T.C. Memo. 2009-187

UNITED STATES TAX COURT

EUGENE AND GLENDA DOLLANDER, Petitioners v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 4936-08. Filed August 19, 2009.

Eugene and Glenda Dollander, pro sese.

Randall L. Eager, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

JACOBS, Judge: Respondent determined for 2005 a deficiency

in petitioners’ income tax of $16,918 and an accuracy-related

penalty of $3,384. After concessions by petitioners, the issues

before the Court are: (1) Whether petitioners are liable for the

10-percent additional tax under section 72(t) with respect to an

early distribution from a qualified retirement plan, and (2)
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whether petitioners are liable for the accuracy-related penalty

pursuant to section 6662(a).

Unless otherwise indicated, all section references are to

the Internal Revenue Code (Code) in effect for 2005, and all Rule

references are to the Tax Court Rules of Practice and Procedure.

FINDINGS OF FACT

Some of the facts have been stipulated, and they are so

found. We incorporate by reference the parties’ stipulation of

facts and accompanying exhibits. At the time they filed their

petition, petitioners resided in Georgia. Glenda Dollander is a

party hereto as a consequence of filing a joint return with

Eugene Dollander (hereinafter referred to as petitioner).

I. Petitioner’s Employment and Medical History

Petitioner worked for the Department of Veterans Affairs,

previously known as the Veterans’ Administration (the VA), from

June 21, 1985, until April 7, 2006. During 2004 he worked at the

VA medical center in Augusta, Georgia, as a staff nurse in its

triage section, which dealt with evaluating individuals having

psychiatric emergencies. 

On June 30, 2004, an individual petitioner evaluated died

within an hour thereafter. As a consequence of this incident,

petitioner was reassigned to a clerical position. Petitioner

thereafter attended numerous administrative hearings, which,
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1Over time, petitioner also was diagnosed with hypertension,

renal calculi, spina bifida, sleep apnea, back pain, and

occupational and social problems. 

combined with the strain of the incident itself, caused

petitioner to suffer mental health difficulties. 

On October 6, 2004, petitioner was seen by Dr. Simon

Sebastian of the Medical College of Georgia. He was diagnosed

with posttraumatic stress disorder, depressive disorder, and

bipolar type II, depressed.1 On October 29, 2004, Dr. Sebastian

sent a letter to the VA stating that (1) petitioner had been

referred to Dr. Susan Sato for psychotherapy, (2) petitioner’s

prognosis for recovery was good, and (3) petitioner should be

restricted to light duty for at least a month. On January 7,

2005, Dr. Sebastian wrote a second letter to the VA stating that

although petitioner had begun psychotherapy sessions with Dr.

Sato, petitioner’s condition had not significantly changed and

that he should continue to be restricted to light duty for 6

months. The letter further advised that in the context of

petitioner’s emotional problems, light duty implies assigning

petitioner to tasks that are less demanding than his previous

assignment; “in other words he [petitioner] should not be

assigned to dealing with emergency situations and medication

administration.”

Throughout this period, petitioner’s struggle with the VA

escalated. Petitioner was accused of not performing his duties
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adequately. In February 2005 petitioner was suspended from work

without pay. Petitioner, in turn, initiated worker’s

compensation and equal employment opportunity lawsuits against

the VA.

At the end of his work suspension period petitioner was

taken off light duty and transferred to a job in a locked

psychiatric unit in Minnesota. Petitioner felt this new

assignment required him to perform tasks more demanding than

those required by light duty. When the VA refused to reconsider

its decision, petitioner used his accumulated leave in an effort

to postpone the assumption of the duties assigned to him in

Minnesota. (The record is not entirely clear, but it appears

that after petitioner exhausted his leave, he did not report to

the Minnesota facility.) Petitioner was then charged with being

absent from work, and the VA took disciplinary action. 

Throughout this period, petitioner received his full pay with the

exception of the February 2005 suspension period.

On May 11, 2005, petitioner submitted a U.S. Office of

Personnel Management Standard Form 3112A, Applicant’s Statement

of Disability. This form is used when an employee requests

retirement because of a disability. On the form petitioner

described his medical conditions and how these conditions

affected his work. In describing “other restrictions on your

activities imposed by your illness”, petitioner referenced his
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doctor’s recommendation that he be limited to light duty. 

Petitioner further noted that because of his medical conditions,

he had requested assignment to either one of two nursing jobs or

a human resources position that were within the range of the

light duties he was capable of performing, but the VA did not

grant his request.

In December 2005 while continuing to work for the

VA petitioner began to manage his family’s farm in Minnesota as

well as his own rental property in Georgia. These activities

required petitioner to travel from Georgia to Minnesota

approximately four times during 2005.

In April 2006 petitioner retired from the VA. Initially

petitioner was classified as having retired under an optional

retirement. This classification was changed to FERS (Federal

Employee Retirement System) disability retirement. (FERS

disability retirement is a benefit provided to protect an

employee who is no longer able to provide useful and efficient

service in his current grade or pay level because of a medical

condition.) Approximately 1 month after he retired petitioner

began full-time work as a nurse with the State of Georgia

Community Services Board of East Central Georgia at Serenity

Behavioral Health Systems.
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2See infra p. 7.

II. Petitioner’s Thrift Savings Plan Distributions and Other

Income

While petitioner was employed with the VA, he established a

thrift savings plan (TSP) account. (TSP is the Federal

Government plan equivalent to the private sector section 401(k)

plan.2) During 2005 while he was employed with the VA,

petitioner filed Form TSP-76, Thrift Savings Plan Financial

Hardship In-Service Withdrawal Request, and received a

$158,310.42 financial hardship distribution.

Petitioners received the following items of income that were

omitted on their 2005 Federal income tax return:

 Income Type Source Amount

Interest Edward D. Jones & Co. $71

Interest Wachovia Bank N.A. 34

Cancellation of debt Citibank South Dakota NA 2,745

Cancellation of debt Citibank South Dakota NA 1,499

Petitioners concede that they should have reported these items as

income in 2005.

Petitioners engaged H&R Block to prepare their 2005 tax

return. H&R Block has prepared petitioners’ income tax returns

since 1967.
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3Sec. 72(t)(1) provides:

SEC. 72(t). 10-Percent Additional Tax on Early 

Distributions from Qualified Retirement Plans.--

(1) Imposition of additional tax.--If any taxpayer

receives any amount from a qualified retirement plan 

(as defined in section 4974(c)), the taxpayer’s tax 

under this chapter for the taxable year in which such 

amount is received shall be increased by an amount 

equal to 10 percent of the portion of such amount which

is includible in gross income.

4Sec. 4974(c)(1) provides:

SEC. 4974(c). Qualified Retirement Plan.--For purposes

of this section, the term “qualified retirement plan” 

means–

(1) a plan described in section 401(a) which 

includes a trust exempt from tax under section 501(a),

Similarly, sec. 7701(j) provides:

SEC. 7701(j). Tax Treatment of Federal Thrift Savings 

Fund.--

(1) In general.--For purposes of this title–

(continued...)

OPINION

I. 10-Percent Additional Tax on Early Distributions

A. Introduction

Section 72(t)(1) imposes a 10-percent additional tax on any

distribution from a “qualified retirement plan” that fails to

satisfy one of the statutory exceptions in section 72(t)(2).3 TSP

is a qualified retirement plan, and the 2005 distribution of

$158,310.42 was an early distribution made before petitioner

attained the age of 59-1/2. See secs. 4974(c)(1), 7701(j)(1).4
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4(...continued)

(A) the Thrift Savings Fund shall be treated 

as a trust described in section 401(a) which is 

exempt from taxation under section 501(a);

(B) any contribution to, or distribution 

from, the Thrift Savings Fund shall be treated in 

the same manner as contributions to or 

distributions from such a trust; * * *

Accordingly, the 10-percent additional tax applies to

petitioner’s $158,310.42 distribution unless an exception

applies.

B. Petitioner’s Financial Hardship Argument

Petitioner contends that he should not be subject to the 10-

percent additional tax of section 72(t) because he requested his

TSP distribution, and it was approved, as a “financial hardship

in-service withdrawal” arising from negative monthly cashflow. 

Petitioner’s contention is flawed. Section 72(t) is explicit: 

if any taxpayer receives any amount from a qualified retirement

plan, the taxpayer’s tax shall be increased by an amount equal to

10 percent of the portion of such amount which is includable in

gross income, unless one of the exceptions enumerated in section 

72(t)(2) applies. Financial hardship is not one of the

exceptions in section 72(t)(2). See Milner v. Commissioner, T.C.

Memo. 2004-111 (no “umbrella hardship exception”); Gallagher v.

Commissioner, T.C. Memo. 2001-34 (“There is, however, no hardship

exception in the controlling statutes.”).
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C. Petitioner’s Disability Argument

Petitioner further maintains he received the 2005 TSP

distribution because he was disabled and that section

72(t)(2)(A)(iii) excepts distributions from a qualified

retirement plan that are “attributable to the employee’s being

disabled within the meaning of subsection (m)(7) [of section

72]”. Section 72(m)(7) defines “disabled” for purposes of

section 72 as follows:

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 an impairment constitutes a

disability is made with reference to all facts in the case. Sec.

1.72-17A(f)(2), Income Tax Regs. The burden is on petitioner to

prove that he meets the definition of “disabled”. See sec.

72(m)(7). 

Section 1.72-17A(f)(2), Income Tax Regs., provides examples

of impairments which would ordinarily be considered as preventing

substantial gainful activity:

(i) Loss of use of two limbs;

(ii) Certain progressive diseases which have resulted 

in physical loss or atrophy of a limb, such as diabetes, 

multiple sclerosis, or Buerger’s disease;
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(iii) Diseases of the heart, lungs or blood vessels 

* * *;

(iv) Cancer which is inoperable and progressive;

(v) Damage to the brain or brain abnormality which has 

resulted in severe loss of judgment, intellect, orientation,

or memory;

(vi) Mental diseases (e.g., psychosis or severe 

psychoneurosis) requiring continued institutionalization or 

constant supervision of the individual;

(vii)Loss or diminution of vision * * * [of a specified

severity];

(viii) Permanent and total loss of speech;

(ix) Total deafness uncorrectible by a hearing aid.

The regulations point out that the existence of one or more

of the impairments described therein “will not, however, in and

of itself always permit a finding that an individual is disabled

as defined in section 72(m)(7).” Id. (flush language).

Furthermore, the regulations caution that any 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. Id. An impairment which is

remediable does not constitute a disability, and an individual

will not be deemed disabled if the impairment can be diminished

to the extent that the individual can engage in his customary or

any comparable substantial gainful activity. Kopty v.

Commissioner, T.C. Memo. 2007-343, affd. 313 Fed. Appx. 333 (D.C.

Cir. 2009); sec. 1.72-17A(f)(4), Income Tax Regs. In order to
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meet the requirements of section 72(m)(7), the regulations

provide that “an impairment must be expected either to continue

for a long and indefinite period or to result in death.” Sec.

1.72-17A(f)(3), Income Tax Regs. 

Petitioner contends that he is disabled and notes that he

was classified as disabled for purposes of FERS retirement status

in 2006. There is no question that petitioner suffered from

mental and physical illnesses. But in 2005, the year in which

the TSP distribution was made, the record does not support

petitioner’s contention that he was disabled for purposes of

section 72(t)(2)(A)(iii) and (m)(7).

As noted supra pp. 9-11, a taxpayer is considered disabled

for purposes of section 72(t)(2)(A)(iii) and (m)(7) only if he is

unable to engage in any substantial gainful activity by reason of

a medically determinable physical or mental impairment which can

be expected to result in death or to be of long-continued or

indefinite duration. The regulations contemplate that only

medical conditions of a nature so severe as to prevent

substantial gainful activity result in a taxpayer’s being

considered disabled. According to the example in the

regulations, a mental impairment that would prevent substantial

gainful activity consists of psychosis or severe psychoneurosis

requiring continued institutionalization or constant supervision

of the individual. See sec. 1.72-17A(f)(2)(vi), Income Tax Regs. 
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While petitioner required continuing treatment for his illnesses,

he did not require institutionalization or constant supervision. 

See Dwyer v. Commissioner, 106 T.C. 337, 342 (1996) (“periodic

professional consultation (such as petitioner’s) alone does not,

in our judgment, equate with the constant supervision envisioned

by the regulation”). 

The regulations also provide that an impairment which is

remediable does not constitute a disability. Sec. 1.72-

17A(f)(4), Income Tax Regs. In this regard, the record reflects

that petitioner’s illness was expected to be remediable and that

he was expected to fully recover.

Finally, the record shows that petitioner engaged in

substantial gainful activity in 2005. As we previously stated,

we “equate ‘substantial gainful activity’ in this context with an

‘actual and honest objective of making a profit.’” Dwyer v.

Commissioner, supra at 341. 

In 2005 petitioner continued working at the VA at the same

pay grade and earning the same salary as before his impairment

was diagnosed. Moreover, petitioner engaged in a business

activity throughout the year that required him to travel numerous

times, back and forth, between Georgia and Minnesota. We are

satisfied that although petitioner did not earn a profit in this

business activity, he participated in this activity with an

intent to earn a profit. See id. Furthermore, after retiring
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from the VA in 2006, petitioner got a full-time job with another

employer. In sum, we find that petitioner was not disabled for

purposes of section 72(t)(2)(A)(iii) and (m)(7) in 2005.

II. Section 6662(a) Accuracy-Related Penalty

Section 6662(a) imposes an accuracy-related penalty equal to

20 percent of the underpayment of tax attributable to, inter

alia, a substantial understatement of income tax, as provided in

section 6662(b)(2), or negligence or disregard of rules or

regulations, as provided in section 6662(b)(1). A substantial

understatement of income tax pursuant to section 6662(b)(2) is

equal to the excess of the amount of tax required to be shown on

the tax return over the amount of tax shown on the return. Sec.

6662(d)(2)(A). The understatement is substantial in the case of

an individual if it exceeds the greater of 10 percent of the tax

required to be shown or $5,000. Sec. 6662(d)(1)(A). Negligence

is the lack of due care or failure to do what a reasonable and

ordinarily prudent person would do under the circumstances. Jean

Baptiste v. Commissioner, T.C. Memo. 1999-96. Respondent has the

burden of production with respect to the section 6662(a)

accuracy-related penalty. See sec. 7491(c). Respondent has met

his burden of production.

The accuracy-related penalty does not apply to any part of

an underpayment of tax if it is shown that the taxpayer acted

with reasonable cause and in good faith. Sec. 6664(c)(1). This
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determination is made on a case-by-case basis, taking into

account all the pertinent facts and circumstances. Sec. 1.6664-

4(b)(1), Income Tax Regs. Petitioners bear the burden of proving

that they had reasonable cause and acted in good faith. See

Higbee v. Commissioner, 116 T.C. 438, 446 (2001).

Petitioners relied on H&R Block to prepare their 2005 tax

return and their tax returns for every year prior thereto since

1967. There is no evidence that their return preparer was not

competent or that petitioners were not justified in relying on

the preparer’s expertise in preparing their tax returns. 

Moreover, it does not appear from the record that petitioners

were anything but forthright with respect to information they

gave their preparer, including the receipt of the $158,310.42

distribution from petitioner’s TSP in 2005.

This is not a situation of omission of income or an

exaggeration of deductions, but rather the proper reporting of

income governed by the Code, the regulations, and the

interpretation of the relevant statutory provisions by numerous

cases. On the record before us, we are satisfied that

petitioners acted in good faith and with reasonable cause with

respect to that portion of the underpayment relating to the 10-

percent additional tax under section 72(t). Such was not the

case with respect to the understatement relating to the omitted

interest and cancellation of debt income which was negligently
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omitted (unexcused by reasonable cause or good faith) from

petitioners’ 2005 income.

To reflect the foregoing,

Decision will be entered

under Rule 155.