Evers v. Comm'r

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.
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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.
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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
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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.
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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).
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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)
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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.