TAX COURT OPINION

Case: Bernard W. & Deborah L. Evers
Docket Number: 3151-07S
Judge: Ruwe
Opinion Type: summary
Filed: 11/03/2008
Pages: 7

T .C . Summa'y Opinion 2008-14 0 UNITED TATES TAX COUR T BERNARD W . EVERS AND DI COMMISSIONER OF I N I~BORAH TERNAL L . EVERS, Petitioners v . REVENUE, Responden t Docket No . 3151-07S . Filed November 3, 2008 . Bernard W . Evers, pro s. Katherine Lee Kosar , fo respondent . RUWE,' Judge : This case was heard pursuant to the provision s of section 7463 of the Intertlal .Re'enue Code in effect when th e petition was filed .' Pursuant to section 7463(b), the decisio n to be entered is not reviewa)le,by any other court, and thi s opinion shall not be treated as precedent for any other case . ' Unless otherwise indi ated, all section references are to the Internal Revenue Code in effect for the year at issue . SERVED NOV -3 2008 2 - After concessions, the issue for decision is whether petitioners °are eligible for the exception, under section 72(t)(2)(B), to the 10-percent additional tax on an early withdrawal .from petitioners' qualified retirement account in 2004, . which was used to repay a loan they had obtained to pay medical expenses in 2003 . Background Some of the facts have been stipulated and are so found . At the time their petition was filed, petitioners resided in Ohio . Petitioners . are husband and wife . In 2003 petitioners borrowed $15,000 from APCI Federal Credit Union (APCI) to pay expenses incurred for the treatment of infertility .2 Petitioners used part of the proceeds from the loan to pay medical expenses of $12,0103 during 2003 to the Family Fertility Center for in vitro fertilization procedures . 2 Respondent conceded on brief that the expenses petitioners'- incurred for in vitro fertilization procedures were medical expenses . 3 On the basis of the Transactional Journal from the Family Fertility Center, respondent agrees that petitioners paid medical expenses of $11,980 in 2003 . Likewise, respondent agrees that petitioners paid $110 of medical expenses in 2004 . The Transactional Journal from the Family Fertility Center, however, clearly indicates that petitioners paid $12,010 in 2003 and $80 in 2004 . There is no explanation in the record as to the method the parties used to make their calculations . In 2004 petitioners witi drew $ 16,250 from their qualifie d retirement account . with Cooper Cameron Corp . to repay the loa n from APCI . Section 72(t) ge erallj provides, for a,10-percent additional tax on withdrawal from qualified retirement plan s made before the employee att4ins ache 59-1/2 . Petitioners did no t contend that they met this a4eregdirement'? Petitioners paid $13,000 of the $16,250 withd :awal to APCI in partial satisfactio n of their loan . decision to prematurely withdra w funds from their qualified r tirem nt account to repay APCI was made under the belief that t ey wo ld qualify for an exception t o the 10-percent additional ta unde section 72(t) because they, were using the withdrawn fu n s to ,epay the loan which had bee n acquired to pay medical ..expe set . Petitioners timely fil e their Form 1040, ;U .S . Individua l Income Tax Return, for 2004 . $104,713 . Petitioners prope ly included the $16,250 distributio n in their total reported inco corresponding section 72(t) their taxes owed . On November 6, 2006, re pondent sent to petitioners a notice of deficiency in which he d e erinin~d a deficiency in petitioners ' 2004 Federal income tax of 487 . Respondent's determinatio n indicated that petitioners ' 004 F rm 1040 failed to include : (1) Interest received from A $35, reported to respondent on t Form 1099-INT, Interest Income ; (2) unemployment compensation from the Commonwealth of Pennsylvania of $3,429 and tax withholding of $342, reported to respondent on Form 1099-G, . Certain Government Payments ; and (3) the 10-percent additional tax of $1,625 under section 72( ;t) for a premature distribution from their qualified retirement plan with Cooper Cameron Corp ., reported to respondent on Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing . Plans, IRAs , r Insurance Contracts, etc . Petitioners petitioned the Court for redetermination of the deficiency, contending that : (1) They did not receive a Form 1099-INT from APCI ; (2) they did not have unemployment compensation in 2004 and did not receive the Form 1099-G from the Commonwealth of Pennsylvania ; and (3) they are eligible for the section 72(t)(2)(B) exception to the 10-percent additional tax because the $16,250 distribution from their qualified retirement account was used to cover medical expenses . At trial petitioners conceded issues (1) and (2) . The only issue remaining for us to decide is whether petitioners are eligible for the section 72(t)(2)(B) exception to the 10-percent additional tax under section 72(t) .for the $16,250 early withdrawal from their qualified retirement account with Cooper Cameron Corp . - 5 D'scuss o n Section 72(t)(1) impose a 10 percent additional tax on early distributions from qualified retirement-plans . The fact that petitioners ' distribution was early is not in dispute . The issue is whether petitioners qualify for the section 72(t) (2)(B) . exception to the 10-percent dditional tax . Section 72 (t) (2) ( B) 'pro ides that the imposition-of the additional tax under sectionl72(t)( 1) shall not apply to : Distributions made to t e employee * * * to the extent such distributions do n t exceed the amount allowable as 'a deduction under section 2,13 to the employee for amounts paid during the taxab e year for medical care (determined without regard to whether the employee itemizes deductions for such Taxable year) . Section 213 provides a deduction for expenses paid durin g the taxable year, not compen4ated by insurance or otherwise, fo r medical .-care of the taxpayer, his pouse or a dependent, to th e extent that such expenses ex4eed 7 .5 percent . of the taxpayer' s adjusted gross income . The medical expense deduction under section 213 is allowable only with respect to medical expenses actually paid during the taxable yar, regardless of when the incident or event which occasioned the expenses occurred and regardless of the method of accounting employed by the taxpayer in making his income tax return . ee sec . 1 .213-1(a)(1), Income Tax Regs . In other words, i is t e time of payment that determines the year of the d ductic~n . Granan v . Commissioner , 5 5 T .C . 753, 755 (1971) . Petitioners contend that because $13,000 of the early distribution from their qualified retirement account was used t o repay a portion of the borrowed funds that were used to pay their 2003 medical expenses, the partial repayment of the loan in 2004 should be considered tantamount to direct payments of medica l expenses in 2004 . Respondent disagrees and contends that the section 72(t)(2)(B) exception could apply only with respect to medical expenses actually paid in 2004 . Respondent contends tha t $12,010 of medical expenses was "paid" in 2003 with the borrowed funds, not in 2004 when the loan was partially repaid with the funds distributed from petitioners' qualified retirement account, and that the medical expenses actually paid in 2004 fall well short of 7 .5 percent of petitioners' 2004 adjusted gross income . See sec . 213 . The clear language of section 72(t)(2)(B) limits the scop e of the exception to the amount of deductible medical expenses "paid during the taxable year" of the distribution . Duncan v . Commissioner , T .C . Memo . 2005-171 . This exception does not appl y to the medical expenses that petitioners paid in 2003 because the taxable year of the early distribution was 2004 . See id . The small amount of medical expenses actually paid in 2004 is not deductible because it does not exceed 7 .5 percent of petitioners ' adjusted gross income . See sec . 213(a) . We . conclude that petitioners are not eligible for the section 72(t)(2)(B) distribution from their qual .fied #etirement plan in 2004 . To'reflect the foregoing, Decision will be entere d for respondent .