                    T.C. Summary Opinion 2005-172



                       UNITED STATES TAX COURT



         FREDERICK W. HAAS AND DONNA S. HAAS, Petitioners v.
             COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 7524-04S.             Filed November 22, 2005.



     Frederick W. Haas and Donna S. Haas, pro se.

     Pamela L. Mable, for respondent.


     POWELL, Special Trial Judge:    This case was heard pursuant

to the provisions of section 74631 of the Internal Revenue Code

in effect at the time the petition was filed.    The decision to be

entered is not reviewable by any other court, and this opinion

should not be cited as authority.




     1
        Unless otherwise indicated, subsequent section references
are to the Internal Revenue Code in effect for the year in issue.
                               - 2 -

     Respondent determined a deficiency of $6,079 and an

accuracy-related penalty under section 6662(a) of $1,216 in

petitioners’ 2001 Federal income tax.    After concessions,2 the

issue is whether petitioners are liable for a 10-percent

additional tax under section 72(t) of $5,625.    At the time the

petition was filed, petitioners resided in Alpharetta, Georgia.

                            Background

     Petitioner (Frederick W. Haas) was a chemical engineer and

was employed by various chemical companies.    In 1977, he was

employed by British Petroleum (BP) and was employed by BP for a

number of years.   In 1992, he was employed by OHM Remediation

(OHM), a leader in the cleaning up of high hazard chemical

spills.   OHM was bought by IT Corporation (IT) in 1998.

     During his years as a chemical engineer petitioner was

exposed to various chemicals and became sensitive to various

chemicals.   In February 2000, petitioner’s doctor wrote that

petitioner “should avoid direct exposure to known liver toxins.

He may, however, participate in site surveys where the level of

protection recommended is Level C or Level D.”    On April 18,

2001, petitioner was told that his physical examination results

were in the normal limits range, but he was “restricted from



     2
       Petitioners concede that they omitted from gross income
$1,280 (State income tax refund), $26 (interest income from State
Farm Life Insurance Co.), and $254 (interest income from the U.S.
Treasury Dept.). Respondent concedes the sec. 6662(a) penalty.
                               - 3 -

exposure to known liver toxins.”

       In 2002, IT went bankrupt and petitioner's employment was

terminated.   After IT went into bankruptcy, petitioner could not

find employment similar to that which he had.   He attended North

Georgia College and State University, became qualified as a high

school teacher, and became a teacher in August 2003.

     During 2001, petitioner withdrew $56,250 from a section

401(k) retirement plan (the distribution).    At that time he had

not reached age 59-1/2.   Petitioners reported the distribution on

their joint 2001 Federal income tax return, but did not report

any additional tax under section 72(t).   Respondent determined

that the 10-percent additional tax was due.

                            Discussion

     Section 72(t) 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 * * * 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.

                 (2) Subsection not to apply to certain
          distributions.--Except as provided in paragraphs (3)
          and (4), paragraph (1) shall not apply to any of the
          following distributions:
                                   - 4 -

                       (A) In general.--Distributions which are--

           *          *        *           *     *        *         *

                            (iii) attributable to the employee’s
                       being disabled within the meaning of
                       subsection (m)(7) * * *.

     Section 72(m)(7) provides:

          (7) Meaning of disabled.--For purposes of this section,
     an individual shall be considered to be disabled if he is
     unable to engage in any substantial gainful activity by
     reason of any medically determinable physical or mental
     impairment which can be expected to result in death or to be
     of long-continued and indefinate duration. An individual
     shall not be considered to be disabled unless he furnishes
     proof of the existence thereof in such form and manner as
     the Secretary may require.

The regulations provide, inter alia, that to be considered

disabled a person is unable to engage in any “substantial gainful

activity”.     Substantial gainful activity means the activity, or a

comparable activity, in which the individual customarily engaged

prior to the disability.    Sec. 1.72-17(f)(1), Income Tax Regs.

     Petitioners agree that there was a distribution during the

taxable year 2001 and that the distribution was taxable.      The

question solely concerns whether the section 72(t) additional tax

applies.

     Petitioners maintain that petitioner was disabled within the

meaning of section 72(m)(7) during the year of the distribution.

This is somewhat peculiar since petitioner, during the entire

2001 year, was paid a $93,165 salary for his employment with IT.

Furthermore, the reports from his doctors provide that, while he
                                - 5 -

should avoid direct exposure to known liver toxins, he could

participate in site surveys with recommended protection, and his

physical examination results were within normal limits.

     Petitioner points to communications with IT personnel in

March and April of 2000 where it was determined that he should

not go on certain projects.   But also during 2000, he was still

going out on projects.    In 2002, when IT went into bankruptcy and

petitioner became unemployed, we cannot say his unemployment was

due to a disability within the meaning of section 72(m)(7).

Certainly none of his doctors stated that he was disabled.      It

may well be that he had medical problems, but we are not

convinced that these problems could be expected to result in

death or to be of a long-continued duration to keep him from

engaging in his customary or any comparable substantial gainful

activity.

     Petitioners may have been subject to financial hardship

during 2001; there is, however, no exception under section 72(t)

for financial hardship.   This principle has been applied

consistently in cases dealing with premature individual

retirement account distributions.    See Arnold v. Commissioner,

111 T.C. 250, 255 (1998); Gallagher v. Commissioner, T.C. Memo.

2001-34; Deal v. Commissioner, T.C. Memo. 1999-352; Pulliam v.

Commissioner, T.C. Memo. 1996-354.      As the legislative history of

section 408(f), the predecessor to section 72(t), explains, the
                              - 6 -

purpose of the 10-percent additional tax was to discourage early

distributions from retirement plans because “Premature

distributions frustrate the intention of saving for retirement”.

S. Rept. 93-383, at 134 (1974), 1974-3 C.B. (Supp.) 80, 213.

Petitioners are therefore subject to the 10-percent additional

tax under section 72(t) on the distribution.

     Reviewed and adopted as the report of the Small Tax Case

Division.

                                   Decision will be entered for

                              respondent with respect to the

                              deficiency, and decision will be

                              entered for petitioner with respect

                              to the section 6662(a) penalty.
