Court Opinion

ID: 4337299
Source: CourtListenerOpinion
Date Created: 2018-11-14 03:17:10.045586+00
Date Added: 2024-06-11T07:59:07.971119
License: Public Domain

T.C. Summary Opinion 2008-140

                        UNITED STATES TAX COURT

         BERNARD W. EVERS AND DEBORAH L. EVERS, Petitioners v.
              COMMISSIONER OF INTERNAL REVENUE, Respondent

     Docket No. 3151-07S.                Filed November 3, 2008.

     Bernard W. Evers, pro se.

     Katherine Lee Kosar, for respondent.

     RUWE, Judge:    This case was heard pursuant to the provisions

of section 7463 of the Internal Revenue Code in effect when the

petition was filed.1    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.

     1
       Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the year at issue.
                              - 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.
                                - 3 -

     In 2004 petitioners withdrew $16,250 from their qualified

retirement account with Cooper Cameron Corp. to repay the loan

from APCI.   Section 72(t) generally provides for a 10-percent

additional tax on withdrawals from qualified retirement plans

made before the employee attains age 59-1/2.      Petitioners did not

contend that they met this age requirement.      Petitioners paid

$13,000 of the $16,250 withdrawal to APCI in partial satisfaction

of their loan.   Petitioners’ decision to prematurely withdraw

funds from their qualified retirement account to repay APCI was

made under the belief that they would qualify for an exception to

the 10-percent additional tax under section 72(t) because they

were using the withdrawn funds to repay the loan which had been

acquired to pay medical expenses.

     Petitioners timely filed their Form 1040, U.S. Individual

Income Tax Return, for 2004.   They reported total income of

$104,713.    Petitioners properly included the $16,250 distribution

in their total reported income but did not include the

corresponding section 72(t) 10-percent additional tax as part of

their taxes owed.

     On November 6, 2006, respondent sent to petitioners a notice

of deficiency in which he determined a deficiency in petitioners’

2004 Federal income tax of $2,487.      Respondent’s determination

indicated that petitioners’ 2004 Form 1040 failed to include:

(1) Interest received from APCI of $35, reported to respondent on
                               - 4 -

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,

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 -

                            Discussion

     Section 72(t)(1) imposes 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 additional tax.

     Section 72(t)(2)(B) provides that the imposition of the

additional tax under section 72(t)(1) shall not apply to:

     Distributions made to the employee * * * to the extent
     such distributions do not exceed the amount allowable
     as a deduction under section 213 to the employee for
     amounts paid during the taxable 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 during

the taxable year, not compensated by insurance or otherwise, for

medical care of the taxpayer, his spouse or a dependent, to the

extent that such expenses exceed 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 year, 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.   See sec. 1.213-1(a)(1), Income

Tax Regs.   In other words, it is the time of payment that

determines the year of the deduction.    Granan v. Commissioner, 55
T.C. 753, 755 (1971).
                               - 6 -

     Petitioners contend that because $13,000 of the early

distribution from their qualified retirement account was used to

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 medical

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 that

$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 scope

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 apply

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)
                                 - 7 -

exception to the 10-percent additional tax on the early

distribution from their qualified retirement plan in 2004.

Although we are sympathetic to petitioners’ situation, we cannot

ignore the plain language of the statute.

     To reflect the foregoing,

                                              Decision will be entered

                                         for respondent.