T.C. Summary Opinion 2009-38

UNITED STATES TAX COURT

NANCY GARZA-MARTINEZ, Petitioner v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 4390-07S. Filed March 23, 2009.

Nancy Garza-Martinez, pro se.

Sheila R. Pattison, for respondent.

JACOBS, Judge: This case was heard pursuant to the

provisions of section 7463 of the Internal Revenue Code in effect

when the petition was filed. Pursuant to section 7463(b), the

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

and this opinion shall not be treated as precedent for any other

case. All subsequent section references are to the Internal
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Revenue Code in effect for the year in issue, and all Rule

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

Respondent determined a $1,845 deficiency in petitioner’s

Federal income tax for 2004. The deficiency arises from the

imposition of the 10-percent additional tax mandated by section

72(t)(1) on early distributions from a qualified retirement plan. 

Respondent contends that the 10-percent additional tax was

triggered by an impermissible modification to a “series of

substantially equal periodic payments” (the additional

distributions) petitioner had been receiving from her individual

retirement account (IRA) pursuant to section 72(t)(2)(iv). 

Petitioner asserts that these additional distributions did not

trigger the 10-percent additional tax because they were used for

“qualified higher educational expenses” and therefore were

excepted from the 10-percent additional tax pursuant to section

72(t)(2)(E). Thus, the issues for decision are: (1) Whether

petitioner is liable for the section 72(t)(1) 10-percent

additional tax on early distributions from a qualified retirement

plan; and, if so, (2) the amount ($18,450, as respondent asserts

or $4,050, as petitioner maintains) of the distributions that is

subject to the 10-percent additional tax.

Background

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

found. We incorporate by reference the parties’ stipulations of
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facts and accompanying exhibits. At the time she filed her

petition, petitioner resided in Texas.

Petitioner worked for Southwestern Bell for more than 20

years before 2001. In 2001, at age 48, she took early

retirement. At the end of 2000 petitioner rolled the amount in

her Southwestern Bell retirement plan account into an IRA with

Merrill Lynch and thereafter elected to receive monthly

distributions of $1,200 (the periodic payment distributions) from

her IRA, beginning February 1, 2001, and ending on February 18,

2012.

Petitioner began receiving her periodic payment

distributions as scheduled. However, during each of years 2001

to 2004 she received additional distributions from her IRA. In

2001 she received distributions from her IRA totaling $33,266. 

Petitioner took the additional distributions in 2001 because she

had overcontributed to her IRA and took the additional

distributions in order to be in compliance with IRA contribution

rules. In 2002 petitioner received distributions totaling

$46,331, taking the additional distributions in 2002 because the

value of the investments that made up her IRA was plummeting and

she wanted to withdraw money from the stock market. In 2003

petitioner received distributions totaling $25,145. The

additional distributions were made pursuant to a qualified

domestic relations order arising from her divorce.
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1In 2004 petitioner’s son was 23. He lived off and on with

his girlfriend and at times with petitioner. For 2001-2004

petitioner claimed her son as a dependent. On her 2001 tax

return she claimed an education credit of $1,500; on her 2002 tax

return she claimed a tuition and fees deduction of $3,000; and on

her 2003 tax return she claimed an education credit of $2,000. 

She did not claim an education credit or a deduction (with

respect to her son) on her 2004 tax return.

In 2004, when petitioner was 52 years old, she received (in

addition to her periodic payment distributions of $1,200) $4,050

of additional distributions as follows:

Date Amount

 Jan. 9 $1,800

Mar. 30 800

May 24 500

July 19 400

Oct. 25 400

Nov. 30 150

Thus, in 2004 petitioner received distributions totaling $18,450. 

The $4,050 of additional distributions was used to pay her son’s

higher education expenses.1 However, she did not know

specifically how her son spent the money she gave him, although

she believed that he used most of the money for college books and

supplies. When her son requested money, petitioner would make

withdrawals from her IRA and give him cash or transfer money to

his bank account. Petitioner did not provide documentation to

corroborate her assertion that she gave the money to her son or

that her son used the money for college tuition, books, and/or

supplies.
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2Petitioner did not argue that the burden of proof should be

shifted to respondent pursuant to sec. 7491. Regardless of

whether the sec. 72(t) additional tax is a “penalty, addition to

tax, or additional amount imposed by this title” for which

respondent would have the burden of production pursuant to sec.

7491(c), we find that respondent has met that burden. See Milner

v. Commissioner, T.C. Memo. 2004-111 n.2.

Petitioner reported the following amounts as being subject

to the section 72(t)(1) additional tax as a consequence of the

additional distributions she received in 2001, 2002, and 2003:

Date Amount

 2001 $11,331

2002 31,931

2003 1,938

She did not report any amount as being subject to the section

72(t)(1) additional tax for 2004.

Discussion

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

amount of any distribution from a qualified retirement plan (such

as an IRA) that fails to satisfy one of the statutory exceptions

in section 72(t)(2).2 One exception, found in section

72(t)(2)(A)(iv), relates to periodic payments that are 

substantially equal in amount:

(2) Subsection not to apply to certain distributions. 

--Except as provided in paragraphs (3) and (4), paragraph 

(1) shall not apply to any of the following distributions:

(A) In general.--Distributions which are--
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3Although sec. 72(t)(2)(A)(iv) requires that the series of

payments be made for the life or life expectancy of the employee,

petitioner elected to receive monthly distributions from her IRA

from February 2001 through February 2012. We need not and do not

decide whether these payments were to be made for her life or

life expectancy. See Rev. Rul. 2002-62, 2002-2 C.B. 710; Notice

89-25, Q&A-12, 1989-1 C.B. 662, 666.

* * * * * * *

(iv) part of a series of substantially equal 

periodic payments (not less frequently than 

annually) made for the life (or life expectancy) 

of the employee or the joint lives (or joint life 

expectancies) of such employee and his designated 

beneficiary,

Petitioner asserts that distributions of $14,440 that she

received from her IRA plan during 2004 were designed to qualify

as substantially equal periodic payments under section

72(t)(2)(A)(iv) and thus are not subject to the 10-percent

additional tax. Petitioner readily admits, however, that she

received distributions during 2004 (and in previous years) in

addition to the $1,200 monthly payment. 

Assuming arguendo that the series of $1,200 monthly payments

originally complied with section 72(t)(2)(A)(iv), petitioner ran

afoul of the recapture provision of section 72(t)(4).3 
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4Sec. 72(t)(4) provides in pertinent part:

(4) Change in substantially equal payments.--

(A) In general.--If–-

(i) paragraph (1) does not apply to a 

distribution by reason of paragraph (2)(A)(iv), and

(ii) the series of payments under such paragraph 

are subsequently modified (other than by reason of 

death or disability)--

(I) before the close of the 5-year period 

beginning with the date of the first payment and

after the employee attains age 59-1/2, or

(II) before the employee attains age 59-1/2,

the taxpayer’s tax for the 1st taxable year in which such 

modification occurs shall be increased by an amount, 

determined under regulations, equal to the tax which (but 

for paragraph (2)(A)(iv)) would have been imposed, plus 

interest for the deferral period.

Section 72(t)(4)4 provides that the exception found in section

72(t)(2)(A)(iv) is not applicable if the series of substantially

equal periodic payments is subsequently modified (other than by

reason of death or disability) before the employee attains age

59-1/2. However, respondent is not seeking the 10-percent

additional tax for 2001, 2002, or 2003 in an amount greater than

reported on petitioner’s income tax return as a consequence of

the section 72(t)(4) recapture provision.

Petitioner maintains that she should not be subject to the

10-percent additional tax under section 72(t)(1) for 2004

because, as noted supra, she received those additional
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distributions in order to pay her son’s higher education

expenses. Petitioner introduced no documentation such as bills

or receipts to substantiate her claim. Petitioner initially

testified that all of the additional amounts in 2004 were for her

son’s educational expenses. But under cross-examination,

petitioner testified that 90 percent of the 2004 distributions

were for her son’s educational expenses. Moreover, when asked

how she knew how her son used the money given to him, petitioner

admitted that once she gave the money to her son, he did not give

her any receipts. She testified: “I knew he had things due at

school * * * [b]ut I took his word, because they [sic] told me,

because once they’re [sic] in college, they [sic] don’t allow you

to look at their [sic] records and stuff.”

To assist petitioner, we held the record open for 30 days

after trial to allow her to submit documentation showing how the

2004 additional distributions were used. Petitioner failed to

submit such documentation.

It is well established that the taxpayer has the burden of

proving the applicability of the exception found in section

72(t)(2)(E). Lodder-Beckert v. Commissioner, T.C. Memo. 2005-

162; see Matthews v. Commissioner, 92 T.C. 351, 361-362 (1989)

(exemptions and exclusions from taxable income should be

construed narrowly, and the taxpayers must bring themselves

within the clear scope of the exclusions), affd. 907 F.2d 1173
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(D.C. Cir. 1990). And we have rejected a taxpayer’s claim for

the exception under section 72(t)(2) where the taxpayer failed to

provide the substantiating evidence. See Nolan v. Commissioner,

T.C. Memo. 2007-306 (taxpayer failed to provide evidence of

medical expenses and therefore could not claim an exception to

the additional tax under the medical expense exception of section

72(t)(2)(B)). Because petitioner failed to present documentation

to corroborate the alleged higher education expense use of the

additional distributions, we hold that petitioner is not entitled

to the claimed exception. See Rule 142(a).

Finally, petitioner argues that should we conclude that she

is liable for the section 72(t)(1) additional tax, the 10-percent

additional tax should be imposed only with respect to the $4,050

in additional distributions she received in 2004. Respondent

disagrees and asserts that the 10-percent additional tax should

be imposed on the entire $18,450 of the distributions petitioner

received in 2004. We agree with respondent. 

Section 72(t)(4) provides that if a series of substantially

equal payments (which otherwise is excepted from the 10-percent

additional tax) is modified (other than by reason of death or

disability) before the employee reaches 59-1/2 years of age,

beginning on the date of the first distribution, then the

taxpayer’s tax for the first taxable year in which such

modification occurs is to be increased by an amount equal to the
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tax which (but for section 72(t)(2)(A)(iv)) would have been

imposed, plus interest. Thus paragraph (4) makes clear that the

10-percent additional tax is imposed on the full distribution for

the year. See Arnold v. Commissioner, 111 T.C. 250, 255-256

(1998); Notice 89-25, Q&A-12, 1989-1 C.B. 662, 666. Moreover,

the conference report accompanying the Tax Reform Act of 1986,

Pub. L. 99-514, 100 Stat. 2085, includes the following example

regarding the imposition of the tax:

if, at age 50, a participant begins receiving payments 

under a distribution method which provides for substantially

equal payments over the individual’s life expectancy, and, 

at age 58, the individual elects to receive the remaining 

benefits in a lump sum, the additional tax will apply to the

lump sum and to amounts previously distributed. 

H. Conf. Rept. 99-841 (Vol. II), at II-457 (1986), 1986-3 C.B.

(Vol. 4) 1, 457.

Accordingly, we hold that the 10-percent additional tax

applies to the entire $18,450 distributed to petitioner from her

IRA in 2004, as respondent maintains.

To give effect to respondent’s statement in his posttrial

brief,

Decision will be entered

under Rule 155.