TAX COURT OPINION

Case: David E. Lennon
Docket Number: 27674-10S
Judge: Marvel
Opinion Type: bench
Filed: 07/05/2011
Pages: 10

UNITED STATES TAX COURT WASHINGTON, DC 20217 DAVID E . LENNON, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent ) ) ) ) ) ) ) ) ) O R D E R Docket No. 27674-10S. Pursuant to Rule 152(b), Tax Court Rules of Practice and Procedure, it is ORDERED that the Clerk of the Cou t shall transmit herewith to petitioner and to respondent a copy of transcript of Marvel at Portland, Maine, on June 17, 2011, containing her oral findings of trial. the trial in the above c se before Judge L. Paige fact and opinion rendered at the conclusion of the the pages of the In accordance with the oral findings of fact and opinion, a decision will be entered for responden . (Signed) L. Paige Marvel Judge Dated: Washington, D.C. July 5, 2011 1 $ERVEC JUL - 5 2011 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 3 Bench Opinion by Judge L. Paige Marvel June 17, 2011 David E. Lennon v. Commissioner Docket No. 27674-10S THE COURT: The Court has decided to render oral findings of fact and opinion in this case, and the following represents the Court's oral findings of fact and opinion. The oral findings of fact and opinion shall not be relied upon as precedent in any other case. This proceeding for the redetermination of a deficiency is a Small Tax Ca e conducted pursuant to the provisions of section 7463 of the Internal Revenue Code as amended and Rules 170 through 175 of the Tax Court Rules of Practice and Procedure. This bench opinion is made pursuant to the authority granted by section 7459(b) of the Internal Revenue Code of 1986 as amended and Rule 152 of t e Tax Court Rules of Practice and Procedure. Unless otherwise indicated, subsequent section references made in this bench opinion are to the Internal Revenue Code of 1986 as amended and in effect for the relevant period. Petitioner appeared pro se. Andrea D. Haddad appeared on behalf of espondent. Some of the facts have been stipulated. The stipulated facts are incorpor ted into these findings Heritage Reportingi Corporation (202) 62824888 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 4 by reference. Petitioner resided in New Hampshire when he filed his petition in this case. Petitioner obtained a master's degree in 2005, the expenses for which he paid during 2004 and 2005. He financed those expenses with student loans. In 2008 petitioner was still making regular\ monthly payments on his outstanding student loans. Petitioner, who is a teacher by profession, was laid off at the end of th 2007-08 school year. He applied for unemployment mpensation, and on or about July 1, 2008, he began eceiving benefits. In September 2008 he began to work sporadically as a substitute teacher and earne a salary of $62 per day. During the time that he was working as a substitute teacher, he continued to rec ive unemployment compensation benefits whenever his income from substitute teaching was below the amount at which unemployment compensation benefits were suspended or terminated. After the layoff in June 2008, petitioner's expenses substantially excee ed his income. His income throughout the rest of 2008, before taking into account any retirement account distribution, consisted solely of the amount he earned from substitute Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 5 teaching, unemployment compenlsation benefits, and a small amount of interest and dividends. Because he needed additional funding to pay his expenses while he looked for permanent employment, petitioner, who had not yet attained the age of 59-1/2 years old in 2008, withdrew $18,778 from his individual retirement account (retirement distribution), which he used to help pay expenses including his student loan payments and health insurance premiums. Petitioner, however, failed to report the $18,778 retirement distribution as taxable income on his 2008 Federal income tax return. Petitioner was not disabled in 2008, nor was he disabled at the time of trial. Respondent examined petitioner's 2008 return and determined that petitioner should have reported the retirement distribution he received during 2008 as taxable income. Respondent also determined that petitioner was liable for the section 72(t) additional tax because petitioner was not yet 59-1/2 years old when he received the distribution. By notice of deficiency dated September 20, 2010, respondent determined that petitioner was liable for an income tax deficiency of $4,951. Petitioner now agrees that the premature Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 6 retirement distribution was ncludable in his taxable income for 2008. However, he does not agree that he is liable for the additional tax imposed by section 72(t) on premature distributions. Petitioner alleges that the premature retirement distribution was the result of extreme financial hardship that he was suffering during 2008 due to the loss of his teaching job, and he contends that he is not liable for the section 72(t) additional tax Decause his circumstances fit within one of the exceptions set forth therein. Respondent contendä that there is no exception under section 72(t) for premature distributions attributable to general financial hardship. Consequently, resp>ndent asserts that petitioner is liable for a deEiciency as determined in the notice of deficiency tha was mailed to petitioner on September 20, 2010 . Discussion Section 402 provid 3 that distributions from an employee's trust, such as a plan under section 401(k), shall be taxable to tae distributee under section 72 . Section 72 (a) provides that gross income includes any amount received is an annuity except as otherwise provided in chapte 1 of the Internal Revenue Code. Heritage Reportin Corporation (202) 628 4888 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 7 Section 72(t) (1) imposes an additional tax of 10 percent on the portion f a distribution from a qualified retirement plan th is includable in gross income, unless the distributi n falls under one of the exceptions in section 72(t) (2). A distribution made on or after the date on which the employee attains age 59-1/2 is generally not subject to the additional tax. Sec. 72(t) (2) (A) (I). The parties do not dispute that petitioner's individual reti ment account was a qualified retirement plan or hat petitioner had not yet attained the age of 59-1/ years old when he received the 2008 distribution. Section 72(t) contáins certain exceptions that, if applicable, will sav a taxpayer from liability for the additional ax imposed on a premature distribution. For xample, section 72(t) (2) (A) excludes from th additional tax those distributions that are paid fcom a qualified plan if the distributions (1) are made to a beneficiary on or after the death of the employse, (2) are attributable to the employee's being disabled, or (3) are part of a series of substantially equal periodic payments. See sec. 72(t) (2) (A). None of these exceptions apply. Petitioner also has not established that he comes within any of the othe exceptions to the Heritage Reporting Corporation (202) 628 -4888 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 8 general rule under section 72(t) (2). As relevant to petitioner's arguments, sectïon 72(t) (2) (E) provides an exception from the 10-percent additional tax for distributions from individual retirement plans for qualified higher education expenses. Under section 72(t) (7) the phrase "qualifie higher education expenses" means qualified hig er education expenses within the meaning of sectio 529(e) (3) for education furnished to the taxpayer, his spouse, or any child as prescribed therein. Section 529(e) (3) (A), in turn, defines qualified higher edugation expenses as "tuition, fees, books, supplies, and equipment required for the enrollment or attendance of a designated beneficiary at an eligible educational institution." Petitioner paid tu tion and other expenses related to his master's degree in 2004-05. Qualified higher education expenses paid in a year other than the year of a premature indi idual retirement account distribution do not reduce the amount of the premature distribution subject to the 10-percent additional tax. See Duronio v. Commissioner, T.C. Memo. 2007-90 (citing Lodder-Beckert v. Commissioner, T.C. Memo. 2005-162). In 2008 petitioner paid his student loans. Student loan repayment, however, is not among the Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 9 qualified higher education e penses enumerated in section 529(e) (3). Petitioner also argles that he used the distribution to pay his health insurance premiums in 2008. Under section 72(t) (2) (B) the additional tax does not apply to distributinas made to the employee to the extent such distributi ns do not exceed the amount allowable as a deduct n under section 213 to the employee for amounts paid during the taxable year for medical care. Section 7 (t) (2) (D) also provides that in certain situations the additional tax does not apply to distributions to uneinployed individuals for health insurance premiums. One such situation when the additional tax does not apply is if the taxpayer has received unemployment co ensation for 12 consecutive weeks under any e ployment compensation law. See sec. 72 (t) (2) (D) (i) (I) . The 12-week consecutive unemployment com ensation provision is deemed satisfied in the case of a self-employed individual if such individual would have received unemployment compensation bud for the fact the individual was self-employed. See sec . 72 (t) (D) (iii) . Petitioner testifièd that he received unemployment compensation benefits throughout July and August 2008, and then sporadically during the fall of Heritage Reportinc Corporation (202) 628. 4888 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 10 2008, depending on the amount| of income he earned as a part-time substitute teacher. However, petitioner did not prove that he received unemployment compensation benefits for 12 consecutive weeks during 2008. Because petitioner did not peove he received unemployment compensation for 12 consecutive weeks, petitioner does not qualify for the exception under section 72(t) (2) (D). There are no other exceptions under section 72(t) (2) that apply to petitioner's situation in 2008. Although we sympathize with p titioner's financial hardship, which we are convi ed was legitimate, and while we respect petitioner's efforts to deal responsibly with his obligations during a time of financial crisis, there is no general financial hardship exception under section 72(t) (2) that covers petitioner's situation. See Arnold v. Commissioner, 111 T.C. 250, 255-256 (1998)) Milner v. Commissioner, T.C. Memo. 2004-111; Gallagher v. Commissioner, T.C. Memo. 2001-34. Consequently the distribution petitioner received is subjec to the 10-percent additional tax under section 72(t). We hold therefore that petitioner is liable fo the 2008 income tax deficiency as determined by respondent. Decision will be en ered for respondent. Heritage Reporti Corporation (202) 628 4888 1 2 3 4 s 6 7 8 9 10 11 12 13 14 is 16 17 18 19 20 21 22 23 24 2s This concludes the Court's oral findings of fact and opinion in this case. (Whereupon, at 10:18 a.m., the bench opinion in the above-entitled matter'was concluded.) 11 I // // // // // // // // // // // // // // // // / // // // // Heritage Reporting Corporation (202) 628 - 4888