T.C. Memo. 1996-354
UNITED STATES TAX COURT
BRENT ALLAN PULLIAM, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 899-95. Filed August 1, 1996.
Brent Allan Pulliam, pro se.
Bryan E. Sladek, for respondent.
MEMORANDUM OPINION
COUVILLION, Special Trial Judge: This case was heard
pursuant to section 7443A(b)(3)1 and Rules 180, 181, and 182.
Respondent determined a deficiency of $2,479 in petitioner's
1992 Federal income tax. The sole issue for decision is whether
1
Unless otherwise indicated, section references are to the
Internal Revenue Code in effect for the year at issue. All Rule
references are to the Tax Court Rules of Practice and Procedure.
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petitioner is liable for the 10-percent additional tax imposed
under section 72(t) on early distributions from qualified
retirement plans.
Some of the facts were stipulated, and those facts, with the
annexed exhibits, are so found and are incorporated herein by
reference. At the time the petition was filed, petitioner's
legal residence was Walnut Creek, California.
Prior to and during the year at issue, petitioner was a
self-employed insurance agent, specializing in the sale of long-
term care insurance. Petitioner represented the Aetna and CNA
insurance companies.
During 1992, petitioner was participating in two retirement
plans offered by Northwestern Mutual Life Insurance Co.
(Northwestern). One plan was a simplified employee pension (SEP)
plan for self-employed individuals qualified under section 408(b)
and (k); the other was a Keogh plan qualified under section
401(a). Each of these plans was funded 100 percent by
petitioner. Petitioner did not represent or sell any insurance
contracts offered by Northwestern.
Beginning in 1988 and continuing in 1992, petitioner
sustained a downturn in sales of insurance policies. As a
consequence, petitioner's income was reduced drastically. In
order to pay off his debts, petitioner made early withdrawals
totaling $24,793.94 from his two retirement plans during 1992.
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Specifically, petitioner received a distribution of $14,793.94
from the SEP plan and a distribution of $10,000 from the Keogh
plan. Petitioner received a Form 1099-R from Northwestern,
showing premature taxable distributions totaling $24,793.94 with
no exceptions applicable. During the year 1992, petitioner was
36 years of age.
On his 1992 Federal income tax return, petitioner reported
the total distributions of $24,793.94 as gross income.
Petitioner did not report, however, liability for the 10-percent
additional tax under section 72(t), claiming that the
distributions were excepted from the additional tax due to
financial hardship. In the notice of deficiency, respondent
determined that petitioner was liable for the 10-percent
additional tax under section 72(t).
The determinations of the Commissioner in a notice of
deficiency are presumed correct, and the burden of proof is on
the taxpayer to prove that the determinations are in error. Rule
142(a); Welch v. Helvering, 290 U.S. 111 (1933).
Section 72(t) provides for a 10-percent additional tax on
early distributions from qualified retirement plans. Paragraph
(1), which imposes the tax, provides in relevant part as follows:
(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
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of the portion of such amount which is includible in gross
income.
The parties do not dispute that petitioner's SEP and Keogh plans
are qualified retirement plans under section 4974(c). The 10-
percent additional tax, however, does not apply to certain
distributions. Section 72(t)(2) exempts distributions from the
additional tax if the distributions are made: (1) To an employee
age 59-1/2 or older; (2) to a beneficiary (or to the estate of
the employee) on or after the death of the employee; (3) on
account of disability; (4) as part of a series of substantially
equal periodic payments made for life; (5) to an employee after
separation from service after attainment of age 55; (6) as
dividends paid with respect to corporate stock described in
section 404(k); (7) to an employee for medical care; or (8) to an
alternate payee pursuant to a qualified domestic relations order.
Petitioner concedes that none of the described section
72(t)(2) exemptions apply in his case. Petitioner contends,
however, that, due to his financial hardship, the distributions
should be exempt from section 72(t), and that, in not allowing a
financial hardship exemption, section 72(t) is contrary to public
policy and violates his constitutional right to equal protection.
Petitioner also relies heavily on the case of In re Cassidy, 983
F.2d 161 (10th Cir. 1992).
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In In re Cassidy, supra, the Court of Appeals held that, in
determining the priority of claims for bankruptcy purposes, the
section 72(t) additional tax constitutes a penalty that bears no
relationship to the direct financial loss of the Government and
is thereby punitive in nature. Accordingly, pursuant to the
bankruptcy laws, the Internal Revenue Service's claim against the
taxpayer for the payment of the section 72(t) additional tax was
ineligible for priority status, and the Internal Revenue Service,
therefore, was subordinated to the status of a general unsecured
creditor. Relying on In re Cassidy, supra, petitioner argues
that his "financial hardship circumstances and subsequent
premature withdrawals to pay outstanding debts constitute a
bankruptcy, and the early withdrawal penalty should be
subordinated in accordance with the equitable principles of the
Bankruptcy Code, thereby effectively relieving the penalty
assessment."
Petitioner's reliance on In re Cassidy, supra, is misplaced.
The Court of Appeals' holding was based strictly on bankruptcy
policy and was limited to determining the priority of claims in
bankruptcy proceedings. The holding is not applicable to this
case. Petitioner is not in a bankruptcy proceeding, and his case
before this Court is solely for the purpose of determining his
income tax liability. Moreover, the argument petitioner makes is
not even analogous to the question in this case as to whether the
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premature distributions from the two qualified plans were exempt
from the additional tax of section 72(t) because there are no
competing claims from which a determination of priorities has to
be made.
Petitioner also contends that the limited exceptions to the
section 72(t) additional tax violate his constitutional right of
equal protection. Specifically, petitioner argues that the death
and disability hardship exceptions to section 72(t) are "under-
inclusive, denying exceptions for general hardship circumstances,
thereby treating similarly situated persons in a substantially
different manner." The "hardship exceptions" in section 72(t)
for death and disability do not involve either a fundamental
interest or a suspect classification. Accordingly, the proper
level for review is the rational basis test--i.e., whether the
classification bears a reasonable relationship to some legitimate
government purpose. The legislative history of section 72
provides that the section was enacted to prevent the diversion of
retirement savings for nonretirement purposes and to recapture a
measure of the tax benefits provided by the deferral of income
tax through retirement plans. At the same time, Congress
recognized that it was appropriate to provide, under limited
circumstances, an exemption from the tax for certain withdrawals
on account of specified hardships. H. Rept. 99-426 (1985), 1986-
3 C.B. (Vol.2) 1, 727-729; S. Rept. 99-313 (1985), 1986-3 C.B.
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(Vol. 3) 1, 612-613. Petitioner failed to prove to the Court
that the omission in the statute of an exemption from the
additional tax under section 72(t) for financial hardships, as
opposed to those resulting from death or disability, was not
reasonable and, therefore, that the statute was not
constitutional. Whether Congress' distinction between financial
hardships and those caused by death or disability is a wise one
for policy, as opposed to constitutional, reasons is a matter for
petitioner to argue to Congress and not to this Court.
Finally, petitioner argues generally that section 72(t) is
contrary to public policy and is inequitable. The Tax Court is a
court of limited jurisdiction and lacks general equitable powers.
Commissioner v. McCoy, 484 U.S. 3, 7 (1987); Hays Corp. v.
Commissioner, 40 T.C. 436 (1963), affd. 331 F.2d 422 (7th Cir.
1964); see sec. 7442. The Court has no authority to disregard
the express provisions of statutes adopted by Congress, even
where the result in a particular case seems harsh. See, e.g.,
Estate of Cowser v. Commissioner, 736 F.2d 1168, 1171-1174 (7th
Cir. 1984), affg. 80 T.C. 783, 787-788 (1983).
In view of the foregoing, the Court holds that petitioner is
liable for the 10-percent additional tax imposed by section
72(t). While the Court sympathizes with petitioner's financial
situation, the Court notes that petitioner's participation in the
two retirement plans was voluntary. The decision to participate
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in such plans comes with attendant benefits and costs. While
participation in the plans allowed petitioner the deferral of
income tax, early distributions from these plans result in the
additional tax under section 72(t). Just as petitioner's
decision to participate in the retirement plans was voluntary, so
too was his decision to make the early withdrawals from his SEP
plan and Keogh plan, albeit under an adverse financial situation.
Petitioner must accept the consequences of the withdrawals.
Decision will be entered
for respondent.