T.C. Memo. 2004-111

UNITED STATES TAX COURT

JAMES J. MILNER AND MARILYN R. MILNER, Petitioners v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 5504-03. Filed May 4, 2004.

James J. Milner, pro se.

Kelley Blaine, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

SWIFT, Judge: Respondent determined an additional tax under

section 72(t) in the amount of $5,555 relating to petitioners’

1999 Federal income tax liability.

The issue for decision is whether petitioners are subject to

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

a $55,555 distribution from a qualified retirement plan.
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Unless otherwise specified, references to petitioner in the

singular are to petitioner James J. Milner, and all section

references are to the Internal Revenue Code in effect for the

year in issue.

FINDINGS OF FACT

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

At the time the petition was filed, petitioners resided in

Molalla, Oregon.

Through August of 1998, petitioner was employed as vice

president of lending at Safeway Credit Union (Safeway). In

August of 1998, petitioner was placed by Safeway on

administrative leave. Petitioner received from Safeway a

severance package that included total payments to petitioner of

$21,000 to be made to petitioner over the course of the last 4

months of 1998 with the final payment to be made in January of

1999.

In January of 1999, petitioner’s employment with Safeway was

officially terminated. Shortly thereafter, in order to obtain

funds to continue remodeling petitioners’ home, petitioner

attempted to borrow against his qualified retirement plan (the

plan), which was administered by Safeway. Petitioner however was

unable to obtain a loan from the plan because he was no longer

employed by Safeway.
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Petitioner then requested and received from the plan a total

distribution of the balance in his account in the amount of

$55,555. At the time of the plan distribution, petitioner was 53

years old.

Petitioner did not roll over the $55,555 proceeds of the

distribution into an individual retirement account or into

another qualified retirement plan. Petitioners used

approximately $15,000 to $20,000 from the plan distribution in

order to complete the remodeling of their home.

Later in 1999, petitioners sold their home for approximately

$199,000. At the time of this sale, petitioners apparently owed

approximately $188,000 on a home mortgage. After selling their

home, petitioners purchased another home for a purchase price of

approximately $132,000.

Sometime in 1999, petitioner Marilyn R. Milner had a heart

attack and thereafter was unable to work. In January of 2001,

petitioner Marilyn R. Milner applied for Social Security

disability benefits relating to the heart attack. Her

application, at the time of trial, was still pending.

On March 21, 2000, petitioners timely filed their 1999 joint

Federal income tax return on which they reported as taxable

income the $55,555 distribution that petitioner received from the

plan but on which petitioners did not report a 10-percent
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1 For example, under sec. 72(t)(2)(A)(i), an exception to

the 10-percent additional tax on an early distribution from a

qualified retirement plan is provided where, on the date of the

distribution, a taxpayer has attained the age of 59-1/2. Under

sec. 72(t)(2)(A)(v), an exception is provided where a taxpayer,

having attained the age of 55, receives a distribution after he

is no longer employed by his former employer that administered

the plan. As stated, petitioner was only 53 years of age when

his employment was terminated and when he received his

distribution.

Under sec. 72(t)(2)(B), another exception is provided where

a taxpayer uses the proceeds of an early distribution to pay for

(continued...)

additional tax under section 72(t) with regard to the

distribution.

On March 5, 2003, respondent mailed to petitioners a notice

of deficiency in which respondent determined that under section

72(t) the $55,555 distribution petitioner received constituted an

early distribution on which the 10-percent additional tax in the

amount of $5,555 was due.

At the time of trial, petitioner held two jobs, working

approximately 60 hours per week.

OPINION

Generally, under section 72, a 10-percent additional tax is

imposed against a taxpayer on that portion of a distribution from

a qualified retirement plan that is includable in the taxpayer’s

gross income. Sec. 72(t)(1). Under section 72(t)(2), certain

exceptions to the 10-percent additional tax are provided, none of

which apply here.1
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1(...continued)

certain expenses for medical care. Petitioners stipulated that

the $55,555 distribution petitioner received was not used for

medical care.

In their pretrial memorandum, however, petitioners argue

that the additional tax imposed under section 72(t)(1)

constitutes a “penalty” the imposition of which in this case

would create undue hardship on petitioners. Petitioners state

that “Congress intended the law to be liberally applied in favor

of the taxpayer in cases in which the taxpayer was forced to

retire and forced to accept a distribution from the retirement

plan.”

Nothing in the legislative history of section 72(t) supports

petitioners’ interpretation of the purpose of section 72(t)(1). 

To the contrary, the Senate Finance Committee, in the legislative

history of section 408(f), the predecessor to section 72(t),

stated that the purpose of the 10-percent additional tax was to

discourage early distributions from retirement plans because

“Premature distributions frustrate the intention of saving for

retirement”. S. Rept. 93-383, at 134 (1974), 1974-3 C.B. (Supp.)

80, 213; see also H. Conf. Rept. 93-1280, at 339 (1974), 1974-3

C.B. 415, 500. The Senate Finance Committee went on to state

that the purpose of the additional tax was to prevent such

premature distributions.

We find no authority in the Code, the legislative history,

caselaw, or Internal Revenue Service notices and private letter
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2 Petitioners do not argue that the burden of proof on the

issue in this case should be shifted to respondent under sec.

7491. In any event, we do not decide the issue in this case on

the burden of proof. Also, regardless of whether the $5,555

additional tax under sec. 72(t) would be considered an

“additional amount” under sec. 7491(c) and regardless of whether

the burden of production with respect to this additional tax

would be on respondent, respondent in this case has met any such

burden of production by showing that petitioner received the

distribution when he was 53 years of age. See H. Conf. Rept.

105-599, at 241 (1998), 1998-3 C.B. 747, 995.

rulings that would provide for what would amount to an umbrella

hardship exception, applicable on a case-by-case basis, to the

10-percent additional tax on early distributions from qualified

retirement plans. See, e.g., Vulic v. Commissioner, T.C. Memo.

2004-51 (premature distribution used to refinance the taxpayer’s

home, to pay for son’s wedding, and to make payments on credit

cards subject to section 72(t) additional tax); Robertson v.

Commissioner, T.C. Memo. 2000-100 (premature distribution used

for the taxpayer’s “own subsistence and that of her family”

subject to section 72(t) additional tax), affd. 15 Fed. Appx. 467

(9th Cir. 2001).

Under section 72(t), petitioners are liable for the 10-

percent additional tax on the $55,555 early distribution that

petitioner received from the plan.2

To reflect the foregoing,

Decision will be entered

for respondent.