                  T.C. Summary Opinion 2003-137



                     UNITED STATES TAX COURT



            JOHN AND MICHELE MCGOVERN, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 19183-02S.           Filed September 30, 2003.


     John McGovern and Michele McGovern, pro se.

     James Brian Urie, for respondent.



     PANUTHOS, Chief Special Trial Judge:   This case was heard

pursuant to the provisions of section 7463 of the Internal

Revenue Code in effect at the time the petition was filed.

Unless otherwise indicated, section references are to the

Internal Revenue Code in effect for the year in issue.   The

decision to be entered is not reviewable by any other court, and

this opinion should not be cited as authority.
                                - 2 -

     Respondent determined a deficiency in petitioners’ 1999

Federal income tax of $1,288.   The issue for decision is whether

the 10-percent additional tax under section 72(t)(1) applies to

the early distribution from petitioners’ Federal Employees’

Thrift Savings Plan.

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

found.   The stipulation of facts and attached exhibits are

incorporated herein by this reference.   At the time of filing the

petition, petitioners resided at Scranton, Pennsylvania.

Background

     During the year in issue, John McGovern (petitioner) was a

full-time student at Villanova University School of Law.   Also

during the year in issue, petitioner received a lump-sum

distribution of $27,880.04 from his Federal Employees’ Thrift

Savings Plan (TSP) and deposited that amount into a personal

checking account.   Petitioner rolled over $15,000 of that amount

into an individual retirement account (IRA).1   Petitioner used

the remaining $12,880.04 to pay tuition and education fees to

Villanova University during the 1999 taxable year.   Neither

petitioner attained the age of 59½ years during the 1999 taxable

year.




     1
        Respondent did not determine a 10-percent additional tax
as to this amount.
                               - 3 -

     On April 15, 2000, petitioners filed a Form 1040, U.S.

Individual Income Tax Return, for the 1999 taxable year (1999 tax

return).   They reported “Total pensions and annuities” of $27,880

and included $12,880 of that amount as part of their total income

for the 1999 taxable year.   However, petitioners did not report

any additional tax under section 72(t)(1) with respect to the

$12,880 distribution from their TSP.

     Respondent issued petitioners a notice of deficiency dated

September 10, 2002, determining a deficiency in Federal income

tax of $1,288 for the 1999 taxable year.   Respondent contends

that, with respect to the $12,880.04 distribution from

petitioner’s TSP, petitioners are subject to a 10-percent

additional tax on an early distribution from a qualified

retirement plan under section 72(t)(1).

     Petitioners contend that they are not subject to the 10-

percent additional tax under section 72(t)(1) for one of two

reasons.   First, they rely upon Larotonda v. Commissioner, 89

T.C. 287 (1987), and contend that the form of the transaction

complies with the requirements of the exception under section

72(t)(2)(E) when petitioners used $12,880.04 from the TSP to pay

Villanova University for tuition and education fees during the

1999 taxable year.   In the alternative, petitioners seek to

disavow the transaction under the doctrine of substance over

form.   In other words, petitioners seek to recharacterize the
                                 - 4 -

$12,880.04 distribution from their TSP to Villanova University,

arguing that this transaction was tantamount to first rolling

over the $12,880.04 into an IRA and then distributing that amount

to Villanova University.

Discussion

     Petitioners filed the 1999 tax return on April 15, 2000;

accordingly section 7491(a) is applicable in the instant case.

Neither party takes a position as to whether the burden of proof

has shifted to respondent under section 7491(a).     We conclude

that, based upon the record, respondent bears the burden of

proof.   Nevertheless, we further conclude that resolution of the

issue whether the 10-percent additional tax applies to the

$12,880.04 distribution from the TSP does not depend upon which

party has the burden of proof.

     A 10-percent additional tax is imposed upon early

distributions from a “qualified retirement plan”.     Sec.

72(t)(1).2    In the present case, petitioner’s TSP is a qualified

retirement plan, and the $12,880.04 distribution from his TSP was


     2
         Sec. 72(t)(1) provides:

          SEC. 72(t). 10-Percent Additional Tax on Early
     Distributions from Qualified Retirement Plans.--

                  (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.
                               - 5 -

an early distribution made before either petitioner attained the

age of 59½ years.3   Compare sec. 4974(c)(1) with sec.

7701(j)(1).4   Accordingly, the 10-percent additional tax applies


     3
        The total distribution from petitioner’s TSP was
$27,880.04. Of this amount, $15,000 was rolled over into an IRA,
and its tax treatment is not the subject of dispute in the
present case. See sec. 402(c)(1), (5).
     4
         Sec. 4974(c)(1) provides:

          SEC. 4974(c). Qualified Retirement Plan.–-For
     purposes of this section, the term “qualified
     retirement plan” means--

                (1) a plan described in section 401(a) which
           includes a trust exempt from tax under section
           501(a), * * *

Similarly, sec. 7701(j)(1) provides:

          SEC. 7701(j).   Tax Treatment of Federal Thrift
     Savings Fund.–-

                (1) In general.–-For purposes of this title--

                     (A) the Thrift Savings Fund shall be
                treated as a trust described in section
                401(a) which is exempt from taxation under
                section 501(a);

                     (B) any contribution to,   or distribution
                from, the Thrift Savings Fund   shall be
                treated in the same manner as   contributions
                to or distributions from such   a trust; and

                     (C) subject to section 401(k)(4)(B) and
                any dollar limitation on the application of
                section 402(e)(3), contributions to the
                Thrift Savings Fund shall not be treated as
                distributed or made available to an employee
                or Member nor as a contribution made to the
                Fund by an employee or Member merely because
                the employee or Member has, under the
                                                    (continued...)
                               - 6 -

to the $12,880.04 distribution unless an exception applies.

     Section 72(t)(2)(E) provides that the 10-percent additional

tax does not apply to “Distributions to an individual from an

individual retirement plan” for “qualified higher education

expenses”.   Petitioners contend that this exception applies to

the present case.   While the parties do not dispute that tuition

payments made and education fees paid to Villanova University

constitute “qualified higher education expenses”, the issue is

whether the remaining requirements of section 72(t)(2)(E) are

satisfied.

     The $12,880.04 distribution from petitioner’s TSP is not a

distribution from an “individual retirement plan”.   An IRA and a

TSP are separately defined by the Internal Revenue Code.     Section

7701(a)(37) provides that an IRA means “an individual retirement

account described in section 408(a)”.   Section 7701(j)(1)

provides that a TSP is treated as a trust described in

section 401(a).   Compare sec. 7701(a)(37) with sec. 7701(j)(1).5


     4
      (...continued)
               provisions of subchapter III of chapter 84 of
               title 5, United States Code, and section 8351
               of such title 5, an election whether the
               contribution will be made to the Thrift
               Savings Fund or received by the employee or
               Member in cash.

See also 5 U.S.C. sec. 8440(a)(1) (2000).
     5
         Sec. 7701(a)(37) refers to sec. 408 and provides:

          SEC. 7701(a). When used in this title, where not
     otherwise distinctly expressed or manifestly
                                                  (continued...)
                                   - 7 -

Since the distribution in this case is not from an IRA, but

rather from a TSP, the exception provided by section 72(t)(2)(E)

is inapplicable.

       Petitioners nevertheless invite us to interpret broadly the

exception under section 72(t)(2)(E) to include the $12,880.04

distribution from the TSP, citing Larotonda v. Commissioner, 89

T.C. 287 (1987).       In Larotonda, we concluded that the taxpayers

were not liable for the 10-percent premature distribution penalty

under former section 72(m)(5) when the IRS served a levy against

the taxpayers’ Keogh account for payment of an assessed

deficiency and the bank trustee paid the money directly to the

IRS.       Former section 72(m)(5) differed from current section

72(t), particularly in that the former did not include the list

of specific exceptions to tax set forth in section 72(t)(2).

Swihart v. Commissioner, T.C. Memo. 1998-407.        Moreover, unlike

petitioners in the present case, the taxpayers in Larotonda never


       5
        (...continued)
       incompatible with the intent thereof--

                   *     *     *     *     *     *     *

                    (37) Individual Retirement Plan.–-The term
               “individual retirement plan” means--

                         (A) an individual retirement account
                    described in section 408(a), and

                         (B) an individual retirement annuity
                    described in section 408(b).

In contrast, as indicated above, sec. 7701(j)(1) refers to sec.
401.
                               - 8 -

received the funds and had no opportunity to avoid the 10-percent

premature distribution penalty under former section 72(m)(5).

Compare Larotonda v. Commissioner, supra, with Aronson v.

Commissioner, 98 T.C. 283, 292-293 (1992) (sustaining the

imposition of the 10-percent additional tax under former section

408(f)(1) when taxpayers had an opportunity to avoid such tax).

     Petitioners also ask that we apply the doctrine of substance

over form to the $12,880.04 distribution from petitioner’s TSP to

Villanova University.   “The substance-over-form doctrine is

applicable to instances where the ‘substance’ of a particular

transaction produces tax results inconsistent with the ‘form’

embodied in the underlying documentation, permitting a court to

recharacterize the transaction in accordance with its substance.”

Neonatology Associates, P.A. v. Commissioner, 299 F.3d 221, 230

n.12 (3d Cir. 2002), affg. 115 T.C. 43 (2000).   However, the

Supreme Court “has observed repeatedly that, while a taxpayer is

free to organize his affairs as he chooses, nevertheless, once

having done so, he must accept the tax consequences of his

choice, whether contemplated or not, * * * and may not enjoy the

benefit of some other route he might have chosen to follow but

did not.”   Commissioner v. Natl. Alfalfa Dehydrating & Milling

Co., 417 U.S. 134, 149 (1974) (citations omitted).   Similarly,

the United States Court of Appeals for the Third Circuit has also

observed:   “The government has the right to claim that the form

of a transaction should not be utilized to postpone taxes that

are otherwise due.   The taxpayer does not have the like right to
                                 - 9 -

contend that the form that it has chosen should be ignored so

that avoidance or postponement of the tax can be accomplished.”

Strick Corp. v. United States, 714 F.2d 1194, 1206 (3d Cir.

1983).

     We conclude that petitioners are liable for the 10-percent

additional tax under section 72(t)(1) on the $12,880.04

distribution from petitioner’s TSP to Villanova University.

     Reviewed and adopted as the report of the Small Tax Case

Division.

     To reflect the foregoing,

                                           Decision will be entered

                                      for respondent.
