scheme of the Civil Service Retirement Act (CSRA). The CSRA provisions for early retirement simply mean that the employees may retire at age 50 without having the amount of their CSRA annuities reduced because of their retirement age. Further, by electing the alternative annuity, they received their full retirement benefits, and they chose to receive part of the unreduced benefits as an early distribution.
R.L. Siano, DC Pa., 96-2 USTC ¶50,661.
A retired federal employee who received an accelerated distribution of annuity payments from the Civil Service Retirement System (CSRS) was liable for the 10% additional tax on early plan distributions. The CSRS constituted a "qualified retirement plan" and none of the statutory exemptions to the liability for the 10% tax were applicable to the CSRS.
E.D. Roundy, CA-9, 97-2 USTC ¶50,625, 122 F3d 835.
A teacher's refund distribution, which resulted from his transfer from a state retirement system to a state pension system, was subject to the 10% additional tax on early distributions from a qualified retirement plan. The teacher had not attained age 59 1/2at the time of the refund and no exceptions to liability applied.
L.B. Wheeler, 66 TCM 1444, Dec. 49,434(M), TC Memo. 1993-561.
Similarly.
R.J. O'Connor, 67 TCM 2708, Dec. 49,795(M), TC Memo. 1994-70.
L.H. Dorsey, 69 TCM 2041, Dec. 50,508(M), TC Memo. 1995-97. Appeal dism'd on another issue, CA-4 (unpublished opinion), 96-2 USTC ¶50,355.
W.H. Huebl, 69 TCM 2264, Dec. 50,551(M), TC Memo. 1995-134.
H.L. Humberson, 70 TCM 886, Dec. 50,923(M), TC Memo. 1995-470.
G.L. Wittstadt, Jr., 70 TCM 994, Dec. 50,945(M), TC Memo. 1995-492.
R.B. Ross, 70 TCM 1596, Dec. 51,063(M), TC Memo. 1995-599.
R.J. Montgomery, 71 TCM 3154, Dec. 51,387(M), TC Memo. 1996-263. Aff'd sub nom. A.R. Powell, CA-4, 97-2 USTC ¶50,820.
J.G. Thompson, 71 TCM 3160, Dec. 51,390(M), TC Memo. 1996-266.
P.J. Conway, DC Md., 96-1 USTC ¶50,041, 908 FSupp 292.
A disabled, retired engineering technician for a state (Maryland) highway administration, who received a transfer refund as a result of his transfer from a state employees' retirement system to a state employees' pension system, was not liable for the 10% additional tax imposed on early distributions from qualified retirement plans because the distribution was rolled over into an individual retirement account (IRA).
J.M. Brown, 72 TCM 651, Dec. 51,556(M), TC Memo. 1996-421.
The district court properly determined that a lump-sum payment of pension benefits made to a retired police officer was subject to the 10% tax imposed on early distributions from qualified retirement plans. Although the taxpayer conceded that the retirement system was a qualified plan, he contended that the benefit was attributable to an arbitration award that eliminated age requirements and provided benefits based on length of service that was exempt from Code Sec. 72(t). The fact that the distribution involved benefits that arose from the arbitration award, rather than from the state's retirement system, however, did not mean that the distribution did not come "from a qualified plan." Under state (Pennsylvania) law, the arbitration award was an inseparable part of the retirement plan, and it was not an independent contractual obligation.
W.T. Kute, CA-3, 99-2 USTC ¶50,853, 191 F3d 371.
An individual who failed to timely elect income averaging of a lump-sum distribution that she received from her employer's qualified retirement plan due to her separation from service was subject to the additional tax on early withdrawals that was in effect at the time she received it.
I.H. Dzuris, FedCl, 99-2 USTC ¶50,780, 44 FedCl 452. Aff'd, per curiam, CA-FC (unpublished opinion), 2000-1 USTC ¶50,348.
A taxpayer who initiated, received, and controlled the withdrawals from an individual retirement account in order to pay his ex-wife pursuant to a family court order was liable for the 10% addition to tax on early distributions of retirement income because he failed to show that he qualified for any statutory exceptions.
R.D. Czepiel, 78 TCM 378, Dec. 53,523(M), TC Memo. 1999-289. Aff'd without discussion, CA-1, 2001-1 USTC ¶50,134.
R.C. Baas, 83 TCM 1744, Dec. 54,758(M), TC Memo. 2002-130.
An individual who received a distribution from an individual retirement account (IRA) prior to attaining age 59 1/2, and who did not roll those funds over into another qualified IRA, was liable for the 10% premature distribution penalty. Although her purported reliance on erroneous advice obtained from IRS employees was unfortunate, that advice did not have the force of law. Further, she was not relieved of liability for the additional tax based on her present financial hardship because there is no financial hardship exception to Code Sec. 72(t).
L. Deal, 78 TCM 638, Dec. 53,597(M), TC Memo. 1999-352.
The retroactive imposition of a 10% additional tax for married taxpayers' nonqualified withdrawal from the husband's Roth IRA did not violate either the Fifth or Eighth Amendment of the U.S. Constitution. Congress clearly did not intend to exempt nonqualified withdrawals from newly converted Roth IRAs from the 10% additional tax. Application of Code Sec. 72(t) to the taxpayers' situation did not violate the Excessive Fines Clause of the Eighth Amendment since the imposition of the tax was not a punishment. Although the husband's withdrawal from his rolled-over Roth IRA subjected him to the 10% additional tax, it violated no law and, as the taxpayers recognized, was not a criminal offense.
D.Q. Kitt, CA-FC, 2002-1 USTC ¶50,167, 277 F3d 1330.
A separated individual was not liable for taxes or the early distribution penalty on income associated with distributions from an IRA held by her husband. Despite the fact that the couple resided in a community property state and had no matrimonial agreement opting out of the community property regime, distributions from the IRA to the husband were not attributable to the wife as community property under the guidelines of Code Sec. 408(g).
A.C. Morris, 83 TCM 1104, Dec. 54,620(M), TC Memo. 2002-17.
Early distributions that married taxpayers received from retirement annuity contracts which were used as collateral to obtain a personal loan were includible in income and subject to an early distribution penalty. There was no dispute that the funds were actually withdrawn as a result of the taxpayers' default, or that Code Sec. 72(p)(1) applied. Therefore, the IRS did not err in assessing taxes as a result of the transaction.
L. Armstrong, CA-8, 2004-1 USTC ¶50,238.
A divorced individual did not qualify for an exception from the early retirement withdrawal penalty for retirement distributions that he used to satisfy the terms of his divorce decree. The taxpayer failed to establish that the retirement distributions were received pursuant to a qualified domestic relations order.
E.A. Bougas III, Dec. 55,212(M), TC Memo. 2003-194.
An individual was required to include unreported retirement distributions in income. The record demonstrated that the taxpayer received distributions from his retirement fund, which he used to purchase a bank certificate of deposit that was cashed out shortly thereafter. The court rejected the taxpayer's claim that he rolled over the funds to an eligible retirement plan. Because the taxpayer was required to include the distributions in income, he was liable for the 10-percent addition to tax on premature retirement distributions.
J.C. Jensen, 86 TCM 293, Dec. 55,272(M), TC Memo. 2003-249.
A divorced husband who used a premature plan distribution to pay a money judgment to his ex-wife that was acknowledged in their divorce decree was liable for the 10 percent additional tax on the early distribution. His contention that his wife was an alternate payee who should bear the burden of the additional tax was rejected. The funds were disbursed by the plan administrator directly to the husband as his sole and separate property. Moreover, the divorce decree did not constitute a qualified domestic relations order within the meaning of the Code Sec. 72(t)(2)(C) exception to the additional tax.
R.S. Simpson, I, 86 TCM 470, Dec. 55,325(M), TC Memo. 2003-294.
An individual did not qualify under Code Sec. 72(t)(2)(B) for the exception to the 10 percent early withdrawal penalty for her premature retirement plan distributions. The taxpayer failed to present sufficient evidence that she used the premature distributions for medical care.
G. Berry, 87 TCM 812, Dec. 55,512(M), TC Memo. 2004-11.
An individual was subject to the 10-percent early distribution penalty resulting from a distribution of funds from his employer-sponsored pension plan. The taxpayer's claim that the issuing bank withheld the 10-percent tax from the gross amount of the withdrawal was rejected.
F.J. Mendes, 121 TC 308, Dec. 55,372.
The additional 10-percent tax imposed on early distributions from qualified retirement plans applied to a distribution to a 53-year-old taxpayer despite his contentions of hardship. The taxpayer argued that the imposition of the 10-percent tax would cause him undue hardship due apparently to the loss of his job and his wife's inability to work due to medical problems. The Tax Court found no support from any relevant authorities for the taxpayer's argument which it dubbed "an umbrella hardship exception applicable on a case-by-base basis."
J.J. Milner, 87 TCM 1287, Dec. 55,629(M), TC Memo. 2004-111.
An individual who had a digestive disorder, resigned her position and received an IRA distribution was liable for the 10-percent additional tax on premature distributions. The former employee did not establish that she met the disability exception under Code Sec. 72(t)(2)(iii). She failed to show that she was incapable of engaging in any substantial gainful activity as defined in Code Sec. 72(m)(7).
M.E. Robertson, 88 TCM 294, Dec. 55,758(M), TC Memo. 2004-217.
The taxpayer did not qualify for the exception to the 10-percent penalty for early withdrawals because his spouse was disabled. The exception for a disability applies only to an employee or participant of a qualified pension plan. The wife was not a vested participant of the plan by virtue of state community property laws.
M.J. Barkley, 88 TCM 634, Dec. 55,832(M), TC Memo. 2004-287.
The 10-percent additional tax on early distributions from qualified retirement plans did not apply to the taxable portion of a distribution from the 401(k) plan of the taxpayer's former spouse. The taxpayer was an alternate payee pursuant to a qualified domestic relations order and Code Sec. 72(t)(2)(C) provides an exception from the penalty for distributions to such alternate payees. However, the penalty was imposed with respect to an early distribution received by the taxpayer from her own 401(k) plan.
L.D. Seidel, 89 TCM 972, Dec. 55,977(M), TC Memo. 2005-67.
Taxpayers were subject to the 10-percent additional tax for an early pension distribution because the distribution could not qualify for the exception for higher education expenses. Although the 10-percent additional tax does not apply to distributions from individual retirement plans for higher education expenses, for these purposes an individual retirement plan is defined as an individual retirement account or individual retirement annuity. The distribution in this case was from a section 401(k) account, which is separate and distinct from classification within the IRA category, and such a distribution would not qualify for the exception.
H. Uscinski, 89 TCM 1337, Dec. 56,040(M), TC Memo. 2005-124.
A taxpayer who used part of an early distribution from her individual retirement account to pay down her credit card debts, which were incurred to pay qualified higher education expenses for two years prior to the distribution, was subject to the 10-percent penalty. The higher education expense exception under Code Sec. 72(t)(2)(E) requires that qualified expenses be incurred in the tax year of the distribution
L.L. Lodder-Beckert, 90 TCM 4, Dec. 56,082(M), TC Memo. 2005-162.
The unpaid balance of an individual's qualified retirement plan loan was a taxable distribution subject to the early distribution penalty in the year the taxpayer failed repay the loan, not in the year that the loan was made. In addition, the taxpayer's medical expenses for the year that the loan was made could not be applied to reduce the taxable amount of the distribution because those expenses were not "paid during the taxable year" of the distribution, which was a subsequent tax year.
S.A. Duncan, 90 TCM 35, Dec. 56,093(M), TC Memo. 2005-171.
An individual was liable for the penalty for early withdrawal from a qualified retirement plan because she had not yet attained the age of 59 1/2at the time of withdrawal. She was not eligible for the disability exception since her medical condition did not prevent her from substantial gainful activities.
J.M. Thomas, 90 TCM 477, Dec. 56,187(M), TC Memo. 2005-258.
A taxpayer who received early distributions from certain Code Sec. 403(b) retirement annuity accounts was subject to the 10-percent tax imposed by Code Sec. 72(t). Because the accounts were funded by a Code Sec. 501(c)(3) organization, the taxpayer argued that her distributions were subject to Code Sec. 72(q) and, therefore, avoided the penalty. However, Code Sec. 72(t)(1) explicitly imposes early withdrawal penalties on retirement accounts established and funded by Code Sec. 501(c)(3) organizations.
E. D. Mitchell, 91 TCM 1172, Dec. 56,516(M), TC Memo. 2006-101.
A distribution from an individual's retirement fund was taxable income since he used it to purchase gold coins, rather than rolling it over into another retirement plan. The ten-percent early distribution penalty was properly imposed because he had not reached age 59-1/2 when the distribution was made.
R.L. Minteer, CA-9 (unpublished opinion), 2006-1 USTC ¶50,353, 168 FedAppx 790 , aff'g an unreported Tax Court opinion.
A taxpayer who rolled over a distribution from her deceased husband's individual retirement account (IRA) into her separate IRA, and subsequently received an early distribution from her IRA, was liable for the 10-percent additional tax. The taxpayer argued that the distribution was an amount received as a distribution to a beneficiary upon a decedent's death and, therefore, was exempt from the 10-percent additional tax under Code Sec. 72(t)(2)(A)(ii). However, the amount received by the taxpayer from her deceased husband's IRA lost its character as a distribution to a beneficiary upon a decedent's death when she rolled over the funds into her separate IRA. Once the taxpayer chose to roll over the funds into her own IRA, the source of the funds became irrelevant and she lost the ability to qualify for the exception from the 10-percent additional tax on early distributions.
C. Gee, 127 TC 1, Dec. 56,568.
An individual who received an early distribution from her IRA was subject to the 10-percent additional tax on the taxable amount of the distribution. The distribution did not qualify for the qualified education exception because the taxpayer did not establish that she paid any of her son's educational expenses in the year she received the early distribution.
R.F. Duronio, 93 TCM 1112, Dec. 56,901(M), TC Memo. 2007-90.
An individual failed to show that the distributions from a retirement plan were loans that satisfied the exemption requirements of Code Sec. 72.
T.J. Jordan, 91 TCM 1129, Dec. 56,509(M), TC Memo 2006-95. Aff'd per curiam, CA-1 (unpublished opinion) 2007-2 USTC ¶50,606.
An individual received early distributions from qualified plans was subject to a 10-percent addition to tax.
A.B. Rhodes, Jr., 94 TCM 109, Dec. 57,024(M), TC Memo. 2007-206.
An attorney was liable for the 10-percent additional tax on an early distribution from an individual retirement account plan because he failed to qualify for any of the statutory exceptions. The use of the distribution to pay his son's secondary educational expenses did not qualify for the higher education expense exception because the high school was not an eligible educational institution as defined in Code Sec. 529(e)(5). The evidence did not show that the taxpayer used any of the distribution to pay medical expenses as he claimed or that the distribution qualified for any other exception to the penalty.
D.B. Nolan, 94 TCM 378, Dec. 57,134(M), TC Memo. 2007-306.
Guidance is provided as to the taxation under Code Sec. 72(t) on early distributions from qualified retirement plans.
[Full Text Excerpts --Notice 87-13]
* * *
Until further guidance is published, the guidance provided by these questions and answers may be relied on by taxpayers to design and administer plans and to determine the tax treatment of plan contributions and distributions.
D. New Section 72(t) of the Code ( Section 1123 of TRA '86)
Q-20: What additional tax on early distributions from qualified plans applies under section 72(t) (as added by TRA '86)?
A-20: Section 72(t) (as added by TRA '86) applies an additional tax equal to 10% of the portion of any "early distribution" from a qualified retirement plan (as defined in section 4974(c) of the Code) that is includible in the taxpayer's gross income. A distribution (including deemed distributions under section 72(p)) is treated as an "early distribution" unless it is described in section 72(t)(2)(A) (taking into account section 72(t)(3) & (4)). A distribution to an employee from a qualified plan will be treated as within section 72(t)(2)(A)(v) if (i) it is made after the employee has separated from service for the employer maintaining the plan and (ii) such separation from service occurred during or after the calendar year in which the employee attained age 55.
A distribution that is an "early distribution" will not be subject to the additional tax to the extent provided under section 72(t)(2)(B) (relating to deductible medical expenses under section 213), section 72(t)(2)(C) (relating to certain distributions from employee stock ownership plans), or section 72(t)(2)(D) (relating to distributions pursuant to qualified domestic relations orders). The determination of whether the additional tax under section 72(t) applies to a distribution is to be made without regard to whether the distribution is treated as a mandatory distribution for purposes of section 411(a)(11) or section 417(e).
The payor (or, if applicable, plan administrator) is not liable under section 3405 to withhold any amount on account of the additional income tax imposed under section 72(t). However, the taxpayer may have estimated tax liability with respect to such additional income tax.
Notice 87-13, 1987-1 CB 432, modified by Notice 98-49, 1998-2 CB 365.
The IRS has provided guidance regarding the definition of substantially equal payments for purposes of avoiding the Code Sec. 72(t) 10% additional tax on early withdrawals. [See ¶6140.0686.]
Notice 89-25, 1989-1 CB 662, modified by Rev. Rul. 2002-62, 2002-2 CB 710.
Relief is provided to taxpayers who could prematurely deplete their retirement account assets due to a decline in market value. Taxpayers who selected either the fixed amortization method or the fixed annuitization method as a distribution safe harbor, as provided in Notice 89-25, 1989-1 CB 662, may, in any subsequent year, switch to the required minimum distribution method to determine the payment for the year of the switch and for all subsequent years. The change in method will not be treated as a modification within the meaning of Code Sec. 72t)(4). If a change is made, the required minimum distribution method must be followed in all subsequent years. Any subsequent change will be considered a modification under Code Sec. 72(t)(4). This guidance replaces the guidance in Q&A-12 of Notice 89-25for any series of payments commencing on or after January 1, 2003, and may be used for distributions commencing in 2002.
Rev. Rul. 2002-62, 2002-2 CB 710.
The IRS has provided a definition of "academic period" for purposes of an exception from the penalty on early withdrawals from individual retirement arrangements (IRAs) for educational expenses (as provided by the Taxpayer Relief Act of 1997 ( P.L. 105-34)). The exception applies to IRA distributions made after December 31, 1997, with respect to expenses paid after that date, for education provided in academic periods beginning after that date. An academic period includes a semester, trimester, quarter, or other academic term designated by the educational institution, begins on the first day of classes, and does not include periods of orientation, counseling or vacation.
Notice 97-53, 1997-2 CB 306.
The 10% early withdrawal penalty will not apply to certain IRA withdrawals used to pay for qualified higher education expenses. The early withdrawal tax does not apply to a distribution from an IRA to the extent that the amount of the distribution does not exceed the qualified higher education expenses for the taxpayer, the taxpayer's spouse, and the child or grandchild of the taxpayer or the taxpayer's spouse at an eligible educational institution. For purposes of this rule, the term "qualified higher education expenses" means tuition, fees, books, supplies and equipment required for the enrollment or attendance of the student at an eligible educational institution. Qualified higher education expenses paid with an individual's earnings, a loan, a gift, an inheritance given to the student or the individual claiming the credit, or personal savings (including savings from a qualified state tuition program) are included in determining the amount of the IRA withdrawal which is not subject to the 10% early withdrawal tax. Qualified higher education expenses paid with a Pell Grant or other tax-free scholarship, a tax-free distribution from an Education IRA, or tax-free employer-provided educational assistance are excluded. A taxpayer may also make a withdrawal from a Roth IRA to pay qualified higher educational expenses without paying the 10% early withdrawal tax.
Notice 97-60, 1997-2 CB 310.
For a qualified Hurricane Katrina distribution (Katrina distribution), section 101 of the Katrina Emergency Tax Relief Act of 2005 (KETRA) ( P.L. 109-73) allows the distribution to be included in income ratably over 3 years. A Katrina distribution is any distribution from an eligible retirement plan made on or after August 25, 2005, and before January 1, 2007, to a qualified individual who designates the distribution as a Katrina distribution. Any distribution received by a qualified individual as a beneficiary can be treated as a Katrina distribution. A reduction or offset of a participant's account balance in order to pay certain plan loans can also be treated as a Katrina distribution. No more than $100,000 of distributions, however, can be treated as Katrina distributions. Katrina distributions are permitted without regard to the qualified individual's need. In addition, the amount of the distribution does not have to correspond to the amount of the economic loss that the person suffered.
Notice 2005-92, 2005-2 CB 1165.
Early distributions to active duty military reservists from an IRA (including a Roth IRA) and distributions attributable to elective deferrals under a Code Sec. 401(k) plan or a Code Sec. 403(b) annuity, are not subject to the 10% penalty of Code Sec. 72(t) ( Code Sec. 72(t)(2)(G), as added by the Pension Protection Act of 2006). To qualify, the distributee reservist must have been called to active duty for at least 180 days, or for an indefinite period, between September 11, 2001, and December 31, 2007. Reservists who have already paid tax under Code Sec. 72(t) on an eligible distribution may claim a refund using an IRS Form 1040X, Amended U.S. Individual Income Tax Return. In addition, the reservist can recontribute part or all of the distribution to an IRA. Generally, such recontribution must take place within two years after the reservist's active duty period ends. However, reservists whose duty period ended before August 17, 2006, may recontribute the distribution until August 17, 2008. There is no deduction for making such a recontribution.
IRS News Release IR-2006-152, September 28, 2006.
An individual may withdraw funds from his individual retirement account for personal use without tax consequences provided that he redeposits the funds in the same or another IRA within the 60-day rollover period. The transaction is treated as a rollover and the distribution is not subject to the early withdrawal penalty.
IRS Letter Ruling 9010007, December 14, 1989.
A resident of the United Kingdom who was a participant in a defined benefit pension plan was not liable for the additional 10% tax on early distributions when he received a distribution from an IRA that was funded, in part, with a rolled-over, lump-sum payment from the plan. The distribution was governed by the "Other Income" provision of the income tax treaty between the United States and the United Kingdom rather than the pension provision because an IRA is not a pension.
IRS Letter Ruling 9253049, October 6, 1992.
A loan that did not comply with the level amortization rules was deemed an early plan distribution and subject to the 10% additional tax on early distributions. The loan was made by a profit-sharing plan to a plan participant before the effective date of the level amortization rules contained in the Tax Reform Act of 1986, but was subject to the rules because the loan was extended twice after the effective date of the Act. The extensions were sufficient to cause the loan to be treated as a new loan on each of the extension dates.
IRS Letter Ruling 9344001, April 12, 1993.
A distribution from two individual retirement accounts received by an individual who took early retirement did not constitute a payment that was part of a series of substantially equal periodic payments. The amount of the distribution was not computed on the total aggregate balance of the IRAs. Therefore, the 10% tax under Code Sec. 72(t)(1) applied to the distribution.
IRS Letter Ruling 9705033, November 8, 1996.
Distributions from an individual's IRAs, calculated as a joint and last survivor annuity for the life of the individual and her beneficiary, which began prior to the individual reaching age 59 1/2, were not subject to the 10% tax on early distributions from qualified plans. The method of determining payments satisfied the requirements of Notice 89-25, 1989-1 CB 662, and resulted in substantially equal periodic payments within the meaning of Code Sec. 72(t)(2)(A)(iv). Furthermore, the life expectancies and the interest rate used were reasonable.
IRS Letter Ruling 9824047, March 18, 1998.
An IRA owner who was under the age of 59 1/2could not modify his annual payments to include a cost of living adjustment (COLA) without triggering the 10% early distribution penalty, even though the stock market's success had caused his account balance to be much larger than originally anticipated. The COLA would result in a modification of his substantially equal period payments under Code Sec. 72(t)(4). The distribution of a one-time catch up payment, equal to the amount of annual COLA distributions for prior years, would also result in a modification of substantially equal periodic payments under Code Sec. 72.
IRS Letter Ruling 199943050, August 3, 1999.
An individual was liable for the 10% additional tax on premature distributions received from a qualified retirement plan because he did not fall within any of the exceptions to the additional tax.
D.A. Hughes, Dec. 57,577(M), TC Memo. 2008-249.
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