                        T.C. Memo. 1996-421



                      UNITED STATES TAX COURT



          JOE M. AND PATRICIA M. BROWN, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 9129-93.                  Filed September 18, 1996.



     Robert O. Kazary, for petitioners.

     Alan R. Peregoy, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     DAWSON, Judge:   This case was assigned to Special Trial

Judge Robert N. Armen, Jr., pursuant to the provisions of section

7443A(b)(4) of the Internal Revenue Code of 1986, as amended, and
                                - 2 -

Rules 180, 181, and 183.1   The Court agrees with and adopts the

Opinion of the Special Trial Judge, which is set forth below.

                OPINION OF THE SPECIAL TRIAL JUDGE

     ARMEN, Special Trial Judge:    Respondent determined the

following deficiencies in petitioners' Federal income and excise

taxes for the taxable years 1989 and 1990:

     (1)   For the taxable year 1989, respondent determined a

deficiency in petitioners' income tax, as well as deficiencies in

petitioners' excise taxes under sections 4973 and 4980A,2 in the

total amount of $73,905.    The deficiency in income tax includes

the 10-percent additional tax imposed by section 72(t) on early

distributions from qualified retirement plans.3

     1
       Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for 1989 and 1990, the
taxable years in issue, and all Rule references are to the Tax
Court Rules of Practice and Procedure.
     2
       Sec. 4973 imposes a 6-percent excise tax on excess
contributions to individual retirement accounts. Sec. 4980A
imposes a 15-percent excise tax on excess distributions from
qualified retirement plans. Both of these taxes are included
within ch. 43 of the I.R.C. They are therefore subject to the
deficiency procedures set forth in subch. B of ch. 63 of the
I.R.C. See sec. 6211(a).
     3
       The notice of deficiency is not a model of clarity.
However, the deficiencies determined therein for the taxable year
1989 are as follows:

   Deficiency in income tax
     (1) Regular income tax under sec. 1     $38,233
     (2) Additional tax under sec. 72(t)      22,781      $61,014

   Deficiencies in excise taxes
     (1) Under sec. 4973                                   9,000
     (2) Under sec. 4980A                                  3,891
                                   - 3 -

     (2)    For the taxable year 1990, respondent determined a

deficiency in petitioners' income tax, as well as a deficiency in

petitioners' excise tax under section 4980A, in the total amount

of $15,669.    The 10-percent additional tax imposed by section

72(t) constitutes the deficiency in income tax.4

     In her amended answer, respondent asserted deficiencies in

petitioners' income tax and excise tax under section 4980A for

the taxable year 1990 in the total amount of $19,394, an increase

in the amount of $3,725 over the total determined in the notice

of deficiency.5




   Total deficiencies in income and excise taxes            73,905
     4
       Again, the notice of deficiency is not a model of clarity.
However, the deficiencies determined therein for the taxable year
1990 are as follows:

   Deficiency in income tax
     -- under sec. 72(t)                                  $15,446

   Deficiency in excise tax
     -- under sec. 4980A                                      223

   Total deficiencies in income and excise taxes           15,669
     5
         The increase consists of the following:

                                Deficiencies
Income/excise tax     Statutory notice   Amended answer    Increase

Section 1                  ---                $3,302        $3,302
Section 72(t)            $15,446              15,728           282
Section 4980A                223                 364           141
                         $15,669             $19,394        $3,725
                              - 4 -

     After concessions by the parties,6 the issues for decision

are as follows:

     (1) Whether the Transfer Refund distribution received by

petitioner Joe M. Brown in 1989 from the Maryland State

Employees' Retirement System qualifies as a partial distribution

eligible for tax-free rollover treatment under section 402(a)(5);

     (2) whether petitioners must include in their gross income

for 1990, the amount distributed from petitioner's individual

retirement account during that year;

     (3) whether petitioners are liable for the 10-percent

additional tax under section 72(t) for 1989 and 1990; and

     (4) whether petitioner Joe M. Brown is liable for the 6-

percent excise tax under section 4973 for 1989 and the 15-percent

excise tax under 4980A for 1989 and 1990.7

     Generally speaking, the resolution of the foregoing issues

turns on whether petitioner Joe M. Brown was disabled, within the

meaning of section 72(m)(7), immediately before receiving the



     6
       For 1989, respondent concedes that the 6-percent excise
tax imposed by sec. 4973 should be calculated based on an excess
contribution of $148,000 rather than $150,000. Respondent also
concedes that petitioner Patricia M. Brown is not liable for: (1)
The excise taxes under secs. 4973 and 4980A for 1989, or (2) the
excise tax under sec. 4980A for 1990.
     For 1990, petitioners concede: (1) They failed to report
interest income from the First National Bank of Maryland in the
amount of $512, and (2) they are only entitled to a deduction for
mortgage interest in the amount of $3,262, rather than in the
amount of $5,480, as claimed on their return for that year.
     7
       See supra note 6 regarding respondent's concessions of the
excise taxes as to petitioner Patricia M. Brown.
                               - 5 -

Transfer Refund distribution from the Maryland State Employees'

Retirement System in 1989.

                         FINDINGS OF FACT

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

found.   Petitioners resided in Oldtown, Maryland, at the time

that their petition was filed with the Court.

General Background

     Petitioner Joe M. Brown (petitioner) was born in 1937.      He

was hired by the Maryland State Highway Administration (Highway

Administration) in 1956, and he worked for the Highway

Administration until he retired, effective May 1, 1991.

     For most of his career with the Highway Administration,

petitioner was employed as an engineering technician.    As an

engineering technician, petitioner worked as a project engineer,

responsible for the construction of highways and bridges.

Petitioner's principal focus, at least during the latter stages

of his career, was the construction of bridges.

     A project engineer is the State's construction engineering

representative who is directly in charge of a particular road-

building or bridge-building project.   The State considers a

project engineer to be a key person of the team assigned to such

a project.

     The responsibilities of a project engineer include many

duties that are supervisory in nature.   For example, a project

engineer must supervise the activities and performance of
                                - 6 -

personnel to ensure that delegated tasks are satisfactorily

performed.   Additionally, a project engineer must ensure that

appropriate personnel are on duty at all required times and that

they carry out their work assignments.   A project engineer is

also responsible for recordkeeping and report preparation.

     Project engineers spend anywhere from 50 to 70 percent of

their time working "on site".   In order to perform their duties

on site, the project engineer must be able to move freely about a

construction site.   Such mobility demands considerable walking

and climbing (e.g., up and down ladders and hillsides, into and

out of operating machinery and motor vehicles, on top of building

supplies, and over various obstructions).   In addition, "site

work" requires the project engineer to lift heavy objects and to

"walk beams", particularly when bridge construction is involved.

     Petitioner was competent as a project engineer, having a

good combination of professional skills and practical experience.

Moreover, he enjoyed a good reputation as a hard-worker and a

"can do" person.   He was also dependable and always available to

help others.   Not surprisingly, petitioner was popular among his

colleagues; he was equally respected and well-liked by both his

superiors and his subordinates.

     Petitioner received superior job evaluations on his annual

efficiency rating reports for the calendar years 1989 and 1990.
                               - 7 -

 Petitioner's Transfer Refund Distribution

     For most of his employment career, petitioner was a member

of the Maryland State Employees' Retirement System (the

Retirement System).   However, on October 6, 1989, petitioner

elected to transfer to the Maryland State Employees' Pension

System (the Pension System).   Petitioner's election to transfer

from the Retirement System to the Pension System was effective

October 1, 1989.8

     The Retirement System is a qualified defined benefit plan

under section 401(a) that requires mandatory nondeductible

employee contributions.   The Pension System is also a qualified

defined benefit plan under section 401(a), but generally does not

require mandatory nondeductible employee contributions.   The

State of Maryland contributes to both the Retirement System and

the Pension System on behalf of the members of those systems.

The trusts maintained as part of the Retirement System and the

Pension System are both exempt from taxation under section

501(a).




     8
       For a discussion of the Retirement System and the Pension
System, see generally Hylton v. Commissioner, T.C. Memo. 1995-27;
Hoppe v. Commissioner, T.C. Memo. 1994-635; Hamilton v.
Commissioner, T.C. Memo. 1994-633; Maryland State Teachers
Association v. Hughes, 594 F. Supp. 1353, 1357-1358 (D. Md.
1984); Conway v. United States, 908 F. Supp. 292 (D. Md. 1995).
                                - 8 -

     As previously indicated, petitioner elected to transfer from

the Retirement System to the Pension System on October 6, 1989.

On the application to transfer, petitioner specifically opted to

receive, in a lump sum, the distribution to which he was entitled

upon transferring from the Retirement System to the Pension

System.

     As a result of the election to transfer, petitioner received

a distribution (the Transfer Refund) from the Retirement System

in the amount of $244,151.04.   Petitioner received the Transfer

Refund in the form of a check dated October 31, 1989, from

Maryland State Retirement Systems.

     Petitioner's Transfer Refund consisted of $16,338.93 in

previously taxed contributions made by petitioner during his

employment tenure with the State, $1,005.11 of employer "pick-up

contributions",9 and $226,807 of earnings in the form of

interest.    The earnings and "pick-up contributions", which total

$227,812.11, constitute the taxable portion of the Transfer

Refund.

     At the time that petitioner transferred from the Retirement

System to the Pension System and received the Transfer Refund, he

had attained the age of 52.    If petitioner had not transferred to

the Pension System but had remained a member of the Retirement

System, he would have been entitled to retire and receive a


     9
         See sec. 414(h)(2).
                               - 9 -

normal service retirement benefit, including a regular monthly

annuity, under the Retirement System.   He would not have been

entitled to receive a Transfer Refund, however, because a

Transfer Refund is payable only as a consequence of transferring

from the Retirement System to the Pension System.

     Also as a consequence of transferring from the Retirement

System to the Pension System, petitioner became a member of the

Pension System.   As a member of the Pension System, petitioner

became entitled (when he chose to retire) to receive a retirement

benefit based upon his salary and his creditable years of

service, specifically including those years of creditable service

recognized under the Retirement System.10   However, because

petitioner received the Transfer Refund on account of

transferring from the Retirement System to the Pension System,

the monthly annuity that petitioner would receive when he chose

to retire from the Pension System was less than the monthly

annuity that he would have received if he had not transferred to

the Pension System but had retired under the Retirement System.

Rollover of Petitioner's Transfer Refund

     In late October or early November 1989, immediately after

receiving the Transfer Refund, petitioner rolled over $150,000



     10
        Petitioner became a member of the Retirement System when
he was hired by the Highway Administration in 1956. He remained
a member of the Retirement System for most of his employment
career.
                                - 10 -

thereof into an IRA with First National Bank of Maryland (First

National).

Petitioner's IRA Distribution

     Sometime after petitioner had effected the $150,000 rollover

of his Transfer Refund, petitioner's former supervisor informed

petitioner that the Transfer Refund might not qualify for tax-

free rollover treatment.    Accordingly, on or about August 8,

1990, petitioner withdrew $157,174 from his IRA with First

National.    At the time that petitioner received this

distribution, he had not quite attained the age of 53.

Petitioner's Health And His Employment

     Petitioner has had a history of health problems.    When he

was about 1 year old, petitioner contracted polio and suffered

severe atrophy of his right leg.    As a consequence, petitioner

has suffered severe degenerative joint disease of the spine and

left knee.

     The strain on petitioner's body, and in particular the

strain on petitioner's right leg and spine, has been exacerbated

by petitioner's obesity.    His weight has exceeded 300 pounds for

substantial periods of his life.    In October 1989 his weight

exceeded 290 pounds.

     Petitioner developed severe lower back problems, which

caused considerable pain, because of the polio-induced atrophy of

his right leg.    In 1977 petitioner was forced to undergo back

surgery, and vertebrae in his spine were fused in order to manage
                               - 11 -

his pain.    For some time thereafter, petitioner was temporarily

paralyzed.

     Petitioner also developed osteoarthritis, primarily in the

lower back related to the fusion of vertebrae and in his knees.

By mid-1987, moderate degenerative changes were apparent in

petitioner's mid- and lower thoracic spine.   By 1990 the

degenerative changes were apparent throughout petitioner's spine.

     In September 1978, Maryland State Retirement Systems granted

petitioner a disability retirement allowance.    However, after a

discussion with his wife, petitioner decided not to accept any

"freeloads".    Petitioner struggled to rehabilitate himself, and

he eventually returned to work as a project engineer with the

Highway Administration.

     In early 1987, petitioner's left knee "went out completely".

Sometime thereafter, but before 1989, doctors replaced

petitioner's left knee.   However, within 9 months, the

replacement knee "broke completely out of [the] bone".

Petitioner had difficulty walking after the replacement knee

broke.   Accordingly, on August 3, 1990, doctors replaced

petitioner's left knee for the second time.   Petitioner needed to

use crutches for 6 months following his second knee operation.

     Petitioner has also had a clinically significant history of

hypertension.   This condition has occasioned the postponement of

scheduled surgery on two occasions.
                               - 12 -

     At various times and for extended periods, petitioner has

experienced pain severe enough to warrant prescription-strength

analgesics.   Such analgesics have not always been effective to

manage petitioner's pain.

     Petitioner's medical condition justified the issuance of

handicapped tags and permit by the Maryland department of motor

vehicles.   However, by no later than February 1991, petitioner's

ability even to drive a motor vehicle was very limited.

     Notwithstanding petitioner's physical impairment as of

October 1989, petitioner retained his position as project

engineer and remained "on the job" until December 1990, at which

time he went on leave, never to return to work.    During this

period, petitioner struggled to perform his job.    Although he

could no longer climb or "walk beams", he attempted to "control

his job" by telephone from home and he attempted to work "on

site" by driving along, or by being driven along, in a vehicle.

     During 1989, petitioner earned 120 hours of sick leave but

did not use any amount thereof.    During 1990, petitioner also

earned 120 hours of sick leave but did not use any amount

thereof.    However, it was not unusual for petitioner to use

annual leave (vacation days) in lieu of sick leave.    Thus, for

example, petitioner used annual leave for his knee replacement

surgery on August 3, 1990, and for the two-week period thereafter

while he convalesced.   Petitioner used all of his 200 hours of
                              - 13 -

annual leave in 1990.   In 1989, he used 84 hours of annual leave,

mostly in the final two months of the year.

Events Leading to Petitioner's Retirement

     On December 26, 1990, petitioner went on leave and never

returned to work.   Petitioner exhausted his accumulated annual

and sick leave before his retirement.    Petitioner chose to

exhaust his leave before retiring because it was both permitted

and financially advantageous to do so.

     On February 14, 1991, petitioner authorized his physician to

submit a medical statement of disability to the Medical Board of

the State of Maryland (the Medical Board).    Petitioner also

submitted a handwritten statement at that time, which statement

concluded as follows:

          As when the State of Maryland gave a handi-cap boy
     a wonderful job in 1956, in 1977 I said I was not ready
     to give up.
          But in 1991, I don't think I have no other choice.

     On March 21, 1991, the Medical Board recommended that

petitioner be approved for ordinary disability retirement.      The

Medical Board's report stated as follows:

     It is the recommendation of the Medical Board that
     [petitioner] be approved ordinary disability due to
     osteoarthritis of the spine, hypertensive
     cardiovascular disease, old polio with atrophy of the
     right leg and obesity.

Petitioner's Retirement

     Even though petitioner was approved for an ordinary

disability retirement, he ultimately decided to apply for a
                              - 14 -

normal service retirement.   In view of the fact that petitioner

had worked for the Highway Administration for over 35 years and

had previously received a Transfer Refund, retirement on a

"normal" basis, rather than on a disability basis, was more

advantageous.   Accordingly, on April 22, 1991, petitioner applied

to the Pension System for a normal service retirement, effective

May 1, 1991.    Petitioner's application for retirement was

approved, and petitioner retired from the Highway Administration

on May 1, 1991.

     As a result of his retirement, petitioner is receiving a

normal service retirement benefit from the Pension System based

upon his salary and his creditable years of service, specifically

including those years of creditable service recognized under the

Retirement System.   However, as previously indicated, because

petitioner received the Transfer Refund on account of

transferring from the Retirement System to the Pension System,

petitioner's monthly annuity is less than the monthly annuity

that he would have received if he had not transferred to the

Pension System but had retired under the Retirement System.

     On November 19, 1991, the Social Security Administration

(SSA) notified petitioner that he was entitled to disability

benefits because of SSA's determination that petitioner had

become disabled on December 22, 1990.
                              - 15 -

Petitioners' 1989 Income Tax Return

     On their income tax return for 1989, petitioners disclosed

the receipt of the taxable portion of the Transfer Refund; i.e.,

$227,812.   Of this amount, petitioners reported that $77,812 was

taxable and that the balance, or $150,000, had been rolled over

tax-free into an IRA.

     Petitioners attached Form 5329 "Return for Additional Taxes

Attributable to Qualified Retirement Plans (Including IRAs)

Annuities, and Modified Endowment Contracts" to their 1989

return.   In Part II of this form, petitioners reported liability

in the amount of $7,781 for the additional tax under section

72(t); i.e., 10 percent of $77,812, the amount of the Transfer

Refund that petitioners had included in gross income.

Respondent's Deficiency Determination For 1989

     In the notice of deficiency for 1989, respondent determined

that petitioner's Transfer Refund was not eligible for tax-free

rollover treatment under section 402(a)(5).   Respondent also

determined that, by virtue of sections 402(a)(1) and 72, the

taxable portion of the Transfer Refund (i.e., $227,812.11) was

includable in petitioners' gross income for 1989.   Accordingly,

because petitioners had previously reported that $77,812 of such

amount was taxable and had attempted to roll over only the

balance (i.e., $150,000), respondent increased petitioners'
                                - 16 -

taxable income by $150,000.11   As corollaries to this

determination, respondent also determined that petitioners are

liable for: (1) The additional tax under section 72(t) for a

premature distribution from the Retirement System; (2) the excise

tax under section 4980A for an excess distribution from the

Retirement System; and (3) the excise tax under section 4973 for

an excess contribution to petitioner's IRA with First National.12

Petitioners' 1990 Income Tax Return

     On their income tax return for 1990, petitioners reported

taxable interest in the total amount of $154,613.   Of this

amount, $150,000 represented a distribution from petitioner's IRA

with First National, which petitioners characterized as an early

withdrawal.   The balance represented interest income from

unrelated bank accounts.


     11
       The notice of deficiency, which was issued by
respondent's Appeals Office in Baltimore, Maryland, states as
follows:

     Your gross income has been increased to include the
     amount of $150,000 you received as payment from your
     qualified retirement plan because you received the
     payment before you reached aged [sic] 59 1/2 or became
     disabled. Accordingly, taxable income is increased
     $150,000.

Respondent repeatedly cross-referenced the foregoing paragraph by
way of explanation for most of the other adjustments made in the
notice of deficiency.
     12
       See supra note 6 regarding respondent's concession of the
excise taxes as to petitioner Patricia M. Brown.
                               - 17 -

Respondent's Deficiency Determination For 1990

     In the notice of deficiency for 1990, respondent determined

that petitioners are liable for: (1) The additional tax under

section 72(t) for a premature distribution from petitioner's IRA

with First National, and (2) the excise tax under section 4980A

for an excess distribution from such IRA.13

Respondent's Claim For An Increased Deficiency For 1990

     In her amended answer, respondent asserted deficiencies in

petitioners' income tax and excise tax under section 4980A for

the taxable year 1990 in the total amount of $19,394, an increase

of $3,725 over the total determined in the notice of

deficiency.14   The increase is principally attributable to the

fact that petitioner withdrew $157,174 from his IRA with First

National in 1990 but only reported $150,000 thereof on his 1990

income tax return.   Correlative adjustments were asserted

regarding the additional tax under section 72(t) and the excise

tax under section 4980A.15


     13
       See supra note 6 regarding respondent's concession of the
excise tax as to petitioner Patricia M. Brown.
     14
       See supra note 5 for a breakdown of the increase by the
type of tax involved.
     15
       Other adjustments asserted by respondent that served to
increase petitioners' income tax include: (1) The understatement
of interest income in the amount of $512, (2) the overstatement
of a deduction for mortgage interest in the amount of $2,218, and
(3) the understatement of additional income from Maryland State
                               - 18 -

Petitioner's Physical Condition At Trial

      Petitioner's physical condition at the time of trial was

essentially the same as petitioner's physical condition

immediately before receiving the Transfer Refund in October 1989.

      At trial, petitioner was unable to stand with reasonable

effort and was unable to assume the witness stand without risk of

safety to himself.    The evidence of significant physical pain was

apparent from petitioner's demeanor.

                      ULTIMATE FINDING OF FACT

      Petitioner was disabled within the meaning of section

72(m)(7) immediately before receiving the Transfer Refund in

October 1989.

                               OPINION

I.   Rollover Issue

      We must first decide whether the Transfer Refund received by

petitioner in 1989 from the Retirement System qualifies for tax-

free rollover treatment under section 402(a)(5).   The resolution




Retirement Systems in the amount of $103. Petitioners have
conceded the first two adjustments. See supra note 6. However,
respondent did not offer any evidence at trial regarding the
third adjustment and therefore did not carry her burden of proof
in respect of that adjustment or the correlative adjustments
under secs. 72(t), 4980A. Accordingly, petitioners are not
liable for any increase in tax (whether under secs. 1, 72(t), or
4980A) attributable to the $103 adjustment related to additional
income from Maryland State Retirement Systems.
                              - 19 -

of this issue turns on whether the Transfer Refund constitutes a

"partial distribution", as defined by section 402(a)(5)(E)(v).16

     A "partial distribution" is defined as "any distribution to

an employee of all or any portion of the balance to the credit of

such employee in a qualified trust; except that such term shall

not include any distribution which is a qualified total

distribution."   Sec. 402(a)(5)(E)(v).   Further, a partial

distribution must be "payable as provided in clause (i), (iii),

or (iv) of subsection (e)(4)(A) (without regard to the second

sentence thereof)".   Sec. 402(a)(5)(D)(i)(I).17

     As relevant herein, section 402(e)(4)(A) provides that a

distribution must be made either "(i) on account of the



     16
       The Transfer Refund would also qualify for tax-free
rollover treatment if it were a "qualified total distribution",
as defined by sec. 402(a)(5)(E)(i). In this case, petitioners do
not contend that the Transfer Refund was a qualified total
distribution. In any event, the Transfer Refund was not a
qualified total distribution. See Wittstadt v. Commissioner,
T.C. Memo. 1995-492, Humberson v. Commissioner, T.C. Memo. 1995-
470; Pumphrey v. Commissioner, T.C. Memo 1995-469; Dorsey v.
Commissioner, T.C. Memo. 1995-97, affd. without published opinion
91 F.3d 129 (4th Cir. 1996); Hylton v. Commissioner, T.C. Memo.
1995-27.
     17
       In order to qualify as a "partial distribution", sec.
402(a)(5)(D)(i)(I) also requires that the distribution "is of an
amount equal to at least 50 percent of the balance to the credit
of the employee in a qualified trust". This additional
requirement was not raised in the notice of deficiency as a
reason for the adjustment to petitioners' income for 1989, see
supra note 11, nor was it raised by respondent in either her
trial memorandum or at trial in her counsel's opening statement.
                               - 20 -

employee's death", "(iii) on account of the employee's separation

from the service", or "(iv) after the employee has become

disabled (within the meaning of section 72(m)(7))".   Petitioners

do not contend that the Transfer Refund was received either on

account of petitioner's death or on account of petitioner's

separation from service.18   Rather, petitioners contend that the

Transfer Refund was received "after * * * [petitioner had] become

disabled (within the meaning of section 72(m)(7))" under section

402(e)(4)(A)(iv).   Respondent contends to the contrary.19

     Our analysis necessarily begins with section 72(m)(7).   That

section is explicit as to the meaning of the term "disabled".

Under section 72(m)(7), an individual is considered 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 a



     18
       In other cases we have held that a Transfer Refund is not
received on account of a taxpayer's separation from the service
but rather on account of a taxpayer's election to transfer from
the Retirement System to the Pension System. E.g., Dorsey v.
Commissioner, supra; Hylton v. Commissioner, T.C. Memo. 1995-27.
But see Adler v. Commissioner, 86 F.3d 378 (4th Cir. 1996), revg.
and remanding T.C. Memo. 1995-148.
     19
       As previously noted, respondent has limited her
contention regarding whether the Transfer Refund constitutes a
partial distribution to the issue of petitioner's disability.
See supra note 17. Accordingly, we consider such issue to be
dispositive of whether the Transfer Refund constitutes a partial
distribution.
                               - 21 -

long-continued and indefinite duration."     See Dwyer v.

Commissioner, 106 T.C. 337 (1996).      The regulations provide that

the determination is to be made on the basis of all the facts.

See sec. 1.72-17A(f)(2), Income Tax Regs.     The regulations also

set forth general considerations upon which a determination of

disability is to be made.   See sec. 1.72-17A(f), Income Tax Regs.

     In determining whether an individual's infirmity makes the

individual unable to engage in any substantial gainful activity,

primary consideration is to be given to the nature and severity

of the impairment.   Sec. 1.72-17A(f)(1), Income Tax Regs.

However, the regulations emphasize that the "substantial gainful

activity" to which section 72(m)(7) refers is the activity, or a

comparable activity, in which the individual customarily engaged

prior to the impairment.    Sec. 1.72-17A(f)(2), Income Tax Regs.

Therefore, the impairment must be evaluated in terms of whether

it does, in fact, prevent the individual from engaging in his

customary, or any comparable, substantial gainful activity.      Id.

More specifically, the regulations provide that an individual

will not be deemed disabled if "with reasonable effort and safety

to himself, the impairment can be diminished to the extent that

the individual will not be prevented by the impairment from

engaging in his customary or any comparable substantial gainful

activity".   Sec. 1.72-17A(f)(4), Income Tax Regs.
                               - 22 -

     Although we think that the issue is very close, we hold that

petitioners have carried their burden of proof.

     In advocating her position, respondent relies heavily on the

fact that petitioner did not use any sick leave in either 1989 or

1990.   However, it was not unusual for petitioner to use annual

leave in lieu of sick leave, as evidenced by the fact that

petitioner used annual leave for his knee replacement surgery in

August 1990 and for the convalescent period thereafter.      We also

note that petitioner used all of his annual leave in 1990, as

well as a substantial portion thereof in 1989, mostly in the

final 2 months of that year.

     Respondent also relies heavily on the fact that petitioner

remained "on the job" until December 1990, at which time he went

on leave, never to return to work.      In a related vein, respondent

points to the superior job evaluations that petitioner received

for 1989 and 1990.

     We observe, however, that petitioner did not receive his

Transfer Refund until late October 1989, almost 10 months into

the rating period for 1989.    Accordingly, a superior job

evaluation for 1989 is not incompatible with the fact of

disability immediately before the receipt of the Transfer Refund.

     Petitioner's job evaluation for 1990 is another matter, and

we can appreciate why respondent focuses on it.     However, we are
                               - 23 -

reminded that petitioner's position as a project engineer

required that he be substantially mobile and physically fit in

order to perform his duties.   Further, the record clearly

demonstrates that as of October 1989, petitioner was unable to

climb ladders or otherwise, lift heavy objects, or "walk beams".

In short, based on the particular facts and circumstances of this

case, we find the content of the job evaluation report for 1990

to be contrary to the weight of the evidence.   Moreover, the

record demonstrates that when petitioner's disability became such

that petitioner could no longer perform his job but he was

mentally not ready to give up, his subordinates and superiors

accommodated him however they could.

     As reflected in our findings of fact, petitioner's physical

condition at the time of trial was essentially the same as it was

immediately before receiving the Transfer Refund in October 1989.

In our judgment, and based on our observations over the course of

an afternoon, petitioner was disabled at the time of trial.

Thus, suffice it to say that petitioner was neither mobile nor

fit immediately before receiving the Transfer Refund in October

1989.   His physical impairment, which was of a long-continued and

indefinite duration, precluded him from engaging in his customary

or any comparable substantial gainful activity.
                              - 24 -

     In view of the foregoing, we hold that petitioner was

disabled, within the meaning of section 72(m)(7), immediately

before receiving the Transfer Refund.   Accordingly, the Transfer

Refund qualifies as a partial distribution and is eligible for

tax-free rollover treatment under section 402(a)(5)(D).

Petitioners are therefore not required to include in their gross

income for 1989 the $150,000 that was not previously included

therein.

II. The IRA Distribution Issue

     On or about August 8, 1990, petitioner withdrew $157,174

from his IRA with First National.   Petitioners reported $150,000

of this distribution in their gross income for 1990.

     Respondent contends that for 1990, petitioners failed to

include in their gross income $7,174 of petitioner's IRA

distribution from First National.   We do not understand

petitioners to argue that the amount of the IRA distribution in

excess of $150,000; i.e., $7,174, is not includable in their

gross income for 1990.   In any event, based on the record as a

whole, we are satisfied that the $7,174 represents taxable

earnings from petitioner's IRA and that such amount is properly

includable in petitioners' gross income for 1990.   Sec.

408(d)(1).
                               - 25 -

     In view of our conclusion, supra, that petitioner's Transfer

Refund qualifies for tax-free rollover treatment in 1989 under

section 402(a)(5)(D), we understand petitioners to abandon what

must be viewed as their alternative contentions concerning the

alleged excludibility of $150,000 of petitioner's IRA

distribution from gross income for 1990.   In any event, such

amount is properly includable in petitioners' gross income for

that year.   Sec. 408(d)(1).

III. Section 72(t) Additional Tax Issue

     We turn next to respondent's determination that petitioners

are liable for the additional tax under section 72(t) for 1989

and 1990.

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

early distributions from qualified retirement plans.    Paragraph

(1), which imposes the tax, provides in relevant part as follows:

          (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.

     Pursuant to section 4974(c), the term "qualified retirement

plan" includes plans described in section 401(a) and individual

retirement accounts described in section 408(a).   The Retirement

System from which petitioner received his Transfer Refund in 1989
                              - 26 -

is a qualified plan under section 401(a).   Additionally, the

account from which petitioner received his distribution in 1990

was a valid IRA under section 408(a).   Accordingly, absent an

applicable exception, the additional tax under section 72(t)(1)

applies to the distributions received by petitioners in both 1989

and 1990.

      By virtue of paragraph (2)(A)(iii) of section 72(t), the 10-

percent additional tax does not apply, inter alia, to

distributions attributable to the taxpayer's being disabled

(within the meaning of section 72(m)(7)).

      We have already decided that petitioner was disabled within

the meaning of section 72(m)(7) when he received the Transfer

Refund.   Accordingly, petitioners are not liable for the

additional tax imposed by section 72(t) for either of the taxable

years in issue.

IV.   Excise Tax Issues

      We turn next to respondent's excise tax determinations.    We

begin with section 4973.

      Section 4973

      Section 4973(a) imposes a 6-percent excise tax on excess

contributions to an IRA.   As relevant herein, an "excess

contribution" is the amount in excess of the amount allowable as

a deduction under section 219 (computed without regard to section
                               - 27 -

219(g)), exclusive of amounts properly rolled over tax free.

Sec. 4973(b).

     In view of our conclusion, supra, that petitioner's Transfer

Refund qualifies for tax-free rollover treatment in 1989 under

section 402(a)(5)(D), petitioner is not liable for the excise tax

under section 4973(a).

     Section 4980A

     Finally, we turn to section 4980A.    Section 4980A(a) imposes

a 15-percent excise tax on excess distributions from qualified

retirement plans.    As relevant herein, an "excess distribution"

is defined as the aggregate amount of the retirement

distributions with respect to any individual during any calendar

year to the extent that such amount exceeds $150,000.    Sec.

4980A(c)(1).    However, pursuant to section 4980A(c)(2)(D), a

retirement distribution is not an "excess distribution" if the

retirement distribution is not included in gross income by reason

of a rollover contribution.

     In view of our conclusion, supra, that petitioner's Transfer

Refund qualifies for tax-free rollover treatment in 1989 under

section 402(a)(5)(D), petitioner is not liable for the excise tax

imposed by section 4980A for 1989.

     For 1990, petitioner withdrew an amount in excess of

$150,000 from his IRA with First National.    Accordingly,
                              - 28 -

petitioner is liable for the excise tax imposed by section 4980A

for 1990.20

V.Conclusion

     In order to give effect to our disposition of the disputed

issues, as well as the parties' concessions,21



                                        Decision will be entered

                                   under Rule 155.




     20
       See supra note 15 and accompanying text. Further, we
note that petitioner is not entitled to the offset provided by
sec. 4980A(b) in view of our conclusion, supra, that petitioners
are not liable for the 10-percent additional tax under sec.
72(t).
     21
          See supra note 6.
