T.C. Memo. 1996-421
UNITED STATES TAX COURT
JOE M. AND PATRICIA M. BROWN, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 9129-93. Filed September 18, 1996.
Robert O. Kazary, for petitioners.
Alan R. Peregoy, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
DAWSON, Judge: This case was assigned to Special Trial
Judge Robert N. Armen, Jr., pursuant to the provisions of section
7443A(b)(4) of the Internal Revenue Code of 1986, as amended, and
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Rules 180, 181, and 183.1 The Court agrees with and adopts the
Opinion of the Special Trial Judge, which is set forth below.
OPINION OF THE SPECIAL TRIAL JUDGE
ARMEN, Special Trial Judge: Respondent determined the
following deficiencies in petitioners' Federal income and excise
taxes for the taxable years 1989 and 1990:
(1) For the taxable year 1989, respondent determined a
deficiency in petitioners' income tax, as well as deficiencies in
petitioners' excise taxes under sections 4973 and 4980A,2 in the
total amount of $73,905. The deficiency in income tax includes
the 10-percent additional tax imposed by section 72(t) on early
distributions from qualified retirement plans.3
1
Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for 1989 and 1990, the
taxable years in issue, and all Rule references are to the Tax
Court Rules of Practice and Procedure.
2
Sec. 4973 imposes a 6-percent excise tax on excess
contributions to individual retirement accounts. Sec. 4980A
imposes a 15-percent excise tax on excess distributions from
qualified retirement plans. Both of these taxes are included
within ch. 43 of the I.R.C. They are therefore subject to the
deficiency procedures set forth in subch. B of ch. 63 of the
I.R.C. See sec. 6211(a).
3
The notice of deficiency is not a model of clarity.
However, the deficiencies determined therein for the taxable year
1989 are as follows:
Deficiency in income tax
(1) Regular income tax under sec. 1 $38,233
(2) Additional tax under sec. 72(t) 22,781 $61,014
Deficiencies in excise taxes
(1) Under sec. 4973 9,000
(2) Under sec. 4980A 3,891
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(2) For the taxable year 1990, respondent determined a
deficiency in petitioners' income tax, as well as a deficiency in
petitioners' excise tax under section 4980A, in the total amount
of $15,669. The 10-percent additional tax imposed by section
72(t) constitutes the deficiency in income tax.4
In her amended answer, respondent asserted deficiencies in
petitioners' income tax and excise tax under section 4980A for
the taxable year 1990 in the total amount of $19,394, an increase
in the amount of $3,725 over the total determined in the notice
of deficiency.5
Total deficiencies in income and excise taxes 73,905
4
Again, the notice of deficiency is not a model of clarity.
However, the deficiencies determined therein for the taxable year
1990 are as follows:
Deficiency in income tax
-- under sec. 72(t) $15,446
Deficiency in excise tax
-- under sec. 4980A 223
Total deficiencies in income and excise taxes 15,669
5
The increase consists of the following:
Deficiencies
Income/excise tax Statutory notice Amended answer Increase
Section 1 --- $3,302 $3,302
Section 72(t) $15,446 15,728 282
Section 4980A 223 364 141
$15,669 $19,394 $3,725
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After concessions by the parties,6 the issues for decision
are as follows:
(1) Whether the Transfer Refund distribution received by
petitioner Joe M. Brown in 1989 from the Maryland State
Employees' Retirement System qualifies as a partial distribution
eligible for tax-free rollover treatment under section 402(a)(5);
(2) whether petitioners must include in their gross income
for 1990, the amount distributed from petitioner's individual
retirement account during that year;
(3) whether petitioners are liable for the 10-percent
additional tax under section 72(t) for 1989 and 1990; and
(4) whether petitioner Joe M. Brown is liable for the 6-
percent excise tax under section 4973 for 1989 and the 15-percent
excise tax under 4980A for 1989 and 1990.7
Generally speaking, the resolution of the foregoing issues
turns on whether petitioner Joe M. Brown was disabled, within the
meaning of section 72(m)(7), immediately before receiving the
6
For 1989, respondent concedes that the 6-percent excise
tax imposed by sec. 4973 should be calculated based on an excess
contribution of $148,000 rather than $150,000. Respondent also
concedes that petitioner Patricia M. Brown is not liable for: (1)
The excise taxes under secs. 4973 and 4980A for 1989, or (2) the
excise tax under sec. 4980A for 1990.
For 1990, petitioners concede: (1) They failed to report
interest income from the First National Bank of Maryland in the
amount of $512, and (2) they are only entitled to a deduction for
mortgage interest in the amount of $3,262, rather than in the
amount of $5,480, as claimed on their return for that year.
7
See supra note 6 regarding respondent's concessions of the
excise taxes as to petitioner Patricia M. Brown.
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Transfer Refund distribution from the Maryland State Employees'
Retirement System in 1989.
FINDINGS OF FACT
Some of the facts have been stipulated, and they are so
found. Petitioners resided in Oldtown, Maryland, at the time
that their petition was filed with the Court.
General Background
Petitioner Joe M. Brown (petitioner) was born in 1937. He
was hired by the Maryland State Highway Administration (Highway
Administration) in 1956, and he worked for the Highway
Administration until he retired, effective May 1, 1991.
For most of his career with the Highway Administration,
petitioner was employed as an engineering technician. As an
engineering technician, petitioner worked as a project engineer,
responsible for the construction of highways and bridges.
Petitioner's principal focus, at least during the latter stages
of his career, was the construction of bridges.
A project engineer is the State's construction engineering
representative who is directly in charge of a particular road-
building or bridge-building project. The State considers a
project engineer to be a key person of the team assigned to such
a project.
The responsibilities of a project engineer include many
duties that are supervisory in nature. For example, a project
engineer must supervise the activities and performance of
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personnel to ensure that delegated tasks are satisfactorily
performed. Additionally, a project engineer must ensure that
appropriate personnel are on duty at all required times and that
they carry out their work assignments. A project engineer is
also responsible for recordkeeping and report preparation.
Project engineers spend anywhere from 50 to 70 percent of
their time working "on site". In order to perform their duties
on site, the project engineer must be able to move freely about a
construction site. Such mobility demands considerable walking
and climbing (e.g., up and down ladders and hillsides, into and
out of operating machinery and motor vehicles, on top of building
supplies, and over various obstructions). In addition, "site
work" requires the project engineer to lift heavy objects and to
"walk beams", particularly when bridge construction is involved.
Petitioner was competent as a project engineer, having a
good combination of professional skills and practical experience.
Moreover, he enjoyed a good reputation as a hard-worker and a
"can do" person. He was also dependable and always available to
help others. Not surprisingly, petitioner was popular among his
colleagues; he was equally respected and well-liked by both his
superiors and his subordinates.
Petitioner received superior job evaluations on his annual
efficiency rating reports for the calendar years 1989 and 1990.
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Petitioner's Transfer Refund Distribution
For most of his employment career, petitioner was a member
of the Maryland State Employees' Retirement System (the
Retirement System). However, on October 6, 1989, petitioner
elected to transfer to the Maryland State Employees' Pension
System (the Pension System). Petitioner's election to transfer
from the Retirement System to the Pension System was effective
October 1, 1989.8
The Retirement System is a qualified defined benefit plan
under section 401(a) that requires mandatory nondeductible
employee contributions. The Pension System is also a qualified
defined benefit plan under section 401(a), but generally does not
require mandatory nondeductible employee contributions. The
State of Maryland contributes to both the Retirement System and
the Pension System on behalf of the members of those systems.
The trusts maintained as part of the Retirement System and the
Pension System are both exempt from taxation under section
501(a).
8
For a discussion of the Retirement System and the Pension
System, see generally Hylton v. Commissioner, T.C. Memo. 1995-27;
Hoppe v. Commissioner, T.C. Memo. 1994-635; Hamilton v.
Commissioner, T.C. Memo. 1994-633; Maryland State Teachers
Association v. Hughes, 594 F. Supp. 1353, 1357-1358 (D. Md.
1984); Conway v. United States, 908 F. Supp. 292 (D. Md. 1995).
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As previously indicated, petitioner elected to transfer from
the Retirement System to the Pension System on October 6, 1989.
On the application to transfer, petitioner specifically opted to
receive, in a lump sum, the distribution to which he was entitled
upon transferring from the Retirement System to the Pension
System.
As a result of the election to transfer, petitioner received
a distribution (the Transfer Refund) from the Retirement System
in the amount of $244,151.04. Petitioner received the Transfer
Refund in the form of a check dated October 31, 1989, from
Maryland State Retirement Systems.
Petitioner's Transfer Refund consisted of $16,338.93 in
previously taxed contributions made by petitioner during his
employment tenure with the State, $1,005.11 of employer "pick-up
contributions",9 and $226,807 of earnings in the form of
interest. The earnings and "pick-up contributions", which total
$227,812.11, constitute the taxable portion of the Transfer
Refund.
At the time that petitioner transferred from the Retirement
System to the Pension System and received the Transfer Refund, he
had attained the age of 52. If petitioner had not transferred to
the Pension System but had remained a member of the Retirement
System, he would have been entitled to retire and receive a
9
See sec. 414(h)(2).
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normal service retirement benefit, including a regular monthly
annuity, under the Retirement System. He would not have been
entitled to receive a Transfer Refund, however, because a
Transfer Refund is payable only as a consequence of transferring
from the Retirement System to the Pension System.
Also as a consequence of transferring from the Retirement
System to the Pension System, petitioner became a member of the
Pension System. As a member of the Pension System, petitioner
became entitled (when he chose to retire) to receive a retirement
benefit based upon his salary and his creditable years of
service, specifically including those years of creditable service
recognized under the Retirement System.10 However, because
petitioner received the Transfer Refund on account of
transferring from the Retirement System to the Pension System,
the monthly annuity that petitioner would receive when he chose
to retire from the Pension System was less than the monthly
annuity that he would have received if he had not transferred to
the Pension System but had retired under the Retirement System.
Rollover of Petitioner's Transfer Refund
In late October or early November 1989, immediately after
receiving the Transfer Refund, petitioner rolled over $150,000
10
Petitioner became a member of the Retirement System when
he was hired by the Highway Administration in 1956. He remained
a member of the Retirement System for most of his employment
career.
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thereof into an IRA with First National Bank of Maryland (First
National).
Petitioner's IRA Distribution
Sometime after petitioner had effected the $150,000 rollover
of his Transfer Refund, petitioner's former supervisor informed
petitioner that the Transfer Refund might not qualify for tax-
free rollover treatment. Accordingly, on or about August 8,
1990, petitioner withdrew $157,174 from his IRA with First
National. At the time that petitioner received this
distribution, he had not quite attained the age of 53.
Petitioner's Health And His Employment
Petitioner has had a history of health problems. When he
was about 1 year old, petitioner contracted polio and suffered
severe atrophy of his right leg. As a consequence, petitioner
has suffered severe degenerative joint disease of the spine and
left knee.
The strain on petitioner's body, and in particular the
strain on petitioner's right leg and spine, has been exacerbated
by petitioner's obesity. His weight has exceeded 300 pounds for
substantial periods of his life. In October 1989 his weight
exceeded 290 pounds.
Petitioner developed severe lower back problems, which
caused considerable pain, because of the polio-induced atrophy of
his right leg. In 1977 petitioner was forced to undergo back
surgery, and vertebrae in his spine were fused in order to manage
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his pain. For some time thereafter, petitioner was temporarily
paralyzed.
Petitioner also developed osteoarthritis, primarily in the
lower back related to the fusion of vertebrae and in his knees.
By mid-1987, moderate degenerative changes were apparent in
petitioner's mid- and lower thoracic spine. By 1990 the
degenerative changes were apparent throughout petitioner's spine.
In September 1978, Maryland State Retirement Systems granted
petitioner a disability retirement allowance. However, after a
discussion with his wife, petitioner decided not to accept any
"freeloads". Petitioner struggled to rehabilitate himself, and
he eventually returned to work as a project engineer with the
Highway Administration.
In early 1987, petitioner's left knee "went out completely".
Sometime thereafter, but before 1989, doctors replaced
petitioner's left knee. However, within 9 months, the
replacement knee "broke completely out of [the] bone".
Petitioner had difficulty walking after the replacement knee
broke. Accordingly, on August 3, 1990, doctors replaced
petitioner's left knee for the second time. Petitioner needed to
use crutches for 6 months following his second knee operation.
Petitioner has also had a clinically significant history of
hypertension. This condition has occasioned the postponement of
scheduled surgery on two occasions.
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At various times and for extended periods, petitioner has
experienced pain severe enough to warrant prescription-strength
analgesics. Such analgesics have not always been effective to
manage petitioner's pain.
Petitioner's medical condition justified the issuance of
handicapped tags and permit by the Maryland department of motor
vehicles. However, by no later than February 1991, petitioner's
ability even to drive a motor vehicle was very limited.
Notwithstanding petitioner's physical impairment as of
October 1989, petitioner retained his position as project
engineer and remained "on the job" until December 1990, at which
time he went on leave, never to return to work. During this
period, petitioner struggled to perform his job. Although he
could no longer climb or "walk beams", he attempted to "control
his job" by telephone from home and he attempted to work "on
site" by driving along, or by being driven along, in a vehicle.
During 1989, petitioner earned 120 hours of sick leave but
did not use any amount thereof. During 1990, petitioner also
earned 120 hours of sick leave but did not use any amount
thereof. However, it was not unusual for petitioner to use
annual leave (vacation days) in lieu of sick leave. Thus, for
example, petitioner used annual leave for his knee replacement
surgery on August 3, 1990, and for the two-week period thereafter
while he convalesced. Petitioner used all of his 200 hours of
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annual leave in 1990. In 1989, he used 84 hours of annual leave,
mostly in the final two months of the year.
Events Leading to Petitioner's Retirement
On December 26, 1990, petitioner went on leave and never
returned to work. Petitioner exhausted his accumulated annual
and sick leave before his retirement. Petitioner chose to
exhaust his leave before retiring because it was both permitted
and financially advantageous to do so.
On February 14, 1991, petitioner authorized his physician to
submit a medical statement of disability to the Medical Board of
the State of Maryland (the Medical Board). Petitioner also
submitted a handwritten statement at that time, which statement
concluded as follows:
As when the State of Maryland gave a handi-cap boy
a wonderful job in 1956, in 1977 I said I was not ready
to give up.
But in 1991, I don't think I have no other choice.
On March 21, 1991, the Medical Board recommended that
petitioner be approved for ordinary disability retirement. The
Medical Board's report stated as follows:
It is the recommendation of the Medical Board that
[petitioner] be approved ordinary disability due to
osteoarthritis of the spine, hypertensive
cardiovascular disease, old polio with atrophy of the
right leg and obesity.
Petitioner's Retirement
Even though petitioner was approved for an ordinary
disability retirement, he ultimately decided to apply for a
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normal service retirement. In view of the fact that petitioner
had worked for the Highway Administration for over 35 years and
had previously received a Transfer Refund, retirement on a
"normal" basis, rather than on a disability basis, was more
advantageous. Accordingly, on April 22, 1991, petitioner applied
to the Pension System for a normal service retirement, effective
May 1, 1991. Petitioner's application for retirement was
approved, and petitioner retired from the Highway Administration
on May 1, 1991.
As a result of his retirement, petitioner is receiving a
normal service retirement benefit from the Pension System based
upon his salary and his creditable years of service, specifically
including those years of creditable service recognized under the
Retirement System. However, as previously indicated, because
petitioner received the Transfer Refund on account of
transferring from the Retirement System to the Pension System,
petitioner's monthly annuity is less than the monthly annuity
that he would have received if he had not transferred to the
Pension System but had retired under the Retirement System.
On November 19, 1991, the Social Security Administration
(SSA) notified petitioner that he was entitled to disability
benefits because of SSA's determination that petitioner had
become disabled on December 22, 1990.
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Petitioners' 1989 Income Tax Return
On their income tax return for 1989, petitioners disclosed
the receipt of the taxable portion of the Transfer Refund; i.e.,
$227,812. Of this amount, petitioners reported that $77,812 was
taxable and that the balance, or $150,000, had been rolled over
tax-free into an IRA.
Petitioners attached Form 5329 "Return for Additional Taxes
Attributable to Qualified Retirement Plans (Including IRAs)
Annuities, and Modified Endowment Contracts" to their 1989
return. In Part II of this form, petitioners reported liability
in the amount of $7,781 for the additional tax under section
72(t); i.e., 10 percent of $77,812, the amount of the Transfer
Refund that petitioners had included in gross income.
Respondent's Deficiency Determination For 1989
In the notice of deficiency for 1989, respondent determined
that petitioner's Transfer Refund was not eligible for tax-free
rollover treatment under section 402(a)(5). Respondent also
determined that, by virtue of sections 402(a)(1) and 72, the
taxable portion of the Transfer Refund (i.e., $227,812.11) was
includable in petitioners' gross income for 1989. Accordingly,
because petitioners had previously reported that $77,812 of such
amount was taxable and had attempted to roll over only the
balance (i.e., $150,000), respondent increased petitioners'
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taxable income by $150,000.11 As corollaries to this
determination, respondent also determined that petitioners are
liable for: (1) The additional tax under section 72(t) for a
premature distribution from the Retirement System; (2) the excise
tax under section 4980A for an excess distribution from the
Retirement System; and (3) the excise tax under section 4973 for
an excess contribution to petitioner's IRA with First National.12
Petitioners' 1990 Income Tax Return
On their income tax return for 1990, petitioners reported
taxable interest in the total amount of $154,613. Of this
amount, $150,000 represented a distribution from petitioner's IRA
with First National, which petitioners characterized as an early
withdrawal. The balance represented interest income from
unrelated bank accounts.
11
The notice of deficiency, which was issued by
respondent's Appeals Office in Baltimore, Maryland, states as
follows:
Your gross income has been increased to include the
amount of $150,000 you received as payment from your
qualified retirement plan because you received the
payment before you reached aged [sic] 59 1/2 or became
disabled. Accordingly, taxable income is increased
$150,000.
Respondent repeatedly cross-referenced the foregoing paragraph by
way of explanation for most of the other adjustments made in the
notice of deficiency.
12
See supra note 6 regarding respondent's concession of the
excise taxes as to petitioner Patricia M. Brown.
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Respondent's Deficiency Determination For 1990
In the notice of deficiency for 1990, respondent determined
that petitioners are liable for: (1) The additional tax under
section 72(t) for a premature distribution from petitioner's IRA
with First National, and (2) the excise tax under section 4980A
for an excess distribution from such IRA.13
Respondent's Claim For An Increased Deficiency For 1990
In her amended answer, respondent asserted deficiencies in
petitioners' income tax and excise tax under section 4980A for
the taxable year 1990 in the total amount of $19,394, an increase
of $3,725 over the total determined in the notice of
deficiency.14 The increase is principally attributable to the
fact that petitioner withdrew $157,174 from his IRA with First
National in 1990 but only reported $150,000 thereof on his 1990
income tax return. Correlative adjustments were asserted
regarding the additional tax under section 72(t) and the excise
tax under section 4980A.15
13
See supra note 6 regarding respondent's concession of the
excise tax as to petitioner Patricia M. Brown.
14
See supra note 5 for a breakdown of the increase by the
type of tax involved.
15
Other adjustments asserted by respondent that served to
increase petitioners' income tax include: (1) The understatement
of interest income in the amount of $512, (2) the overstatement
of a deduction for mortgage interest in the amount of $2,218, and
(3) the understatement of additional income from Maryland State
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Petitioner's Physical Condition At Trial
Petitioner's physical condition at the time of trial was
essentially the same as petitioner's physical condition
immediately before receiving the Transfer Refund in October 1989.
At trial, petitioner was unable to stand with reasonable
effort and was unable to assume the witness stand without risk of
safety to himself. The evidence of significant physical pain was
apparent from petitioner's demeanor.
ULTIMATE FINDING OF FACT
Petitioner was disabled within the meaning of section
72(m)(7) immediately before receiving the Transfer Refund in
October 1989.
OPINION
I. Rollover Issue
We must first decide whether the Transfer Refund received by
petitioner in 1989 from the Retirement System qualifies for tax-
free rollover treatment under section 402(a)(5). The resolution
Retirement Systems in the amount of $103. Petitioners have
conceded the first two adjustments. See supra note 6. However,
respondent did not offer any evidence at trial regarding the
third adjustment and therefore did not carry her burden of proof
in respect of that adjustment or the correlative adjustments
under secs. 72(t), 4980A. Accordingly, petitioners are not
liable for any increase in tax (whether under secs. 1, 72(t), or
4980A) attributable to the $103 adjustment related to additional
income from Maryland State Retirement Systems.
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of this issue turns on whether the Transfer Refund constitutes a
"partial distribution", as defined by section 402(a)(5)(E)(v).16
A "partial distribution" is defined as "any distribution to
an employee of all or any portion of the balance to the credit of
such employee in a qualified trust; except that such term shall
not include any distribution which is a qualified total
distribution." Sec. 402(a)(5)(E)(v). Further, a partial
distribution must be "payable as provided in clause (i), (iii),
or (iv) of subsection (e)(4)(A) (without regard to the second
sentence thereof)". Sec. 402(a)(5)(D)(i)(I).17
As relevant herein, section 402(e)(4)(A) provides that a
distribution must be made either "(i) on account of the
16
The Transfer Refund would also qualify for tax-free
rollover treatment if it were a "qualified total distribution",
as defined by sec. 402(a)(5)(E)(i). In this case, petitioners do
not contend that the Transfer Refund was a qualified total
distribution. In any event, the Transfer Refund was not a
qualified total distribution. See Wittstadt v. Commissioner,
T.C. Memo. 1995-492, Humberson v. Commissioner, T.C. Memo. 1995-
470; Pumphrey v. Commissioner, T.C. Memo 1995-469; Dorsey v.
Commissioner, T.C. Memo. 1995-97, affd. without published opinion
91 F.3d 129 (4th Cir. 1996); Hylton v. Commissioner, T.C. Memo.
1995-27.
17
In order to qualify as a "partial distribution", sec.
402(a)(5)(D)(i)(I) also requires that the distribution "is of an
amount equal to at least 50 percent of the balance to the credit
of the employee in a qualified trust". This additional
requirement was not raised in the notice of deficiency as a
reason for the adjustment to petitioners' income for 1989, see
supra note 11, nor was it raised by respondent in either her
trial memorandum or at trial in her counsel's opening statement.
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employee's death", "(iii) on account of the employee's separation
from the service", or "(iv) after the employee has become
disabled (within the meaning of section 72(m)(7))". Petitioners
do not contend that the Transfer Refund was received either on
account of petitioner's death or on account of petitioner's
separation from service.18 Rather, petitioners contend that the
Transfer Refund was received "after * * * [petitioner had] become
disabled (within the meaning of section 72(m)(7))" under section
402(e)(4)(A)(iv). Respondent contends to the contrary.19
Our analysis necessarily begins with section 72(m)(7). That
section is explicit as to the meaning of the term "disabled".
Under section 72(m)(7), an individual is considered 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 a
18
In other cases we have held that a Transfer Refund is not
received on account of a taxpayer's separation from the service
but rather on account of a taxpayer's election to transfer from
the Retirement System to the Pension System. E.g., Dorsey v.
Commissioner, supra; Hylton v. Commissioner, T.C. Memo. 1995-27.
But see Adler v. Commissioner, 86 F.3d 378 (4th Cir. 1996), revg.
and remanding T.C. Memo. 1995-148.
19
As previously noted, respondent has limited her
contention regarding whether the Transfer Refund constitutes a
partial distribution to the issue of petitioner's disability.
See supra note 17. Accordingly, we consider such issue to be
dispositive of whether the Transfer Refund constitutes a partial
distribution.
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long-continued and indefinite duration." See Dwyer v.
Commissioner, 106 T.C. 337 (1996). The regulations provide that
the determination is to be made on the basis of all the facts.
See sec. 1.72-17A(f)(2), Income Tax Regs. The regulations also
set forth general considerations upon which a determination of
disability is to be made. See sec. 1.72-17A(f), Income Tax Regs.
In determining whether an individual's infirmity makes the
individual unable to engage in any substantial gainful activity,
primary consideration is to be given to the nature and severity
of the impairment. Sec. 1.72-17A(f)(1), Income Tax Regs.
However, the regulations emphasize that the "substantial gainful
activity" to which section 72(m)(7) refers is the activity, or a
comparable activity, in which the individual customarily engaged
prior to the impairment. Sec. 1.72-17A(f)(2), Income Tax Regs.
Therefore, the impairment must be evaluated in terms of whether
it does, in fact, prevent the individual from engaging in his
customary, or any comparable, substantial gainful activity. Id.
More specifically, the regulations provide that an individual
will not be deemed disabled if "with reasonable effort and safety
to himself, the impairment can be diminished to the extent that
the individual will not be prevented by the impairment from
engaging in his customary or any comparable substantial gainful
activity". Sec. 1.72-17A(f)(4), Income Tax Regs.
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Although we think that the issue is very close, we hold that
petitioners have carried their burden of proof.
In advocating her position, respondent relies heavily on the
fact that petitioner did not use any sick leave in either 1989 or
1990. However, it was not unusual for petitioner to use annual
leave in lieu of sick leave, as evidenced by the fact that
petitioner used annual leave for his knee replacement surgery in
August 1990 and for the convalescent period thereafter. We also
note that petitioner used all of his annual leave in 1990, as
well as a substantial portion thereof in 1989, mostly in the
final 2 months of that year.
Respondent also relies heavily on the fact that petitioner
remained "on the job" until December 1990, at which time he went
on leave, never to return to work. In a related vein, respondent
points to the superior job evaluations that petitioner received
for 1989 and 1990.
We observe, however, that petitioner did not receive his
Transfer Refund until late October 1989, almost 10 months into
the rating period for 1989. Accordingly, a superior job
evaluation for 1989 is not incompatible with the fact of
disability immediately before the receipt of the Transfer Refund.
Petitioner's job evaluation for 1990 is another matter, and
we can appreciate why respondent focuses on it. However, we are
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reminded that petitioner's position as a project engineer
required that he be substantially mobile and physically fit in
order to perform his duties. Further, the record clearly
demonstrates that as of October 1989, petitioner was unable to
climb ladders or otherwise, lift heavy objects, or "walk beams".
In short, based on the particular facts and circumstances of this
case, we find the content of the job evaluation report for 1990
to be contrary to the weight of the evidence. Moreover, the
record demonstrates that when petitioner's disability became such
that petitioner could no longer perform his job but he was
mentally not ready to give up, his subordinates and superiors
accommodated him however they could.
As reflected in our findings of fact, petitioner's physical
condition at the time of trial was essentially the same as it was
immediately before receiving the Transfer Refund in October 1989.
In our judgment, and based on our observations over the course of
an afternoon, petitioner was disabled at the time of trial.
Thus, suffice it to say that petitioner was neither mobile nor
fit immediately before receiving the Transfer Refund in October
1989. His physical impairment, which was of a long-continued and
indefinite duration, precluded him from engaging in his customary
or any comparable substantial gainful activity.
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In view of the foregoing, we hold that petitioner was
disabled, within the meaning of section 72(m)(7), immediately
before receiving the Transfer Refund. Accordingly, the Transfer
Refund qualifies as a partial distribution and is eligible for
tax-free rollover treatment under section 402(a)(5)(D).
Petitioners are therefore not required to include in their gross
income for 1989 the $150,000 that was not previously included
therein.
II. The IRA Distribution Issue
On or about August 8, 1990, petitioner withdrew $157,174
from his IRA with First National. Petitioners reported $150,000
of this distribution in their gross income for 1990.
Respondent contends that for 1990, petitioners failed to
include in their gross income $7,174 of petitioner's IRA
distribution from First National. We do not understand
petitioners to argue that the amount of the IRA distribution in
excess of $150,000; i.e., $7,174, is not includable in their
gross income for 1990. In any event, based on the record as a
whole, we are satisfied that the $7,174 represents taxable
earnings from petitioner's IRA and that such amount is properly
includable in petitioners' gross income for 1990. Sec.
408(d)(1).
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In view of our conclusion, supra, that petitioner's Transfer
Refund qualifies for tax-free rollover treatment in 1989 under
section 402(a)(5)(D), we understand petitioners to abandon what
must be viewed as their alternative contentions concerning the
alleged excludibility of $150,000 of petitioner's IRA
distribution from gross income for 1990. In any event, such
amount is properly includable in petitioners' gross income for
that year. Sec. 408(d)(1).
III. Section 72(t) Additional Tax Issue
We turn next to respondent's determination that petitioners
are liable for the additional tax under section 72(t) for 1989
and 1990.
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 of the portion of such amount which
is includible in gross income.
Pursuant to section 4974(c), the term "qualified retirement
plan" includes plans described in section 401(a) and individual
retirement accounts described in section 408(a). The Retirement
System from which petitioner received his Transfer Refund in 1989
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is a qualified plan under section 401(a). Additionally, the
account from which petitioner received his distribution in 1990
was a valid IRA under section 408(a). Accordingly, absent an
applicable exception, the additional tax under section 72(t)(1)
applies to the distributions received by petitioners in both 1989
and 1990.
By virtue of paragraph (2)(A)(iii) of section 72(t), the 10-
percent additional tax does not apply, inter alia, to
distributions attributable to the taxpayer's being disabled
(within the meaning of section 72(m)(7)).
We have already decided that petitioner was disabled within
the meaning of section 72(m)(7) when he received the Transfer
Refund. Accordingly, petitioners are not liable for the
additional tax imposed by section 72(t) for either of the taxable
years in issue.
IV. Excise Tax Issues
We turn next to respondent's excise tax determinations. We
begin with section 4973.
Section 4973
Section 4973(a) imposes a 6-percent excise tax on excess
contributions to an IRA. As relevant herein, an "excess
contribution" is the amount in excess of the amount allowable as
a deduction under section 219 (computed without regard to section
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219(g)), exclusive of amounts properly rolled over tax free.
Sec. 4973(b).
In view of our conclusion, supra, that petitioner's Transfer
Refund qualifies for tax-free rollover treatment in 1989 under
section 402(a)(5)(D), petitioner is not liable for the excise tax
under section 4973(a).
Section 4980A
Finally, we turn to section 4980A. Section 4980A(a) imposes
a 15-percent excise tax on excess distributions from qualified
retirement plans. As relevant herein, an "excess distribution"
is defined as the aggregate amount of the retirement
distributions with respect to any individual during any calendar
year to the extent that such amount exceeds $150,000. Sec.
4980A(c)(1). However, pursuant to section 4980A(c)(2)(D), a
retirement distribution is not an "excess distribution" if the
retirement distribution is not included in gross income by reason
of a rollover contribution.
In view of our conclusion, supra, that petitioner's Transfer
Refund qualifies for tax-free rollover treatment in 1989 under
section 402(a)(5)(D), petitioner is not liable for the excise tax
imposed by section 4980A for 1989.
For 1990, petitioner withdrew an amount in excess of
$150,000 from his IRA with First National. Accordingly,
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petitioner is liable for the excise tax imposed by section 4980A
for 1990.20
V.Conclusion
In order to give effect to our disposition of the disputed
issues, as well as the parties' concessions,21
Decision will be entered
under Rule 155.
20
See supra note 15 and accompanying text. Further, we
note that petitioner is not entitled to the offset provided by
sec. 4980A(b) in view of our conclusion, supra, that petitioners
are not liable for the 10-percent additional tax under sec.
72(t).
21
See supra note 6.