T.C. Summary Opinion 2004-57
UNITED STATES TAX COURT
BERNADETTE WILLIAMS, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 123-03S. Filed May 13, 2004.
Bernadette Williams, pro se.
Richard F. Stein, for respondent.
CARLUZZO, 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. Unless otherwise
indicated, subsequent section references are to the Internal
Revenue Code in effect for the taxable year in issue. The
decision to be entered is not reviewable by any other court, and
this opinion should not be cited as authority.
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Respondent determined a deficiency of $1,609.80 in
petitioner’s 2000 Federal income tax. The issue for decision is
whether petitioner is liable for the 10-percent additional tax
imposed by section 72(t) with respect to a distribution from a
qualified retirement plan.
Background
Some of the facts have been stipulated and are so found. At
the time the petition was filed, petitioner resided in Burke,
Virginia.
Petitioner began working at the U.S. Postal Service (USPS)
as a mail carrier in 1985 and, at least as of the date of trial,
has been employed by USPS in some capacity ever since. As an
employee of USPS, petitioner participated in a qualified
retirement plan (the retirement plan) made available to her
through her employer.1 During 1999 petitioner borrowed from, and
made some repayments to, the retirement plan.
Petitioner began experiencing back problems in 1995.
Her back problems caused her to miss work from October through
December 4, 1999. During that time she stopped making loan
repayments to the retirement plan.
1
The record contains little information regarding the
exact nature of the retirement plan. The parties proceeded as
though the retirement plan is described in secs. 72(t) and
4974(c), and we do likewise.
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On December 2, 1999, petitioner’s physician cleared
petitioner to return to “full duty” work with USPS. Shortly
thereafter, petitioner returned to work at USPS and resumed her
duties as a mail carrier.
Petitioner filed a bankruptcy proceeding in January 2000.
Throughout 2000, petitioner made specified payments to her
various creditors as required by the terms of the bankruptcy
plan; however, the bankruptcy plan did not provide for any
repayments to the retirement plan. Accordingly, petitioner did
not resume making loan repayments to the retirement plan.
In or around May 2000, petitioner’s back condition caused
her to stop working again. In September 2000, the U.S.
Department of Labor denied petitioner’s disability claim. In a
letter dated May 18, 2001, petitioner’s physician stated that
petitioner could perform all duties with respect to her job
except for getting in and out of the mail truck, and that she
could return to “light duty” work. After being away from work
for approximately 1 year, petitioner returned to work for 4 hours
a day, but she did not resume her job as a mail carrier. In a
letter dated October 9, 2001, petitioner’s physician further
stated that petitioner is “not totally disabled” and that she is
“capable of working an eight hour day” within prescribed limits.
In March 2002, petitioner returned to work full-time.
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As of the close of 2000, petitioner had not attained the age
of 59 ½. At the time, her outstanding loan balance from the
retirement plan was $16,098 (the distribution). The distribution
is reported on a Form 1099-R, Distributions From Pensions,
Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance
Contracts, etc., issued to petitioner by USPS.
Petitioner filed a timely 2000 Federal income tax return.
In addition to other items, the distribution is included in the
income reported on that return. The Federal income tax reported
on her 2000 return does not include the additional tax imposed by
section 72(t). In the notice of deficiency, respondent
determined that petitioner is liable for the additional tax
imposed by section 72(t) with respect to the distribution.
Discussion2
Section 72(t)(1) imposes an additional tax on early
distributions from qualified retirement plans “equal to 10
percent of the portion of such amount which is includable in
gross income.” Failure to make any installment payment when due
in accordance with the terms of a loan from a qualified
retirement plan may result in a taxable distribution. Sec.
72(p). Accordingly, a loan that constitutes a taxable
distribution is subject to the 10-percent additional tax on early
2
Petitioner does not argue for the application of sec.
7491.
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distributions under section 72(t). Plotkin v. Commissioner,
T.C. Memo. 2001-71.
The additional tax imposed by section 72(t) does not apply
to certain distributions from qualified retirement plans. For
example and most common, distributions that are made on or after
the date on which the taxpayer attains the age of 59 ½ are not
subject to the additional tax. Sec. 72(t)(2)(A)(i). Petitioner
did not attain the age of 59 ½ as of the close of 2000, and she
does not claim that she did. Instead, she argues that section
72(t) is not applicable to the distribution because she was
disabled at the time. She further suggests that the section
72(t) additional tax should not be imposed because she was
prohibited from making loan repayments to her retirement plan
by the terms of her bankruptcy plan.
Among other exceptions, none of which applies here, section
72(t)(2)(A)(iii) provides an exception for distributions
“attributable to the employee’s being disabled within the meaning
of subsection (m)(7)”. Section 72(m)(7) defines the term
“disabled” as follows:
(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.
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The determination of whether a taxpayer is disabled is made
on the basis of all the facts. Sec. 1.72-17A(f)(2), Income Tax
Regs. 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 disability. Sec. 1.72-17A(f)(1), Income Tax Regs.
The regulations also provide that the nature and severity of the
impairment are the primary consideration in determining whether
an individual is able to engage in any substantial gainful
activity. Id. Other factors to consider in the evaluation of
the impairment include the taxpayer’s education, training, and
work experience. 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.
Additionally, the impairment must be expected either to
continue for a long and indefinite period or to result in death.
Sec. 1.72-17A(f)(3), Income Tax Regs. In this context, the term
“indefinite” means that it cannot reasonably be anticipated that
the impairment will, in the foreseeable future, be so diminished
as no longer to prevent substantial gainful activity. Id. More
specifically, the regulations provide that “An individual will
not be deemed disabled if, with reasonable effort and safety to
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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.
Respondent contends that petitioner was not disabled within
the meaning of section 72(m)(7). Specifically, respondent argues
that petitioner’s condition did not persist for a long and
indefinite period as to prevent her from engaging in substantial
gainful activity within the meaning provided by the above
regulations.
Although petitioner’s back condition began in 1995, she
continued to work full-time as a mail carrier until October 1999.
After approximately a 2-month absence from her job in 1999,
petitioner was cleared by her physician to return to “full duty”
work as a mail carrier. Petitioner continued to work full-time
as a mail carrier until May 2000, at which time petitioner again
stopped working due to her back condition. In September 2000,
the U.S. Department of Labor denied petitioner’s disability
claim. In May 2001, petitioner’s physician determined that she
could return to “light duty” work at USPS. Petitioner returned
to work part-time in the office at USPS in May 2001. In October
2001, petitioner’s physician further determined that she was not
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disabled and fully capable of working an 8-hour day. Petitioner
returned to work full-time in March 2002.
Based on the record before us, we find that petitioner’s
condition was not of a long-continued and indefinite duration as
required by section 72(m)(7). Petitioner’s condition did not
prevent her from returning, and, in fact, petitioner did return,
to comparable substantial gainful activity at USPS. Therefore,
we find that petitioner was not disabled within the meaning of
section 72(m)(7) at the time of the distribution.3
Petitioner’s suggestion with respect to the consequences of
the bankruptcy plan is somewhat undermined by the fact that she
stopped making repayments prior to the date that the bankruptcy
proceeding was commenced. Furthermore, there is no specific
exception under section 72(t)(2) that addresses her situation.
With respect to section 72(t), this Court has repeatedly ruled
that it is bound by the list of statutory exceptions under
section 72(t)(2), none of which is applicable here. Arnold v.
Commissioner, 111 T.C. 250, 255 (1998); Schoof v. Commissioner,
110 T.C. 1, 11 (1998); Swihart v. Commissioner, T.C. Memo. 1998-
407. Although the Court is somewhat sympathetic to petitioner’s
situation, we are constrained to sustain respondent’s
3
Because petitioner was working full-time as a mail
carrier, she was likewise not disabled within the meaning of sec.
72(m)(7) at the time that she obtained the loan from the
retirement plan.
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determination. Accordingly, we hold that petitioner is liable
for the additional tax imposed by section 72(t) with respect to
the distribution.
Reviewed and adopted as the report of the Small Tax Case
Division.
To reflect the foregoing,
Decision will be entered
for respondent.