T.C. Summary Opinion 2009-34
UNITED STATES TAX COURT
MICHAEL DAVID LIEBER, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 15703-07S. Filed March 16, 2009.
Michael David Lieber, pro se.
Jeffrey D. Heiderscheit, for respondent.
JACOBS, Judge: This case was heard pursuant to the
provisions of section 7463 of the Internal Revenue Code in effect
when the petition was filed. 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. Unless otherwise indicated, all subsequent section
references are to the Internal Revenue Code in effect for the
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year in issue, and all Rule references are to the Tax Court Rules
of Practice and Procedure.
Respondent determined a $4,031.10 deficiency in petitioner’s
Federal income tax for 2005. The deficiency arises from the
imposition of the 10-percent penalty mandated by section 72(q)(1)
for premature distributions from an annuity contract. Respondent
asserts that the penalty is applicable because petitioner
received distributions in 2005 from an annuity policy contract
(annuity policy) that do not qualify for any of the exceptions
set forth in section 72(q)(2). Petitioner asserts that the 10-
percent penalty should not apply because the distributions were
used for his college expenses.
Background
The parties submitted this case fully stipulated, pursuant
to Rule 122. The stipulation of facts and the attached exhibits
are incorporated herein by this reference. At the time he filed
his petition, petitioner resided in Texas.
In 1988, when petitioner was very young, his father died.
At the date of his death, petitioner’s father was the insured
under a life insurance policy issued by Jackson National Life
Insurance Co. of Texas (Jackson Life). A portion of the proceeds
from that policy was used to purchase a single premium,
nonqualified, deferred annuity policy for the benefit of
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petitioner. The annuity policy permitted partial withdrawals
before the contract’s maturity date of April 14, 2056.
In 2005 petitioner attended college in Texas. Petitioner’s
mother (as the owner of the annuity policy) requested, and
received on behalf of petitioner, as the annuitant, distributions
from Jackson Life during 2005 totaling $40,310.80, which were
used for petitioner’s college expenses.1
Discussion
Section 72(q)(1) imposes a 10-percent penalty on
distributions from an annuity contract unless the distribution
satisfies one of the exceptions set forth in section 72(q)(2);
namely, distributions:2
(A) made on or after the date in which the taxpayer attains
age 59-1/2;
1
The annuity policy was purchased pursuant to the order of
the District Court of El Paso County, Tex., 243rd Judicial
District, dated Mar. 20, 1989. The order was issued in response
to a motion to invest funds of a minor, filed by T. Udell Moore,
guardian ad litem, and Gail Lieber, natural mother and next
friend, of Michael David Lieber, a minor. Under the terms of the
annuity policy, (1) Jackson Life agreed to pay the annuitant
(Michael David Lieber), if living on the maturity date, a monthly
income with 120 months certain, and (2) pursuant to the terms of
the annuity policy, while the annuitant is living, the owner
(Gail Lieber) may exercise all rights under the annuity policy
subject to the interest of any assignee or irrevocable
beneficiary.
2
Sec. 72(q)(1) was enacted as part of the Tax Equity and
Fiscal Responsibility Act of 1982, Pub. L. 97-248, sec.
265(b)(1), 96 Stat. 546, to discourage the use of annuity
contracts as short-term tax sheltered investments for certain
“premature” distributions. See S. Rept. No. 97-494 (Vol. 1), at
349 (1982).
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(B) made on or after the death of the holder;
(C) attributable to the taxpayer’s becoming disabled;
(D) that are part of a series of substantially equal
periodic payments;
(E) from certain qualified plans as described in section
72(e)(5)(D);
(F) allocable to investment in the contract before August
14, 1982;
(G) under a qualified funding asset (within the meaning of
section 130(d), without regard to whether there is a qualified
assignment);
(H) to which section 72(t) applies (without regard to
paragraph (2) thereof);
(I) under an immediate annuity contract (within the meaning
of section 72(u)(4));3 or
(J) from an annuity purchased by an employer, under certain
circumstances.
None of the section 72(q)(2) distribution exceptions is
herein applicable. Nonetheless, petitioner contends that the
higher education exception (section 72(t)(2)(E)), which applies
to the penalty for early distributions from qualified retirement
plans (section 72(t)(1)), should apply to distributions from
annuity contracts since the title of section 72, “Annuities;
3
The annuity policy involved herein would not qualify as an
immediate annuity contract. Although it was purchased with a
single premium, the annuity policy’s starting date (the first day
of the first period for which an amount is received as an annuity
under the policy) was not within 1 year from the date of the
purchase of the annuity policy, and it did not provide for a
series of substantially equal periodic payments during the
annuity period.
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Certain Proceeds of Endowment and Life Insurance Contracts”,
indicates that all of the section’s provisions apply to
annuities. This argument fails inasmuch as it is well settled
that the heading of a section does not limit the plain meaning of
the text. See Bhd. of R.R. Trainmen v. Balt. & Ohio R.R., 331
U.S. 519, 528 (1947); Warren v. Commissioner, 114 T.C. 343, 347
(2000). The relevant text of section 72(q)(2) is clear; nothing
therein contains either: (1) An exception for higher education
expenses, or (2) a provision that the exception found in section
72(t)(2)(E) applies to the 10-percent penalty under section
72(q)(1).
Section 72(t)(2)(E) specifically limits its reach to the 10-
percent additional tax on distributions from qualified retirement
plans under section 72(t)(1), and we have held that the higher
education expense exception found in section 72(t)(2)(E) does not
apply to the section 72(q)(1) penalty for premature distributions
from annuity contracts. See Sadberry v. Commissioner, T.C. Memo.
2004-40, affd. 153 Fed. Appx. 336 (5th Cir. 2005).
Petitioner next makes an equitable argument; namely, that
the distributions he received in 2005 should not be subject to
the section 72(q)(1) penalty because: (1) The annuity policy was
purchased to provide funds for petitioner’s college expenses and
therefore should be excepted from the section 72(q)(1) penalty by
section 72(t)(2)(E), and (2) petitioner’s mother was informed by
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her father (who was an insurance agent and who “worked with
annuities”) that there would be “no repercussions for early
withdrawals if the funds were used solely for higher educational
purposes.” Moreover, petitioner asserts that the certified
public accountant who prepared his 2005 tax return knew that the
annuity policy had been purchased in order to provide funds for
petitioner’s educational expenses.
The equitable argument petitioner advances is not relevant.
This Court, like all other courts, construes statutes as written;
we do not enlarge them. We cannot create exceptions in order to
reach what someone believes is an equitable outcome. See Iselin
v. United States, 270 U.S. 245, 250 (1926); Pollock v.
Commissioner, 132 T.C. __ (2009); Paxman v. Commissioner, 50 T.C.
567, 576-577 (1968), affd. 414 F.2d 265 (10th Cir. 1969).
Moreover, we are mindful that a letter from Jackson Life dated
September 26, 2007, informed petitioner:
We have also researched how this policy should be qualified.
Per the court order we have in our records it instructed us
to issue a deferred annuity. The court order did not state
that this should be issued as a retirement annuity or an
educational annuity. Therefore, this policy was issued as a
non-qualified annuity.
Finally, petitioner maintains that the annuity distributions
are excepted from the 10-percent penalty by section 72(q)(2)(B),
which provides that no penalty shall be imposed on any
distribution made on or after the death of the holder of the
annuity, because the annuity was funded by the proceeds from his
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father’s life insurance policy. Again, we disagree with
petitioner’s assertion. The distributions involved herein were
not made on or after the death of the holder of the annuity
policy.
We have considered all petitioner’s arguments, and to the
extent not discussed herein, we reject them as irrelevant and/or
without merit. We sustain the deficiency of $4,031.10 determined
in respondent’s notice of deficiency.
To reflect the foregoing,
Decision will be entered
for respondent.