                          T.C. Memo. 2001-34



                      UNITED STATES TAX COURT



       ANDREW P. AND ROSEANNE L. GALLAGHER, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 659-00.                    Filed February 13, 2001.



     Andrew P. and Roseanne L. Gallagher, pro se.

     Thomas L. Fenner, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION

     COHEN, Judge:   Respondent determined a deficiency of $2,280

in petitioners’ Federal income tax for 1997.    The issues for

decision are whether the distribution to Andrew P. Gallagher

(petitioner) from an individual retirement account (IRA) was

includable in petitioners’ gross income and whether that same
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distribution was subject to the 10-percent additional tax imposed

by section 72(t).

       Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect for the years in issue.

                          FINDINGS OF FACT

       Some of the facts have been stipulated, and the stipulated

facts are incorporated in our findings by this reference.

       Petitioners resided in Houston, Texas, at the time they

filed their petition.    In 1976, petitioner opened an IRA as

described in section 408(a).    Petitioners made additional

contributions to the IRA over the next several years.

Petitioners claimed deductions on their Federal income tax

returns under section 219 for all of their contributions to the

IRA.    Petitioners made no nondeductible contributions to the IRA.

       Petitioner was a civil engineer employed by the City of

Houston, Texas, from May 6, 1985, until sometime in 1997.

Petitioner was involuntarily demoted by the City of Houston

effective December 3, 1996.    The demotion resulted in a decrease

of $11,700 to petitioner’s annual salary.    In November 1997,

petitioner began working full time for the City of Pearland,

Texas.

       Because of financial hardship, in early 1997 petitioner

requested a $6,000 distribution from the administrator of the

IRA.    Petitioner was 46 years old at the time he received the
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distribution from the IRA.    Petitioners used the money to pay

bills, tuition at their son’s private high school, and other

personal expenses.   Petitioners did not report the $6,000

distribution on their Federal income tax return for 1997.

     No portion of the distribution was rolled over into another

IRA or other retirement account.    The distribution was not paid

on account of disability, was not paid as part of a series of

substantially equal periodic payments made for life, and was not

paid for medical care.

                               OPINION

     Petitioners contend that, because of their financial

hardship, the $6,000 distribution should not be included in their

gross income and, if it is, they should not be subject to the

10-percent additional tax imposed by section 72(t).    Petitioners

seek relief from the income tax and additional 10-percent tax

imposed on the IRA distribution based on their financial

hardship.   There is, however, no hardship exception in the

controlling statutes.

     Generally, any amount paid or distributed out of an

individual retirement plan is included in gross income by the

payee or distributee.    See sec. 408(d)(1); sec. 1.408-4(a)(1),

Income Tax Regs; see also Arnold v. Commissioner, 111 T.C. 250,

253 (1998).   Section 408(d)(3) provides an exception to the

general rule where the entire amount received is paid into an IRA
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or individual retirement annuity for the benefit of the

distributee within 60 days after the receipt of the distribution.

Petitioners do not qualify for the exception provided for in

section 408(d)(3), because petitioners did not roll over the

$6,000 IRA distribution into another IRA or other retirement

account but rather used the money to pay for personal expenses.

     In general, the basis of an IRA is zero.   See sec. 1.408-

4(a)(2), Income Tax Regs.; see also Costanza v. Commissioner,

T.C. Memo. 1985-317.   Petitioners did not make any nondeductible

or excess contributions that would have increased their basis,

and, thus, petitioners’ tax basis in the IRA was zero.    See

Patrick v. Commissioner, T.C. Memo. 1998-30, affd. 181 F.3d 103

(6th Cir. 1999).

     Section 72(t) provides for a 10-percent additional tax on

early distributions from an IRA.   The 10-percent additional tax,

however, does not apply to certain distributions.   Section

72(t)(2) sets forth specific exemptions.   As the Court stated in

Arnold v. Commissioner, supra at 255:

     The legislative purpose underlying the section 72(t)
     tax is that “premature distributions from IRAs
     frustrate the intention of saving for retirement, and
     section 72(t) discourages this from happening.” Dwyer
     v. Commissioner, 106 T.C. 337, 340 (1996); see also S.
     Rept. 93-383, at 134 (1973), 1974-3 C.B. (Supp.) 80,
     213.

     Petitioners do not argue that any of the statutory

exceptions apply to them.   Petitioners, instead, seek relief from
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the income tax or from the 10-percent additional tax imposed by

statute based on their financial hardship.      However, there is no

exception under section 72(t) for financial hardship.      This

principle has been applied consistently in cases dealing with

premature IRA distributions.   See Arnold v. Commissioner, supra

at 255; Deal v. Commissioner, T.C. Memo. 1999-352; Pulliam v.

Commissioner, T.C. Memo. 1996-354.       Thus, the IRA distribution

received by petitioners is taxable in 1997 and is also subject to

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

     To reflect the foregoing,

                                             Decision will be entered

                                      for respondent.
