TAX COURT OPINION

Case: William D. Prendergast, Jr. & Katrina S. Prendergast
Docket Number: 25409-14S
Judge: Marvel
Opinion Type: bench
Filed: 07/09/2015
Pages: 13

SYM UNITED STATES TAX COURT WASHINGTON, DC 20217 WILLIAM D. PRENDERGAST, JR. & KATRINA S. PRENDERGAST, Petitioner(s), v. ) ) ) ) ) ) Docket No. 25409-14S COMMISSIONER OF INTERNAL REVENUE, Respondent. ) ) ) ) ORDER Pursuant to Rule 152(b), Tax Court Rules of Practice and Procedure, it is ORDERED that the Clerk of the Court shall transmit to petitioners and to respondent a copy of the pages of the transcript of the proceedings of the above case before Judge L. Paige Marvel at Knoxville, Tennessee, on June 24, 2015, containing the Court's oral findings of fact and opinion. In accordance with the oral findings of fact and opinion, decision will be entered for petitioners. (Signed) L. Paige Marvel Judge Dated: Washington, D.C. July 9, 2015 SERVED Jul 10 2015 Capital Reporting Company 3 1 2 Bench Opinion by Judge L. Paige Marvel June 24, 2015 3 William D. Prendergast, Jr. and Katrina S. 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Prendergast v. Commissioner Docket No. 25409-14S 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 case was heard pursuant to the provisions of section 7463 of the Internal Revenue Code of 1986 as amended (Code), and Rules 170 through 174 of the Tax Court Rules of Practice and Procedure. 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. This bench opinion is made pursuant to the authority granted by section 7459(b) of the Code, and Rule 152 of the Tax Court Rules of Practice and Procedure. Unless otherwise indicated, subsequent section references are to the Code in effect for the year in issue, and Rule references are to the Tax Court Rules of Practice and Procedure. Petitioners William Prendergast (Mr. 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 4 1 2 Prendergast) and Katrina Prendergast (Mrs. Prendergast) appeared pro sese. Amber B. Martin ·3 appeared on behalf of respondent. Petitioners 4 5 6 7 8 9 10 11 12 13 14 15 16 petitioned this Court after respondent mailed to them a notice of deficiency increasing their tax due for taxable year 2012 by the 10% additional tax under section 72(t)(1) for an early distribution from a qualified retirement plan. The sole issue for decision is whether Mr. Prendergast is "disabled" under section 72(t)(2) (A)(iii) and therefore qualifies for an exception from liability for the additional tax. FINDINGS OF FACT Some of the facts have been stipulated. The stipulated facts and facts drawn from stipulated exhibits are incorporated herein by this reference 17 When they petitioned this Court, petitioners resided 18 19 20 21 22 23 24 25 in Tennessee. Mr. Prendergast, a graduate of the University of Tennessee with a degree in accounting and finance, has worked approximately 35 years selling insurance products and financial planning services. He is a licensed insurance broker. Mrs. Prendergast is a registered nurse, who also obtained an insurance license in 1999. 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 1 2 3 4 In approximately 1985 or 1986, Mr. Prendergast developed a serious drinking problem. In 1990, he was diagnosed with acute alcoholism and abnormal liver function. In 1991, after an arrest for driving 5 5 while intoxicated, he was admitted to the hospital 6 7 8 9 10 11 12 for treatment. This was the first of many hospitalizations occasioned by Mr. Prendergast's alcoholism. On a date that does not appear in the record, Mr. Prendergast admitted himself into a two- week inpatient substance abuse facility in Raleigh, NC, and then received six weeks of outpatient treatment at the Indian Path treatment facility in 13 Kingsport, TN. After some success in remaining 14 15 16 17 18 sober, Mr. Prendergast relapsed in 2001, 2002, 2003, and 2004, resulting in additional admissions to the Indian Path treatment facility. Mr. Prendergast's continuing bouts with his alcoholism had a profound effect on his business 19 activities. He was fired from a security sales job 20 21 22 23 24 25 for drinking. Because of concerns about the effect of Mr. Prendergast's drinking on his sole proprietorship Insurance business, Mrs. Prendergast took classes, obtained her insurance brokerage license, and together with her husband, incorporated the insurance business in 1999 as Prendergast 866.488.DEPO www.Capita1ReportingCompany.com Capital Reporting Company 6 Insurance. It is an S corporation and Mrs. Prendergast owns all of the stock but Mr. Prendergast is its sole employee. Mr. Prendergast's sole proprietorship, Prendergast Financial Services, generated small net profits in 2008 and 2009, a small net loss in 2010, and substantial net losses in 2011 and 2012. Gross income generated by Prendergast Financial Services has steadily declined from $104,832 in 2008 to one sale of $15,304 that Mr. Prendergast made in 2012 during a period of sobriety. In 2012 Mr. Prendergast experienced a particularly severe relapse that resulted in three hospital visits, including a trip to the emergency room for falling down in his house while intoxicated. Throughout 2012 Mr. Prendergast had only short bouts of sobriety and spent most of his time on his couch, intoxicated and unable to perform basic functions for himself such as eating and bathing. Mrs. Prendergast was his caretaker during this time. Mr. Prendergast's physician has opined that "It is highly doubtful that A [Mr. Prendergast] could have sustained any gainful employment in 2012 due to his condition" and that any continued use of alcohol "will prevent any type of continued employment and will be the 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 cause of [his] death." 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 7 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 Prendergast Insurance was also adversely affected by Mr. Prendergast's chronic alcoholism during 2012. The company reported a net $18,000 loss on its 2012 Form 1120s, U.S. Income Tax Return for an S Corporation, which flowed through to petitioners' Federal income tax return. The net loss was calculated by reducing gross receipts of $133,074 by cost of goods sold and business expenses. The gross receipts were generated from customers renewing their insurance policies and not from Mr. Prendergast's services, as he was unable to work for the business in any meaningful way in 2012. Mr. Prendergast took three trips in 2012: to Des Moines, Iowa for continuing education and licensing; to Louisville, Kentucky, for a company product trip overnight; and to Tampa, Florida, for continuing education and licensing. He flew to Des 18 Moines but drove himself to Louisville and Tampa. 19 During at least two of the trips Mr. Prendergast 20 21 22 23 24 experienced acute bouts of alcoholism, and he had to extend his time in Tampa for several days before he could make it safely home. During 2012, Mr. Prendergast, who was not yet 59 1/2 years old, received a $57,881 distribution from a 25 qualified retirement plan. Petitioners reported the 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 8 1 2 3 distribution on their 2012 Federal income tax return but did not report the 10% additional tax under section 72(t). In a notice of deficiency dated 4 October 17, 2014, respondent determined that 5 6 7 8 9 10 11 12 13 petitioners were liable for the section 72(t) additional tax and for an accuracy-related penalty under section 6662(a). Petitioners assert that they are not liable for the additional tax because Mr. Prendergast was disabled during 2012 and therefore an exception applies. Although respondent has since conceded the accuracy-related penalty, he maintains that Mr. Prendergast's alcoholism does not qualify as a 14 disability. 15 16 17 18 19 20 21 22 23 24 OPINION Generally, if a taxpayer receives a distribution from a qualified retirement plan before attaining the age of 59-1/2, the tax on the amount distributed is increased by 10% of the total distribution. Sec. 72(t)(1) and (2)(A) (i). The additional tax is not imposed, however, if the distribution is "attributable to the employee's being disabled within the meaning of subsection (m)(7)". Sec. 25 72(t)(2)(A)(iii). Subsection (m)(7) provides: 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 9 For purposes of this section, an individual shall be considered to be disabled if he is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or to be of long-continued and indefinite duration. An individual shall not be considered to be disabled unless he furnishes proof of the existence thereof in such form and manner as the Secretary may require. The determination of whether a taxpayer is disabled is made with reference to all the facts of the case. See sec. 1.72-17A(f)(2), Income Tax Regs. The regulations also set forth general considerations upon which a determination of disability is to be 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 made, with the nature and severity of the impairment 20 21 22 23 24 25 being the primary considerations. See id. subpara. (1). The regulations emphasize that the "substantial gainful activity" to which section 72(m) (7) refers is the activity, or a comparable activity, in which the individual customarily engaged prior to the arising 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 10 1 2 3 4 5 6 7 8 9 10 11 12 13 of the disability. See Dwyer v. Commissioner, 106 T.C. 337, 341 (1996); sec. 1.72-17A(f)(1), Income Tax Regs. Therefore, the impairment must be evaluated in terms of whether it does, in fact, prevent the individual from engaging in his customary, or any comparable, substantial gainful activity considering the individual's education, training, and work experience. Sec. 1.72-17A(f)(1), Income Tax Regs. In order to meet the requirements of section 72(m)(7), an impairment must be expected either to continue for a long and indefinite period or to result in death. Ordinarily, a terminal illness because of disease or injury would result in 14 disability. The term "indefinite" is used in the 15 16 17 18 19 20 21 22 23 24 25 sense that it cannot reasonably be anticipated that the impairment will, in the foreseeable future, be so diminished as no longer to prevent substantial gainful activity. Id. subpara. (3). For example, an individual who suffers a bone fracture which prevents him from working for an extended period of time will not be considered disabled, if his recovery can be expected in the foreseeable future; if the fracture persistently fails to knit, the individual would ordinarily be considered disabled. Id. Further, an individual with a mental disease is disabled if 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 11 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 continued institutionalization or constant supervision is required. Id. subpara. (2)(vi). An impairment which is remediable does not constitute a disability. Id. subpara. (4). An individual will not be deemed disabled if, with reasonable effort and safety to himself, the impairment can be diminished to the extent that the individual will not be prevented by the impairment from engaging in his customary or any comparable substantial gainful activity. Id. Mr. Prendergast's physician diagnosed him with alcoholism in 1990, and Mr. Prendergast continues to be afflicted with this disease today. He therefore has a "medically determinable physical or mental impairment". See sec. 72(m)(7). Respondent contends that Mr. Prendergast's impairment has not rendered him unable to engage in any substantial gainful 18 activity because petitioners' businesses were going 19 20 21 22 23 24 25 concerns in 2012 and generated gross receipts and business expenses, and because Mr. Prendergast took three trips in 2012 related to his work. However, the gross receipts were a result of (1) a single transaction that Mr. Prendergast was able to conduct during a brief period of sobriety, and (2) insurance policy renewals that did not require Mr. Prendergast 866.488.DEPO www.Capita1ReportingCompany.com Capital Reporting Company 12 1 2 3 4 to perform substantial services. Because Mr. Prendergast was the only one operating these businesses, it is clear that in prior years when his alcoholism was less severe he provided much more 5 meaningful and substantial service to the businesses. 6 7 8 9 The severe relapse in 2012 caused him to spend most of his time on the couch unable to care for himself let alone operate the two businesses. Although he attempted to undertake three business trips in 2012, 10 Mr. Prendergast was unable to remain sober throughout 11 12 13 14 15 16 17 the trips and even had to extend the Tampa trip by several days before he was sober enough to travel home. We therefore find that Mr. Prendergast was unable to engage in his customary, or any comparable, substantial gainful activity because of his alcoholism. To meet the requirements of section 72(m)(7), 18 Mr. Prendergast's alcoholism at the time of the 19 20 21 22 23 24 25 distribution must have been expected either to continue for a long and indefinite period or to result in death. Although Mr. Prendergast had periods in previous years where his drinking fluctuated in severity, the 2012 relapse was particularly severe, with multiple hospital trips and only intermittent and brief bouts of sobriety. 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 13 1 Considering the severity of Mr. Prendergast's 2 3 4 5 condition and his physician's letter stating that alcoholism will likely cause his death, during 2012 it was not reasonably foreseeable when, if ever, Mr. Prendergast would be able to return to his regular 6 activities in the businesses. Moreover, Mr. 7 8 9 Prendergast's alcoholism was not "remediable" because it was so chronic and severe in 2012 that it rendered him unable to take the steps necessary to break his 10 more than 20-year chain of addiction with reasonable 11 effort and safety. See sec. 1.72-17A(f)(4), Income 12 13 14 15 16 17 18 19 Tax Regs. Respondent cites Dwyer v. Commissioner, 106 T.C. 337 (100C support his position that Mr. Prendergast was not disabled in 2012. However, Dwyer v. Commissioner is distinguishable. The taxpayer in that case, a stock trader suffering from "a biochemical depression", returned to a healthy condition after six weeks of taking the proper 20 medications and was able to trade "in excess of 350 21 22 23 24 25 stocks" during the last three months of the taxable year even though his illness continued until the following spring. See id. at 339-341. On the other hand, Mr. Prendergast was unable to operate his businesses throughout 2012 with the exception of one 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 14 transaction and multiple treatment programs and interventions from 1990 to and including 2012 were unable to break Mr. Prendergast's cycle of addiction. We find that Mr. Prendergast was disabled within the meaning of that term in section 72 (m) (7) in 2012, and that petitioners are not liable for the additional tax under section 72(t). See sec. 72(t) (2) (A) (iii). We have considered the remaining arguments made by the parties and, to the extent not discussed above, conclude those arguments are irrelevant, moot, or without merit. To reflect the foregoing, decision will be entered for petitioner&. A THIS CONCLUDES THE COURT'S ORAL FINDINGS OF FACT AND OPINION IN THIS CASE. (Whereupon, at 11:02 a.m., the above- entitled matter was concluded.) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 866.488.DEPO www.Capita1ReportingCompany.com