T.C. Summary Opinion 2004-135
UNITED STATES TAX COURT
CHARLOTTE MARIE SCOTT, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 12045-03S. Filed September 30, 2004.
Charlotte Marie Scott, pro se.
Charlotte Mitchell, for respondent.
GOLDBERG, 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,
subsequent section references are to the Internal Revenue Code in
effect for the year in issue.
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Respondent determined a deficiency in petitioner’s Federal
income tax of $1,000.11 for the taxable year 2000.
The issue for decision is whether petitioner is liable for
the 10-percent additional tax on an early distribution pursuant
to section 72(t).
Some of the facts have been stipulated and are so found.
The stipulation of facts and the attached exhibits are
incorporated herein by this reference. Petitioner resided in
Hillsborough, California, on the date the petition was filed in
this case.
Charlotte Marie Scott (petitioner) began working for Digital
Equipment Corp. in 1985. Petitioner worked 13 years for Digital
Equipment Corp. until she was laid off in 1998. During her
employment with Digital Equipment Corp., petitioner set up an
Individual Retirement Account (IRA). This IRA was established
through Donaldson, Lufkin and Jenrette Securities Corp. as an
agent for Gruntal and Co., LLC. At the end of her employment,
this account was valued at about $30,000.
After being laid off from Digital Equipment Corp.,
petitioner received unemployment benefits for the remainder of
1998 to April 1999, when she was employed by High Voltage
Engineering Corp. (referred to as Robicon). Petitioner worked
for Robicon from April to October 1999, when she was again laid
off. While with Robicon, petitioner became a member of her
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employer’s 401(k) qualified retirement plan. This retirement
plan was established by Robicon through Vanguard Fiduciary Trust
Co. At the time of her dismissal from Robicon, the plan was
valued at about $1,170. After her dismissal from Robicon,
petitioner once again began to receive unemployment benefits for
the remainder of 1999.
Petitioner moved from Pennsylvania to California in January
2000 to care for her sister. Petitioner was receiving
unemployment benefits from the Commonwealth of Pennsylvania when
she moved to California. However, petitioner did not receive
unemployment benefits from California in 2000 because she was not
eligible.
During 2000, petitioner had a sporadic employment record.
Between January and April 2000, petitioner was employed on a
“project by project” basis by Changing Places, a packing and
moving company. From April 2000 until the end of the year,
petitioner was employed on a “project by project” basis designing
closets by Ronald Duerksen. Petitioner earned purely commission
income from her employment with Ronald Duerksen, and such
compensation was reported on her Schedule C, Profit or Loss From
Business.
During 1999, petitioner had COBRA medical insurance coverage
due to her previous employment at Robicon. Petitioner paid a
$239 per month insurance premium for the insurance policy, which
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covered only herself. However, in 2000, petitioner extended her
COBRA coverage to include her husband, which resulted in her
premiums increasing to $772 per month. Petitioner was notified
in 2001 that such coverage was canceled retroactively to November
2000 due to unpaid premiums. Petitioner would eventually file
for bankruptcy in 2001.
During 2000, the year in issue, petitioner withdrew
$1,168.39 from her Vanguard 401(k) qualified retirement plan and
$10,000 from her Gruntal IRA. Petitioner did not roll over the
distributed amounts into another qualified employee retirement
plan or individual retirement plan. Petitioner reported the
$11,168.39 combined amount withdrawn on her 2000 Federal income
tax return. Although the amount of the distributions was
reported on the return, petitioner did not compute the 10-percent
additional tax due for the early withdrawals. Petitioner, who
was born in 1948, was 52 years of age in 2000 when the
distributions were made.
Petitioner filed a joint Federal income tax return with her
then-husband, Robert J. Scott, for the taxable year 2000.
Between January and July 2000, Mr. Scott was a salesman with the
Pittsburgh Post Gazette. In July, he moved to San Francisco,
California, to live with petitioner and began work with the San
Francisco Chronicle, where he remained employed until November
when he left for Florida.
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In the notice of deficiency, the Commissioner determined a
deficiency in the amount of $1,000.11.1 This amount represents a
10-percent additional tax on the early IRA distribution pursuant
to section 72(t).2
Although admitting that the early distributions were made,
the gist of petitioner’s contention is that she is not liable for
the additional tax on the IRA distribution because it was (1)
used to pay medical insurance premiums and therefore met the
requirements of the section 72(t)(2)(D) exception, (2) used to
pay medical expenses and therefore met the requirements of
section 72(t)(2)(B), and/or (3) made because of financial
hardship, therefore making the application of the 10-percent
additional tax inequitable.
Section 72(t)(1) generally imposes a 10-percent additional
tax on early distributions from “a qualified retirement plan (as
defined in section 4974(c)),” unless the distributions come
within one of several statutory exceptions.
The parties do not dispute that petitioner’s accounts were
qualified employee retirement plans and that petitioner did not
“roll over” her distributions pursuant to section 408(d)(3).
1
The record is unclear as to how the Commissioner calculated
the amount of deficiency.
2
The Commissioner’s notice of deficiency mentioned the
additional tax only with regard to petitioner’s IRA distribution;
there was no mention of her 401(k) qualified retirement plan
distribution.
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Therefore, in order for petitioner to prevail, she must show that
the distributions fall under one of the exceptions under section
72(t)(2).
With respect to section 72(t), this Court has repeatedly
held that it is bound by the list of statutory exceptions
enumerated in section 72(t)(2). See, e.g., Arnold v.
Commissioner, 111 T.C. 250, 255-256 (1998); Schoof v.
Commissioner, 110 T.C. 1, 11 (1998); Clark v. Commissioner, 101
T.C. 215, 224-225 (1993); Swihart v. Commissioner, T.C. Memo.
1998-407; Pulliam v. Commissioner, T.C. Memo. 1996-354; Roundy v.
Commissioner, T.C. Memo. 1995-298, affd. 122 F.3d 835 (9th Cir.
1997).
The exceptions relevant to the case at hand are found in
section 72(t)(2)(D) and section 72(t)(2)(B). Section
72(t)(2)(D), provides that the following distributions are not
subject to the additional tax:
(i) In General.--Distributions from an individual
retirement plan to an individual after separation from
employment--
(I) if such individual has received
unemployment compensation for 12 consecutive weeks
under any Federal or State unemployment
compensation law by reason of such separation,
(II) if such distributions are made during
any taxable year during which such unemployment
compensation is paid or the succeeding taxable
year, and
(III) to the extent such distributions do not
exceed the amount paid during the taxable year for
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insurance described in section 213(d)(1)(D) with
respect to the individual * * * .
(ii) Distributions After Reemployment.-–Clause (i)
shall not apply to any distribution made after the
individual has been employed for at least 60 days after
the separation from employment to which clause (i)
applies.
(iii) Self-Employed Individuals.-–To the extent
provided in regulations, a self-employed individual
shall be treated as meeting the requirements of clause
(i)(I) if, under Federal or State law, the individual
would have received unemployment compensation but for
the fact the individual was self-employed.
Section 72(t)(2)(D) provides that the additional tax on
early distributions does not apply to “Distributions from an
individual retirement plan to an individual”. (Emphasis added.)
An “individual retirement plan” is defined as: “(A) an
individual retirement account described in section 408(a), and
(B) an individual retirement annuity described in section
408(b).” Sec. 7701(a)(37) (an individual retirement plan is
commonly referred to as an IRA).
It is clear that the retirement plan established by Robicon,
from which petitioner withdrew the $1,168.39 distribution, was a
qualified retirement plan described in section 401(a), and,
therefore, the exception contained in section 72(t)(2)(D) does
not apply. Under the statutory language it is clear that section
72(t)(2)(D) does not apply to petitioner’s 401(k) qualified
retirement plan distribution.
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After petitioner was dismissed from employment at Robicon at
the end of October 1999, she claims she received unemployment
benefits for the remainder of 1999. However, petitioner also
testified that she was “sporadically” employed between January
and April 2000. Petitioner stated that she requested her 401(k)
qualified retirement plan distribution in January 2000.
Therefore, even if section 72(t)(2)(D) did apply to such
distribution, based upon the record, this Court is unable to find
that petitioner received unemployment compensation for 12
consecutive weeks in the year of the distribution or the
preceding year as required by section 72(t)(2)(D)(i)(I).
Petitioner has not substantiated receiving unemployment
compensation for 12 consecutive weeks in the year of the
distribution from her IRA or the preceding year. Id. Therefore,
she has not fulfilled the requirements of section 72(t)(2)(D)
with respect to her IRA, which would have enabled her to receive
a portion of her IRA distribution without paying the 10-percent
additional tax.3 We conclude that petitioner is not entitled to
an exception under section 72(t)(2)(D) from the 10-percent
additional tax imposed by section 72(t). See sec. 72(t)(2)(D).
3
We note that even if petitioner had satisfied the
requirements of sec. 72(t)(2)(D), the sec. 72(t)(2)(D) exception
would have applied only to $7,723.60 of the $11,168 distribution,
which was the amount substantiated as used to pay for health
insurance premiums from January to October 2000, due to the fact
that petitioner’s insurance was canceled retroactively to
November 2000 for nonpayment.
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In the petition to this Court, it is unclear whether
petitioner contended that her distributions were not subject to
the 10-percent additional tax because they were used for medical
expenses under section 72(t)(2)(B). However, petitioner
introduced evidence that would suggest that such a claim might be
relevant; therefore, we shall discuss this contention.
Section 72(t)(2)(B) provides that the following
distributions are not subject to the additional tax:
(B) Medical Expenses.--Distributions made to the
employee * * * to the extent such distributions do not
exceed the amount allowable as a deduction under
section 213 to the employee for amounts paid during the
taxable year for medical care (determined without
regard to whether the employee itemizes deductions for
such taxable year).
The deduction allowed under section 213(a) is for “the expenses
paid during the taxable year, * * * for medical care * * * to the
extent that such expenses exceed 7.5 percent of adjusted gross
income.”
On petitioner’s Schedule A, Itemized Deductions,4 petitioner
calculated that the total medical and dental expenses paid by her
and her husband in 2000 was $3,365. Petitioner’s 2000 Federal
income tax return reflects that her and her husband’s joint
adjusted gross income was $54,340. Therefore, 7.5 percent of
4
Petitioner decided against itemizing her deductions and
instead used the standard deduction in her 2000 joint Federal
income tax return. However, petitioner introduced her Schedule
A, Itemized Deductions, into evidence in this case.
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their 2000 adjusted gross income was $4,076. Thus, petitioner’s
expenses paid for medical care in 2000 did not satisfy the
requirements of section 72(t)(2)(B). Therefore, the
distributions do not fall under the exception of section
72(t)(2)(B).
Finally, petitioner contends that, because of her financial
hardship, the $11,168 should not be subject to the 10-percent
additional tax imposed by section 72(t). Petitioner seeks relief
from the 10-percent additional tax imposed on her distributions
based on her financial hardship. There is, however, no hardship
exception in the controlling statute, section 72(t). This
principle has been applied consistently in cases dealing with
premature IRA distributions. See Arnold v. Commissioner, 111
T.C. at 255; Gallagher v. Commissioner, T.C. Memo. 2001-34; Deal
v. Commissioner, T.C. Memo. 1999-352; Pulliam v. Commissioner,
T.C. Memo. 1996-354. Thus, the IRA distribution received by
petitioner is subject to the 10-percent additional tax under
section 72(t).
Moreover, petitioner alluded that her requests for her
distributions in 2000 were based on reliance of advice given to
her by her accountant. The authoritative sources of Federal tax
law are the statutes, regulations, and judicial decisions.
Zimmerman v. Commissioner, 71 T.C. 367, 371 (1978), affd. without
published opinion 614 F.2d 1294 (2d Cir. 1979); Green v.
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Commissioner, 59 T.C. 456, 458 (1972). We have applied the
relevant statute, and we have concluded that respondent correctly
applied the law in this case. Respondent’s imposition of the
additional tax is sustained.
Reviewed and adopted as the report of the Small Tax Case
Division.
Decision will be entered
for respondent.