1 Unless otherwise indicated, subsequent section

references are to the Internal Revenue Code in effect for the

year at issue. All Rule references are to the Tax Court Rules of

Practice and Procedure. 

T.C. Summary Opinion 2005-10

UNITED STATES TAX COURT

JEROME P. AND RHONDA A. REIMANN, Petitioners v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 10877-03S. Filed January 27, 2005.

Jerome P. Reimann, pro se.

Louis H. Hill, for respondent.

COUVILLION, Special Trial Judge: This case was heard

pursuant to section 7463 in effect at the time the petition was

filed.1 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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2 Rule 91(a) requires that the parties stipulate all

facts, all documents and papers or contracts or aspects thereof,

and all evidence that should fairly not be in dispute. 

Petitioners declined to agree to a written stipulation of facts.

Respondent determined a deficiency of $10,824 in

petitioners' 2000 Federal income tax and the accuracy-related

penalty under section 6662(a) in the amount of $2,254. The

issues for decision are: (1) Whether petitioners are liable for

the 10-percent additional tax under section 72(t) for early

distributions from qualified retirement plans, and (2) whether

petitioners are liable for the section 6662(a) accuracy-related

penalty. At the time the petition was filed, petitioners were

legal residents of Dresden, Ohio.2

The facts are not in dispute. Jerome P. Reimann

(petitioner) is a metallurgical engineer and a "manager of

process improvement". Petitioner explained this latter category

as the review of reports from other engineers. He described his

occupation as being in "materials science". Petitioner has a

bachelor of science degree in science and metallurgical

engineering as a graduate of Wayne State University at Detroit,

Michigan. He received his degree in 1977, and his employment has

continuously been in that field of endeavor. In his career,

petitioner has been employed by several employers and has been a

participant in at least four pension plans qualified under

section 401(a).
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During 1999, petitioner was terminated by his employer, and

he thereafter began a self-employed consulting business in his

field of work. That endeavor was not successful and resulted in

petitioners' filing for bankruptcy. Because of their financial

needs, petitioner withdrew $115,142.97 during the year 2000 from

his qualified plans.

On their joint Federal income tax return for 2000,

petitioners reported as gross income the $115,142.97 in

distributions from their qualified plans. Petitioners included

with their 2000 tax return Form 5329, Additional Taxes

Attributable to IRAs, Other Qualified Retirement Plans,

Annuities, Modified Endowment Contracts, and MSAs, on which they

listed the $115,142.97 in retirement plan distributions but

elected on Form 5329 that the distributions were not subject to

the early withdrawal tax under section 72(t). On Part I, line 2

of the form, "Early distributions not subject to additional tax",

petitioners entered exception number 11 as the appropriate

exception from page 2 of the instructions for the entire amount

of the distribution. The Form 5329 did not otherwise include any

statement to describe the basis upon which petitioners claimed

that the section 72(t) tax was not applicable. Respondent, in

the notice of deficiency, determined that the $115,142.97 early

distribution was subject to the additional tax under section
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3 The additional tax under sec. 72(t) is 10 percent of

the amount of the distribution. In this case, the distribution

was $115,142.97; therefore, 10 percent of that amount is

$11,514.30. The deficiency determined in the notice of

deficiency is $10,824. At trial, counsel for respondent agreed

that this was an incorrect computation but declined to move to

increase the deficiency to $11,514.30.

72(t) and determined a deficiency of $10,824 for that tax and the

negligence penalty under section 6662(a).3

Section 72(t) provides for a 10-percent additional tax on

early distributions from qualified retirement plans. Paragraph

(1), which imposes the tax, provides in relevant part:

(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.

The 10-percent additional tax, however, does not apply to certain

distributions. Section 72(t)(2) excepts distributions from the

additional tax if the distributions are made: (1) To an employee

age 59-1/2 or older; (2) to a beneficiary (or to the estate of

the employee) on or after the death of the employee; (3) on

account of the employee's disability; (4) as part of a series of

substantially equal periodic payments made for life; (5) to an

employee after separation from service after attainment of age

55; (6) as dividends paid with respect to corporate stock
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described in section 404(k); (7) to an employee for medical care;

or (8) to an alternate payee pursuant to a qualified domestic

relations order. 

Petitioners contend they do not owe the section 72(t)

additional tax for three reasons:

(1) The distributions are not subject to the section 72(t)

additional tax because of their financial hardship;

(2) The Internal Revenue Service, even though notice was

served of petitioners' bankruptcy proceeding, failed to file a

proof of claim in the bankruptcy proceeding; therefore, the

additional tax was discharged; and

(3) Even if the additional tax was not discharged, following

their discharge, the bankruptcy proceeding was reopened to

include in the bankruptcy estate a monetary judgment of $607,500

that petitioner recovered against a former employer, which, if

collected, would pay off all creditors. Therefore, petitioners

contend, pending collection of this asset, respondent, as a

creditor, is stayed from instituting collection action, including

the deficiency in this case.

With respect to petitioners' first contention, as noted

earlier, section 72(t)(2) excepts from the additional tax certain

categories of distributions. Petitioners agree that none of

these categories apply to their fact situation. Instead,

petitioners contend that, because of financial hardship, they are
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relieved of the section 72(t) additional tax and argue that the

availability of that relief is provided and allowed on Form 5329

and the specific instructions for that form. In particular,

petitioners point to the instructions for line 2 of Form 5329. 

Those instructions, in addition to describing the exceptions that

are expressly provided in section 72(t)(2), also include another

category described as "other", which is explained as number 11 in

the instructions for Form 5329. The "other" situations in which

the additional tax does not apply are described in the

instructions as: (1) Distributions that are incorrectly labeled

as an early distribution; (2) distributions from an employer plan

as to an employee's separation from service prior to March 1,

1986; (3) distributions that are dividends from stock described

in section 404(k); and (4) distributions from certain annuity

contracts. It is very clear that the distributions to petitioner

in this case do not fit under any of these categories. Financial

hardship is not described as an exemption from the tax on an

early distribution. Petitioners, however, argue on brief:

In fact, the Service has responded to the growing list of

exemptions identified under Form 5329. Form 5329

specifically lists eleven (11) such exemptions with number

11 listed simply as "other". Petitioner had duly asserted

his exemption as number 11 on the form submitted. 

Certainly, the dire financial situation of being unemployed

leading the petitioners to file bankruptcy in this case can

be considered as great an economic hardship as a minimal

standard compared to the examples listed above. At the very

least, the Service had the duty to respond to petitioner's
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Form 5329 submission and allow any differences of opinion to

be settled in a timely manner by a court of competent

jurisdiction.

Petitioners have selected this Court as the forum to decide

that question. This Court's conclusion is that financial

hardship is not a category or basis for an exception from the

section 72(t) additional tax on early retirement plan

distributions. Milner v. Commissioner, T.C. Memo. 2004-111;

Gallagher v. Commissioner, T.C. Memo. 2001-34 (and cases cited). 

Petitioners have simply crafted an additional category of

exception that is clearly beyond the intent and meaning of

section 72(t)(2) and the instructions petitioners relied on. 

Their argument fails.

Petitioners also contend that respondent is precluded from

making an assessment against them for the section 72(t) penalty

because respondent never filed a proof of claim in their

bankruptcy proceeding. That argument is also rejected because,

whether or not a proof of claim was filed, a discharge in

bankruptcy does not discharge an individual debtor from an

obligation with respect to a return that was either not filed, or

a return that was due to be filed, less than 3 years before the

date of filing the bankruptcy petition. In this case,

petitioner's income tax return for the year 2000 was filed well

within the 3-year period prior to the filing of their bankruptcy
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petition. The tax, therefore, is not dischargeable under Federal

law.

Petitioners also contend that, after their bankruptcy

discharge, the bankruptcy proceeding was reopened in order to

allow into the bankruptcy estate a monetary judgment of $607,500

petitioners recovered against a former employer. Because of this

reopening of the bankruptcy proceeding, petitioners contend that

a new "stay" came into effect. The Court rejects that argument

because no evidence was presented to show that the stay was

reinstituted by the bankruptcy court. See Guerra v.

Commissioner, 110 T.C. 271, 277-278 (1998). The reopening of the

bankruptcy proceeding is not a restoration of the stay against

this Court.

The Court holds that petitioners are liable for the

additional tax under section 72(t). Respondent is sustained on

this issue.

The second issue is whether petitioners are liable for the

accuracy-related penalty under section 6662(a) for negligence or

disregard of rules or regulations. Section 6662(a) provides

that, if it is applicable to any portion of an underpayment in

taxes, there shall be added to the tax an amount equal to 20

percent of the portion of the underpayment to which section 6662

applies. Section 6662(b)(1) provides that section 6662 shall
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apply to any underpayment attributable to negligence or disregard

of rules or regulations.

Section 6662(c) provides that the term "negligence" includes

any failure to make a reasonable attempt to comply with the

provisions of the internal revenue laws, and the term "disregard"

includes any careless, reckless, or intentional disregard of

rules or regulations. Negligence is the lack of due care or

failure to do what a reasonable and ordinarily prudent person

would do under the circumstances. Neely v. Commissioner, 85 T.C.

934, 947 (1985). Under section 6664(c), no penalty shall be

imposed under section 6662(a) with respect to any portion of an

underpayment if it is shown that there was a reasonable cause for

such portion and that the taxpayer acted in good faith with

respect to such portion. The determination of whether a taxpayer

acted with reasonable cause and in good faith depends upon the

facts and circumstances of each particular case. Sec. 1.6664-

4(b)(1), Income Tax Regs. Relevant factors include the

taxpayer's efforts to assess his or her proper tax liability, the

knowledge and experience of the taxpayer, and the taxpayer's

reliance on the advice of a professional, such as an accountant. 

See Drummond v. Commissioner, T.C. Memo. 1997-71, affd. in part

and revd. in part without published opinion 155 F.3d 558 (4th

Cir. 1998). However, the most important factor is the extent of

the taxpayer's effort to determine the taxpayer's proper tax
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liability. See sec. 1.6664-4(b)(1), Income Tax Regs. An honest

misunderstanding of fact or law that is reasonable in light of

the experience, knowledge, and education of the taxpayer may

indicate reasonable cause and good faith. Remy v. Commissioner,

T.C. Memo. 1997-72. 

Petitioners made an insufficient effort to determine their

proper tax liability for 2000. The instructions for the Form

5329 clearly did not provide for an exception from the section

72(t) additional tax on the distributions to petitioner. 

Petitioners merely crafted an additional exception to accommodate

their situation. There is no evidence in the record to show that

they solicited the assistance of a tax professional regarding

their liability for the section 72(t) additional tax on the

qualified plan distributions. The Court sustains respondent on

this issue.

Reviewed and adopted as the report of the Small Tax Case

Division.

Decision will be entered

for respondent.