CourtListener opinion 4330687

Evidence quotes

Clean opinion text

T.C. Memo. 1996-354

 UNITED STATES TAX COURT

 BRENT ALLAN PULLIAM, Petitioner v.
 COMMISSIONER OF INTERNAL REVENUE, Respondent

 Docket No. 899-95. Filed August 1, 1996.

 Brent Allan Pulliam, pro se.

 Bryan E. Sladek, for respondent.

 MEMORANDUM OPINION

 COUVILLION, Special Trial Judge: This case was heard

pursuant to section 7443A(b)(3)1 and Rules 180, 181, and 182.

 Respondent determined a deficiency of $2,479 in petitioner's

1992 Federal income tax. The sole issue for decision is whether

1
 Unless otherwise indicated, section references are to the
Internal Revenue Code in effect for the year at issue. All Rule
references are to the Tax Court Rules of Practice and Procedure.
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petitioner is liable for the 10-percent additional tax imposed

under section 72(t) on early distributions from qualified

retirement plans.

 Some of the facts were stipulated, and those facts, with the

annexed exhibits, are so found and are incorporated herein by

reference. At the time the petition was filed, petitioner's

legal residence was Walnut Creek, California.

 Prior to and during the year at issue, petitioner was a

self-employed insurance agent, specializing in the sale of long-

term care insurance. Petitioner represented the Aetna and CNA

insurance companies.

 During 1992, petitioner was participating in two retirement

plans offered by Northwestern Mutual Life Insurance Co.

(Northwestern). One plan was a simplified employee pension (SEP)

plan for self-employed individuals qualified under section 408(b)

and (k); the other was a Keogh plan qualified under section

401(a). Each of these plans was funded 100 percent by

petitioner. Petitioner did not represent or sell any insurance

contracts offered by Northwestern.

 Beginning in 1988 and continuing in 1992, petitioner

sustained a downturn in sales of insurance policies. As a

consequence, petitioner's income was reduced drastically. In

order to pay off his debts, petitioner made early withdrawals

totaling $24,793.94 from his two retirement plans during 1992.
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Specifically, petitioner received a distribution of $14,793.94

from the SEP plan and a distribution of $10,000 from the Keogh

plan. Petitioner received a Form 1099-R from Northwestern,

showing premature taxable distributions totaling $24,793.94 with

no exceptions applicable. During the year 1992, petitioner was

36 years of age.

 On his 1992 Federal income tax return, petitioner reported

the total distributions of $24,793.94 as gross income.

Petitioner did not report, however, liability for the 10-percent

additional tax under section 72(t), claiming that the

distributions were excepted from the additional tax due to

financial hardship. In the notice of deficiency, respondent

determined that petitioner was liable for the 10-percent

additional tax under section 72(t).

 The determinations of the Commissioner in a notice of

deficiency are presumed correct, and the burden of proof is on

the taxpayer to prove that the determinations are in error. Rule

142(a); Welch v. Helvering, 290 U.S. 111 (1933).

 Section 72(t) provides for a 10-percent additional tax on

early distributions from qualified retirement plans. Paragraph

(1), which imposes the tax, provides in relevant part as follows:

 (1) Imposition of additional tax.--If any taxpayer
 receives any amount from a qualified retirement plan (as
 defined in section 4974(c)), the taxpayer's tax under this
 chapter for the taxable year in which such amount is
 received shall be increased by an amount equal to 10 percent
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 of the portion of such amount which is includible in gross
 income.

The parties do not dispute that petitioner's SEP and Keogh plans

are qualified retirement plans under section 4974(c). The 10-

percent additional tax, however, does not apply to certain

distributions. Section 72(t)(2) exempts distributions from the

additional tax if the distributions are made: (1) To an employee

age 59-1/2 or older; (2) to a beneficiary (or to the estate of

the employee) on or after the death of the employee; (3) on

account of disability; (4) as part of a series of substantially

equal periodic payments made for life; (5) to an employee after

separation from service after attainment of age 55; (6) as

dividends paid with respect to corporate stock described in

section 404(k); (7) to an employee for medical care; or (8) to an

alternate payee pursuant to a qualified domestic relations order.

 Petitioner concedes that none of the described section

72(t)(2) exemptions apply in his case. Petitioner contends,

however, that, due to his financial hardship, the distributions

should be exempt from section 72(t), and that, in not allowing a

financial hardship exemption, section 72(t) is contrary to public

policy and violates his constitutional right to equal protection.

Petitioner also relies heavily on the case of In re Cassidy, 983

F.2d 161 (10th Cir. 1992).
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 In In re Cassidy, supra, the Court of Appeals held that, in

determining the priority of claims for bankruptcy purposes, the

section 72(t) additional tax constitutes a penalty that bears no

relationship to the direct financial loss of the Government and

is thereby punitive in nature. Accordingly, pursuant to the

bankruptcy laws, the Internal Revenue Service's claim against the

taxpayer for the payment of the section 72(t) additional tax was

ineligible for priority status, and the Internal Revenue Service,

therefore, was subordinated to the status of a general unsecured

creditor. Relying on In re Cassidy, supra, petitioner argues

that his \financial hardship circumstances and subsequent