T.C. Summary Opinion 2006-23
UNITED STATES TAX COURT
STACEY LYNN REESE, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 5598-05S. Filed February 13, 2006.
Stacey Lynn Reese, pro se.
George W. Bezold, for respondent.
DEAN, 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 as in effect for the year at 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 petitioner’s Federal
income tax of $3,291.90 for 2003.1 The issue for decision is
whether petitioner is liable for the 10-percent additional tax on
an early distribution under section 72(t).
Background
The stipulated facts and the exhibits received into evidence
are incorporated herein by reference. At the time the petition
in this case was filed, petitioner resided in Winneconne,
Wisconsin.
In August 2001, petitioner’s former husband was involved in
a diving accident and became a quadriplegic. From August 2001 to
September 2003, petitioner was employed, but she resigned at the
end of 2003 to care for her two young children. During 2003,
because of financial hardship, petitioner took a lump-sum
distribution of $32,917 from her 401(k) account maintained by her
former employer (distribution). Petitioner used the funds to pay
normal day-to-day living expenses. Petitioner had not yet
reached the age of 55 in 2003.
On April 15, 2004, petitioner electronically filed a Form
1040, U.S. Individual Income Tax Return, for 2003. The
distribution was reported as income on the return.
1
In the statutory notice of deficiency, respondent
determined that petitioner is liable for a 10-percent additional
tax of $3,291.70 and a child care credit adjustment of $.20.
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Respondent subsequently issued to petitioner a statutory
notice of deficiency for 2003. Respondent determined that
petitioner is liable for a 10-percent additional tax on the
distribution under section 72(t), because she received the
distribution prematurely.
Discussion
Section 72(t)(1) generally imposes a 10-percent additional
tax on premature distributions from “a qualified retirement plan
(as defined in section 4974(c))”, unless the distributions come
within one of the statutory exceptions under section 72(t)(2).
The parties do not dispute that petitioner’s 401(k) account was a
qualified retirement plan.
The legislative purpose underlying the section 72(t) tax is
that “premature distributions from IRAs frustrate the intention
of saving for retirement, and section 72(t) discourages this from
happening”. Arnold v. Commissioner, 111 T.C. 250, 255 (1998)
(quoting Dwyer v. Commissioner, 106 T.C. 337, 340 (1996)); S.
Rept. 93-383, at 134 (1974), 1974-3 C.B. (Supp.) 80, 213. The
Court has repeatedly held that it is bound by the statutory
exceptions enumerated in section 72(t)(2). See, e.g., Arnold v.
Commissioner, supra at 255-256; Schoof v. Commissioner, 110 T.C.
1, 11 (1998). Petitioner has not shown that she comes within any
of the exceptions to the 10-percent additional tax under section
72(t)(2).
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Petitioner contends that she should not be subject to the
10-percent additional tax, because she has a “qualifying
hardship”. While it is evident that petitioner took the
distribution because of financial hardship, and the Court
sympathizes with her, there is, however, no hardship exception
under section 72(t)(2). This principle has been applied
consistently in cases dealing with premature retirement
distributions. See Arnold v. Commissioner, supra at 255 (holding
that premature distribution received as a result of financial
hardship was subject to section 72(t) additional tax, because no
exception exists for financial hardship); Milner v. Commissioner,
T.C. Memo. 2004-111 (same); Gallagher v. Commissioner, T.C. Memo.
2001-34 (holding that premature distribution received by
taxpayers due to financial hardship and used to pay bills,
tuition at their son’s private high school, and other personal
expenses was subject to section 72(t) additional tax); Robertson
v. Commissioner, T.C. Memo. 2000-100, affd. 15 Fed. Appx. 467
(4th Cir. 2001) (holding that premature distribution used for the
taxpayer’s “own subsistence and that of her family” was subject
to section 72(t) additional tax); Pulliam v. Commissioner, T.C.
Memo. 1996-354 (holding that premature distribution received by
taxpayer due to financial hardship and used to pay off his debts
was subject to section 72(t) additional tax). Thus, the
distribution received by petitioner is subject to the 10-percent
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additional tax under section 72(t).
Reviewed and adopted as the report of the Small Tax Case
Division.
Decision will be entered
for respondent.