Sandra M. Conard v. Commissioner ( 2020 )

154 T.C. No. 6
UNITED STATES TAX COURT
SANDRA M. CONARD, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 27571-10. Filed March 10, 2020.
P received $61,777 in distributions from a qualified retirement
plan in 2008, when P was not yet 59-1/2 years old, was not disabled,
and was not eligible for any of the exceptions under I.R.C.
sec. 72(t)(2) to the additional tax imposed by I.R.C. sec. 72(t)(1).
R mailed P a statutory notice of deficiency showing a
deficiency of $6,177 for the 2008 tax year, attributable to the
additional tax under I.R.C. sec. 72(t)(1) on the distributions P had
received that year. P timely filed a petition seeking review of the
deficiency and now challenges the additional tax under I.R.C.
sec. 72(t)(1) on grounds that applying the tax to her distributions
violates the equal protection component of the Due Process Clause of
the Fifth Amendment to the United States Constitution.
Held: The age and disability classifications under I.R.C.
sec. 72(t)(2) involve neither a substantive constitutional right or
freedom nor a suspect classification. Therefore, we review the
-2-
constitutional validity of I.R.C. sec. 72(t), as applied to P, under the
rational-basis test.
Held, further, as applied to P, I.R.C. sec. 72(t) is valid because
the age and disability classifications established by the statute bear a
reasonable relationship to a legitimate Government purpose.
Sandra M. Conard, pro se.
Scott W. Forbord and Mark J. Miller, for respondent.
OPINION
TORO, Judge: A taxpayer who receives a distribution from a qualified
retirement plan during a taxable year generally must, under the first paragraph of
section 72(t),1 pay for that year an additional tax equal to 10% of the taxable
portion of the distribution.2 Sec. 72(t)(1). But, under the second paragraph of
1
Unless otherwise noted, all section references are to the Internal Revenue
Code in effect at all relevant times, and all Rule references are to the Tax Court
Rules of Practice and Procedure. We round all monetary amounts to the nearest
dollar.
2
This additional tax has been referred to informally as the “early withdrawal
tax penalty.” See, e.g., Joshua D. Blank & Leigh Osofsky, “Simplexity: Plain
Language and the Tax Law,” 66 Emory L.J. 189, 225 (2017). For an overview of
the rules of section 72(t) as applied to one type of qualified retirement plan--an
individual retirement account (“IRA”)--see Boris I. Bittker, Martin J. McMahon,
(continued...)
-3-
section 72(t), the additional tax does not apply to certain distributions described in
that paragraph. Sec. 72(t)(2). Among the distributions described there are those
made to a taxpayer who is at least 59-1/2 years old or disabled at the time of the
distributions. Sec. 72(t)(2)(A)(i), (iii).
In this deficiency case brought under section 6213(a), we are asked to
decide whether applying the additional tax imposed by the first paragraph of
section 72(t) to distributions made to a taxpayer who, at the time of the
distributions, was not yet 59-1/2 years old, was not disabled, and was otherwise
not eligible for any of the other exceptions described in the second paragraph of
section 72(t), violates the equal protection component of the Due Process Clause
of the Fifth Amendment to the United States Constitution. We hold that it does
not.
2
(...continued)
Jr. & Lawrence A. Zelenak, Federal Income Taxation of Individuals, para.
40.05[1] (3d ed. 2002 & 2020 Cum. Supp. No. 1). As relevant here, the discussion
in that overview generally applies to other types of qualified retirement plans as
well.
-4-
Background
The parties submitted this case fully stipulated under Rule 122. The facts
described below are based on the pleadings and the parties’ stipulation of facts
(including the exhibits attached thereto).3
Petitioner Sandra Conard was a resident of Wisconsin at the time her
petition was filed. In 2008, when she was not yet 59-1/2 years old, was not
disabled, and was not eligible for any of the exceptions described in
section 72(t)(2), Ms. Conard received nine distributions totaling $61,777 from a
qualified retirement plan. Ms. Conard reported the distributions in her Federal
income tax return for that year, but she neither reported nor paid with that return
the additional tax imposed by section 72(t)(1). Instead, Ms. Conard included with
the return a statement that the additional tax was arbitrary and capricious, and she
claimed a refund of the additional tax under section 72(t)(1) that she had paid for
2005, 2006, and 2007.
Respondent issued a statutory notice of deficiency for 2008 (the “Notice”),
showing a deficiency of $6,177 attributable to a “10% tax on premature
3
The parties’ stipulation of facts with accompanying exhibits is incorporated
herein by this reference.
-5-
distributions from a qualified retirement plan.”4 Ms. Conard timely filed a
petition seeking our review. She maintains that, in light of the exceptions set out
in section 72(t)(2)--particularly the exceptions for distributions made to taxpayers
who are at least 59-1/2 years old or who are disabled--applying section 72(t)(1) to
the distributions that she received violates “the U.S. Constitution’s guarantee of
equal treatment under the law.”
Discussion
We begin our evaluation of Ms. Conard’s contention by reviewing the text
of the relevant constitutional provisions and the framework established by the
Supreme Court for considering equal protection claims. We then apply that
framework to the distinctions Congress drew in section 72(t) with respect to the
treatment of qualified retirement plan distributions made to taxpayers who are
either at least 59-1/2 years old or disabled.
I. Text of the Relevant Constitutional Provisions and Framework for Analysis
The Due Process Clause of the Fifth Amendment to the United States
Constitution provides that no person shall be “deprived of life, liberty, or property,
without due process of law.” U.S. Const. amend. V. “The Due Process Clause
4
The Notice also determined an accuracy-related penalty under
section 6662, but respondent has since conceded that Ms. Conard is not liable for
that penalty.
-6-
imposes on the Federal Government requirements comparable to those that the
Equal Protection Clause of the Fourteenth Amendment imposes on the states.”
Regan v. Taxation With Representation of Wash., 461 U.S. 540, 542 n.2 (1983)
(citing Schweiker v. Wilson, 450 U.S. 221, 226 n.6 (1981)). That clause in turn
prohibits a State from “deny[ing] to any person within its jurisdiction the equal
protection of the laws.” U.S. Const. amend. XIV, sec. 1.
The Supreme Court has established a comprehensive framework for
evaluating equal protection claims regarding statutes affecting economic rights,
such as section 72(t). The U.S. Court of Appeals for the Seventh Circuit, to which
an appeal in this case would lie unless the parties agree otherwise, see sec. 7482,
has aptly summarized that framework in reviewing another decision of this Court:
Statutes affecting economic rights which neither invade a
substantive Constitutional right or freedom nor utilize a suspect
classification such as race are subject to only a low level of judicial
scrutiny--the rational basis test. See Exxon Corp. v. Eagerton, 462
U.S. 176, 195-96 (1983). Under that test “a statute will be sustained
if the legislature could have reasonably concluded that the challenged
classification would promote a legitimate state purpose.” Id. at 196.
Moreover, “[l]egislatures have especially broad latitude in
creating classifications and distinctions in the tax statutes.” Regan v.
Taxation With Representation of Washington, 461 U.S. 540, 547
(1983); see also Barter v. United States, 550 F.2d 1239, 1240 (7th
Cir. 1977) (per curiam) (statutory difference in tax rates for married
couples and single individuals does not violate due process of law of
the Fifth Amendment; “perfect equality or absolute logical
-7-
consistency between persons subject to the Internal Revenue Code [is
not] a constitutional sine qua non”). Thus a tax statute’s
“presumption of constitutionality can be overcome only by the most
explicit demonstration that a classification is a hostile and oppressive
discrimination against particular persons and classes.” Id. at 547
(quoting Madden v. Kentucky, 309 U.S. 83, 87-88 (1940)). “The
burden is on the one attacking the legislative arrangement to negate
every conceivable basis which might support it.” Id. at 547-48.
Finally, the rational basis justifying a statute against an equal
protection claim need not be stated in the statute or in its legislative
history; it is sufficient that a court can conceive of a reasonable
justification for the statutory distinction. McDonald v. Board of
Election Com’rs of Chicago, 394 U.S. 802, 809 (1969).
Estate of Kunze v. Commissioner, 233 F.3d 948, 954 (7th Cir. 2000), aff’g T.C.
Memo. 1999-344.5
This Court follows the same framework in evaluating equal protection
claims regarding statutes affecting economic rights. See Ruggere v.
Commissioner, 78 T.C. 979, 987 (1982) (stating that, for classifications involving
neither a “fundamental interest [n]or a suspect classification[,] * * * the proper
level for review is the rational-basis test--i.e., whether the classification bears a
reasonable relationship to some legitimate Government purpose”).
5
Other Courts of Appeals follow the same framework. See, e.g., Young v.
United States, 332 F.3d 893, 895-896 (6th Cir. 2003); Edwards v. Valdez, 789
F.2d 1477, 1482-1483 (10th Cir. 1986); Grauvogel v. Commissioner, 768 F.2d
1087, 1089 (9th Cir. 1985); Richards v. Commissioner, 745 F.2d 524, 525-526
(8th Cir. 1984), aff’g T.C. Memo 1984-124; Burke Mountain Acad., Inc. v.
United States, 715 F.2d 779, 782-783 (2d Cir. 1983).
-8-
II. Application of Section 72(t)
Having set out the relevant framework that governs our analysis, we turn
next to applying that framework to the facts in this case. Ms. Conard does not
contend that section 72(t) concerns a substantive constitutional right or freedom.
And that is understandable, as the taxation of funds distributed from a qualified
retirement plan does not implicate a substantive constitutional right or freedom.
Neither does she argue that section 72(t) relies on any suspect classifications.
That too is understandable, as the courts have consistently held that age is not a
suspect classification for purposes of the equal protection analysis. Kimel v. Fla.
Bd. of Regents, 528 U.S. 62, 83 (2000) (“[A]ge is not a suspect classification
under the Equal Protection Clause.”) (citing Gregory v. Ashcroft, 501 U.S. 452,
470 (1991), Vance v. Bradley, 440 U.S. 93, 97 (1979), and Mass. Bd. of Ret. v.
Murgia, 427 U.S. 307, 313-314 (1976)); Kimel, 528 U.S. at 83 (“States may
discriminate on the basis of age without offending the Fourteenth Amendment if
the age classification in question is rationally related to a legitimate state
interest.”); see also Levin v. Madigan, 692 F.3d 607, 619 (7th Cir. 2012)
(“[B]ecause age is not a suspect classification, an equal protection claim of age
discrimination in employment is subject only to rational basis review, in which the
age classification must be rationally related to a legitimate state interest.”).
-9-
Similarly, able-bodied persons are not a suspect class. Indeed, courts have held
that even “the disabled are not a suspect or quasi-suspect class.” See, e.g., United
States v. Harris, 197 F.3d 870, 876 (7th Cir. 1999) (applying City of Cleburne v.
Cleburne Living Ctr., 473 U.S. 432 (1985), and citing More v. Farrier, 984 F.2d
269, 271 (8th Cir. 1993), DeVargas v. Mason & Hanger-Silas Mason Co., 844
F.2d 714, 725 (10th Cir. 1988), Cal. Ass’n of the Physically Handicapped, Inc. v.
FCC, 721 F.2d 667, 670 (9th Cir. 1983), and Brown v. Sibley, 650 F.2d 760, 765-
766 (5th Cir. 1981)). Accordingly, section 72(t) as applied to Ms. Conard is
subject to the rational-basis test.
Under that test, the statute is presumed to be constitutional and must be
upheld so long as the legislature “could have reasonably concluded that the
challenged classification would promote a legitimate * * * [Government]
purpose.” Estate of Kunze v. Commissioner, 233 F.3d at 954 (quoting Exxon
Corp. v. Eagerton, 462 U.S. 176, 196 (1983)). Section 72(t) easily clears that
hurdle.
This is not a case where the Court needs to “conceive of a reasonable
justification for the statutory distinction,” Estate of Kunze v. Commissioner, 233
F.3d at 954 (citing McDonald v. Bd. of Election Comm’rs of Chi., 394 U.S. 802,
- 10 -
809 (1969)), without any help from those involved in the drafting of the law.6 In
proposing the enactment of section 72(t) as part of what became the Tax Reform
Act of 1986 (TRA), Pub. L. No. 99-514, sec. 1123(a), 100 Stat. at 2472, the Senate
Finance Committee reasoned that “[t]he absence of withdrawal restrictions in the
case of some tax-favored arrangements allows participants in those arrangements
to treat them as general savings accounts with favorable tax features rather than as
retirement savings arrangements.” S. Rept. No. 99-313, at 612 (1985), 1986-3
6
Under the framework described above, section 72(t) could survive judicial
review even if the only reasons in its support were ones conceived by the Court.
The Supreme Court has never required Congress to “articulate its reasons for
enacting a statute,” particularly where it “must necessarily engage in a process of
line-drawing.” See U.S. R.R. Ret. Bd. v. Fritz, 449 U.S. 166, 179 (1980); see also
McDonald v. Bd. of Election Comm’rs of Chi., 394 U.S. 802, 809 (1969)
(legitimate State purpose may be ascertained even when the legislative or
administrative history is silent). But, as described further in the text, the drafting
history of section 72(t) sheds light on the basis for the line-drawing reflected in the
statute and provides a reasonable justification for the statutory distinction.
- 11 -
C.B. (Vol. 3) 612 (1985).7 In proposing the age- and disability-based exceptions
at issue in this case, the Committee explained its reasoning as follows:
Although the committee recognizes the importance of
encouraging taxpayers to save for retirement, the committee also
believes that tax incentives for retirement savings are inappropriate
unless the savings generally are not diverted to nonretirement uses.
One way to prevent such diversion is to impose an additional income
tax on early withdrawals from tax-favored retirement savings
arrangements in order to discourage withdrawals and to recapture a
measure of the tax benefits that have been provided. Accordingly, the
Committee believes it appropriate to apply an early withdrawal tax to
all tax-favored retirement arrangements. * * *
S. Rept. No. 99-313, supra at 613, 1986-3 C.B. (Vol. 3) at 613.
Similarly, in connection with the enactment of a prior version of
section 72(m)(5),8 which pre-dated section 72(t) but contained similar age- and
7
The Tax Reform Act of 1986 (TRA), Pub. L. No. 99-514, 100 Stat. 2085,
generally extended to early distributions from all qualified retirement plans the
additional tax that previously applied to early distributions from IRAs and early
distributions under individual retirement annuities. Compare section 72(t), with
former section 408(f), before its repeal by TRA section 1123(d)(2), 100 Stat. at
2475. Former section 408(f) reflected the realization that “[p]remature
distributions from IRAs frustrate the intention of saving for retirement” and an
additional tax on such distributions would “discourage[] this from happening.”
Dwyer v. Commissioner, 106 T.C. 337, 340 (1996) (citing S. Rept. No. 93-383, at
134 (1974), 1974-3 (Supp.) C.B. 80, 213).
8
Section 72(m)(5) was initially enacted as part of the Self-Employed
Individuals Tax Retirement Act of 1962, Pub. L. No. 87-792, sec. 4(b), 76 Stat. at
821-824, under the heading “Penalties applicable to certain amounts received by
owner-employees.” Before it was later amended by TRA sec. 1123(d)(1), 100
(continued...)
- 12 -
disability-based exceptions, the Senate Finance Committee explained that the
statute aimed “to provide means for financing retirement” and that the statute’s
penalties for early withdrawals were “designed to insure that retirement plans will
not be used for other purposes.” S. Rept. No. 87-992, at 23 (1961), 1962-3 C.B.
303, 325.
These explanations are entirely rational. If taxpayers face no disincentive
for withdrawing amounts from qualified retirement plans long before their
retirement years and without suffering any disability, it is easy to imagine that
such amounts might be “diverted to nonretirement uses,” thereby frustrating
Congress’ objective of encouraging taxpayers to save for periods of their lives
when they might not be able, or wish, to work. By the same token, allowing a
disabled person--defined by the statute as a person who “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,” sec. 72(t)(2)(A)(iii), (m)(7)--to receive
8
(...continued)
Stat. at 2475, the provision applied an additional tax to “amounts * * * received
from a qualified trust * * * by an individual, who is, or has been, an owner-
employee, before such individual attains the age of 59½ years, for any reason
other than the individual’s becoming disabled.” Sec. 72(m)(5)(A)(i) (before
amendment).
- 13 -
distributions from a qualified retirement plan without paying the additional tax
would be fully consistent with Congress’ objective of encouraging taxpayers to
provide for times when they might not be able to work.9 Although section 72(t)
provides different rules for differently situated taxpayers, as we have
acknowledged before, “[n]o scheme of taxation * * * has yet been devised which
is free of all discriminatory impact.” Druker v. Commissioner, 77 T.C. 867, 872
(1981) (quoting San Antonio Indep. Sch. Dist. v. Rodriguez, 411 U.S. 1, 42
(1973)), aff’d in part on this issue, rev’d in part on another issue, 697 F.2d 46 (2d
Cir. 1982).
In short, Ms. Conard has failed to carry her heavy burden of “‘negat[ing]
every conceivable basis which might support’” the legislative arrangement under
section 72(t). Estate of Kunze v. Commissioner, 233 F.3d at 954 (quoting
Taxation With Representation of Wash., 461 U.S. at 548). Applying the section
72(t) additional tax to the qualified retirement plan distributions Ms. Conard
received in 2008, while she was not yet 59-1/2, was not disabled, and was
9
Even if we were to disagree with where Congress drew the relevant lines in
this area, and we do not, the rational-basis standard “does not allow us to
substitute our personal notions of good public policy for those of Congress.”
Schweiker v. Wilson, 450 U.S. 221, 234 (1981). Mere “belief that an Act of
Congress may be inequitable or unwise is * * * an insufficient basis on which to
conclude that it is unconstitutional.” Schweiker v. Hogan, 457 U.S. 569, 589
(1982).
- 14 -
otherwise not eligible for any of the other exceptions described in section 72(t)(2),
does not violate the equal protection component of the Due Process Clause of the
Fifth Amendment.10 Accordingly, we sustain the deficiency determined by
respondent.11
To reflect the foregoing,
Decision will be entered for
respondent as to the deficiency and for
petitioner as to the accuracy-related penalty
under section 6662(a).
10
This conclusion is consistent with the conclusion reached in Pulliam v.
Commissioner, T.C. Memo. 1996-354.
11
Consistent with this holding, we also conclude that no refund is due to
Ms. Conard for the year 2008, the only year over which we have jurisdiction in
this case.