In the
United States Court of Appeals
For the Seventh Circuit
No. 11-3390
Y OUNG K IM ,
Petitioner-Appellant,
v.
C OMMISSIONER OF INTERNAL R EVENUE,
Respondent-Appellee.
Appeal from the United States Tax Court
No. 11902-10—David Laro, Judge.
A RGUED A PRIL 12, 2012—D ECIDED M AY 9, 2012
Before E ASTERBROOK , Chief Judge, and M ANION and
S YKES, Circuit Judges.
E ASTERBROOK, Chief Judge. At age 56, Young Kim left
his position as a partner in a law firm and enrolled in
the London School of Economics. Employees who depart
at age 55 and up may withdraw money from the em-
ployer’s retirement plan. They must pay income tax
(retirement plans contain pre-tax dollars), but they do
not owe the 10% additional tax that the Internal
Revenue Code imposes on most withdrawals before
2 No. 11-3390
age 59½. 26 U.S.C. §72(t)(1), (2)(A)(v). During 2005
Kim moved the funds from the law firm’s retirement
plan to an individual retirement account. A rollover is
not a taxable event. 26 U.S.C. §402(c); 26 C.F.R. §1.402(c)–2.
During 2006 Kim withdrew about $240,000 from the
IRA. He paid the income tax but not the 10% additional
tax. The Commissioner of Internal Revenue concluded
that he owes the 10% tax and, because he had not paid
it, also owes a penalty for substantial underpayment
of taxes. 26 U.S.C. §6662.
Kim sought review by the Tax Court, which held a trial.
The parties reduced the scope of the dispute because
the money spent on tuition and other education
expenses attending the London School of Economics—
and the amount Kim paid for his daughter’s tuition
and other education expenses at Bryn Mawr College—is
not subject to the 10% tax. See 26 U.S.C. §72(t)(2)(E).
The Tax Court held that Kim owes the 10% tax on the
withdrawn money that he had put to other uses and
also owes the penalty for a substantially inaccurate
return. The parties agreed that, if the Tax Court’s decision
is correct, Kim owes $20,456.50 under §72(t)(1) and
$4,091.30 under §6662. Judgment was entered to that
effect. Kim asks us to hold that he owes nothing—or
at least that he does not owe the accuracy-related
penalty under §6662.
Kim relies on §72(t)(2)(A)(v), which provides that
the 10% additional tax does not apply to a distribution
from a pension plan “made to an employee after separa-
tion from service after attainment of age 55”. His im-
No. 11-3390 3
mediate problem is that the distribution from the IRA
was not “made to an employee”; he was not an
employee of the IRA’s custodian. He had been an
employee of the law firm and therefore could have
taken a distribution from its pension plan, but that’s
not what happened.
Just in case this point was unclear, the Internal
Revenue Code adds: “Subparagraphs (A)(v) and (C) of
paragraph (2) shall not apply to distributions from an
individual retirement plan.” 26 U.S.C. §72(t)(3)(A). Kim
withdrew money from an IRA, an individual plan; sub-
paragraph 72(t)(2)(A)(v) therefore “shall not apply”.
Kim calls his account a “SEP IRA” (“simplified employee
pension”, see 26 U.S.C. §408(k)) as opposed to a “tradi-
tional IRA,” but §72(t)(3)(A) does not distinguish
among flavors of individual retirement plans. Before
reaching 59½, Kim withdrew money from an indi-
vidual retirement plan, rather than from his former em-
ployer’s plan, and therefore must pay the 10% addi-
tional tax.
Kim insists that this makes no sense. He could
have taken the money from the law firm’s pension
plan without the 10% additional tax; why should it
matter that the money went from the law firm’s plan to
an IRA before being withdrawn? The answer is that
the Internal Revenue Code says that it matters, and Kim
does not contend that §72(t)(3)(A) violates the Constitu-
tion. Many parts of the tax code are compromises, and
all parts reflect the need for lines that can’t be deduced
from first principles. Why can an employee withdraw
4 No. 11-3390
money from an employer’s plan without the 10% addi-
tion at age 55 but not age 54? Why does the 10% addi-
tional tax apply to withdrawals at age 59 and 181 days,
but not 59 and 183 days? These questions cannot be
answered by logical analysis. The Code’s lines are arbi-
trary. The law firm’s pension plan put Kim to a choice
between taking the money and moving part or all of
it to an IRA. He chose to roll over the whole balance,
because he did not want to pay any income tax immedi-
ately. The Code allowed Kim to extend the tax deferral
at the cost of the 10% additional tax if he later took
some of the money before age 59½.
Money deposited in pension plans and many IRAs is
not subject to income tax until the funds (including
interest and capital appreciation) are withdrawn. Tax
deferral is expensive to the Treasury, so the Code makes
resort to some tax-deferral opportunities costly. Hence
someone who puts money in an IRA can’t take it out
freely before age 59½; the prospect of the 10% additional
tax on early withdrawal makes IRAs less attractive
(and the 10% tax also compensates the Treasury for
some of the revenue foregone from deferred payment
of the income tax on sheltered funds). Subsection
72(t)(2)(A)(v) offers an opportunity for avoiding the 10%
tax on withdrawals between age 55 and age 59½, but
that opportunity is limited by the “to an employee”
language and the proviso in §72(t)(3)(A), lest it effec-
tively reduce the age of free withdrawal from 59½ to
55. The interaction of these provisions is bound to
seem irrational to many affected persons, but Congress
has concluded that some lines of this kind are appro-
No. 11-3390 5
priate. The judiciary is not authorized to redraw the
boundaries.
Fidelity Investments, which administers Kim’s IRA,
sent him a statement in 2006 informing him that he owed
both income tax and the 10% additional tax. But the
accountant who prepared his tax return omitted the 10%
additional tax, which, coupled with the fact that the
deficiency exceeded $5,000, led to the substantial-under-
statement penalty.
Section 6662 excuses the taxpayer if “there is or was
substantial authority for [the tax return’s] treatment”
(§6662(d)(2)(B)(i)) or all relevant facts were disclosed
on the return and “there is a reasonable basis for
the tax treatment of such item by the taxpayer”
(§6662(d)(2)(B)(ii)(II)). Kim contends that there was
“substantial authority” for his return’s treatment of
the withdrawal, but there was and is no authority at
all for it. Kim does not contend that any court has
accepted his argument that an IRA (SEP flavor or other-
wise) is the same as an employer’s plan under
§72(t)(2)(A)(v).
The Tax Court treats the “reasonable basis” exception
in §6662(d)(2)(B)(ii)(II) as applicable when the taxpayer
furnishes accurate information to, and then relies in
good faith on, the opinion of a competent tax adviser.
See Neonatology Associates, P.A. v. CIR, 115 T.C. 43,
98–99 (2000), affirmed, 299 F.3d 221, 233–35 (3d Cir. 2002);
26 C.F.R. §1.6664–4(c). See also United States v. Boyle, 469
U.S. 241, 251 (1985). The record does not show what
information Kim furnished to his accountant or whether
6 No. 11-3390
the accountant competently analyzed the situation
under §72(t). The Tax Court accordingly concluded that
Kim could not take advantage of §6662(d)(2)(B)(ii)(II).
Kim observes that the Tax Court lacked any
evidence from the accountant, but the shortfall is Kim’s
own responsibility. After the deadline for submitting
expert evidence had passed, Kim filed a motion for a
continuance, which the Tax Court denied. That decision
was not an abuse of discretion. Kim might have asked
the Commissioner to stipulate to what the accountant
would have testified, but he did not make such a re-
quest. Nor did he make an offer of proof. So we have
no idea what evidence the accountant would have pro-
vided. Kim testified at the trial but did not tell the
Tax Court what information he had furnished to the
accountant. With respect to the facts relevant under
Neonatology Associates, the record is essentially empty.
There is no warrant for upsetting the Tax Court’s decision.
Finally, Kim asks us to order the Commissioner to
abate interest on his underpayments. That subject was
not before the Tax Court and therefore is not before us.
CIR v. McCoy, 484 U.S. 3 (1987). Kim must ask for this
relief from the Commissioner, and if he is dissatisfied
with the Commissioner’s decision he can file a separate
petition in the Tax Court. See 26 U.S.C. §6404(e)(1);
Bourekis v. CIR, 110 T.C. 20, 25–26 (1998).
A FFIRMED
5-9-12