T.C. Memo. 2005-162
UNITED STATES TAX COURT
LINDA LOUISE LODDER-BECKERT AND TIMOTHY BECKERT, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 10752-04. Filed July 5, 2005.
P stopped working in 1999 to attend college. At
that time, P had $34,656.29 in a public employees
retirement system (PERS) account. When she asked PERS
to transfer that balance to an individual retirement
account (IRA), she was advised that the Ohio General
Assembly was actively pursuing legislation that would
significantly increase the value of her PERS account.
P deferred her transfer request and paid for her
education with student loans and credit card debts.
When the legislation was enacted in late 2000, P
renewed her request for the transfer of the PERS
balance (which on account of the legislation then
totaled $81,513.38). PERS completed the transfer on or
about Jan. 2, 2001. In 2001, P requested and received
two distributions from her IRA. P used part of the
distributed amounts to pay down her credit card debts
which were incurred to pay qualified higher education
expenses for 1999 and 2000.
Held: Sec. 72(t)(2)(E), I.R.C., does not allow P
to escape the additional tax of sec. 72(t)(1), I.R.C.,
-2-
as to any part of the distributions used for her 1999
and 2000 expenses; to escape that tax, sec.
72(t)(2)(E), I.R.C., requires that qualified higher
education expenses be for the taxable year of the
distribution.
Linda Louise Lodder-Beckert and Timothy Beckert, pro sese.
Terry Serena, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
LARO, Judge: Petitioners petitioned the Court to
redetermine a $2,476.35 deficiency in their 2001 Federal income
tax and a related $929.84 late filing addition to tax under
section 6651(a)(1).1 The deficiency stems in part from
respondent’s determination that petitioners are liable for a
10-percent additional tax under section 72(t)(1) on $20,000 that
petitioner2 received in 2001 through two distributions from her
individual retirement account (IRA). The deficiency also is
attributable to respondent’s determination that petitioners were
not entitled to a $476.35 rate reduction credit.
Respondent concedes that petitioners are entitled to the
rate reduction credit and that they are not liable for the
1
Unless otherwise noted, section references are to the
applicable versions of the Internal Revenue Code, and Rule
references are to the Tax Court Rules of Practice and Procedure.
2
When used in the singular, the term “petitioner” refers to
Linda Louise Lodder-Beckert.
-3-
addition to tax. Respondent also concedes that $7,937 of the
distributions is not subject to the additional tax under section
72(t)(1) by virtue of section 72(t)(2)(E) and the fact that
petitioner used those funds during 2001 to pay $7,937 of
qualified higher education expenses for that year. Following
these concessions, we are left to decide whether the remaining
distributions totaling $12,063 (disputed distributions) are
subject to the additional tax under section 72(t)(1); petitioner
used part of those funds during 2001 to pay her qualified higher
education expenses for 1999 and 2000. We hold that the $12,063
is subject to the additional tax under section 72(t)(1) in that
none of those funds was used by petitioner to pay qualified
higher education expenses for 2001.
FINDINGS OF FACT
Some facts were stipulated. We incorporate herein by this
reference the parties’ stipulation of facts and the exhibits
submitted therewith. We find the stipulated facts accordingly.
Petitioners are husband and wife, and they filed a joint 2001
Federal income tax return. They resided in Cincinnati, Ohio,
when their petition was filed.
On August 18, 1999, petitioner stopped working for the
University of Cincinnati (University) to attend college. She had
worked for the University for 18 years and had participated in
the Public Employees Retirement System of Ohio (PERS). When she
-4-
stopped working for the University, her PERS account had a
balance of $34,665.66, all of which represented her
contributions.
Petitioner desired to use the balance of her PERS account to
pay for her college education and was told that she could receive
that balance approximately 3 months after requesting it. She
knew at the time that her withdrawal of those funds would subject
the funds to an additional tax under section 72(t)(1) unless she
used the funds to pay for her education. On August 19, 1999, she
established an IRA and asked the trustee of PERS to transfer the
$34,665.66 to the IRA. PERS replied through a letter dated
November 9, 1999, that legislation was pending in the Ohio
General Assembly that would retroactively add interest to her
PERS account. The letter stated that the legislation, S. 144,
123d Gen. Assembly Reg. Sess. (Oh. 2000) (S. 144), had passed the
Senate and had been forwarded to the House. The letter advised
petitioner that she may wish to defer her withdrawal request
until after the legislation was effective. Petitioner deferred
her request for the transfer of funds.
From at or around the end of August 1999 through May 2001,
petitioner attended the Art Academy of Cincinnati and, in the
summer of 2000, the University. She graduated from the former
school in May 2001 with a bachelor of fine arts. During 1999,
2000, and 2001, she incurred $7,250, $17,097, and $7,937 of
-5-
expenses, respectively (or $32,284 in total), for tuition, books,
and supplies connected to her college education. She paid the
expenses of the earlier 2 years by borrowing $10,185 in student
loans and by charging the $14,162 balance to her credit cards.
PERS notified petitioner through a letter dated October 5,
2000, that S. 144 had been passed by the Ohio General Assembly
with an effective date of December 13, 2000. The letter stated
that allowable interest would be added to the balance of
petitioner’s contributions to PERS as of December 31, 1999. The
letter also stated that petitioner would receive an additional
amount equal to 2/3 of the total of her contributions plus
interest. The letter estimated that the balance of petitioner’s
PERS account as of January 1, 2001, was $81,513.37.
In 2000, after the passage of S. 144, petitioner asked PERS
to transfer her PERS balance (inclusive of the additional
amounts) to her IRA. By letter dated January 2, 2001, PERS
notified petitioner that it had transferred $77,309.77 of the
balance to her IRA and had enclosed a “warrant” in the amount of
$4,203.61, which represented her previously taxed contributions.
The letter stated that the total amount of $81,513.38 ($77,309.77
+ $4,203.61) consisted of her accumulated contributions of
$34,665.66 plus her allowable interest of $14,144.75 plus
“applicable matching” of $32,702.97.
-6-
On January 8, 2001, petitioner withdrew $15,000 from her
IRA. Approximately 5 months later, she withdrew another $5,000
from her IRA. She used $7,937 of the $20,000 ($15,000 + $5,000)
to pay her qualified higher education expenses incurred in 2001.
She also used part of the $20,000 to pay down her credit card
debts consisting, in part, of her qualified higher education
expenses that were charged to those cards before December 31,
2000.
Petitioners reported the $20,000 as gross income on their
2001 Federal income tax return, but they did not report or pay
any additional tax under section 72(t)(1) with respect thereto.
Respondent determined in the notice of deficiency that the
$20,000 was subject to that additional tax. Respondent has since
conceded that $7,937 of the distributions is not subject to the
additional tax under section 72(t)(1) by virtue of section
72(t)(2)(E) and of the fact that petitioner used those funds
during 2001 to pay $7,937 of her qualified higher education
expenses for 2001.
OPINION
Respondent determined that the distributions made to
petitioner out of her IRA were subject to the 10-percent
additional tax of section 72(t)(1). As relevant here, section
72(t)(1) imposes that tax on an early distribution from an IRA.
See also secs. 408(a), 4974(c)(4). Section 72(t)(2)(E) is an
-7-
exception to this rule. Section 72(t)(2)(E), added to the Code
by the Taxpayer Relief Act of 1997, Pub. L. 105-34, sec. 203(a),
111 Stat. 809, provides:
(E) Distributions from individual retirement
plans for higher education expenses.--Distributions to
an individual from an individual retirement plan to the
extent such distributions do not exceed the qualified
higher education expenses (as defined in paragraph (7))
of the taxpayer for the taxable year. * * *
Petitioner has the burden of proving the applicability of section
72(t)(2)(E). See Matthews v. Commissioner, 92 T.C. 351, 361-362
(1989), affd. 907 F.2d 1173 (D.C. Cir. 1990).
Given respondent’s concessions, we concern ourselves only
with the question of whether the distributions not used for
petitioner’s qualified higher education expenses for 2001 fall
within the exception of section 72(t)(2)(E). According to
petitioner, all of her distributions (inclusive of the disputed
distributions) are within the exception because her total
distributions were less than her total qualified higher education
expenses. Respondent argues that none of the disputed
distributions fall within the exception. As respondent sees it,
a literal reading of section 72(t)(2)(E) requires that the
distributions and qualified higher education expenses be in the
same year.
We agree with respondent. Because the statute is not
unescapably ambiguous, we construe it according to its plain
meaning. Allen v. Commissioner, 118 T.C. 1, 7 (2002). Section
-8-
72(t)(2)(E) states specifically that distributions are excepted
from the additional tax to the extent that they do not exceed the
qualified higher education expenses “for the taxable year.”
Because the distributions from petitioner’s IRA occurred in 2001
and the disputed qualified higher education expenses were for
1999 and 2000, we conclude that the exception of section
72(t)(2)(E) does not apply to any portion of the disputed
distributions.
Petitioner asks the Court to construe the statute equitably
in her favor. We decline to do so. We must apply the law as
Congress enacted it and may not rewrite it. See Hildebrand v.
Commissioner, 683 F.2d 57, 59 (3d Cir. 1982), affg. T.C. Memo.
1980-532. We hesitate, however, to concur that the equities
favor petitioner. The transfer to her IRA more than doubled by
reason of her decision to defer it, and she would in a sense have
it both ways if she were now permitted to escape the 10-percent
additional tax as to the disputed distributions.
We sustain respondent’s determination modified by his
concessions. We have considered all arguments made by the
parties and have rejected those arguments not discussed herein as
meritless.
Decision will be entered
under Rule 155.