T.C. Summary Opinion 2002-108
UNITED STATES TAX COURT
CLAUDIA J. DUNN, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 5131-01S. Filed August 22, 2002.
Claudia J. Dunn, pro se.
Rollin G. Thorley, for respondent.
WOLFE, Special Trial Judge: This case was heard pursuant to
the provisions of section 7463 of the Internal Revenue Code in
effect at the time the petition was filed. The decision to be
entered is not reviewable by any other court, and this opinion
should not be cited as authority. Unless otherwise indicated,
all section references are to the Internal Revenue Code in effect
for the year in issue, and all Rule references are to the Tax
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Court Rules of Practice and Procedure.
Respondent determined a deficiency of $4,199 in petitioner’s
1998 Federal income tax. The issue for decision is whether
petitioner is subject to the 10-percent additional tax under
section 72(t)(1) on a distribution from a qualified retirement
plan.
Background
Petitioner resided in Roseville, California, when the
petition was filed. Prior to and during the year at issue
petitioner worked as a registered nurse. At some point during
1998, petitioner apparently became convinced from watching
television that, according to a recently enacted law, early
distributions from qualified retirement plans no longer were
subject to a 10-percent additional tax if the distributions were
used to pay the taxpayer’s qualified higher education expenses.
Petitioner telephoned respondent’s assistance number and spoke
with a representative. As a result of her conversation with
respondent’s representative, petitioner had the impression that
the information she had heard on television was correct.
Before hearing about the new law, petitioner had been
considering continuing her education in order to advance her
career as a nurse. After speaking with respondent’s
representative, petitioner withdrew $41,993 from a qualified
retirement plan account at the Lincoln National Life Insurance
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Company. Petitioner received the entire distribution in 1998.
Petitioner included the distribution from her retirement
plan in her income tax return for 1998. In a notice of
deficiency dated March 8, 2001, respondent determined a
deficiency of $4,199 in petitioner’s 1998 Federal income tax.
Respondent determined that the entire distribution from
petitioner’s retirement plan in 1998 is subject to the additional
tax under section 72(t)(1).
Discussion
Section 72(t)(1) imposes a 10-percent additional tax on
distributions from qualified retirement plans. Section 72(t)(2)
lists specified exceptions to the imposition of the 10-percent
additional tax. Under the exception described in section
72(t)(2)(E), distributions to an individual from a qualified
retirement plan generally are not subject to the 10-percent
additional tax to the extent the distributions do not exceed the
individual’s qualified higher education expenses for the taxable
year. Qualified higher education expenses include tuition, fees,
books, supplies, and equipment required for enrollment or
attendance of the taxpayer or the taxpayer’s spouse or child,
among others, at an eligible educational institution. Secs.
72(t)(7)(A), 529(e)(3)(A). Under some circumstances, qualified
higher education expenses also may include the costs of room and
board. However, in the present case petitioner has failed to
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show that she satisfied the statutory requirements to deduct room
and board.
Section 529(e), expressly limits room and board benefits to
individuals who are eligible students, as defined in section
25A(b)(3), and satisfy specified additional requirements.
Petitioner’s educational program at the University of
Phoenix commenced on September 30, 1998. The “Student Schedule
Listing” provided by petitioner shows only two courses in 1998,
“Role of the Nurse Practitioner,” a three-credit course held at 6
p.m. each Wednesday between September 30, 1998 and November 4,
1998, and “Advanced Nursing Theory,” also a three-credit course
at 6 p.m. on Wednesdays from November 11, 1998 to January 6,
1999. Petitioner has failed to substantiate that in 1998 she was
an “eligible student,” as defined in section 25A(b)(3)(B),
“carrying at least ½ the normal full-time work load for the
course of study the student is pursuing.” The record in this
case shows that petitioner continued her full-time employment as
a nurse throughout the year in issue and incurred no room and
board expenses allocable to her education.
Petitioner submitted into evidence a copy of a Customer
Account History maintained by the University of Phoenix, which
lists the invoice dates and the payment dates of petitioner’s
transactions with the University of Phoenix from September 1998
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to January 2002. The following transactions had invoice dates in
1998:
Payment Method of payment Invoice date Payment date
$50.00 Check 9/11/1998 9/10/1998
45.00 Check 9/11/1998 9/10/1998
80.27 Check 9/23/1998 9/23/1998
1,038.00 EFT1 9/30/1998 1/25/1999
86.20 Check 11/10/1998 11/10/1998
1,038.00 EFT 11/11/1998 1/25/1999
Petitioner made four payments to the University of Phoenix in
1998 totaling $261.47. Petitioner also made two payments to the
University of Phoenix in 1999 for expenses that were incurred in
1998. The latter two expenses cannot be treated as qualified
higher education expenses for 1998. Petitioner, as a cash method
taxpayer, is not entitled to accrue expenses. Under the cash
receipts and disbursements method of accounting “Expenditures are
to be deducted for the taxable year in which actually made”.
Sec. 1.446-1(c)(1)(i), Income Tax Regs.; see secs. 446, 461; sec.
1.461-1(a)(1), Income Tax Regs. Petitioner’s higher education
expenses for 1998 are limited to the qualified higher education
expenses that she actually paid during 1998. Accordingly, only
$261.47 of petitioner’s payments to the University of Phoenix
qualify as qualified higher education expenses for 1998.
Petitioner mentioned that her daughter was a student. But
petitioner provided no information to indicate the amount of any
expenses she may have incurred for the education of her daughter
1
Electronic funds transfer.
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during 1998.
Petitioner argues that it would be inequitable for the 10-
percent additional tax to apply to any part of the distribution
from her retirement plan in 1998 because it is unrealistic to
expect a student to complete higher education in less than one
year.
Petitioner’s argument is misguided. There is no requirement
in either section 72(t) or section 529(e)(3) that a taxpayer must
complete a higher education within one year to avoid the section
72(t)(1) additional tax on early distributions from a qualified
retirement plan. A taxpayer-student can avoid the section
72(t)(1) tax simply by withdrawing during the year an amount less
than or equal to the amount that the taxpayer pays for higher
education expenses for that year.
In the present case, petitioner explained that she withdrew
$41,993 from her qualified retirement account because she
required funds to buy a car and to pay off bills in addition to
paying amounts to the University of Phoenix during 1998. On this
record it is clear that petitioner did not withdraw the $41,993
from her retirement account for education expenses but used the
bulk of the amounts withdrawn for personal living expenses.
Petitioner further argues that the distribution should not
be subject to the 10-percent additional tax because she is
entitled to rely on the advice of respondent’s representatives.
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Although we cannot be certain whether petitioner
misunderstood the advice she received or whether erroneous advice
was rendered, that distinction does not make a difference in this
case. It is well established that respondent is not bound by an
erroneous interpretation of the law by his agents or employees
but must follow the statutes, regulations, and case law. See
Dixon v. United States, 381 U.S. 68, 72-73 (1965); Zimmerman v.
Commissioner, 71 T.C. 367, 371 (1978), affd. without published
opinion 614 F.2d 1294 (2d Cir. 1979); Neri v. Commissioner, 54
T.C. 767, 771-772 (1970).
Reviewed and adopted as the report of the Small Tax Case
Division.
To reflect the foregoing,
Decision will be entered
under Rule 155.