T.C. Summary Opinion 2006-55
UNITED STATES TAX COURT
LINDA L. DOMANICO AND ANTHONY M. DOMANICO, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 18992-04S. Filed April 19, 2006.
Linda L. Domanico and Anthony M. Domanico, pro sese.
Joan Casali, for respondent.
ARMEN, Special Trial Judge: This case was heard pursuant to
the provisions of section 7463 of the Internal Revenue Code in
effect when the petition was filed.1 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, all subsequent section
references are to the Internal Revenue Code in effect for 2001,
the taxable year in issue. All monetary amounts are rounded.
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Respondent determined a deficiency in petitioners’ Federal
income tax for the taxable year 2001 of $4,046. The deficiency
is attributable solely to the 10-percent additional tax under
section 72(t) on an early distribution from a qualified
retirement plan.
After petitioners’ partial concession concerning the amount
of the deficiency in dispute,2 the sole issue for decision is
whether petitioners are liable under section 72(t) for the 10-
percent additional tax on an early distribution from petitioner
Linda L. Domanico’s section 401(k) qualified retirement plan
(401(k) plan). We hold that they are.
Background
Some of the facts have been stipulated, and they are so
found. We incorporate by reference the parties’ stipulation of
facts and accompanying exhibits.
At the time that the petition was filed, petitioners resided
in Lindenhurst, New York.
From 1978 to 1996, petitioner Linda L. Domanico (Mrs.
Domanico) worked as a flight attendant for Trans World Airlines,
2
On or about Dec. 11, 2003, petitioners paid to respondent
$931 in respect of the $4,046 deficiency representing the 10-
percent additional tax under sec. 72(t) on $8,560 of petitioner
Linda L. Domanico’s 401(k) plan distribution, which portion
petitioners conceded was not used for higher education expenses,
plus interest thereon. However, as discussed infra in the text,
the distribution of $40,457 less her education expenses of
$32,147 equals $8,310. This discrepancy is not explained in the
record.
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Inc. (TWA). During her employment with TWA, Mrs. Domanico
participated in TWA’s 401(k) plan.
In 1996, Mrs. Domanico terminated her employment with TWA
because of a permanent injury that she incurred on board an
aircraft. Several years later, she continued her studies towards
a permanent teaching certificate. In 2000, Mrs. Domanico began
her graduate studies. She incurred the following higher
education expenses:
Year College Amount
1999 Adelphi & St. John’s
University $6,273
2000 St. John’s University 11,848
2001 St. John’s University 10,357
2002 Teacher Education Institute 517
2003 Teacher Education Institute 3,152
Total $32,147
During 2001, Mrs. Domanico was also employed as a librarian.
TWA informed Mrs. Domanico by letter dated July 25, 2001,
that American Airlines had acquired TWA and that she was
eligible to “roll over” your account balance to another
qualified plan or IRA. You were advised that, once
your TWA-sponsored Plan (the “Plan”) is terminated, you
will be required to: (i) make an election either to
roll over the balances in that plan to the American
Airlines $uper $aver Plan (or other qualified plan if
you take a job with another company that allows such
rollovers); (ii) transfer your balances to an
individual IRA; or (iii) take a direct distribution.
On the basis of her research of the 2001 U.S. Master Tax
Guide (Master Tax Guide), a tax guide published by Commerce
Clearing House, Inc., a private commercial publisher, Mrs.
Domanico decided to take a direct distribution of $40,457 from
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the 401(k) plan in 2001. At the time of the distribution, she
had not reached 55 years of age, nor was she disabled.
In 2001, the year that she received the distribution, Mrs.
Domanico used $10,357 of the distribution to pay higher education
expenses that she incurred in that year. With the exception of
$8,560, see supra note 2, she used the remaining funds to (1) pay
off debt that she had incurred in 1999 and 2000 for higher
education expenses and (2) pay for higher education expenses that
she subsequently incurred in 2002 and 2003.
Petitioners timely filed a Form 1040, U.S. Individual Income
Tax Return, for 2001. On their return, petitioners reported the
$40,457 distribution as income but did not report the 10-percent
additional tax for an early distribution under section 72(t). On
Form 5329, Additional Taxes on Qualified Plans (Including IRAs),
and Other Tax-Favored Accounts, petitioners indicated that the
early distribution was not subject to the additional tax by
virtue of exception 8 (IRA distributions made for higher
education expenses).
In the notice of deficiency, respondent determined that
petitioners are liable for the 10-percent additional tax on the
early distribution from Mrs. Domanico’s 401(k) plan pursuant to
section 72(t). An attachment to the notice of deficiency stated,
in relevant part:
the qualified retirement plan in question was not an
individual retirement plan, and that the additional tax
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cannot be avoided by offset of the distribution by
qualified education expenses. * * * any qualified
education expense offset is limited to expenses paid
during the taxable year of distribution.
Petitioners timely filed a petition with the Court disputing
the determined deficiency. Paragraph 4 of the petition states:
I used an early distribution from a qualified plan for
educational expenses. I was forced to make a decision,
by my employer, and I thought I interpreted the tax
code correctly. The monies that I used were entirely
my contributions. I was told that had I rolled them
over for “one day”, they would be exempt from the
penalty (10%). I feel I am being penalized (harshly)
for such a finite misinterpretation. I would greatly
appreciate a favorable ruling.
Discussion3
Petitioners contend that the distribution from Mrs.
Domanico’s 401(k) plan is excepted from the 10-percent additional
tax on early distributions because they used the funds to pay for
Mrs. Domanico’s higher education expenses incurred from 1999
through 2003. In support of their contention, petitioners rely
on paragraph 2179 of the Master Tax Guide that states in
pertinent part:
2179. Early Distributions. Distributions from a
traditional IRA to a participant before the individual
has reached age 59 ½ are generally subject to the same
10% penalty that applies to early distributions from
qualified plans. Many of the exceptions to the early
distribution penalty also apply to early distributions
from a traditional IRA. * * * The following
3
The facts are not in dispute, and the issue is
essentially one of law. Accordingly, we decide the issue without
regard to sec. 7491.
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exceptions to the 10% penalty also apply when early
distributions are made from an IRA.
* * * * * * *
Education Expenses. The 10% penalty does not
apply if the individual uses the IRA money to pay for
“qualified higher education expenses” for the
individual, the individual’s spouse, child, or
grandchild of the individual or the individual’s
spouse. Qualified expenses included [sic] tuition at a
post-secondary educational institution, books, fees,
supplies and equipment (Code Sec. 72(t)(2)(E)).
[Emphasis added.]
Therefore, in petitioners’ view, because distributions from an
IRA and a qualified plan; i.e., a 401(k) plan, are treated the
same in some instances for purposes of the 10-percent penalty and
because a distribution from an IRA that is used for higher
education expenses is exempt from the 10-percent penalty, a
distribution from a qualified plan that is used for higher
education expenses should also be exempt from the 10-percent
penalty. Moreover, according to petitioners, a one-time
distribution should cover expenses incurred over a number of
years because paragraph 2179 of the Master Tax Guide does not
state that the funds must be used in the same calendar year that
the distribution is received. As discussed below, we disagree
with petitioners’ contention.
First, it is well settled that the authoritative sources of
Federal tax law are the statutes, regulations, and judicial
decisions and not guides such as the Master Tax Guide that are
published by private commercial publishers. See, e.g., Zimmerman
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v. Commissioner, 71 T.C. 367, 371 (1978), affd. without published
opinion 614 F.2d 1294 (2d Cir. 1979).
Second, section 72(t)(1) imposes an additional tax on
distributions from a “qualified retirement plan” equal to 10
percent of the portion of such amount that is includable in gross
income unless the distribution comes within one of several
statutory exceptions. For purposes of the 10-percent additional
tax, a qualified retirement plan includes both a 401(k) plan and
an individual retirement account or individual retirement annuity
(collectively, IRAs). See secs. 72(t)(1), 401(a), (k)(1),
4974(c)(1), (4), and (5).
Lastly, as relevant herein, the 10-percent additional tax
imposed on early distributions from qualified retirement plans
does not apply to distributions from “individual retirement
plans” used for higher education expenses of the taxpayer for the
taxable year. Sec. 72(t)(2)(E).4 An individual retirement plan
is defined as an individual retirement account or individual
retirement annuity (commonly referred to as IRAs). Sec.
4
Sec. 72(t)(2)(E) provides:
SEC. 72(t) 10-PERCENT ADDITIONAL TAX ON EARLY DISTRIBUTIONS
FROM QUALIFIED RETIREMENT PLANS.--
* * * * * * *
(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 * * * of the taxpayer for the
taxable year. * * *
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7701(a)(37). Retirement plans qualified under section 401(a) and
(k), however, are not included in the definition of “individual
retirement plan” under section 7701(a)(37).
Clearly, Congress intended this exception to apply only to
distributions from “individual retirement plans”; i.e., IRAs, and
not to all qualified retirement plans. See secs. 4974(c)(4) and
(5) and 7701(a)(37); Taxpayer Relief Act of 1997, Pub. L. 105-34,
sec. 203(a), 111 Stat. 809. This is evident in the report of the
Committee on the Budget, which provides:
Penalty free IRA withdrawals for education
expenses--The bill provides that individuals may make
penalty-free withdrawals from their IRAs to pay for the
undergraduate and graduate higher education expenses of
themselves, their spouses, their children and
grandchildren or the children or grandchildren of their
spouses. [Emphasis added.]
H. Rept. 105-148, at 288-289 (1997), 1997-4 C.B. (Vol. 1) 319,
610-611. The report of the Committee on the Budget specifically
provides that only withdrawals from IRAs that are used for higher
education expenses will qualify as withdrawals excepted from the
10-percent additional tax. Id.
In the present case, Mrs. Domanico’s 401(k) plan is a
qualified retirement plan, and distributions therefrom are
subject to the 10-percent additional tax under section 72(t)(1)
absent an applicable statutory exception.5 Although Mrs.
5
None of the exceptions under sec. 72(t)(2)(A) (e.g.,
distributions (1) made after the employee attains age 59 ½, (2)
(continued...)
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Domanico used her 401(k) plan distribution for a commendable
purpose; i.e., to pay for higher education expenses, the
distribution does not qualify for the higher education expenses
exception under section 72(t)(2)(E) because the distribution was
not from an IRA. Although the common retirement-oriented purpose
of a 401(k) plan and an individual retirement plan may have led
petitioners to a “finite misinterpretation” based on their
reading of the Master Tax Guide, a 401(k) plan and an individual
retirement plan are separate and distinct in that only
withdrawals from an IRA may qualify for this exception.6 See
secs. 72(t)(2)(E), 401(k), 408(a), and (b). The distinction
between the two for purposes of section 72(t)(2)(E) may appear to
exalt form over substance, but it is a distinction that is
legislatively mandated.
In closing, we think it appropriate to observe that we found
petitioners to be very conscientious taxpayers who obviously take
their Federal tax responsibilities quite seriously. We recognize
that the difference between a qualified retirement plan and an
5
(...continued)
attributable to an employee’s being disabled, or (3) made to an
employee after separation from service after attainment of age of
55) apply in this case.
6
In contrast to petitioners’ “finite misinterpretation”,
we note that par. 2179 of the Master Tax Guide is consistent with
the statutory language in that it identifies education expenses
as an additional exception that applies “when early distributions
are made from an IRA”.
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IRA is highly technical, and we applaud petitioners for their
efforts in researching the tax consequences of receiving a 401(k)
plan distribution. The Tax Court, however, is a court of limited
jurisdiction and lacks general equitable powers. Commissioner v.
McCoy, 484 U.S. 3, 7 (1987); Hays Corp. v. Commissioner, 40 T.C.
436, 442-443 (1963), affd. 331 F.2d 422 (7th Cir. 1964).
Consequently, our jurisdiction to grant equitable relief is
limited. Woods v. Commissioner, 92 T.C. 776, 784-787 (1989);
Estate of Rosenberg v. Commissioner, 73 T.C. 1014, 1017-1018
(1980). Although we acknowledge that petitioners used the 401(k)
plan distribution for a laudable purpose, absent some
constitutional defect, we are constrained to apply the law as
written, see Estate of Cowser v. Commissioner, 736 F.2d 1168,
1171-1174 (7th Cir. 1984), affg. 80 T.C. 783, 787-788 (1983), and
we may not rewrite the law because we may “‘deem its effects
susceptible of improvement’”, Commissioner v. Lundy, 516 U.S.
235, 252 (1996) (quoting Badaracco v. Commissioner, 464 U.S. 386,
398 (1984)). Accordingly, petitioners’ appeal for relief must,
in this instance, be addressed to their elected representatives.
“The proper place for a consideration of petitioner’s complaint
is the halls of Congress, not here.” Hays Corp. v. Commissioner,
supra at 443.
Therefore, we conclude that Mrs. Domanico’s 401(k) plan
distribution is subject to the additional tax under section
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72(t). Accordingly, we sustain respondent’s determination on
this issue.
Conclusion
We have considered all of the other arguments made by
petitioners, and, to the extent that we have not specifically
addressed them, we conclude that those arguments are contrary to
the legislative mandate.
Reviewed and adopted as the report of the Small Tax Case
Division.
To reflect our disposition of the disputed issue, as well as
petitioners’ partial concession, see supra note 2,
Decision will be entered
for respondent.