T.C. Summary Opinion 2005-99
UNITED STATES TAX COURT
DONALD MARION AND BETHANY DIANE FENTON, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 1588-04S. Filed July 21, 2005.
Donald Marion and Bethany Diane Fenton, pro sese.
David S. Weiner, for respondent.
DEAN, Special Trial Judge: This case was heard pursuant to
the provisions of section 7463 of the Internal Revenue Code.
Unless otherwise indicated, section references are to the
Internal Revenue Code in effect for the 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 in petitioners’ Federal
income tax of $6,858 for 2001.
The issue for decision is whether petitioners are liable for
the 10-percent additional tax on early distributions pursuant to
section 72(t).
Background
Some of the facts have been stipulated and are so found.
The stipulation of facts and the exhibits received into evidence
are incorporated herein by reference. Petitioners resided in
Clarkston, Michigan, at the time the petition was filed.
During 2001, Donald Marion Fenton (petitioner) was an
automotive engineer with the IBM Corporation, and Bethany Diane
Fenton was a homemaker. Petitioners timely filed their 2001
Federal income tax return.
In late 2001, after petitioner was laid off from IBM, he
received two distributions from the IBM Corporation 401(k) Plan
in the total amount of $68,583. The 401(k) plan is a retirement
plan qualified under section 401(a). Petitioners reported the
distributions from the 401(k) plan as income on their 2001
return. Petitioners did not compute the 10-percent additional
tax due on early distributions from qualified retirement plans.
Petitioner used the funds to pay family expenses, including
the downpayment on a home and college tuition for his daughter.
Petitioner also used the funds to pay family support expenses,
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medical expenses, and mortgage payments to avoid foreclosure. In
2001, petitioner had not yet reached the age of 59-1/2 years.
Respondent issued a notice of deficiency for 2001
determining a deficiency of $6,858. This amount represents a 10-
percent additional tax on the early 401(k) plan distributions
pursuant to section 72(t).
Discussion
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 account was a qualified employee
retirement plan. Therefore, in order for petitioner to prevail,
he 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 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).
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The exceptions that may be relevant to the case at hand are
found in section 72(t)(2)(B) and section 72(t)(2)(E).1 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 petitioners’ Schedule A, Itemized Deductions,
petitioner calculated that the total medical and dental expenses
they paid in 2001 was $774. Petitioners’ 2001 Federal income tax
return reflects that their joint adjusted gross income was
$172,703. Therefore, 7.5 percent of their 2001 adjusted gross
income was $12,953. Thus, petitioners’ expenses paid for medical
care in 2001 did not satisfy the requirements of section 213(a).
Therefore, the distributions do not fall under the exception of
section 72(t)(2)(B).
1
Petitioners assert that they used a portion of the
distributions to make a downpayment on a home. Sec. 72(t)(2)(F),
regarding distributions made for first time home purchases, is
inapplicable here because petitioner’s 401(k) plan is not an
individual retirement account as required by the exception.
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Petitioner also asserts that he used a portion of the
distributions to pay higher education expenses for his daughter.
Section 72(t)(2)(E) provides that the additional tax on early
distributions does not apply to “Distributions to an individual
from an individual retirement plan to the extent such
distributions do not exceed the qualified higher education
expenses * * * of the taxpayer for the taxable year.” (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.
Section 72(t)(2)(E) was added by section 203(a) of the
Taxpayer Relief Act of 1997, Pub. L. 105-34, 111 Stat. 809. The
report of the Committee on the Budget refers only to withdrawals
from IRAs. See H. Conf. Rept. 105-148, at 288-289 (1997), 1997-4
C.B. (Vol. 1) 319, 610-611. It is undisputed that the retirement
plan from which petitioner withdrew the $68,583 is a plan
described in section 401(k), and, therefore, the exception
contained in section 71(t)(2)(E) does not apply.
Finally, petitioner contends that, because of financial
hardship, the $68,583 should not be subject to the 10-percent
additional tax imposed by section 72(t). There is, however, no
hardship exception in the controlling statute, section 72(t).
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This principle has been applied consistently in cases dealing
with premature retirement distributions. See Arnold v.
Commissioner, supra at 255; Milner v. Commissioner, T.C. Memo.
2004-111. Thus, the retirement distributions received by
petitioner are subject to the 10-percent additional tax under
section 72(t).
Reviewed and adopted as the report of the Small Tax Case
Division.
To reflect the foregoing,
Decision will be
entered for respondent.