T.C. Summary Opinion 2009-61
UNITED STATES TAX COURT
SHARON R. DAVIS, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 17074-07S. Filed April 30, 2009.
Sharon R. Davis, pro se.
Stephen J. Neubeck and Robert D. Kaiser, for respondent.
GOEKE, 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. Pursuant to section 7463(b),
the decision to be entered is not reviewable by any other court,
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and this opinion shall not be treated as precedent for any other
case.1
Respondent determined a Federal income tax deficiency of
$2,695 for 2004. The sole issue for decision is whether
petitioner is liable for the 10-percent additional tax under
section 72(t) on early distributions from an individual
retirement account (IRA).
Background
The stipulation of facts and the accompanying exhibits are
incorporated by this reference. Petitioner resided in Ohio at
the time of filing her petition.
In July 2003 petitioner was laid off and began receiving
State unemployment compensation benefits. Petitioner understood
that she would forfeit her unemployment benefits if she received
any distributions from her retirement plans during the period she
received such benefits. Petitioner received 26 weeks of
unemployment benefits. In January 2004 petitioner received $945
in unemployment benefits; thereafter her unemployment benefits
terminated. During 2004 petitioner received distributions from
two IRAs of $14,481 and $15,168 for a total of $29,649.
Petitioner had not attained age 59-1/2 at the time of these
1
Unless otherwise indicated, subsequent section references
are to the Internal Revenue Code in effect for the year at issue,
and all Rule references are to the Tax Court Rules of Practice
and Procedure.
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distributions. Petitioner used a portion of the 2004
distributions to pay health insurance premiums incurred during
periods of unemployment in 2004 and 2005. Petitioner also used a
portion of the 2004 distributions to pay the mortgage on her
principal residence, which she had acquired in 1989.
In February 2004 petitioner closed a preexisting Roth IRA
because of concerns with improper activities by the investment
firm. She withdrew the entire account balance of $1,189.82,
which constituted the remainder of her initial $2,000 investment.
Respondent concedes that petitioner is entitled to a capital loss
of $810.18 from the loss on her investment in her Roth IRA.
Petitioner timely filed Form 1040, U.S. Individual Income
Tax Return, for 2004 and attached Form 5329, Additional Taxes on
Qualified Plans (Including IRAs) and Other Tax-Favored Accounts,
on which she claimed that $26,650 of the 2004 distributions was
excepted from the 10-percent additional tax but did not identify
a specific statutory exception that applied to the distributions.
On May 7, 2007, respondent issued a notice of deficiency for 2004
determining that the entire IRA distribution of $29,649 was
subject to the 10-percent additional tax. The notice of
deficiency stated that respondent did not accept petitioner’s
Form 5329 “due to financial hardship not being a valid exception
to the premature distribution tax.”
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Discussion
Petitioner contends that the notice of deficiency is invalid
because respondent did not accept her Form 5329. Petitioner
asserts that the Form 5329 did not claim financial hardship as an
exception to the 10-percent additional tax as stated in the
deficiency notice. Petitioner further complains of a
“disingenuous process” both before and after the notice was
issued, including unreasonable requests for information.
Section 6212(a) requires the Commissioner to determine that
a deficiency exists before issuing a notice of deficiency. The
notice of deficiency at issue unambiguously identifies
petitioner, the amount of the deficiency, the basis for the
deficiency, and the year at issue and was sent to petitioner’s
last known address. See sec. 7522. Accordingly, the notice is
valid on its face irrespective of petitioner’s allegation that
the notice incorrectly stated that she claimed financial hardship
as an exception to the 10-percent additional tax. As a general
rule, the Court will not look behind a notice of deficiency to
examine the evidence used or the Commissioner’s motives,
policies, or procedures in determining the deficiency. Berkery
v. Commissioner, 91 T.C. 179, 186-187 (1988), affd. without
published opinion 872 F.2d 411 (3d Cir. 1989). We hold that the
notice of deficiency is valid.
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Section 72(t)(1) and (2) provides for a 10-percent
additional tax on early distributions from qualified retirement
plans before the attainment of age 59-1/2 unless a statutory
exception applies. Petitioner argues that she satisfies the
statutory exceptions for distributions made to unemployed
individuals to pay health insurance premiums under section
72(t)(2)(D) and distributions for first-time home purchases under
section 72(t)(2)(F). Petitioner concedes that $3,000 of the 2004
distribution did not qualify for a statutory exception to the
section 72(t) 10-percent additional tax, as she reported on her
2004 return.
Distributions from an IRA taken after separation from
employment and used to pay health insurance premiums are not
subject to the 10-percent additional tax if: (1) The taxpayer
received unemployment compensation for 12 consecutive weeks under
any Federal or State unemployment compensation law by reason of
such separation; (2) the distribution was made during the taxable
year during which such compensation is paid or the succeeding
taxable year; and (3) the distribution does not exceed the amount
paid during the taxable year for health insurance. Sec.
72(t)(2)(D)(i). Petitioner has established that she received
unemployment compensation for over 12 consecutive weeks in 2003,
the year preceding the IRA distributions, satisfying the first
two requirements.
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Respondent concedes that $1,657.52 of the 2004 distributions
qualifies for the health insurance premium exception. Petitioner
has established that she paid an additional $109.46 to Union
Fidelity Insurance Co. for health insurance while unemployed
during 2004. Respondent contends that petitioner is not eligible
for the health insurance premium exception for the amount paid to
Union Fidelity because she paid a part of it in January 2004
before receiving the first IRA distribution in February 2004.
Section 72(t)(2)(D)(i) requires the distributions “do not exceed
the amount paid during the taxable year for insurance”. There is
no requirement that the distribution be received before payment
of the health insurance premium. Accordingly, the $109.46 is not
subject to the 10-percent additional tax.
Petitioner contends that a portion of the 2004 distribution
should be applied to her 2003 health insurance premiums because
she was prevented from taking a distribution from her IRA during
2003 on account of State unemployment compensation laws.
Petitioner also contends that she used a portion of the 2004
distribution to pay health insurance premiums during 2005. As
stated above, the statutory exception for health insurance
premiums is limited to the amount of premiums paid during the
taxable year of the distribution. Petitioner is not entitled to
claim the exception for the amounts of premiums that she paid in
2003 or 2005. This is so even though petitioner may have been
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prevented from taking a distribution from her IRA in 2003 because
of State unemployment compensation laws.
A qualified first-time home buyer distribution is a
distribution from an IRA, in an amount not to exceed $10,000,
that is used within 120 days of its receipt to pay qualified
acquisition costs with respect to a principal residence of a
first-time home buyer. Sec. 72(t)(2)(F), (8)(A) and (B). A
first-time home buyer is an individual who has not had a present
ownership interest in a principal residence during the 2-year
period ending on the date of acquisition of a principal
residence. Sec. 72(t)(8)(D)(i). The date of acquisition is the
date on which a binding contract to acquire the principal
residence is entered into or when construction or reconstruction
is commenced. Sec. 72(t)(8)(D)(iii). Qualified acquisition
costs are the costs of acquiring, constructing, or reconstructing
a residence and include any usual or reasonable settlement,
financing, or other closing costs. Sec. 72(t)(8)(C).
Petitioner contends that she used the statutory limit of
$10,000 of the IRA distributions to pay her mortgage and those
payments qualified for the first-time home buyer exception.
Petitioner has owned her residence since 1989. Petitioner had a
present ownership interest in a residence during the 2-year
period before she received the 2004 distributions. Sec.
72(t)(8)(D)(i); see Cole v. Commissioner, T.C. Memo. 2006-44.
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Accordingly, the 2004 distributions do not qualify for the first-
time home buyer exception under section 72(t)(2)(F).
To reflect the foregoing,
Decision will be entered
under Rule 155.