T.C. Memo. 2006-101
UNITED STATES TAX COURT
EUGENIE DENISE MITCHELL, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 7144-04. Filed May 11, 2006.
Eugenie Denise Mitchell, pro se.
Margaret A. Martin and Daniel J. Parent, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
SWIFT, Judge: The issue for decision is whether petitioner
is liable under section 72(t) for a 10-percent additional tax on
$15,422 that was distributed early from petitioner’s retirement
annuity accounts.
Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the year in issue, and
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all Rule references are to the Tax Court Rules of Practice and
Procedure.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found.
At the time the petition was filed, petitioner resided in
Sacramento, California.
From 1984 to 2001, petitioner was employed as an attorney
with various section 501(c)(3) organizations, which organizations
made contributions on petitioner’s behalf to four separate
section 403(b) tax-deferred annuity accounts and to one tax-
deferred simplified employee plan/individual retirement account
(SEP-IRA).
The employer contributions made to petitioner’s annuity and
SEP-IRA accounts were made with funds which were not included in
petitioner’s taxable income.
On February 28, 2001, petitioner’s then-current employer
went out of business, and petitioner was laid off. As a result
of being laid off, in the spring of 2001 petitioner applied for
and received unemployment benefits from the State of California.
In June of 2001, petitioner began practicing law as a
partner in her own law partnership, which partnership struggled
financially throughout 2001.
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At various times in 2001, due to her financial difficulties,
petitioner requested and received $17,422 in early distributions
from her four annuity and SEP-IRA accounts, as follows:
Annuity and SEP Date of Amount of
Accounts Distribution Distribution
First 06/22/01 $ 3,000
Second 06/22/01 6,000
Third 06/22/01 5,000
Fourth 10/01/01 1,422
SEP-IRA -–/-–/01 2,000
Total distributions $17,422
As of the end of 2001, petitioner had not attained the age
of 59-1/2.
During 2001, petitioner paid a total of $1,809 in
unreimbursed medical expenses, and petitioner’s law partnership
paid on petitioner’s behalf health insurance premiums in the
amount of $3,209.
On August 15, 2002, petitioner timely filed her 2001
individual Federal income tax return on which return petitioner
reported the total $17,422 in early distributions petitioner
received during 2001 from her annuity and SEP-IRA accounts as
taxable income.
Petitioner, however, on her 2001 individual Federal income
tax return failed to report, and petitioner failed to pay with
the filing of her return, a section 72(t) 10-percent additional
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tax on the $17,422 in early distributions petitioner received
from her annuity and SEP-IRA accounts.
Also, on her 2001 tax return petitioner claimed a section
162(l) ordinary deduction of $1,925, the amount allowable under
section 162(l)(1)(B), relating to the $3,209 in health insurance
premiums paid by petitioner’s law partnership on petitioner’s
behalf.
On January 23, 2004, respondent mailed to petitioner a
notice of deficiency with respect to petitioner’s 2001 individual
Federal income tax in which respondent determined that petitioner
was liable for the section 72(t) 10-percent additional tax in the
amount of $1,742 on the total $17,422 in early distributions
petitioner received in 2001 from her annuity and her SEP-IRA
accounts.
At trial, petitioner stipulated the applicability of the
section 72(t) 10-percent additional tax on the $2,000 early
distribution from her SEP-IRA account.
Petitioner disputes the applicability of the section 72(t)
10-percent additional tax only on the $15,422 in early
distributions petitioner received from her annuity accounts.
OPINION
Generally, under the flush language of section 403(b)
amounts contributed to retirement annuity accounts by tax-exempt
section 501(c)(3) organizations on behalf of their employees are
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not, at the time of the contributions, treated as taxable income
to the employees.
However, distributions from the annuity accounts to the
employees are treated as taxable income to the employees in the
year of the distributions. Sec. 403(b)(1) (flush language);
sec. 72(a).
As indicated, respondent takes the position that the $15,422
petitioner received from her annuity accounts prior to petitioner
attaining the age of 59-1/2 is also subject under section 72(t)
to a 10-percent additional tax.
Petitioner argues that the distributions she received from
her annuity accounts are governed not by section 72(t) but by
section 72(q), under the latter of which no 10-percent penalty or
additional tax would apply to the early distributions petitioner
received.1
However, as a result of the section 72(t)(1) cross-reference
to section 4974(c), annuity accounts established and funded by
section 501(c)(3) organizations are explicitly covered by section
72(t), and early distributions from such annuity accounts are
generally subject to a 10-percent additional tax. In its
1
Under the sec. 72(q)(2)(E) cross reference to subsec.
72(e)(5)(D), early distributions from annuity accounts
established and funded by sec. 501(c)(3) organizations are
excepted from the application of the sec. 72(q) 10-percent
penalty provided therein on early distributions. See sec.
72(e)(5)(D)(ii)(III).
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definition of “qualified retirement plans” (to which section
72(t) literally applies) the referenced section 4974(c) includes,
among other things, employee annuity accounts established by
section 501(c)(3) organizations.
Excepted from the above section 72(t) 10-percent additional
tax on early distributions are certain distributions relating to
medical expenses and health insurance premiums. See sec.
72(t)(2)(B). The section 72(t) 10-percent additional tax will
not apply to the extent that the early distributions are equal in
amount to unreimbursed medical expenses including health
insurance premiums which the employees who received the
distributions paid during the year and to the extent that the
medical expenses including health insurance premiums would be
allowable as tax deductions under section 213. Id.
The language of section 72(t)(2)(B) provides as
follows:
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).
Although in 2001 petitioner’s law partnership paid a total
of $3,209 in health insurance premiums, because petitioner
claimed $1,925 thereof as an ordinary deduction, under section
162(l) only the $1,284 balance of the health insurance premiums
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would have been allowable to petitioner for a tax deduction under
section 213. Sec. 162(l)(3). Therefore, the section 72(t) 10-
percent additional tax on petitioner’s early distributions from
her annuity accounts will not apply to the extent that
petitioner’s $1,809 in medical expenses and the $1,284 balance in
petitioner’s health insurance premiums not already deducted under
section 162(l) would potentially be allowable to petitioner as a
deduction under section 213; namely, to the extent of $3,093.
A further limitation however, under section 213 must also be
considered. Medical expenses and health insurance premiums are
allowable as a deduction from income under section 213 only to
the extent that they exceed a floor of 7.5 percent of an
individual’s adjusted gross income. See sec. 213(a).
Applying to petitioner the above section 213(a) 7.5-percent
floor, petitioner herein is permitted to except only $267 from
application of the section 72(t)(2)(B) 10-percent additional
tax.2 On brief, respondent already has allowed petitioner to
reduce the amount of her early annuity account distributions to
which the section 72(t) 10-percent additional tax is applicable
by this $267.
2
Petitioner’s taxable income of $37,685 times 7.5 equals a
floor of $2,826; petitioner’s adjusted total medical expenses and
health insurance premiums of $3,093 less the $2,826 floor equals
$267.
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Petitioner counters that an additional exception under
section 72(t)(2)(D) should apply to the full extent of the $3,209
in health insurance premiums that petitioner’s law partnership
paid in 2001 on petitioner’s behalf. However, this limited
exception that petitioner relies on relating to health insurance
premiums applies only to early distributions from individual
retirement accounts such as the early distributions from
petitioner’s SEP-IRA, not to early distributions from annuity
accounts and carries with it many other limitations not satisfied
by the evidence herein. See sec. 72(t)(2)(D).
As indicated, petitioner has conceded that the $2,000 early
distribution from her SEP-IRA does not qualify for an exception
to the section 72(t) 10-percent additional tax.
To reflect the foregoing,
Decision will be entered
under Rule 155.