                          T.C. Memo. 1996-556



                        UNITED STATES TAX COURT



                    ALFRED P. DUFFY, Petitioner v.
             COMMISSIONER OF INTERNAL REVENUE, Respondent



        Docket No. 6723-93.                 Filed December 23, 1996.



        Alfred P. Duffy, pro se.

        Judith Wilkie, for respondent.


                MEMORANDUM FINDINGS OF FACT AND OPINION


        ARMEN, Special Trial Judge:   This case was assigned pursuant

to the provisions of section 7443A(b)(3) and Rules 180, 181, and

182.1


        1
       Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the taxable year in
issue, and all Rule references are to the Tax Court Rules of
Practice and Procedure.
     Respondent determined a deficiency in petitioner's Federal

income tax for the taxable year 1990 in the amount of $4,047.

The deficiency includes the 10-percent additional tax imposed by

section 72(t) on early distributions from qualified retirement

plans.

     After a concession by petitioner,2 the issues for decision

are as follows:

     (1) Whether petitioner received unreported wages in the

amount of $10,899; and

     (2) whether petitioner is liable for the additional tax

imposed by section 72(t).

                          FINDINGS OF FACT

     Some of the facts have been stipulated, and they are so

found.   Petitioner resided in the State of New York at the time

that his petition was filed with the Court.

Petitioner's Employment

     In June 1989, petitioner signed a 5-year contract with the

Poughkeepsie City School District (the school district) to serve

as assistant superintendent.   In September 1989, petitioner was




     2
       In the notice of deficiency, respondent determined that
petitioner failed to report a distribution from American Capital
Trust Co. in the amount of $2,410.91. Petitioner did not raise
this issue in his pleadings, nor did he address it at trial.
Accordingly, this issue is deemed to be conceded by petitioner.
Rules 34(b)(4), 142(a).
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suspended with pay based on allegations that he had mishandled

the school district's funds during the 1988-89 academic year.3

     In September 1990, the internal claims auditor of the school

district (the auditor) determined that petitioner had received

travel advances in excess of actual expenditures for the 1988-89

academic year.   Thereafter, and pursuant to New York State law,4

the school district began to withhold on a biweekly basis the

entire amount of petitioner's net wages in an effort to recoup

the excess travel advances.    Thus, from late September through

the end of the year, petitioner did not receive any paychecks

from the school district.

     Pursuant to his employment contract with the school

district, petitioner was entitled to receive wages in 1990 in the

amount of $66,254.66.   The school district, however, withheld

from that amount a total of $10,898.90.

     From the beginning of his dispute with the school district,

petitioner maintained that the money advanced to him represented

reimbursement for legitimate travel expenses incurred by him in

     3
       Although the record is not clear on this matter, it would
appear that petitioner had worked for the school district before
signing the 5-year contract in June 1989.
     4
       New York Gen. Mun. Law, sec. 77-b(6) (1986), provides as
follows:

     "Where * * * an employee fails to return [an] excess
     advance * * * the municipality shall deduct the amount
     of such unreturned excess advance from the salary or
     other money owed the * * * employee by the
     municipality."
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connection with his official duties.     Accordingly, in late

September or early October 1990, petitioner commenced a court

proceeding (the court proceeding) against the school district in

the Supreme Court of Dutchess County, New York (the trial court).

In the court proceeding, petitioner sought the return of net

wages already withheld and to enjoin the school district from

withholding net wages in the future.

     In January 1991, the trial court dismissed the court

proceeding.   Petitioner then appealed to the Appellate Division

of the Supreme Court of New York (the Appellate Division).      In

May 1992, the Appellate Division affirmed the trial court.

Petitioner did not pursue any further appeal.

Petitioner's Annuity Contract

     Petitioner maintained an annuity contract described in

section 403(b) with American Capital Trust Co. (the American

Capital account).   On or about February 5, 1990, petitioner

requested a distribution of the entire amount in his account with

American Capital because of "financial hardship".     On or about

February 13, 1990, petitioner received a distribution in the

amount of $2,410.91 from his American Capital account.

Petitioner was 44 years old at the time that he received the

distribution.

Petitioner's 1990 Income Tax Return
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     Petitioner filed a Federal income tax return (Form 1040) for

1990.    On his return, petitioner computed his tax liability using

the cash receipts and disbursements method of accounting.

     Petitioner received a Form W-2 from the school district

disclosing the payment of wages in 1990 in the amount of

$66,254.66.   Petitioner did not attach such form to his return.

Rather, he attached Form 4852 (Substitute for Form W-2).    On such

form, as well as on the return itself, petitioner reported wages

in the amount of $55,355.76; i.e., $66,254.66 less net wages

withheld in the amount of $10,898.90.

     Petitioner did not report the distribution from his American

Capital account on his return for 1990.

Respondent's Notice of Deficiency

     In the notice of deficiency, respondent determined that

petitioner failed to report wages in the amount of $10,899.

Respondent also determined that the distribution from

petitioner's American Capital account was includable in

petitioner's gross income.5   As a corollary, respondent

determined that petitioner was liable for the 10-percent

additional tax imposed by section 72(t).

                               OPINION

     The issues for decision are whether petitioner failed to

report wages in the amount of $10,899 and whether petitioner is

     5
       See supra note 2 regarding petitioner's concession related
to this distribution.
                          - NEXTRECORD   -

liable for the 10-percent additional tax under section 72(t).    We

first consider whether petitioner received unreported wages.

Issue (1): Unreported Wages

     For a taxpayer who uses the cash receipts and disbursements

method of accounting, an item is includable in gross income in

the year in which the item is actually or constructively

received.   Sec. 451(a); sec. 1.451-1(a), Income Tax Regs.   Thus:

          Income although not actually reduced to a
     taxpayer's possession is constructively received by him
     in the taxable year during which it is credited to his
     account, set apart for him, or otherwise made available
     so that he may draw upon it at any time * * * .
     However, income is not constructively received if the
     taxpayer's control of its receipt is subject to
     substantial limitations or restrictions. [Sec. 1.451-
     2(a), Income Tax Regs.]

     Respondent does not contend that petitioner actually

received the net wages withheld by the school district in 1990.

Rather, respondent contends that petitioner constructively

received such amount.   Specifically, respondent argues that

petitioner incurred a debt as a result of the auditor's

determination that petitioner received excess travel advances and

that such debt was discharged through the withholding of net

wages.   From this, respondent concludes that petitioner

constructively received the net wages withheld by the school

district in 1990.

     We disagree with respondent.   The record demonstrates that

from the time of the auditor's determination in September 1990,

petitioner has continuously and vigorously denied that he was
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liable for excess travel advances.   Specifically, petitioner

commenced an action in the trial court, and, following the

dismissal of the action in January 1991, he appealed to the

Appellate Division.   The Appellate Division ultimately affirmed

the trial court, but not until May 1992.     Thus, petitioner's

dispute with the school district was not resolved in 1990, the

taxable year in issue.

      Because there existed a genuine dispute between petitioner

and the school district in 1990 regarding petitioner's liability

for excess travel advances, it cannot be said that in 1990,

petitioner constructively received the net wages withheld by the

school district during that year.    Cf. N. Sobel, Inc. v.

Commissioner, 40 B.T.A. 1263 (1939).

     Respondent cites Tucker v. Commissioner, 69 T.C. 675 (1978),

Kuntz v. Commissioner, T.C. Memo. 1992-650, and Kasey v.

Commissioner, T.C. Memo. 1976-266, in support of her position.

As discussed below, respondent's reliance on these cases is

misplaced.

     In Tucker v. Commissioner, supra, the taxpayer was a teacher

who engaged in an illegal strike against a school district.       The

school district, acting pursuant to a State law that imposed a

monetary penalty on persons participating in illegal strikes,

withheld the penalty from the taxpayer's wages.     We held that the

withholding of the penalty resulted in income to the taxpayer.

We based our holding on the fact that the taxpayer incurred a
                           - NEXTRECORD   -

debt when she participated in the strike and that the penalty

withheld from her wages extinguished such debt.

     We think that petitioner's circumstances are different from

those of the taxpayer in Tucker v. Commissioner, supra.     In the

latter case, the taxpayer did not dispute the fact that she had

violated State law and incurred a debt as a result of such

violation.   Nor did the taxpayer dispute the fact that the

withholding of the penalty from her wages satisfied such debt.

In the present case, however, petitioner vigorously disputed the

auditor's determination that he was liable to the school district

for excess advances, and the parties' dispute was not resolved by

the New York courts by the end of 1990.

     Similarly, respondent's reliance on Kuntz v. Commissioner,

supra, and Kasey v. Commissioner, supra, is also misplaced.      In

those cases, we held that the taxpayers constructively received

income to which they were entitled but which was garnished and

remitted to judgment creditors.   In neither case is there any

indication that the taxpayers disputed their liability.   Thus,

these cases are also distinguishable from the present one.

     In view of the foregoing, we hold that petitioner is not

taxable, in 1990, on the net wages withheld by the school

district during that year.    Because 1990 is the only year before

us, we need not, and do not, decide whether the net wages are

taxable in some other year.

Issue (2): Section 72(t)
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     We turn next to respondent's determination that petitioner

is liable for the 10-percent additional tax imposed by section

72(t).

     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
     of the portion of such amount which is includible in gross
     income.

     As relevant herein, section 4974(c) defines a qualified

employer plan as "an annuity contract described in section

403(b)".   Sec. 4974(c)(3).

     The 10-percent additional tax does not apply to certain

distributions.   Sec. 72(t)(2).   For example, section 72(t)(2)

provides that the 10-percent additional tax does not apply to

distributions that are:   (1) Made on or after the date on which

the taxpayer attains age 59-1/2; (2) made to a beneficiary (or to

the estate of the taxpayer) on or after the death of the

taxpayer; (3) attributable to the taxpayer's being disabled; or

(4) made to a taxpayer after separation from service after

attainment of age 55.   Sec. 72(t)(2)(A)(i), (ii), (iii), and (v).

Because none of the exceptions of section 72(t)(2) applies to

relieve petitioner of the additional tax, we sustain respondent's

determination that petitioner is liable for such tax.
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Conclusion

     To reflect our disposition of the disputed issues, as well

as petitioner's concession,



                                            Decision will be entered

                                   under Rule 155.
