106 T.C. No. 18
UNITED STATES TAX COURT
ROBERT J. DWYER AND CATHERINE DWYER, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 2626-95. Filed May 15, 1996.
P husband, age 53 at the time, made a premature
withdrawal from his individual retirement account (IRA)
in 1989. P was actively engaged as a stock trader
specializing in trading corporate stock on a short-term
basis throughout 1989. During the latter part of the
year he was diagnosed as suffering from clinical
depression. Held: Ps are liable for the 10-percent
additional tax on the premature IRA withdrawal. Sec.
72(t), I.R.C. Although Ps claimed the exception for
disability contained in sec. 72(t)(2)(A)(iii), I.R.C.,
P husband was not "disabled" within the definition of
that term contained in sec. 72(m)(7), I.R.C. and sec.
1.72-17A(f), Income Tax Regs., since he was not
prevented by his illness from engaging in any
substantial gainful activity.
Robert J. Dwyer and Catherine Dwyer, pro se.
Andrew J. Mandell, for respondent.
NIMS, Judge: For the year 1989, respondent determined the
following deficiency in petitioners' Federal income tax and
penalties:
Addition to Tax Penalty
Deficiency Sec. 6651(a)(1) Sec. 6662(a)
$79,092 $19,773 $15,818
Unless otherwise stated, all section references are to
sections of the Internal Revenue Code in effect for the year
1989, and all Rule references are to the Tax Court Rules of
Practice and Procedure.
After concessions, the only issue remaining for decision is
whether petitioners are liable under section 72(t) for the 10-
percent additional tax on an early distribution from a qualified
retirement plan.
FINDINGS OF FACT
Some of the facts were stipulated and are so found. The
stipulation of facts and attached exhibits are incorporated
herein by this reference. Petitioners resided in Remsenburg, New
York, when they filed their petition.
Robert J. Dwyer (petitioner or Robert) is a stock trader,
specializing in trading corporate stock on a short-term basis.
He was 53 years old in 1989.
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Sometime in 1989, petitioner organized Hampton Partners, of
which he was the sole general partner and one of three limited
partners. The three limited partners contributed a total of
$1,750,000 to Hampton Partners, with petitioner contributing
$250,000.
Hampton Partners was formed with the objective that
petitioner would use the contributed capital to generate profits
in the stock market. During the first six months of 1989
petitioner made numerous stock trades that generated large
profits. However, in the latter part of the year the partnership
lost a substantial amount in a trade involving stock of United
Airlines. A dispute then arose among the partners, resulting in
lawsuit's being filed involving claims by the other partners
against petitioner, and a counterclaim by him against them.
Petitioner repaid the other partners, against the advice of
his accountant, in the way he thought the money should go back,
but the partners were not satisfied. Petitioner had never been
sued before, and he found the litigation to be very stressful and
career threatening.
In October, 1989, petitioner withdrew $208,802 from his
individual retirement account (IRA), out of which amount he
placed $200,000 in his own brokerage account. The $208,802 was
reported as a taxable distribution on petitioners' 1989 Form
1040.
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During the last three months of 1989 petitioner traded in
excess of 350 stocks, and had stock sales for his own account
grossing over $20 million. Petitioner felt that if he could
somehow stay in business as a "big butter and egg man", he could
somehow "float into nirvana", but instead he "floated down the
East River", since he lost a substantial part of the $208,802 he
had withdrawn from his IRA. Petitioner intended to treat the IRA
withdrawal as a loan that he intended to repay with the money he
earned through his stock trading, but because of his continuing
losses he was unable to do so.
Sometime in 1989 petitioner was diagnosed as having a
biochemical depression. As a result of the acrimonious lawsuit,
which at the time seemed to petitioner to have resulted almost
from a character failure on his part, petitioner's clinical
depression significantly deepened. In the opinion of Dr. Steven
Gardner, a Diplomate of the American Board of Psychiatry and
Neurology, depression is recognized to be a devastating
psychiatric disease. According to Dr. Gardner, the etiology of
depression is multifactorial and the evolution of the signs and
symptoms, and the degree of dysfunction, are neither abrupt nor
uniform.
The first physician with whom petitioner consulted in 1989
placed him on a combined medication consisting of Prozac and
Pamelor, which were subsequently found to be counteracting each
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other, giving petitioner no relief from his condition and causing
him to be very disoriented. Subsequently, petitioner consulted a
second physician, Dr. Gardner, who prescribed only Pamelor,
which, in about six weeks' time, cleared up petitioner's
condition. Petitioner continued to see Dr. Gardner for about two
years, but discontinued seeing him after that time because he
could no longer afford the consultation fees. Petitioner is no
longer on medication. Petitioner regularly exercises to avoid
"putting myself in positions any longer where I can have this
kind of a setback."
Respondent determined an additional tax of $20,880 on the
$208,802 premature distribution from petitioner's IRA.
OPINION
The legislative history accompanying the enactment of former
section 408(f) explains the purpose of what is now section 72(t),
as follows: Premature distributions from IRAs frustrate the
intention of saving for retirement, and section 72(t) discourages
this from happening. S. Rept. 93-383 at 134 (1974), 1974-3 C.B.
(Supp.) 80, 213. Thus, in the event of a distribution to an
individual from his or her IRA before such individual attains age
59-1/2, the individual's tax on the amount distributed is
increased by 10 percent of the total distribution. H. Conf.
Rept. 93-1280, at 339 (1974), 1974-3 C.B. 415, 500.
Section 72(t)(1) and (2) provides in relevant part:
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SEC. 72(t). 10-Percent Additional Tax on Early
Distributions From Qualified Retirement Plans.--
(1) Imposition of additional tax.--If any
taxpayer receives any amount from a qualified
retirement plan (as defined in section 4974(c)), the
taxpayer's tax under this chapter for the taxable year
in which such amount is received shall be increased by
an amount equal to 10 percent of the portion of such
amount which is includible in gross income.
(2) Subsection not to apply to certain
distributions.--Except as provided in
paragraphs (3) and (4), paragraph (1) shall
not apply to any of the following
distributions:
(A) In general.--
Distributions which are--
* * * * * * *
(iii) attributable
to the employee's being
disabled within the
meaning of subsection
(m)(7),
Section 72(m)(7) provides:
(7) Meaning of disabled.--For purposes
of this section, an individual shall be
considered to be disabled if he is unable to
engage in any substantial gainful activity by
reason of any medically determinable physical
or mental impairment which can be expected to
result in death or to be of long-continued
and indefinite duration. An individual shall
not be considered to be disabled unless he
furnishes proof of the existence thereof in
such form and manner as the Secretary may
require.
S. Rept. 93-383, supra at 134, 1974-3 C.B. (Supp.) at 213 states
that "Generally it is intended that the proof [of disability] be
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the same as where the individual applies for disability payments
under social security."
The regulations, promulgated pursuant to the statutory
authorization contained in section 72(m)(7), provide that an
individual will be considered to be disabled if he or she is
unable to engage in any "substantial gainful activity" by reason
of any medically determinable physical or mental impairment that
can be expected to result in death or to be of long-continued and
indefinite duration. Sec. 1.72-17A(f)(1), Income Tax Regs.
Significantly, the regulations also provide that an impairment
which is remediable does not constitute a disability. Sec. 1.72-
17A(f)(4), Income Tax Regs.
Notwithstanding the apparent severity of petitioner's
illness in 1989, which, according to Dr. Gardner, persisted into
the spring of 1992, the illness did not fall within the
definition of "disabled" as contemplated by sections 72(t)(1) and
(2) and 72(m)(7), and the regulations thereunder. Petitioner
continued to function as an active stock trader in the face of
his clinical depression, and in fact withdrew his IRA funds to
further that activity. Thus, his condition fails to meet the
regulatory requirement that the individual be so impaired as to
be unable to engage in any substantial gainful activity. Sec.
1.72-17A(f)(4), Income Tax Regs.
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Petitioners argue that Robert's activities during 1989
resulted in a net loss of $94,000, which, they say, is not an
indication of participating in a "gainful activity". But we have
held in another context, which by analogy is relevant here, that
a taxpayer may be engaged in a profit-making activity, even
without actually making a profit in a given year, if the
individual has an actual and honest profit-making objective. See
Dreicer v. Commissioner, 78 T.C. 642, 646 (1982), affd. without
published opinion 702 F.2d 1205 (D.C. Cir. 1983). We equate a
"substantial gainful activity" in this context with an "actual
and honest objective of making a profit." Obviously, petitioner
did not have failure to make a profit as his objective, even
though as it turned out he failed to make a profit from his
trading activities in 1989.
Petitioners criticize, as being too restrictive, the
regulatory standard of a mental disease impairment that would be
considered as preventing gainful activity. The standard is
contained in section 1.72-17A(f)(2)(vi), Income Tax Regs., which
reads as follows:
(vi) Mental diseases (e.g., psychosis
or severe psychoneurosis) requiring continued
institutionalization or constant supervision
of the individual;
Petitioners argue that Robert was under "constant
supervision" for two years and that the alternative regulatory
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requirement of "continued institutionalization" is outdated
because "medical practice in the latter part of the 20th century
attempts NOT to institutionalize patients". The fact that Robert
was never institutionalized does not, of course, mean that the
issue must automatically be decided in favor of the Government,
but we do not believe that Robert's psychiatric consultations
rise to a level that could properly be categorized as "constant
supervision". Petitioners assert that more Americans are
affected annually by clinical depression than by heart disease or
cancer. We would simply respond by recognizing that many seek
professional help with the expectation (or hope) that their
depression manifestations can be alleviated, just as persons
suffering from other illnesses, many of them quite serious, seek
and obtain periodic medical assistance to alleviate their
conditions. But periodic professional consultation (such as
petitioner's) alone does not, in our judgment, equate with the
constant supervision envisioned by the regulation. And
petitioners have not suggested that Robert suffered from
psychosis or severe psychoneurosis such as would require his
continued, constant supervision.
Petitioners also assert that the remediability of
petitioner's condition was uncertain in 1989, and that the fact
that the condition abated is a tribute to medical science, but
was by no means a certainty in 1989. While this may or may not
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be true, we would again point out that regardless of the
potential permanency of his condition, or the absence thereof,
petitioner was not so impaired as to be unable to actively pursue
the substantial gainful activity of securities trading in which
profession he was engaged throughout the year in question.
In conclusion, we might also point out that Congress has
provided a means of access to IRAs before retirement in some
cases of medical problems which, though serious, do not result in
permanent disability. Section 72(t)(2)(B) permits premature IRA
distributions without penalty to the extent such distributions do
not exceed the amount allowable as a deduction under section 213
for medical care (determined without regard to whether an
individual itemizes deductions). Petitioners have not claimed
the protection of this section, presumably because they reported
only $5,481 in unreimbursed medical and dental expenses on their
1989 Form 1040, which amount was not deductible by petitioners
because it did not exceed 7.5 percent of their adjusted gross
income, as required by section 213(a).
For the foregoing reasons we hold that petitioners are
liable for the 10-percent additional tax on a premature
distribution from Robert's qualified plan in 1989, pursuant to
section 72(t). See also, to the same effect, Kovacevic v.
Commissioner, T.C. Memo. 1992-609, and Kane v. Commissioner, T.C.
Memo. 1992-218. To reflect this holding and concessions,
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Decision will be entered
under Rule 155.