T.C. Summary Opinion 2005-172
UNITED STATES TAX COURT
FREDERICK W. HAAS AND DONNA S. HAAS, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 7524-04S. Filed November 22, 2005.
Frederick W. Haas and Donna S. Haas, pro se.
Pamela L. Mable, for respondent.
POWELL, Special Trial Judge: This case was heard pursuant
to the provisions of section 74631 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.
1
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 of $6,079 and an
accuracy-related penalty under section 6662(a) of $1,216 in
petitioners’ 2001 Federal income tax. After concessions,2 the
issue is whether petitioners are liable for a 10-percent
additional tax under section 72(t) of $5,625. At the time the
petition was filed, petitioners resided in Alpharetta, Georgia.
Background
Petitioner (Frederick W. Haas) was a chemical engineer and
was employed by various chemical companies. In 1977, he was
employed by British Petroleum (BP) and was employed by BP for a
number of years. In 1992, he was employed by OHM Remediation
(OHM), a leader in the cleaning up of high hazard chemical
spills. OHM was bought by IT Corporation (IT) in 1998.
During his years as a chemical engineer petitioner was
exposed to various chemicals and became sensitive to various
chemicals. In February 2000, petitioner’s doctor wrote that
petitioner “should avoid direct exposure to known liver toxins.
He may, however, participate in site surveys where the level of
protection recommended is Level C or Level D.” On April 18,
2001, petitioner was told that his physical examination results
were in the normal limits range, but he was “restricted from
2
Petitioners concede that they omitted from gross income
$1,280 (State income tax refund), $26 (interest income from State
Farm Life Insurance Co.), and $254 (interest income from the U.S.
Treasury Dept.). Respondent concedes the sec. 6662(a) penalty.
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exposure to known liver toxins.”
In 2002, IT went bankrupt and petitioner's employment was
terminated. After IT went into bankruptcy, petitioner could not
find employment similar to that which he had. He attended North
Georgia College and State University, became qualified as a high
school teacher, and became a teacher in August 2003.
During 2001, petitioner withdrew $56,250 from a section
401(k) retirement plan (the distribution). At that time he had
not reached age 59-1/2. Petitioners reported the distribution on
their joint 2001 Federal income tax return, but did not report
any additional tax under section 72(t). Respondent determined
that the 10-percent additional tax was due.
Discussion
Section 72(t) provides:
SEC. 72(t). 10-Percent Additional Tax on Early
Distributions from Qualified Retirement Plans.--
(1) Imposition of additional tax.--If any
taxpayer receives any amount from a qualified
retirement plan * * * the taxpayer’s tax under this
chapter for the taxable year in which such amount is
received shall be increased by an amount equal to 10
percent of the portion of such amount which is
includible in gross income.
(2) Subsection not to apply to certain
distributions.--Except as provided in paragraphs (3)
and (4), paragraph (1) shall not apply to any of the
following distributions:
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(A) In general.--Distributions which are--
* * * * * * *
(iii) attributable to the employee’s
being disabled within the meaning of
subsection (m)(7) * * *.
Section 72(m)(7) provides:
(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 indefinate 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.
The regulations provide, inter alia, that to be considered
disabled a person is unable to engage in any “substantial gainful
activity”. Substantial gainful activity means the activity, or a
comparable activity, in which the individual customarily engaged
prior to the disability. Sec. 1.72-17(f)(1), Income Tax Regs.
Petitioners agree that there was a distribution during the
taxable year 2001 and that the distribution was taxable. The
question solely concerns whether the section 72(t) additional tax
applies.
Petitioners maintain that petitioner was disabled within the
meaning of section 72(m)(7) during the year of the distribution.
This is somewhat peculiar since petitioner, during the entire
2001 year, was paid a $93,165 salary for his employment with IT.
Furthermore, the reports from his doctors provide that, while he
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should avoid direct exposure to known liver toxins, he could
participate in site surveys with recommended protection, and his
physical examination results were within normal limits.
Petitioner points to communications with IT personnel in
March and April of 2000 where it was determined that he should
not go on certain projects. But also during 2000, he was still
going out on projects. In 2002, when IT went into bankruptcy and
petitioner became unemployed, we cannot say his unemployment was
due to a disability within the meaning of section 72(m)(7).
Certainly none of his doctors stated that he was disabled. It
may well be that he had medical problems, but we are not
convinced that these problems could be expected to result in
death or to be of a long-continued duration to keep him from
engaging in his customary or any comparable substantial gainful
activity.
Petitioners may have been subject to financial hardship
during 2001; there is, however, no exception under section 72(t)
for financial hardship. This principle has been applied
consistently in cases dealing with premature individual
retirement account distributions. See Arnold v. Commissioner,
111 T.C. 250, 255 (1998); Gallagher v. Commissioner, T.C. Memo.
2001-34; Deal v. Commissioner, T.C. Memo. 1999-352; Pulliam v.
Commissioner, T.C. Memo. 1996-354. As the legislative history of
section 408(f), the predecessor to section 72(t), explains, the
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purpose of the 10-percent additional tax was to discourage early
distributions from retirement plans because “Premature
distributions frustrate the intention of saving for retirement”.
S. Rept. 93-383, at 134 (1974), 1974-3 C.B. (Supp.) 80, 213.
Petitioners are therefore subject to the 10-percent additional
tax under section 72(t) on the distribution.
Reviewed and adopted as the report of the Small Tax Case
Division.
Decision will be entered for
respondent with respect to the
deficiency, and decision will be
entered for petitioner with respect
to the section 6662(a) penalty.