                   T.C. Summary Opinion 2004-100



                      UNITED STATES TAX COURT



         KURT STEVEN AND JUANITA FAY URBAN, Petitioners v.
            COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 5497-03S.             Filed July 27, 2004.


     Kurt Steven and Juanita Fay Urban, pro sese.

     Aimee R. Lobo-Berg, for respondent.



     ARMEN, Special Trial Judge:   This case was heard pursuant to

the provisions of section 7463 of the Internal Revenue Code in

effect at the time that the petition was filed.1    The decision to




     1
        Unless otherwise indicated, all subsequent section
references are to the Internal Revenue Code in effect for 1998,
the taxable year in issue. All Rule references are to the Tax
Court Rules of Practice and Procedure. All monetary amounts are
rounded to the nearest dollar.
                                  - 2 -

be entered is not reviewable by any other court, and this opinion

should not be cited as authority.

       Respondent determined a deficiency in petitioners’ Federal

income tax of $5,181 for the taxable year 1998.

       The issues for decision are:

       (1)   Whether petitioners are entitled to deduct Washington

State real estate excise taxes of $12,209.      We hold that they are

not.

       (2)   Whether petitioners are liable under section 72(t) for

the 10-percent additional tax on an early distribution from

petitioner Kurt Steven Urban’s (Mr. Urban) individual retirement

account (IRA).      We hold that they are to the extent provided

herein.

       An adjustment to the amount of petitioners’ itemized

deductions is a purely computational matter, the resolution of

which is dependent on our disposition of the first disputed

issue.

Background

       At the time that the petition was filed, petitioners

resided in Portland, Oregon.

       A.    Real Estate Excise Tax

       From 1994 through 1998, petitioners owned and resided in a

single-family home located at 5518 174th Place Southeast,
                                - 3 -

Bellevue, Washington.   During this time, petitioners paid real

property taxes based on the assessed value of the property.

     On June 12, 1998, petitioners sold their residence for

$678,000.   Petitioners paid $12,068 in Washington State real

estate excise tax on the sale of their residence.    Petitioners’

settlement statement concerning the sale of their residence

listed on line 1204: “Government Recording and Transfer

Charges: Excise Tax $12,068.”   After the sale of their residence,

petitioners relocated to Portland, Oregon.

     B.   IRA Distribution

     During the year in issue, petitioners had one daughter in

her sophomore year at Arizona State University and one daughter

completing high school.   In the same year, Mr. Urban started a

master’s degree program in business.    Petitioners estimated that

they would incur approximately $25,000 in education expenses for

1998.

     To cover their education expenses, Mr. Urban withdrew

$30,000 from his Merrill Lynch IRA.     Petitioners calculated that

this amount would be sufficient to cover their estimated

education expenses of $25,0002 as well as any Federal income

taxes associated with the early withdrawal.    For the taxable year



     2
        Petitioners reduced their education expense estimate to
approximately $20,000 because they later learned that high school
does not qualify as higher education.
                                  - 4 -

1998, petitioners stipulated that they paid and incurred

qualified higher education expenses of $15,716.

     Mr. Urban turned 48 years old in 1998 and was not disabled

at any time during that year.

     C.    Form 1040

     Petitioners timely filed a Form 1040, U.S. Individual Income

Tax Return, for 1998.    Petitioners attached to the Form 1040,

inter alia, Schedule A, Itemized Deductions.    On line 8 of

Schedule A, petitioners claimed a deduction “Excise tax on sale

of WA residence” in the amount of $12,209.3

     Petitioners properly reported on line 15b of the Form 1040

the $30,000 distribution from Mr. Urban’s IRA as taxable income.

Petitioners did not report on their return the 10-percent

additional tax imposed by section 72(t) on that distribution.

     D.    Notice of Deficiency

     In the notice of deficiency, respondent determined that

petitioners are not entitled to a deduction for taxes paid of

$12,209.    Respondent further determined that petitioners paid

qualified higher education expenses of $11,580, which amount

reduces the portion of the early distribution that is subject to

the early withdrawal tax.    Respondent thus determined that


     3
        The settlement statement indicated that petitioners paid
an excise tax of $12,068. Petitioners, however, claimed a
deduction for the excise tax in the amount of $12,209. This
discrepancy is unexplained in the record.
                                - 5 -

$18,420 of petitioners’ early distribution is subject to the 10-

percent additional tax, and, therefore, that petitioners are

liable for such additional tax in the amount of $1,842.4

     E.    Petition

     Petitioners timely filed a petition with the Court disputing

the determined deficiency.    Paragraph 4 of the petition states as

follows:

     TWO ADJUSTMENTS ARE IN DISPUTE:
     1) $12,209 Real Estate Excise Tax-Washington State
     excise tax paid under Chapter 82.45RCW-Chapter 458-
     61WAC is a recognized tax we paid in 1998 and should be
     deductible as an itemized deduction. This tax is a
     real estate tax assessed uniformly in Washington State
     and used for State, community and or governmental
     purposes.
     2) The early IRA withdrawal penalty should not be
     assessed because we had hardship education expenses in
     excess of $20,000 (our calculation showed education
     costs of $25,100) and in order to obtain after tax
     dollars of more than $20,000, $30,000 had to be
     withdrawn. Full federal taxes were paid on the
     withdrawal, however I believe no penalty should be
     charged on any portion of the withdrawal.

Discussion

     We decide the issues in this case without regard to the

burden of proof because the facts are not in dispute and the

issues are legal in nature.   See generally sec. 7491(a); Rule

142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933); New



     4
        The parties stipulated, however, that petitioners paid
and incurred qualified higher education expenses of $15,716.
Therefore, only $14,284 of petitioners’ early distribution is at
issue.
                               - 6 -

Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934); Higbee

v. Commissioner, 116 T.C. 438 (2001).

     A.   Real Estate Excise Tax

     The first issue is whether petitioners are entitled to

deduct under section 164(a)(1) the Washington State real estate

excise tax that they paid on the sale of their residence.

     As relevant herein, section 164(a) allows a deduction for

five specific categories of taxes, specifically including State,

local, and foreign real property taxes.   Sec. 164(a)(1).

Notwithstanding the general deductibility of taxes, any tax that

does not fall within one of the specific categories of deductible

taxes enumerated in section 164(a) and that is paid or accrued in

connection with the disposition of property shall be treated as a

reduction in the amount realized on the disposition of that

property.

     Section 1.164-3(b), Income Tax Regs., defines real property

taxes as: “taxes imposed on interests in real property and levied

for the general public welfare, but it does not include taxes

assessed against local benefits.” [Emphasis added.]

     Petitioners contend that Washington State’s real estate

excise tax constitutes a State real property tax for purposes of

section 164(a)(1).   Petitioners’ theory is that the State of

Washington:

     does not have a general state income tax and therefore
     must collect taxes from other sources to run the state,
                                - 7 -

     local and community services associated with all
     citizens in the state of Washington. All people who
     sell there [sic] homes are uniformly assessed this
     excise property sales tax. This is in effect a
     property tax that is collected on the sale of every
     home in the entire state of Washington and should be
     able to be deducted the same as any other state who has
     a State Income Tax that would be recognized as
     deductible and would be allowed on the Schedule A 1040
     form.

In support of their contention, petitioners rely on the Internal

Revenue Service’s Form 1040 Instructions for Schedule A, Line 6,

Real Estate Taxes, which state in relevant part:

     Include taxes (state, local, or foreign) you paid on
     real estate you own that was not used for business, but
     only if the taxes are based on the assessed value of
     the property. Also, the assessment must be made
     uniformly on property throughout the community, and the
     proceeds must be used for general community or
     governmental purposes. * * *”

     As a preliminary matter, however, we observe that

Instructions are not authoritative sources of law in the tax

field.   Casa De La Jolla Park, Inc. v. Commissioner, 94 T.C. 384,

396 (1990).   Taxpayers must look to authoritative sources of

Federal tax law such as the statutes, regulations, or judicial

decisions.    Green v. Commissioner, 59 T.C. 456, 458 (1972).

     Thus, we begin our analysis by looking to State law to

determine whether Washington State’s real estate excise tax

satisfies the definition of a real property tax for Federal

income tax purposes; i.e., whether it is a tax imposed on an

interest in real property.   If the Washington State real estate

excise tax does not constitute a State real property tax for
                                  - 8 -

purposes of section 164(a)(1), then it would not be deductible as

such, but rather it would reduce the amount realized on the sale

of the property.   Sec. 164(a).

     The Washington Revised Code Annotated section 82.45.060, Tax

imposed on sale of property–-Additional tax imposed (West 2000),

provides in part as follows:

     There is imposed an excise tax upon each sale of real
     property at the rate of one and twenty-eight one-
     hundredths percent of the selling price. An amount
     equal to seven and seven-tenths percent of the proceeds
     of this tax to the state treasurer shall be deposited
     in the public works assistance account * * *[5]
     [Emphasis added.]

See Wash. Rev. Code Ann. ch. 82.45 (West 2000); Wash. Admin. Code

sec. 458-61-015, Real Estate Excise Tax (2004).

     According to the statute, it is clear that the nature and

character of the tax at issue are those of an excise tax.

Typically, an excise tax is imposed on the consumption,

manufacture, or sale of certain commodities, privileges,

particular business transactions, and the like.   See Flint v.

Stone Tracy Co., 220 U.S. 107, 151 (1911).   In the instant case,

the Washington State real estate excise tax is a tax on the

transaction or particular privilege of selling real property.    In


     5
        Petitioner claims, and respondent does not dispute, that
the real estate excise tax is for the general public welfare. We
note that the public works assistance account is established in
the State treasury, and that the money in the account is used to
make loans and to give financial guarantees to local governments
for public works projects. Wash. Rev. Code Ann. sec. 43.155.050
(West 2000).
                                - 9 -

Mahler v. Tremper, 243 P.2d 627, 629-630 (Wash. 1952), the

Supreme Court of the State of Washington held that a county tax

on the sale of real estate is an excise tax and not a property

tax because it is a tax on the transaction rather than merely

ownership.    Moreover, this Court has held on several occasions

that so-called transaction privilege taxes concerning the

transfer of property are not deductible under section 164(a)(1)

because such taxes are not imposed on interests in property.    See

Black v. Commissioner, 60 T.C. 108 (1973) (Pennsylvania State

real estate tax imposed on the transfer of property is not

imposed on an interest in real property); Gibbons v.

Commissioner, T.C. Memo. 1976-125 (Maryland State real estate

transfer tax on the purchase of a home is not a deductible real

property tax); cf. Beimfohr v. Commissioner, T.C. Memo. 1986-57

(a transaction privilege tax on a contractor’s gross proceeds of

sales less land and labor costs is an excise tax on the privilege

to engage in an occupation or business rather than a tax imposed

on an interest in real property).    We continue to follow these

precedents.

     Petitioners argue, however, that Washington State’s real

estate excise tax is a form of real property tax because the

State of Washington does not have a general State income tax

unlike most States.    The fact that Washington State does not have

a general State income tax, however, is not determinative of
                              - 10 -

whether Washington State’s real estate excise tax constitutes a

real property tax for purposes of section 164(a)(1).

     There is nothing in Washington Revised Code Ann. ch. 82.45,

Excise Tax on Real Estate Sales (West 2000), nor in its

legislative history indicating that Washington State’s real

estate excise tax is in lieu of the State’s real property tax.6

Indeed, Washington State’s real estate excise tax is another

source of the State’s tax revenues, but it is separate and

distinct from Washington State’s real property tax.    In fact,

petitioners paid annual real estate property taxes based on their

ownership interest in property.   In addition, when petitioners

sold their property, they paid a separate real estate excise tax

based on the sale transaction.    Thus, petitioners paid at least

two distinguishable taxes on their property: an annual tax based

on their interest in the property, and a one-time tax based on

the sale of their property.   State law makes this distinction and

so shall we for purposes of section 164(a)(1).

     Accordingly, we sustain respondent’s determination on this

issue.




     6
        We note that Washington State’s real estate excise tax is
found in Wash. Rev. Code Ann. tit. 82, Excise Taxes (West 2004),
whereas the State’s real property tax is found in Wash. Rev. Code
tit. 84, Property Taxes.
                               - 11 -

     B.   Section 72(t) Additional Tax

     The next issue is whether petitioners are liable for the 10-

percent additional tax under section 72(t).

     Generally, a distribution from an IRA is includable in the

distributee’s gross income in the year of distribution under the

provisions of section 72.    Secs. 61(a)(9), 408(d)(1), (3); see

secs. 408(a), 4974(c)(4).    Such distributions made prior to a

taxpayer’s attaining the age of 59-1/2 that are includable in

income generally are subject to a 10-percent early withdrawal tax

unless an exception to the tax applies.    Sec. 72(t)(1).   As

relevant herein, section 72(t)(2)(E) exempts distributions from

the early withdrawal tax to the extent such distributions do not

exceed a taxpayer’s qualified higher education expenses for the

taxable year.    See secs. 72(t)(2)(E), (7); 529(e)(3), (5).

     In the instant case, petitioners withdrew $30,000 from Mr.

Urban’s IRA.    Petitioners properly included this amount on the

Form 1040 as taxable income.    Although respondent initially

determined that petitioners had qualified higher education

expenses of $11,580, the parties stipulated that petitioners had

qualified higher education expenses of $15,716, thus reducing the

amount of the IRA distribution that is subject to the early

withdrawal tax to $14,284.    Petitioners, however, did not include

on the Form 1040 the 10-percent early withdrawal tax on any

portion of the IRA distribution.    Thus, the issue is whether
                                - 12 -

petitioners must pay an early withdrawal tax on that portion of

their IRA distribution that exceeded their qualified higher

education expenses; i.e., $14,284.

     Petitioners conceded at trial that they knew they had to pay

regular income tax on the early withdrawal but felt that they

“would avoid the penalty associated with it for early withdrawal”

based on the exception for higher education expenses.   The

essence of petitioners’ contention is that, in order to obtain

sufficient after-tax dollars to pay for their estimated education

expenses, as well as the regular income tax imposed on the IRA

distribution, they had to withdraw an amount in excess of their

estimated education expenses.    Petitioners argue that this “catch

22”7 was not the intent of the early withdrawal tax because they

are being unfairly penalized for taking an early IRA distribution

for the purpose of paying for higher education expenses.   As

such, petitioners contend that no part of the distribution should

be subject to the early withdrawal tax under section 72(t).

     Petitioners, however, cite no authority to support their

proposition, and we are aware of none.   The situation presented

by petitioners (i.e., that the entire distribution should be

exempt from the early withdrawal tax under the exception for

qualified higher education expenses because a portion of the



     7
        Petitioners describe the “catch 22” as: “In order to get
the amount you need, you have to take more than you need.”
                              - 13 -

distribution is attributable to the tax consequences associated

with such withdrawal) is not addressed by any of the express

statutory exceptions to the early withdrawal tax.    Further, there

is nothing in the legislative history of section 72(t) nor in the

case law to support an exception for the portion of an early

distribution used to pay for the tax effect of a distribution

taken for qualified higher education expenses.

     The Tax Court is a court of limited jurisdiction and lacks

general equitable powers.   Commissioner v. McCoy, 484 U.S. 3, 7

(1987); Hays Corp. v. Commissioner, 40 T.C. 436, 442-443 (1963),

affd. 331 F.2d 422 (7th Cir. 1964).    Consequently, our

jurisdiction to grant equitable relief is limited.    Woods v.

Commissioner, 92 T.C. 776, 784-787 (1989); Estate of Rosenberg v.

Commissioner, 73 T.C. 1014, 1017-1018 (1980).    Although we

acknowledge that petitioners used the IRA distribution for

laudable purposes, absent some constitutional defect we are

constrained to apply the law as written, see Estate of Cowser v.

Commissioner, 736 F.2d 1168, 1171-1174 (7th Cir. 1984), affg. 80

T.C. 783, 787-788 (1983), and we may not rewrite the law because

we may “‘deem its effects susceptible of improvement’”,

Commissioner v. Lundy, 516 U.S. 235, 252 (1996) (quoting

Badaracco v. Commissioner, 464 U.S. 386, 398 (1984)).

Accordingly, petitioners’ appeal for relief must, in this

instance, be addressed to their elected representatives.    “The
                                - 14 -

proper place for a consideration of petitioner’s complaint is the

halls of Congress, not here.”    Hays Corp. v. Commissioner, supra

at 443.

     Therefore, we conclude that $14,284 of petitioners’ IRA

distribution is subject to the additional tax under section

72(t).    Accordingly, we sustain respondent’s determination on

this issue to that extent.

     C.     Conclusion

     We have considered all of the other arguments made by

petitioners, and, to the extent that we have not specifically

addressed those arguments, we conclude them to be without merit.8

     Reviewed and adopted as the report of the Small Tax Case

Division.

     To reflect our disposition of the disputed issues, as well

as respondent’s concession,



                                     Decision will be entered

                                under Rule 155.




     8
        Petitioners at trial suggested obliquely that the
exception for medical expenses under sec. 72(t)(2)(B) might also
apply. Petitioners, however, did not present any evidence
whatsoever in support of this contention.
