                         T.C. Memo. 2009-268



                       UNITED STATES TAX COURT



         RICHARD GLEN VENET AND ROBIN VENET, Petitioners v.
            COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 13495-08.               Filed November 24, 2009.



     Richard Glen Venet and Robin Venet, pro sese.

     A. Gary Begun, for respondent.



              MEMORANDUM FINDINGS OF FACT AND OPINION


     VASQUEZ, Judge:    Respondent determined an $11,069.10

deficiency in petitioners’ 2006 Federal income tax.     The issue

for decision is whether petitioners are liable for a 10-percent

additional tax under section 72(t).1


     1
         Unless otherwise indicated, all section references are to
                                                    (continued...)
                                 - 2 -

                           FINDINGS OF FACT

     Some of the facts have been stipulated and are so found.

The stipulation of facts and the attached exhibits are

incorporated herein by this reference.     Petitioners resided in

Michigan at the time they filed the petition.

         Richard Glen Venet (petitioner) worked for 22 years before

being laid off in September 2001.     He was unable to find suitable

work again until 2005.     During this time petitioners used credit

card advances and home equity loans to meet their personal

expenses.     The credit card debt was accruing interest at 22

percent and the home equity loan at approximately 5 or 6 percent.

     Petitioners have two children, a son and a daughter.     During

2006 petitioners’ daughter attended Michigan State University

(MSU) and lived in an off-campus apartment.     A Michigan Education

Trust Fund, which petitioners invested in before 2006, paid

petitioners’ daughter’s tuition.     Petitioners gave their daughter

$575 per month for rent and $100 per month for utilities in

addition to money for food.     They would either give her cash when

they saw her or transfer funds from their LaSalle Bank account to

hers.     Petitioners did not pay any of their daughter’s expenses




     1
      (...continued)
the Internal Revenue Code in effect for the year in issue, and
all Rule references are to the Tax Court Rules of Practice and
Procedure.
                                 - 3 -

directly.   They also did not keep records of the amounts they

gave to her.

     In 2006 petitioner worked in business development and sales

for RWD Technologies, Inc.   Robin Venet (Mrs. Venet) worked for

ABN AMRO Mortgage Group, Inc.    By this time petitioners had

amassed $80,000 in credit card debt in addition to an $80,000

mortgage and a $40,000 home equity loan.2     To avoid putting their

home in foreclosure or filing for bankruptcy, petitioners decided

to withdraw cash from their individual retirement accounts (IRAs)

to reduce their debt.

     Petitioner withdrew $110,691 from his IRAs in 2006.3     He

instructed the distributing institutions to withhold $22,138 of

that amount for Federal income tax.      Petitioners used

approximately $80,000 to pay off their outstanding credit card

debt and set aside the approximate $8,500 remaining in a bank

account for end of year taxes.    At the time of the distribution

petitioner and Mrs. Venet were 48 and 49 years old, respectively.



     2
         These figures are approximations.
     3
        The early distributions were reported on three Forms
1099-R, Distributions From Pensions, Annuities, Retirement or
Profit-Sharing Plans, IRAs, Insurance Contracts, etc. Vanguard
Fiduciary Trust Co. issued a Form 1099-R showing a $104,500 gross
distribution and $20,900 withheld for Federal income tax.
Capital Bank and Trust Co. issued two Forms 1099-R; one showed a
$5,767 gross distribution and $1,153 withheld for Federal income
tax, and the other showed a $424 gross distribution and $85
withheld for Federal income tax. We refer to the three
distributions collectively as the distribution.
                                - 4 -

     Petitioners timely filed their joint Federal income tax

return for 2006 and reported the $110,691 distribution as taxable

income.   Petitioners attached Form 5329, Additional Taxes on

Qualified Plans (Including IRAs) and Other Tax-Favored Accounts,

to their 2006 return but did not report a 10-percent additional

tax related to the early distribution.

                               OPINION

     Section 72(t)(1) imposes a 10-percent additional tax on the

taxable amount of an early distribution from a qualified

retirement plan (as defined in section 4974(c)).4   A distribution

is early if made to an employee who has not attained age 59-1/2.

Sec. 72(t)(2)(A)(i).    Petitioners conceded that they received the

early IRA distribution totaling $110,691 and reported that amount

on their 2006 return.   However, petitioners contend that the

additional tax should not apply at all because the early

distribution was the result of financial hardship and, in the

alternative, that an exception to the 10-percent additional tax

for higher education expenses applies to a portion of the

distribution.

     There is no exception to the additional tax for financial

hardship.   Sec. 72(t)(2); See Arnold v. Commissioner, 111 T.C.

250, 255 (1998); Milner v. Commissioner, T.C. Memo. 2004-111;


     4
        The term “qualified retirement plan” includes an
individual retirement account described in sec. 408(a). Sec.
4974(c)(4).
                                 - 5 -

Robertson v. Commissioner, T.C. Memo. 2000-100 (no exception

exists to additional tax for withdrawal to provide for taxpayer’s

own subsistence and that of her family), affd. 15 Fed. Appx. 467

(9th Cir. 2001).   Taxpayers are limited to the exceptions in the

statute.

     Section 72(t)(2)(E) provides an exception to the 10-percent

additional tax for distributions from individual retirement plans

to the extent such distributions do not exceed the qualified

higher education expenses of the taxpayer for the taxable year.5

In general, “qualified higher education expenses” means qualified

higher education expenses (as defined in section 529(e)(3)) for

education furnished to the taxpayer, the taxpayer’s spouse, or

any child of the taxpayer or the taxpayer’s spouse, at an

eligible educational institution.    Sec. 72(t)(7).   These include

tuition, fees, books, supplies, and equipment, and, in limited

circumstances, room and board.    Sec. 529(e)(3)(A)(i), (B).

     The amount for room and board treated as qualified higher

education expenses for an eligible student6 shall not exceed the

student’s allowance for room and board included in the cost of



     5
        IRAs are included in the definition of “individual
retirement plan”. Sec. 7701(a)(37).
     6
        In general, the term “eligible student” means, with
respect to any academic period, a student who is enrolled at
least half time in a degree or certificate program at an eligible
institution of higher education. See secs. 529(e)(3)(B)(i),
25A(b)(3); 20 U.S.C. sec. 1091(a)(1) (2006).
                               - 6 -

attendance (as defined in section 472 of the Higher Education Act

of 1965, 20 U.S.C. section 1087ll) as determined by the eligible

educational institution for such period, or, in the case of a

student living in housing owned or operated by an eligible

educational institution whose expenses are greater, the actual

amount charged the student by the educational institution for

room and board.   Sec. 529(e)(3)(B)(ii).7

     We are satisfied, on the basis of petitioner’s credible

testimony, that petitioners provided their daughter with $575 per

month for rent, $100 per month for utilities, and $100 per month

for food ($775 per month total) in 2006.    However, the amount

treated as qualified higher education expenses is limited to the

allowance for room and board included in the cost of attendance

for 2006 as determined by MSU.8   Accordingly, the 10-percent

additional tax does not apply to the amount of the distribution



     7
        The term “cost of attendance” includes an allowance (as
determined by the institution) for room and board costs incurred
by the student which, for students residing off-campus but not at
home with parents, shall be an allowance based on the expenses
reasonably incurred by such students for room and board. See 20
U.S.C. sec. 1087ll(3) (2006).
     8
        Sec. 529(e)(3)(B)(ii)(II) does not apply here because
petitioners’ daughter did not live in housing owned or operated
by MSU in 2006. See, e.g., Staff of Joint Comm. on Taxation,
General Explanation of Economic Growth and Tax Relief
Reconciliation Act of 2001 (J. Comm. Print 2003).
                                 - 7 -

equal to the lesser of the room and board expenses petitioners

incurred and MSU’s allowance for room and board in 2006.9

     No other exception applies to the amount of the distribution

in excess of the allowable qualified higher education expenses.

Accordingly, that excess amount is subject to the 10-percent

additional tax.

     In reaching all of our holdings herein, we have considered

all arguments made by the parties, and to the extent not

mentioned above, we find them to be irrelevant or without merit.

     To reflect the foregoing,


                                           Decision will be entered

                                      under Rule 155.




     9
        We leave it to the parties to determine as part of the
Rule 155 computation petitioners’ total room and board expenses
using the Court’s findings for the months petitioners’ daughter
was enrolled at MSU and the applicable limit on reasonable costs
incurred for room and board as determined by MSU for 2006.
