T.C. Summary Opinion 2005-99

UNITED STATES TAX COURT

DONALD MARION AND BETHANY DIANE FENTON, Petitioners v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 1588-04S. Filed July 21, 2005.

Donald Marion and Bethany Diane Fenton, pro sese.

David S. Weiner, 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, section references are to the

Internal Revenue Code in effect for the year in issue. The

decision to be entered is not reviewable by any other court, and

this opinion should not be cited as authority. 
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Respondent determined a deficiency in petitioners’ Federal

income tax of $6,858 for 2001.

The issue for decision is whether petitioners are liable for

the 10-percent additional tax on early distributions pursuant to

section 72(t).

Background

Some of the facts have been stipulated and are so found. 

The stipulation of facts and the exhibits received into evidence

are incorporated herein by reference. Petitioners resided in

Clarkston, Michigan, at the time the petition was filed.

 During 2001, Donald Marion Fenton (petitioner) was an

automotive engineer with the IBM Corporation, and Bethany Diane

Fenton was a homemaker. Petitioners timely filed their 2001

Federal income tax return. 

In late 2001, after petitioner was laid off from IBM, he

received two distributions from the IBM Corporation 401(k) Plan 

in the total amount of $68,583. The 401(k) plan is a retirement

plan qualified under section 401(a). Petitioners reported the

distributions from the 401(k) plan as income on their 2001

return. Petitioners did not compute the 10-percent additional

tax due on early distributions from qualified retirement plans.

Petitioner used the funds to pay family expenses, including

the downpayment on a home and college tuition for his daughter. 

Petitioner also used the funds to pay family support expenses,
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medical expenses, and mortgage payments to avoid foreclosure. In

2001, petitioner had not yet reached the age of 59-1/2 years.

Respondent issued a notice of deficiency for 2001

determining a deficiency of $6,858. This amount represents a 10-

percent additional tax on the early 401(k) plan distributions

pursuant to section 72(t).

Discussion

Section 72(t)(1) generally imposes a 10-percent additional

tax on early distributions from “a qualified retirement plan (as

defined in section 4974(c)),” unless the distributions come

within one of several statutory exceptions. The parties do not

dispute that petitioner’s account was a qualified employee

retirement plan. Therefore, in order for petitioner to prevail,

he must show that the distributions fall under one of the

exceptions under section 72(t)(2).

With respect to section 72(t), this Court has repeatedly

held that it is bound by the statutory exceptions enumerated in

section 72(t)(2). See, e.g., Arnold v. Commissioner, 111 T.C.

250, 255-256 (1998); Schoof v. Commissioner, 110 T.C. 1, 11

(1998).
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1Petitioners assert that they used a portion of the

distributions to make a downpayment on a home. Sec. 72(t)(2)(F), 

regarding distributions made for first time home purchases, is

inapplicable here because petitioner’s 401(k) plan is not an

individual retirement account as required by the exception.

The exceptions that may be relevant to the case at hand are

found in section 72(t)(2)(B) and section 72(t)(2)(E).1 Section

72(t)(2)(B) provides that the following distributions are not

subject to the additional tax: 

(B) Medical expenses.--Distributions made to the

employee * * * to the extent such distributions do not

exceed the amount allowable as a deduction under section 213

to the employee for amounts paid during the taxable year for

medical care (determined without regard to whether the

employee itemizes deductions for such taxable year). 

The deduction allowed under section 213(a) is for “the expenses

paid during the taxable year, * * * for medical care * * * to the

extent that such expenses exceed 7.5 percent of adjusted gross

income.” On petitioners’ Schedule A, Itemized Deductions,

petitioner calculated that the total medical and dental expenses

they paid in 2001 was $774. Petitioners’ 2001 Federal income tax

return reflects that their joint adjusted gross income was

$172,703. Therefore, 7.5 percent of their 2001 adjusted gross

income was $12,953. Thus, petitioners’ expenses paid for medical

care in 2001 did not satisfy the requirements of section 213(a). 

Therefore, the distributions do not fall under the exception of

section 72(t)(2)(B).
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Petitioner also asserts that he used a portion of the

distributions to pay higher education expenses for his daughter. 

Section 72(t)(2)(E) provides that the additional tax on early

distributions does not apply to “Distributions to an individual

from an individual retirement plan to the extent such

distributions do not exceed the qualified higher education

expenses * * * of the taxpayer for the taxable year.” (Emphasis

added.) An “individual retirement plan” is defined as: “(A) an

individual retirement account described in section 408(a), and

(B) an individual retirement annuity described in section

408(b).” Sec. 7701(a)(37). An individual retirement plan is

commonly referred to as an IRA. 

Section 72(t)(2)(E) was added by section 203(a) of the

Taxpayer Relief Act of 1997, Pub. L. 105-34, 111 Stat. 809. The

report of the Committee on the Budget refers only to withdrawals

from IRAs. See H. Conf. Rept. 105-148, at 288-289 (1997), 1997-4

C.B. (Vol. 1) 319, 610-611. It is undisputed that the retirement

plan from which petitioner withdrew the $68,583 is a plan

described in section 401(k), and, therefore, the exception

contained in section 71(t)(2)(E) does not apply.

Finally, petitioner contends that, because of financial

hardship, the $68,583 should not be subject to the 10-percent

additional tax imposed by section 72(t). There is, however, no

hardship exception in the controlling statute, section 72(t). 
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This principle has been applied consistently in cases dealing

with premature retirement distributions. See Arnold v.

Commissioner, supra at 255; Milner v. Commissioner, T.C. Memo. 

2004-111. Thus, the retirement distributions received by

petitioner are subject to the 10-percent additional tax under

section 72(t).

Reviewed and adopted as the report of the Small Tax Case

Division.

To reflect the foregoing, 

Decision will be

entered for respondent.