T.C. Summary Opinion 2006-62
UNITED STATES TAX COURT
BEVERLY JOHNSON, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 5609-05S. Filed April 19, 2006.
Beverly Johnson, pro se.
Stephen A. Haller, 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 $4,899.40 for 2003. 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 Los Angeles,
California.
In 2003, petitioner was employed by Comcast of California as
a customer service representative. Petitioner began a leave of
absence from Comcast on June 3, 2003. Petitioner filed a claim
for disability insurance benefits with California’s Employment
Development Department (department) on grounds of acute
depression. The claim was approved effective as of June 3, 2003,
and petitioner thereafter received disability insurance benefits
from June 3, 2003, to February 28, 2004.
On January 20, 2004, at the department’s request, petitioner
appeared for an examination with a psychiatrist chosen by the
department. The psychiatrist opined in his written report that
petitioner should be able to return to her regular work beginning
January 20, 2004. On the basis of the report, the department
determined that petitioner was no longer eligible for disability
insurance benefits. The department’s determination was upheld by
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a decision from an administrative law judge, and that decision
was subsequently affirmed by the California Unemployment
Insurance Appeals Board.
At the end of 2003, petitioner received a lump-sum
distribution of $48,994 from her Verizon Pension Plan
(distribution). At the time, petitioner was 52 years old.
On March 26, 2004, petitioner electronically filed a Form
1040, U.S. Individual Income Tax Return, for 2003. The
distribution was reported as income on the return.
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.
In her petition, petitioner contended that she is not liable
for the 10-percent additional tax on early distribution, because
she used the distribution to pay her college education expenses.
Petitioner later conceded at trial that she was not entitled to
the higher education expense exception to avoid the 10-percent
additional tax. Petitioner instead asserted, for the first time,
that she withdrew the distribution on account of her disability.
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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 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.
Section 72(t)(2)(A)(iii) provides an exception for
distributions “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 indefinite 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 determination of whether a taxpayer is disabled is made
with reference to all the facts of the case. Sec. 1.72-
17A(f)(2), Income Tax Regs. The regulations also set forth
general considerations upon which a determination of disability
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is to be made, such as the nature and severity of the impairment.
Sec. 1.72-17A(f)(1), Income Tax Regs. However, the regulations
emphasize that the “substantial gainful activity” to which
section 72(m)(7) refers is the activity, or a comparable
activity, in which the individual customarily engaged before the
disability. Id. Therefore, the impairment must be evaluated in
terms of whether it does, in fact, prevent the individual from
engaging in her customary, or any comparable, substantial gainful
activity considering the individual’s education, training, and
work experience.
The term “indefinite” means that it cannot reasonably be
anticipated that the impairment will, in the foreseeable future,
be so diminished as no longer to prevent substantial gainful
activity. Sec. 1.72-17A(f)(3), Income Tax Regs. An impairment
which is remediable does not constitute a disability. Sec. 1.72-
17A(f)(4), Income Tax Regs.
Petitioner contends that she is eligible for the disability
exception under section 72(t)(2)(A)(iii) because she suffered
from depression which rendered her unable to work as of June of
2003. Petitioner submitted into evidence three notes from a Dr.
Oscar Moore as evidence of her disability. Dr. Moore specializes
in internal medicine and hypertension and is not a psychiatrist.
In his notes, Dr. Moore certified that petitioner was totally
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incapacitated from October 2 to December 2, 2003, and from
February 1 to April 1, 2004.
Dr. Moore further certified that petitioner was “released to
full duty” on June 7, 2004. Thus, petitioner should have been
capable of engaging in substantial gainful activity as of that
date. See Kovacevic v. Commissioner, T.C. Memo. 1992-609
(holding that the taxpayer was not “disabled” within the meaning
of section 72(m)(7) even though he suffered from severe
depression and was hospitalized twice, because he had not shown
that his condition was irremediable).
Moreover, as certified by her own physician, petitioner’s
disability was not indefinite. The Court finds that petitioner
was and is not disabled within the meaning of section 72(m)(7)
and is therefore not eligible for the disability exception under
section 72(t)(2)(A)(iii).
The distribution petitioner received is subject to the 10-
percent additional tax under section 72(t).
Reviewed and adopted as the report of the Small Tax Case
Division.
Decision will be entered
for respondent.