                        T.C. Memo. 2006-101



                     UNITED STATES TAX COURT



             EUGENIE DENISE MITCHELL, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 7144-04.             Filed May 11, 2006.



     Eugenie Denise Mitchell, pro se.

     Margaret A. Martin and Daniel J. Parent, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION

     SWIFT, Judge:   The issue for decision is whether petitioner

is liable under section 72(t) for a 10-percent additional tax on

$15,422 that was distributed early from petitioner’s retirement

annuity accounts.

     Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect for the year in issue, and
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all Rule references are to the Tax Court Rules of Practice and

Procedure.


                          FINDINGS OF FACT

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

     At the time the petition was filed, petitioner resided in

Sacramento, California.

     From 1984 to 2001, petitioner was employed as an attorney

with various section 501(c)(3) organizations, which organizations

made contributions on petitioner’s behalf to four separate

section 403(b) tax-deferred annuity accounts and to one tax-

deferred simplified employee plan/individual retirement account

(SEP-IRA).

     The employer contributions made to petitioner’s annuity and

SEP-IRA accounts were made with funds which were not included in

petitioner’s taxable income.

     On February 28, 2001, petitioner’s then-current employer

went out of business, and petitioner was laid off.   As a result

of being laid off, in the spring of 2001 petitioner applied for

and received unemployment benefits from the State of California.

     In June of 2001, petitioner began practicing law as a

partner in her own law partnership, which partnership struggled

financially throughout 2001.
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     At various times in 2001, due to her financial difficulties,

petitioner requested and received $17,422 in early distributions

from her four annuity and SEP-IRA accounts, as follows:


        Annuity and SEP          Date of          Amount of
            Accounts          Distribution      Distribution
            First               06/22/01           $ 3,000
            Second              06/22/01             6,000
            Third               06/22/01             5,000
            Fourth              10/01/01             1,422
            SEP-IRA             -–/-–/01             2,000

                          Total distributions      $17,422


     As of the end of 2001, petitioner had not attained the age

of 59-1/2.

     During 2001, petitioner paid a total of $1,809 in

unreimbursed medical expenses, and petitioner’s law partnership

paid on petitioner’s behalf health insurance premiums in the

amount of $3,209.

     On August 15, 2002, petitioner timely filed her 2001

individual Federal income tax return on which return petitioner

reported the total $17,422 in early distributions petitioner

received during 2001 from her annuity and SEP-IRA accounts as

taxable income.

     Petitioner, however, on her 2001 individual Federal income

tax return failed to report, and petitioner failed to pay with

the filing of her return, a section 72(t) 10-percent additional
                              - 4 -
tax on the $17,422 in early distributions petitioner received

from her annuity and SEP-IRA accounts.

     Also, on her 2001 tax return petitioner claimed a section

162(l) ordinary deduction of $1,925, the amount allowable under

section 162(l)(1)(B), relating to the $3,209 in health insurance

premiums paid by petitioner’s law partnership on petitioner’s

behalf.

     On January 23, 2004, respondent mailed to petitioner a

notice of deficiency with respect to petitioner’s 2001 individual

Federal income tax in which respondent determined that petitioner

was liable for the section 72(t) 10-percent additional tax in the

amount of $1,742 on the total $17,422 in early distributions

petitioner received in 2001 from her annuity and her SEP-IRA

accounts.

     At trial, petitioner stipulated the applicability of the

section 72(t) 10-percent additional tax on the $2,000 early

distribution from her SEP-IRA account.

     Petitioner disputes the applicability of the section 72(t)

10-percent additional tax only on the $15,422 in early

distributions petitioner received from her annuity accounts.


                             OPINION

     Generally, under the flush language of section 403(b)

amounts contributed to retirement annuity accounts by tax-exempt

section 501(c)(3) organizations on behalf of their employees are
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not, at the time of the contributions, treated as taxable income

to the employees.

     However, distributions from the annuity accounts to the

employees are treated as taxable income to the employees in the

year of the distributions.   Sec. 403(b)(1) (flush language);

sec. 72(a).

     As indicated, respondent takes the position that the $15,422

petitioner received from her annuity accounts prior to petitioner

attaining the age of 59-1/2 is also subject under section 72(t)

to a 10-percent additional tax.

     Petitioner argues that the distributions she received from

her annuity accounts are governed not by section 72(t) but by

section 72(q), under the latter of which no 10-percent penalty or

additional tax would apply to the early distributions petitioner

received.1

     However, as a result of the section 72(t)(1) cross-reference

to section 4974(c), annuity accounts established and funded by

section 501(c)(3) organizations are explicitly covered by section

72(t), and early distributions from such annuity accounts are

generally subject to a 10-percent additional tax.   In its



     1
       Under the sec. 72(q)(2)(E) cross reference to subsec.
72(e)(5)(D), early distributions from annuity accounts
established and funded by sec. 501(c)(3) organizations are
excepted from the application of the sec. 72(q) 10-percent
penalty provided therein on early distributions. See sec.
72(e)(5)(D)(ii)(III).
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definition of “qualified retirement plans” (to which section

72(t) literally applies) the referenced section 4974(c) includes,

among other things, employee annuity accounts established by

section 501(c)(3) organizations.

     Excepted from the above section 72(t) 10-percent additional

tax on early distributions are certain distributions relating to

medical expenses and health insurance premiums.   See sec.

72(t)(2)(B).   The section 72(t) 10-percent additional tax will

not apply to the extent that the early distributions are equal in

amount to unreimbursed medical expenses including health

insurance premiums which the employees who received the

distributions paid during the year and to the extent that the

medical expenses including health insurance premiums would be

allowable as tax deductions under section 213.    Id.

      The language of section 72(t)(2)(B) provides as

follows:


     Medical expenses. Distributions made to the employee
     * * * to the extent such distributions do not exceed the
     amount allowable as a deduction under section 213 to the
     employee for amounts paid during the taxable year for
     medical care (determined without regard to whether the
     employee itemizes deductions for such taxable year).


     Although in 2001 petitioner’s law partnership paid a total

of $3,209 in health insurance premiums, because petitioner

claimed $1,925 thereof as an ordinary deduction, under section

162(l) only the $1,284 balance of the health insurance premiums
                                     - 7 -
would have been allowable to petitioner for a tax deduction under

section 213.       Sec. 162(l)(3).   Therefore, the section 72(t) 10-

percent additional tax on petitioner’s early distributions from

her annuity accounts will not apply to the extent that

petitioner’s $1,809 in medical expenses and the $1,284 balance in

petitioner’s health insurance premiums not already deducted under

section 162(l) would potentially be allowable to petitioner as a

deduction under section 213; namely, to the extent of $3,093.

        A further limitation however, under section 213 must also be

considered.       Medical expenses and health insurance premiums are

allowable as a deduction from income under section 213 only to

the extent that they exceed a floor of 7.5 percent of an

individual’s adjusted gross income.          See sec. 213(a).

Applying to petitioner the above section 213(a) 7.5-percent

floor, petitioner herein is permitted to except only $267 from

application of the section 72(t)(2)(B) 10-percent additional

tax.2       On brief, respondent already has allowed petitioner to

reduce the amount of her early annuity account distributions to

which the section 72(t) 10-percent additional tax is applicable

by this $267.




        2
       Petitioner’s taxable income of $37,685 times 7.5 equals a
floor of $2,826; petitioner’s adjusted total medical expenses and
health insurance premiums of $3,093 less the $2,826 floor equals
$267.
                                 - 8 -
     Petitioner counters that an additional exception under

section 72(t)(2)(D) should apply to the full extent of the $3,209

in health insurance premiums that petitioner’s law partnership

paid in 2001 on petitioner’s behalf.       However, this limited

exception that petitioner relies on relating to health insurance

premiums applies only to early distributions from individual

retirement accounts such as the early distributions from

petitioner’s SEP-IRA, not to early distributions from annuity

accounts and carries with it many other limitations not satisfied

by the evidence herein.   See sec. 72(t)(2)(D).

     As indicated, petitioner has conceded that the $2,000 early

distribution from her SEP-IRA does not qualify for an exception

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

     To reflect the foregoing,


                                         Decision will be entered

                                 under Rule 155.
