T.C. Summary Opinion 2007-101
UNITED STATES TAX COURT
STEVEN A. DYKES, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 6488-06S. Filed June 20, 2007.
Steven A. Dykes, pro se.
Erin K. Salel, for respondent.
DEAN, Special Trial Judge: This case was heard pursuant to
the provisions of section 7463 of the Internal Revenue Code.
Unless otherwise indicated, subsequent section references are to
the Internal Revenue Code as in effect for the year at issue, and
all Rule references are to the Tax Court Rules of Practice and
Procedure. Pursuant to section 7463(b), the decision to be
entered is not reviewable by any other court, and this opinion
shall not be treated as precedent for any other case.
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Respondent determined for 2003 a deficiency in petitioner’s
Federal income tax of $3,909. The issue for decision is whether
a qualified retirement plan distribution was attributable to
petitioner’s being “disabled” within the meaning of section
72(m)(7), thereby excepting him from liability for the section
72(t) 10-percent additional tax.
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 Yuma, Arizona.
During the year in issue, petitioner was a detention officer
at Grays Harbor County Juvenile Court Services in the State of
Washington. Petitioner had been a detention officer for 17
years.
In the early 1990s, petitioner suffered an illness
characterized by profound fatigue which was later diagnosed as
hepatitis C. Petitioner received medical treatment, and his
medical report noted that he “did well for a number of years with
excellent physical reserve and stamina.”
At the end of 2002, petitioner began to develop some
fatigue, and he requested a medical evaluation. Dr. William
Mitchell, petitioner’s physician, determined that petitioner had
an apparent viral recurrence of hepatitis C. From approximately
March to August of 2003, petitioner received medication to treat
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his illness. In September of 2003, petitioner quitted his job
and moved to Arizona.
The State of Washington’s Public Employees’ Retirement
System filed with respondent a Form 1099-R, Distributions From
Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs,
Insurance Contracts, etc., reporting that petitioner received an
early distribution of $39,087.10 in 2003 (distribution). At the
time, petitioner was 50 years old.
Petitioner filed for 2003, a Form 1040, U.S. Individual
Income Tax Return, reporting the distribution as income.
Respondent subsequently issued to petitioner a statutory notice
of deficiency for 2003, determining that petitioner is liable for
an additional tax of $3,909 for an early distribution from his
retirement plan.
Discussion
The Commissioner’s determinations are presumed correct, and
generally taxpayers bear the burden of proving otherwise.1 Rule
142(a)(1); Welch v. Helvering, 290 U.S. 111, 115 (1933).
Respondent determined that, under section 72(t)(1),
petitioner is liable for a 10-percent additional tax on an early
distribution from his retirement plan. Petitioner disputes
respondent’s determination, contending that he is not liable for
1
Since this case is decided by applying the law to the
undisputed facts, sec. 7491 is inapplicable.
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the additional tax because he became disabled during 2003.
Petitioner claims that the distribution was used to cover both
daily living costs and medical costs.
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 (1973), 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-
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17A(f)(2), Income Tax Regs. The regulations also set forth
general considerations upon which a determination of disability
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 his customary, or any comparable, substantial gainful
activity considering the individual’s education, training, and
work experience.
According to Dr. Mitchell’s medical reports, petitioner
experienced fatigue as a result of his illness. Nevertheless,
petitioner was able to continue working. In order to treat the
fatigue, petitioner was prescribed a medication called Ritalin.
Dr. Mitchell noted on petitioner’s subsequent visits that Ritalin
had made a significant difference in petitioner’s work
performance and that petitioner was having less problems with
fatigue and attention.
Petitioner’s illness, however, ultimately prompted him to
switch to a graveyard shift which had a lighter workload. See
Thomas v. Commissioner, T.C. Memo. 2005-258 (holding that the
taxpayer was still able to engage in substantially gainful
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activity even though she was forced to switch from full-time to
part-time). Dr. Mitchell’s medical reports indicate that
petitioner was not so impaired as to be unable to engage in any
substantial gainful activity during 2003. See Dwyer v.
Commissioner, supra at 341 (holding that the taxpayer was not
“disabled” within the meaning of section 72(m) because the
taxpayer continued to function in his customary activity despite
facing clinical depression).
Petitioner claims that, contrary to Dr. Mitchell’s reports,
he did not work from March to July of 2003 because of his
illness. At trial, petitioner presented as evidence a letter
that was handwritten on a plain piece of paper from a Thomas
Morgan. Morgan allegedly was a former Director of Detention
services at Grays Harbor County Juvenile Court. Morgan stated in
the letter that petitioner took a leave of absence from his job
as a detention officer from approximately mid-March to the end of
July of 2003 because of a “major medical problem”. The Court
finds that the letter, by itself and without more, is of little
probative value.
Even if it is true that petitioner did not work while he
received treatment for hepatitis C in 2003, i.e., he did not
engage in substantial gainful activity, he must still show that
his illness was expected to continue for a long and indefinite
period to satisfy the meaning of “disabled” under section
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72(m)(7). Sec. 1.72-17A(f)(3), Income Tax Regs. 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. Id.
Petitioner testified at trial that he has recovered from his
illness and that he feels fine now. Petitioner’s illness,
therefore, is not indefinite.
Petitioner argues that he was disabled during 2003. He
claims that hepatitis C is “indefinite” in the sense that it is
an incurable and permanent disease. Although petitioner’s
hepatitis C is permanent, this condition is remediable through
medication. The regulations provide that an impairment which is
remediable does not constitute a disability within the meaning of
section 72(m)(7). Sec. 1.72-17A(f)(4), Income Tax Regs. Section
1.72-17A(f)(4), Income Tax Regs., further provides that:
An individual will not be deemed disabled if,
with reasonable effort and safety to himself,
the impairment can be diminished to the
extent that the individual will not be
prevented by the impairment from engaging in
his customary or any comparable substantial
gainful activity.
Petitioner’s illness is not a disability within the meaning
of section 72(m)(7) because it is remediable and is not
indefinite. Petitioner has not argued, and the record is devoid
of any evidence which would indicate, that petitioner is
qualified for any other exception to section 72(t)(1).
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Petitioner therefore is not eligible for the disability exception
under section 72(t)(2)(A)(iii).
Accordingly, the distribution is subject to the 10-percent
additional tax under section 72(t).
Decision will be entered
for respondent.