T.C. Summary Opinion 2006-106
UNITED STATES TAX COURT
CHRISTINE L. GIBBONS, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 5464-05S. Filed July 13, 2006.
Christine L. Gibbons, pro se.
Bryan E. Sladek, for respondent.
COUVILLION, Special Trial Judge: This case was heard
pursuant to section 7463 in effect at the time 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.
Respondent determined a deficiency of $3,044 in petitioner’s
2002 Federal income tax. The sole issue for decision is whether
1
Unless otherwise indicated, subsequent section references
are to the Internal Revenue Code in effect for the year at issue.
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petitioner is liable for the 10-percent additional tax under
section 72(t) for an early distribution from a qualified
retirement plan.
Some of the facts were stipulated. Those facts and the
accompanying exhibits are so found and are incorporated herein by
reference. Petitioner’s legal residence at the time the petition
was filed was Casco Township, Michigan.
Petitioner was employed as a schoolteacher by the Fraser
Public School System (the school system). The school system
maintained a pension plan for its employees (including
petitioner), which qualified, as stipulated by the parties, as a
section 403(b) plan.
During the year 2002, petitioner, as an employee and a
participant in the pension plan, withdrew $67,552.64 from the
plan, the proceeds of which were to fund her daughter’s higher
education expenses.
On her Federal income tax return for 2002, petitioner
reported the entire amount of the pension plan withdrawal as
income; however, petitioner failed to report a liability for the
10-percent section 72(t) additional tax for an early withdrawal
from a qualified pension plan. In the administrative review or
audit of petitioner’s tax return, the IRS agreed that $37,112.64
of the $67,552.64 withdrawn from the pension plan was
appropriately expended for the qualified higher education
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expenses of petitioner’s daughter under section 72(t)(2)(E), and,
therefore, the section 72(t) addition to tax was not applicable
to that portion of the distribution. The remainder of the
pension plan distribution, or $30,440, was determined to be
subject to the section 72(t) additional tax for the reason that
petitioner did not substantiate that this portion of the
distribution was used for higher education expenses.
At trial, respondent’s position was that no portion of the
$67,552.64 early distribution qualified for higher education
expenses for the reason that the pension plan of the school
system was not in the category of qualified plans as to which the
provisions of section 72(t)(2)(E) are applicable. The parties
stipulated, as noted above, that the school system plan was
qualified under section 403(b).2
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
2
Even though respondent’s position at trial was that no
portion of the $67,552.64 early withdrawal was subject to
exclusion from the sec. 72(t) additional tax, counsel for
respondent stated that respondent would not move to increase the
deficiency to apply the sec. 72(t) additional tax to the
$37,112.64, which was allowed as a higher education expense prior
to issuance of the notice of deficiency.
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qualified retirement plan includes both a section 401(k) plan and
an individual retirement account or individual retirement
annuity. See secs. 72(t)(1), 401(a), (k)(1), 4974(c)(1), (4) and
(5). The 10-percent additional tax imposed on early
distributions from qualified retirement plans does not apply to
distributions from an individual retirement plan used for higher
education expenses of the taxpayer for the taxable year. Sec.
72(t)(2)(E). The term “individual retirement plan” is defined as
an individual retirement account or individual retirement annuity
(commonly referred to as IRAs). Sec. 7701(a)(37). Retirement
plans qualified under section 403(b), as in this case, are not
included in the definition of “individual retirement plan” under
section 7701(a)(37).
Congress intended the exception of section 72(t)(2)(E) 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 states:
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.]
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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. No other types of qualified
plans are provided this exemption from the section 72(t)
additional tax.
As noted earlier, the parties stipulated that the school
system plan in which petitioner participated was a section 403(b)
plan. The plan, therefore, was not an individual retirement
plan. Petitioner, therefore, was not the beneficiary of an
individual retirement plan under section 7701(a)(37), which
defines an individual retirement plan as an individual retirement
account under section 408(a) or an individual retirement annuity
under section 408(b). The school system plan in which petitioner
participated was not a section 408(a) or (b) plan but a section
403(b) plan. A section 403(b) plan (such as the school system
plan) is altogether different from a section 408(a) or (b) plan.
In short, petitioner’s claim that the withdrawal at issue was
excluded from the 10-percent additional tax is incorrect. The
section 72(t)(2)(E) exclusion from the additional tax does not
apply to section 403(b) withdrawals.
In Uscinski v. Commissioner, T.C. Memo. 2005-124, this Court
stated that the 10-percent additional tax on early distributions
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from qualified plans (used for higher education purposes) applies
only as to early distributions from an individual retirement
account or an individual retirement annuity, collectively
referred to as IRAs, as described in section 408(a) or (b). The
school system plan in which petitioner participated was not an
IRA; therefore, the early withdrawals from that plan, even if
used for higher education expenses, are not excluded from the
section 72(t) additional tax.3
Reviewed and adopted as the report of the Small Tax Case
Division.
Decision will be entered
for respondent.
3
Because the Court holds that the withdrawal by petitioner,
as a matter of law, was not subject to the exemption from the
sec. 72(t) additional tax, the Court need not decide whether the
evidence presented at trial established that the funds withdrawn
from the pension plan were in fact used for higher educational
expenses.