Even though petitioner was approved for an ordinary disability retirement, he ultimately decided to apply for a normal service retirement. In view of the fact that petitioner had worked for the Highway Administration for over 35 years and had previously received a Transfer Refund, retirement on a "normal" basis, rather than on a disability basis, was more advantageous. Accordingly, on April 22, 1991, petitioner applied to the Pension System for a normal service retirement, effective May*453 1, 1991. Petitioner's application for retirement was approved, and petitioner retired from the Highway Administration on May 1, 1991.

As a result of his retirement, petitioner is receiving a normal service retirement benefit from the Pension System based upon his salary and his creditable years of service, specifically including those years of creditable service recognized under the Retirement System. However, as previously indicated, because petitioner received the Transfer Refund on account of transferring from the Retirement System to the Pension System, petitioner's monthly annuity is less than the monthly annuity that he would have received if he had not transferred to the Pension System but had retired under the Retirement System.

On November 19, 1991, the Social Security Administration (SSA) notified petitioner that he was entitled to disability benefits because of SSA's determination that petitioner had become disabled on December 22, 1990.

Petitioners' 1989 Income Tax Return

On their income tax return for 1989, petitioners disclosed the receipt of the taxable portion of the Transfer Refund; i.e., $ 227,812. Of this amount, petitioners reported that $ 77,812 was *454 taxable and that the balance, or $ 150,000, had been rolled over tax-free into an IRA.

Petitioners attached Form 5329 "Return for Additional Taxes Attributable to Qualified Retirement Plans (Including IRAs) Annuities, and Modified Endowment Contracts" to their 1989 return. In Part II of this form, petitioners reported liability in the amount of $ 7,781 for the additional tax under section 72(t); i.e., 10 percent of $ 77,812, the amount of the Transfer Refund that petitioners had included in gross income.

Respondent's Deficiency Determination For 1989

In the notice of deficiency for 1989, respondent determined that petitioner's Transfer Refund was not eligible for tax-free rollover treatment under section 402(a)(5). Respondent also determined that, by virtue of sections 402(a)(1) and 72, the taxable portion of the Transfer Refund (i.e., $ 227,812.11) was includable in petitioners' gross income for 1989. Accordingly, because petitioners had previously reported that $ 77,812 of such amount was taxable and had attempted to roll over only the balance (i.e., $ 150,000), respondent increased petitioners' taxable income by $ 150,000. *455 also determined that petitioners are liable for: (1) The additional tax under section 72(t) for a premature distribution from the Retirement System; (2) the excise tax under section 4980A for an excess distribution from the Retirement System; and (3) the excise tax under section 4973 for an excess contribution to petitioner's IRA with First National. *456 Petitioners' 1990 Income Tax Return

On their income tax return for 1990, petitioners reported taxable interest in the total amount of $ 154,613. Of this amount, $ 150,000 represented a distribution from petitioner's IRA with First National, which petitioners characterized as an early withdrawal. The balance represented interest income from unrelated bank accounts.

Respondent's Deficiency Determination For 1990

In the notice of deficiency for 1990, respondent determined that petitioners are liable for: (1) The additional tax under section 72(t) for a premature distribution from petitioner's IRA with First National, and (2) the excise tax under section 4980A for an excess distribution from such IRA. Respondent's Claim For An Increased Deficiency For 1990

In her amended answer, respondent asserted deficiencies in petitioners' income tax and excise tax under section 4980A for the *457 taxable year 1990 in the total amount of $ 19,394, an increase of $ 3,725 over the total determined in the notice of deficiency. *458 Petitioner's Physical Condition At Trial

Petitioner's physical condition at the time of trial was essentially the same as petitioner's physical condition immediately before receiving the Transfer Refund in October 1989.

At trial, petitioner was unable to stand with reasonable effort and was unable to assume the witness stand without risk of safety to himself. The evidence of significant physical pain was apparent from petitioner's demeanor.

ULTIMATE FINDING OF FACT

Petitioner was disabled within the meaning of section 72(m)(7) immediately before receiving the Transfer Refund in October 1989.

OPINION

I. Rollover Issue

We must first decide whether the Transfer Refund received by petitioner in 1989 from the Retirement System qualifies for tax-free rollover treatment under section 402(a)(5). The resolution of this issue turns on whether the Transfer Refund constitutes a "partial distribution", as defined by section 402(a)(5)(E)(v). *459 A "partial distribution" is defined as "any distribution to an employee of all or any portion of the balance to the credit of such employee in a qualified trust; except that such term shall not include any distribution which is a qualified total distribution." Sec. 402(a)(5)(E)(v). Further, a partial distribution must be "payable as provided in clause (i), (iii), or (iv) of subsection (e)(4)(A) (without regard to the second sentence thereof)". Sec. 402(a)(5)(D)(i)(I). *460 a distribution must be made either "(i) on account of the employee's death", "(iii) on account of the employee's separation from the service", or "(iv) after the employee has become disabled (within the meaning of section 72(m)(7))". Petitioners do not contend that the Transfer Refund was received either on account of petitioner's death or on account of petitioner's separation from service. *461 Rather, petitioners contend that the Transfer Refund was received "after * * * [petitioner had] become disabled (within the meaning of section 72(m)(7))" under section 402(e)(4)(A)(iv). Respondent contends to the contrary. Dwyer v. Commissioner, 106 T.C. 337">106 T.C. 337 (1996). The regulations provide that the determination is to be made on the basis of all the facts. 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 made. See sec. 1.72-17A(f), Income Tax Regs.

In determining *462 whether an individual's infirmity makes the individual unable to engage in any substantial gainful activity, primary consideration is to be given to the nature and severity of the impairment. Sec. 1.72-17A(f)(1), Income Tax Regs. However, 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 impairment. Sec. 1.72-17A(f)(2), 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. Id. More specifically, the regulations provide that 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". Sec. 1.72-17A(f)(4), Income Tax Regs.

Although we think that the issue is very close, we hold that petitioners have carried their burden of proof.

In advocating her position, respondent relies*463 heavily on the fact that petitioner did not use any sick leave in either 1989 or 1990. However, it was not unusual for petitioner to use annual leave in lieu of sick leave, as evidenced by the fact that petitioner used annual leave for his knee replacement surgery in August 1990 and for the convalescent period thereafter. We also note that petitioner used all of his annual leave in 1990, as well as a substantial portion thereof in 1989, mostly in the final 2 months of that year.

Respondent also relies heavily on the fact that petitioner remained "on the job" until December 1990, at which time he went on leave, never to return to work. In a related vein, respondent points to the superior job evaluations that petitioner received for 1989 and 1990.

We observe, however, that petitioner did not receive his Transfer Refund until late October 1989, almost 10 months into the rating period for 1989. Accordingly, a superior job evaluation for 1989 is not incompatible with the fact of disability immediately before the receipt of the Transfer Refund.

Petitioner's job evaluation for 1990 is another matter, and we can appreciate why respondent focuses on it. However, we are reminded that petitioner's*464 position as a project engineer required that he be substantially mobile and physically fit in order to perform his duties. Further, the record clearly demonstrates that as of October 1989, petitioner was unable to climb ladders or otherwise, lift heavy objects, or "walk beams". In short, based on the particular facts and circumstances of this case, we find the content of the job evaluation report for 1990 to be contrary to the weight of the evidence. Moreover, the record demonstrates that when petitioner's disability became such that petitioner could no longer perform his job but he was mentally not ready to give up, his subordinates and superiors accommodated him however they could.

As reflected in our findings of fact, petitioner's physical condition at the time of trial was essentially the same as it was immediately before receiving the Transfer Refund in October 1989. In our judgment, and based on our observations over the course of an afternoon, petitioner was disabled at the time of trial. Thus, suffice it to say that petitioner was neither mobile nor fit immediately before receiving the Transfer Refund in October 1989. His physical impairment, which was of a long-continued*465 and indefinite duration, precluded him from engaging in his customary or any comparable substantial gainful activity.

In view of the foregoing, we hold that petitioner was disabled, within the meaning of section 72(m)(7), immediately before receiving the Transfer Refund. Accordingly, the Transfer Refund qualifies as a partial distribution and is eligible for tax-free rollover treatment under section 402(a)(5)(D). Petitioners are therefore not required to include in their gross income for 1989 the $ 150,000 that was not previously included therein.

II. The IRA Distribution Issue

On or about August 8, 1990, petitioner withdrew $ 157,174 from his IRA with First National. Petitioners reported $ 150,000 of this distribution in their gross income for 1990.

Respondent contends that for 1990, petitioners failed to include in their gross income $ 7,174 of petitioner's IRA distribution from First National. We do not understand petitioners to argue that the amount of the IRA distribution in excess of $ 150,000; i.e., $ 7,174, is not includable in their gross income for 1990. In any event, based on the record as a whole, we are satisfied that the $ 7,174 represents taxable earnings *466 from petitioner's IRA and that such amount is properly includable in petitioners' gross income for 1990. Sec. 408(d)(1).

In view of our conclusion, supra, that petitioner's Transfer Refund qualifies for tax-free rollover treatment in 1989 under section 402(a)(5)(D), we understand petitioners to abandon what must be viewed as their alternative contentions concerning the alleged excludibility of $ 150,000 of petitioner's IRA distribution from gross income for 1990. In any event, such amount is properly includable in petitioners' gross income for that year. Sec. 408(d)(1).

III. Section 72(t) Additional Tax Issue

We turn next to respondent's determination that petitioners are liable for the additional tax under section 72(t) for 1989 and 1990.

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*467 by an amount equal to 10 percent of the portion of such amount which is includible in gross income.

Pursuant to section 4974(c), the term "qualified retirement plan" includes plans described in section 401(a) and individual retirement accounts described in section 408(a). The Retirement System from which petitioner received his Transfer Refund in 1989 is a qualified plan under section 401(a). Additionally, the account from which petitioner received his distribution in 1990 was a valid IRA under section 408(a). Accordingly, absent an applicable exception, the additional tax under section 72(t)(1) applies to the distributions received by petitioners in both 1989 and 1990.

By virtue of paragraph (2)(A)(iii) of section 72(t), the 10-percent additional tax does not apply, inter alia, to distributions attributable to the taxpayer's being disabled (within the meaning of section 72(m)(7)).

We have already decided that petitioner was disabled within the meaning of section 72(m)(7) when he received the Transfer Refund. Accordingly, petitioners are not liable for the additional tax imposed by section 72(t) for either of the taxable years in issue.

IV. Excise Tax Issues

We turn *468 next to respondent's excise tax determinations. We begin with section 4973.

Section 4973

Section 4973(a) imposes a 6-percent excise tax on excess contributions to an IRA. As relevant herein, an "excess contribution" is the amount in excess of the amount allowable as a deduction under section 219 (computed without regard to section 219(g)), exclusive of amounts properly rolled over tax free. Sec. 4973(b).

In view of our conclusion, supra, that petitioner's Transfer Refund qualifies for tax-free rollover treatment in 1989 under section 402(a)(5)(D), petitioner is not liable for the excise tax under section 4973(a).

Section 4980A

Finally, we turn to section 4980A. Section 4980A(a) imposes a 15-percent excise tax on excess distributions from qualified retirement plans. As relevant herein, an "excess distribution" is defined as the aggregate amount of the retirement distributions with respect to any individual during any calendar year to the extent that such amount exceeds $ 150,000. Sec. 4980A(c)(1). However, pursuant to section 4980A(c)(2)(D), a retirement distribution is not an "excess distribution" if the retirement distribution is not included in gross income by reason*469 of a rollover contribution.

For 1990, petitioner withdrew an amount in excess of $ 150,000 from his IRA with First National. Accordingly, petitioner is liable for the excise tax imposed by section 4980A for 1990. ^Conclusion

In order to give effect to our disposition of the disputed issues, as well as the parties' concessions, *470 Decision will be entered under Rule 155.

Footnotes

1. Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for 1989 and 1990, the taxable years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.↩
2. Sec. 4973 imposes a 6-percent excise tax on excess contributions to individual retirement accounts. Sec. 4980A imposes a 15-percent excise tax on excess distributions from qualified retirement plans. Both of these taxes are included within ch. 43 of the I.R.C. They are therefore subject to the deficiency procedures set forth in subch. B of ch. 63 of the I.R.C. See sec. 6211(a).↩

3. The notice of deficiency is not a model of clarity. However, the deficiencies determined therein for the taxable year 1989 are as follows:

↩

Deficiency in income tax
(1)	Regular income tax under sec. 1	$ 38,233
(2)	Additional tax under sec. 72(t)	22,781	$ 61,014

Deficiencies in excise taxes
(1)	Under sec. 4973		9,000
(2)	Under sec. 4980A		3,891

Total deficiencies in income and excise taxes			73,905

4. Again, the notice of deficiency is not a model of clarity. However, the deficiencies determined therein for the taxable year 1990 are as follows:
↩
Deficiency in income tax
-- under sec. 72(t) $ 15,446
Deficiency in excise tax
-- under sec. 4980A 223
Total deficiencies in income and excise taxes 15,669
5. The increase consists of the following:
↩
Deficiencies
Income/excise tax Statutory notice Amended answer Increase
Section 1 --- $ 3,302 $ 3,302
Section 72(t) $ 15,446 15,728 282
Section 4980A 223 364 141
$ 15,669 $ 19,394 $ 3,725
6. For 1989, respondent concedes that the 6-percent excise tax imposed by sec. 4973 should be calculated based on an excess contribution of $ 148,000 rather than $ 150,000. Respondent also concedes that petitioner Patricia M. Brown is not liable for: (1) The excise taxes under secs. 4973 and 4980A for 1989, or (2) the excise tax under sec. 4980A for 1990.
For 1990, petitioners concede: (1) They failed to report interest income from the First National Bank of Maryland in the amount of $ 512, and (2) they are only entitled to a deduction for mortgage interest in the amount of $ 3,262, rather than in the amount of $ 5,480, as claimed on their return for that year.↩
7. See supra↩ note 6 regarding respondent's concessions of the excise taxes as to petitioner Patricia M. Brown.
8. For a discussion of the Retirement System and the Pension System, see generally Hylton v. Commissioner, T.C. Memo. 1995-27; Hoppe v. Commissioner, T.C. Memo. 1994-635; Hamilton v. Commissioner, T.C. Memo. 1994-633; Maryland State Teachers Association v. Hughes, 594 F. Supp. 1353">594 F. Supp. 1353, 1357-1358 (D. Md. 1984); Conway v. United States, 908 F. Supp. 292↩ (D. Md. 1995).
9. See sec. 414(h)(2).↩
10. Petitioner became a member of the Retirement System when he was hired by the Highway Administration in 1956. He remained a member of the Retirement System for most of his employment career.↩
11. The notice of deficiency, which was issued by respondent's Appeals Office in Baltimore, Maryland, states as follows:
Your gross income has been increased to include the amount of $ 150,000 you received as payment from your qualified retirement plan because you received the payment before you reached aged [sic] 59 1/2 or became disabled. Accordingly, taxable income is increased $ 150,000.↩
Respondent repeatedly cross-referenced the foregoing paragraph by way of explanation for most of the other adjustments made in the notice of deficiency.
12. See supra↩ note 6 regarding respondent's concession of the excise taxes as to petitioner Patricia M. Brown.
13. See supra↩ note 6 regarding respondent's concession of the excise tax as to petitioner Patricia M. Brown.
14. See supra↩ note 5 for a breakdown of the increase by the type of tax involved.
15. Other adjustments asserted by respondent that served to increase petitioners' income tax include: (1) The understatement of interest income in the amount of $ 512, (2) the overstatement of a deduction for mortgage interest in the amount of $ 2,218, and (3) the understatement of additional income from Maryland State Retirement Systems in the amount of $ 103. Petitioners have conceded the first two adjustments. See supra↩ note 6. However, respondent did not offer any evidence at trial regarding the third adjustment and therefore did not carry her burden of proof in respect of that adjustment or the correlative adjustments under secs. 72(t), 4980A. Accordingly, petitioners are not liable for any increase in tax (whether under secs. 1, 72(t), or 4980A) attributable to the $ 103 adjustment related to additional income from Maryland State Retirement Systems.
16. The Transfer Refund would also qualify for tax-free rollover treatment if it were a "qualified total distribution", as defined by sec. 402(a)(5)(E)(i). In this case, petitioners do not contend that the Transfer Refund was a qualified total distribution. In any event, the Transfer Refund was not a qualified total distribution. See Wittstadt v. Commissioner, T.C. Memo. 1995-492, Humberson v. Commissioner, T.C. Memo 1995-470">T.C. Memo. 1995-470; Pumphrey v. Commissioner, T.C. Memo 1995-469">T.C. Memo 1995-469; Dorsey v. Commissioner, T.C. Memo. 1995-97, affd. without published opinion 91 F.3d 129">91 F.3d 129 (4th Cir. 1996); Hylton v. Commissioner, T.C. Memo. 1995-27↩.
17. In order to qualify as a "partial distribution", sec. 402(a)(5)(D)(i)(I) also requires that the distribution "is of an amount equal to at least 50 percent of the balance to the credit of the employee in a qualified trust". This additional requirement was not raised in the notice of deficiency as a reason for the adjustment to petitioners' income for 1989, see supra↩ note 11, nor was it raised by respondent in either her trial memorandum or at trial in her counsel's opening statement.
18. In other cases we have held that a Transfer Refund is not received on account of a taxpayer's separation from the service but rather on account of a taxpayer's election to transfer from the Retirement System to the Pension System. E.g., Dorsey v. Commissioner, supra;Hylton v. Commissioner, T.C. Memo 1995-27">T.C. Memo. 1995-27. But see Adler v. Commissioner, 86 F.3d 378 (4th Cir. 1996), revg. and remanding T.C. Memo. 1995-148↩.
19. As previously noted, respondent has limited her contention regarding whether the Transfer Refund constitutes a partial distribution to the issue of petitioner's disability. See supra↩ note 17. Accordingly, we consider such issue to be dispositive of whether the Transfer Refund constitutes a partial distribution.
20. See supra note 15 and accompanying text. Further, we note that petitioner is not entitled to the offset provided by sec. 4980A(b) in view of our conclusion, supra↩, that petitioners are not liable for the 10-percent additional tax under sec. 72(t).
21. See supra↩ note 6.

	Deficiencies
Section 1	---	$ 3,302	$ 3,302
Section 72(t)	$ 15,446	15,728	282
Section 4980A	223	364	141
	$ 15,669	$ 19,394	$ 3,725

Authorities (3)

Maryland State Teachers Ass'n v. Hughes ( 1984 )

Rudolph F. Adler Jacquelyn L. Adler v. Commissioner of the ... ( 1996 )

Dwyer v. Commissioner ( 1996 )

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Deficiency in income tax
-- under sec. 72(t)	$ 15,446

Deficiency in excise tax
-- under sec. 4980A	223

Total deficiencies in income and excise taxes	15,669

	Deficiencies
Income/excise tax	Statutory notice	Amended answer	Increase
Section 1	---	$ 3,302	$ 3,302
Section 72(t)	$ 15,446	15,728	282
Section 4980A	223	364	141
	$ 15,669	$ 19,394	$ 3,725