                    T.C. Summary Opinion 2003-53



                      UNITED STATES TAX COURT



         BRIAN P. KEELEY AND MARY G. KEELEY, Petitioners v.
            COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 1019-02S.               Filed May 15, 2003.


     Brian P. Keeley and Mary G. Keeley, pro sese.

     David S. Weiner, for respondent.



     ARMEN, Special Trial Judge:    This case was heard pursuant to

the provisions of section 7463 of the Internal Revenue Code in

effect at the time that the petition was filed.1   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, all subsequent section
references are to the Internal Revenue Code in effect for the
taxable years in issue, and all Rule references are to the Tax
Court Rules of Practice and Procedure.
                               - 2 -

     Respondent determined deficiencies in petitioners’ Federal

income taxes for the taxable years 1997 and 1998 in the amounts

of $5,400 and $1,228, respectively.2

     After a concession by respondent,3 the issue for decision is

whether petitioners are liable under section 72(t) for the 10-

percent additional tax on early distributions from qualified

retirement plans.   We hold that they are.

Background

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

found.   Petitioners resided in Chicago, Illinois, at the time

that their petition was filed with the Court.

     Petitioner Mary G. Keeley (Mrs. Keeley) worked part-time for

the West Chicago School District in 1997 for a time period not

disclosed in the record.   From the end of December 1997 to the

present, Mrs. Keeley has been working for Tyndale House

Publishers.

     Petitioner Brian P. Keeley (Mr. Keeley) worked as a leasing

manager with Hughes Enterprises, a commercial laundry equipment

distributor, for some time until August 1996.   In August 1996,

Mr. Keeley left Hughes Enterprises because he was dissatisfied

with the annual reduction in his base salary and commission



     2
         All numbers are rounded to the nearest dollar.
     3
        At trial, respondent conceded the erroneous disallowance
of a $400 child tax credit that petitioners claimed in 1998.
                               - 3 -

schedule over the previous 3 to 4 years.   Because of his past

experience in the insurance industry, Mr. Keeley decided to

become a self-employed insurance broker.   In September 1996, Mr.

Keeley began to work on a commission basis as an insurance broker

with New York Life Insurance Co. (New York Life).    By mid-1997,

Mr. Keeley stopped working as an insurance broker because he

failed to meet New York Life’s application approval rate.

     Around this time, Mr. Keeley suffered a mental breakdown as

a result of “not being able to support the family, having what I

felt was a good situation turn into what was a very bad situation

at that point in time, that being the self-employment

opportunity”.   In addition, Mrs. Keeley thought that Mr. Keeley’s

depression “robbed him of the confidence to do his job

successfully” such that “by March [of 1997], he could not

function on the job at all” and that “during the summer and early

autumn, he spent a good part of the day in bed”.    Thus, Mr.

Keeley became unemployed for several months, except for small

jobs, e.g., delivering newspapers and collecting donations.

     As a result of petitioners’ financial hardship,4    Mr. Keeley

withdrew funds in 1997 from his individual retirement account



     4
        Mr. Keeley testified that in 1997 his income declined to
$3,000. We note, however, that on their 1997 return, petitioners
reported gross wages of $15,705 ($3,115 of which was earned by
Mr. Keeley), and on a Schedule C, Profit or Loss From Business,
attached to their return, Mr. Keeley reported gross receipts of
$13,140 and a net profit of $4,766.
                                - 4 -

(IRA) with National Financial Services Co. (National) in the

amount of $54,000.   At the time, Mr. Keeley was 52 years of age.

In December 1997, Mr. Keeley started work as a sales

representative at Advanced Telecommunications, Inc. (ATI) and

remains currently employed there.    Mr. Keeley earned $3,115 with

ATI in 1997 and $44,352 in 1998.

     In 1998, Mr. Keeley withdrew the remaining IRA balance at

National in the amount of $5,280.    Mrs. Keeley also withdrew the

balance of her Illinois Municipal Retirement Fund5 (pension) in

the amount of $2,998.    At the time, Mrs. Keeley was 52 years of

age and not disabled.    Petitioners used the entire balance in the

National and pension accounts “to survive and pay our bills”,

e.g., their mortgage and daughter’s college loans.

     With respect to Mr. Keeley’s medical history, he has been

diagnosed with anxiety, depression, and panic disorder for which

he has been receiving treatment from his internist, Scott

McNaughton, M.D. (Dr. McNaughton).      According to Dr. McNaughton,

Mr. Keeley “has been treated with medication in 1994 and required

several physician visits for follow up and medicine adjustment

during 1997 and 1998”.

     In addition, Mr. Keeley had been seeing David E. Dillon,



     5
        Neither party has raised any issue regarding the status
of Mrs. Keeley’s retirement fund as a “qualified retirement
plan”, see sec. 4974(c)(1), and the record provides no basis for
us to conclude that it was not.
                               - 5 -

Ed.D. (Dr. Dillon), a licensed psychologist, to deal with his

depression and various childhood issues.6   During the years in

issue, Mr. Keeley had at least one or two sessions monthly with

Dr. Dillon.7   According to a letter dated October 24, 2000, from

Dr. Dillon:

          [Mr. Keeley] was under my care as a psychologist,
     treating moderately severe symptoms associated with
     depression. Mr. Keeley reported feeling depressed and
     exhibited symptoms of low energy, sadness, somatic
     complaints, anhedonia, and hopelessness, all of which
     are consistent with a depressed condition. Depression
     lasting longer than two weeks is often considered
     serious enough for medical and psychological
     intervention.

          Such a depression is often triggered by a
     combination of serious social and/or career
     disappointments coupled with an innate tendency toward
     depression. Mr. Keeley suffered two serious set backs
     which appear to account for the onset of depression: 1)
     a change in jobs following several alterations of tasks
     and financial remuneration at Hughes Enterprises; 2)
     although successful as a New York Life agent, Mr.
     Keeley was unable to sell enough insurance to overcome
     the company’s rejection rate. After this he floundered
     in one menial job after another until his present
     employment with ATI. At the time, neither he nor I
     could have predicted how long these conditions and his


     6
        The record does not disclose when Mr. Keeley initiated
treatment with Dr. Dillon. However, Mr. Keeley submitted to the
Court copies of Dr. Dillon’s bills dating as far back as May 17,
1996.
     7
        Based on the receipts in the record, we note that Mr.
Keeley had 13 90-minute sessions and one 45-minute session with
Dr. Dillon in 1997; 10 90-minute sessions in 1998; eight 90-
minute sessions in 1999; one 90-minute session in 2001; and two
90-minute sessions in 2002. Mr. Keeley testified that he
normally did 90-minute sessions because Dr. Dillon’s office was
located approximately 1 hour and 15 minutes from Mr. Keeley’s
residence.
                                 - 6 -

     depression would last.

     In another letter dated August 11, 1998, Dr. Dillon states

that Mr. Keeley’s depression “impaired his ability to make

decisions, and thus could have affected his ability to get and

hold a job.   Depression is known to keep a person from making

clear and forceful decisions.”    Petitioners testified that they

thought that Mr. Keeley’s depression was for an indefinite

duration.   Mrs. Keeley also testified that, at present, she

observes the continuing effects of Mr. Keeley’s depression such

that “any tasks, job-related or home-related, take him much

longer to complete”.

     Also, Mr. Keeley was diagnosed in June 1997 with a herniated

disk and bone spur in his neck, which had been causing him

discomfort for several years.    This condition caused weakness and

pain in his left shoulder and arm, which resolved around November

and December 1997.   For this condition, Mr. Keeley received

medication, physical therapy, a neurosurgical evaluation, and

magnetic resonance imaging.

     Petitioners timely filed joint Forms 1040, U.S. Individual

Income Tax Return, for 1997 and 1998.    On both returns, Mr.

Keeley listed his occupation as “sales rep” and Mrs. Keeley

listed her occupation as “secretary”.    Petitioners reported as

income their respective IRA and pension distributions received

during the taxable years 1997 and 1998.    For each distribution,
                               - 7 -

petitioners did not compute the 10-percent additional tax imposed

by section 72(t).   However, petitioners attached to both returns

several letters from Mr. Keeley’s physicians and a statement as

follows:

     Form 5329[8], Line 2 Distributions exempt from tax -
          The taxpayer became permanently disabled in 1997
     with respect to his employment as an insurance broker
     as a result of neurological and spinal conditions,
     which prevent the taxpayer from engaging in customary
     substantial gainful activities (See medical opinions
     attached). The taxpayer continues to be disabled.
     Accordingly, distributions from the taxpayer’s IRA
     account are not subject to the 10% penalty for early
     withdrawal.

     During the examination of petitioners’ returns, petitioners

received a letter dated September 25, 2000, from respondent’s tax

examiner stating that respondent does not “dispute the contention

regarding the taxpayer’s ability to perform substantial gainful

activity”, but contends that petitioners did not provide

substantiation (physician’s letters) stating that “Mr. Keeley is

‘totally and permanently’ disabled or his condition was expected

to result in death or to be of long continued or indefinite

duration.”   Petitioners submitted a response referring to the

letters attached to petitioners’ returns and also attaching a

copy of Dr. Dillon’s letter dated October 24, 2000.


     8
       Form 5329 is entitled “Additional Taxes Attributable to
Qualified Retirement Plans (Including IRAs), Annuities, Modified
Endowment Contracts, and MSAs”. Part I of the form is entitled
“Tax on Early Distributions”. A taxpayer would report on Line 2
of Part I of the form “Distributions excepted from additional
tax”.
                                 - 8 -

     In the notice of deficiency, respondent determined that

petitioners are liable for the 10-percent additional tax on each

of the early distributions from petitioners’ retirement accounts.

     Petitioners timely filed a petition with the Court disputing

the determined deficiencies.   Paragraph 4 of the petition states,

in pertinent part, as follows:

     We feel very strongly that Brian did qualify for the
     medical/disability exemption from the penalty for early
     withdrawal. We do have supporting documentation from
     medical professionals.

On brief, petitioners argue:

     While [Mr. Keeley] is able to work, he cannot return to
     occupations that require strategic thinking, planning
     and the related stress and responsibility, lest he have
     a reoccurrence of that afflicted state [of depression].
     * * * Mr Keeley no longer has the capacity to sell
     insurance, the commissions from which would generate
     substantially more income than his present in-house
     desk sales function for his employer [ATI], a telephone
     retailer.

Discussion9

     Generally, section 72(t)(1) imposes a 10-percent additional

tax on early distributions from qualified retirement plans,10

unless the distribution comes within one of several statutory

exceptions.   For example, distributions that are made on or after



     9
        We decide the principal issue in this case without regard
to the burden of proof. See sec. 7491(a)(1); Rule 142(a); Higbee
v. Commissioner, 116 T.C. 438 (2001).
     10
        As relevant to the present case, a “qualified retirement
plan” includes an individual retirement account (IRA) and a
qualified pension or profit sharing plan. Sec. 4974(c)(1), (4).
                               - 9 -

the date on which the taxpayer attains the age of 59-½ are not

“early” and therefore not subject to the additional tax.     Sec.

72(t)(2)(A)(i).   As relevant to the present case, section

72(t)(2)(A)(iii) provides an exception for distributions

“attributable to the employee’s being disabled within the meaning

of subsection (m)(7)”.11   There are also limited exceptions

available for distributions made to an employee for medical care

expenses, sec. 72(t)(2)(B),12 and for qualified higher education

expenses, sec. 72(t)(2)(E).

     Petitioners contend that the exception under section

72(t)(2)(A)(iii) applies because Mr. Keeley was disabled during

the years in issue because of severe depression that petitioners

thought was indefinite and for which Mr. Keeley is still under

medical treatment.   On the other hand, respondent argues that Mr.

Keely was not disabled because “a long-term psychiatric illness

where petitioner [Mr. Keeley] is able to work and where there

wouldn’t be a need for some type of constant treatment” is

inconsistent with the definition of disability under section



     11
        For purposes of sec. 72(t), the term “employee” includes
participants in individual retirement plans. Sec. 72(t)(5).
     12
        In the petition, petitioners appear to contend that the
exception for medical expenses under sec. 72(t)(2)(B) may apply.
However, petitioners did not present any evidence in support of
this contention, presumably because their unreimbursed medical
and dental expenses on both returns did not exceed 7.5 percent of
their adjusted gross income. See sec. 213(a); Dwyer v.
Commissioner, 106 T.C. 337, 343 (1996).
                                   - 10 -

72(m)(7).        Respondent further argues that Mr. Keeley’s continued

psychological consultations do not constitute “constant

treatment”.

        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 indefinite 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.[13]

     The determination of whether a taxpayer is disabled is made

on the basis of all the facts.       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 such as 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 disability.        Id.

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



        13
        Generally, proof of disability is the same as where the
individual applies for disability payments under Social Security.
S. Rept. 93-383, at 134 (1974), 1974-3 C.B. (Supp.) 80, 213.
                              - 11 -

considering the individual’s education, training, and work

experience.   Sec. 1.72-17A(f)(2), Income Tax Regs.    As an example

of a disability, the regulations list “Mental diseases (e.g.,

psychosis or severe psychoneurosis) requiring continued

institutionalization or constant supervision of the individual”.

Sec. 1.72-17A(f)(2)(vi), Income Tax Regs.     The impairment,

however, must be expected either to continue for a long and

indefinite period or to result in death.    Sec. 1.72-17A(f)(3),

Income Tax Regs.   In this context, the term “indefinite” means

that it cannot reasonably be anticipated that the impairment

will, in the foreseeable future, be so diminished as no longer to

prevent substantial gainful activity.   Id.    However, an

impairment that is remediable does not constitute a disability.

Sec. 1.72-17A(f)(4), Income Tax Regs.   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.”      Id.

     Based on the record, we assume arguendo that Mr. Keeley’s

depression affected his ability to engage in substantial gainful

activity during the years in issue.14   Nevertheless, we are


     14
        We note that, during the examination of petitioners’
returns, respondent did not dispute Mr. Keeley’s contention that
                                                   (continued...)
                              - 12 -

constrained to sustain respondent’s determination for the reasons

below.

     Petitioners assert that Mr. Keeley’s depression was expected

to last for a long and indefinite period.   Although we are

sensitive to the severity of Mr. Keeley’s mental health problems

and the fact that he continues to take antidepressants and

receive psychological counseling, we conclude that his state of

depression does not qualify as a “mental disease”, as defined

under section 72(m)(7), requiring continued institutionalization

or constant supervision.   See Dwyer v. Commissioner, 106 T.C.

337, 342 (1996) (The taxpayer suffered from severe depression for

which he had periodic consultations with a psychologist; the

Court held that periodic professional consultation alone does not

equate with the constant supervision envisioned by the

regulation).   Further, based on the record, Mr. Keeley’s

psychological condition is not irremediable within the meaning of

section 1.72-17A(f)(2), Income Tax Regs.    Therefore, we must

sustain respondent’s determination as to Mr. Keeley’s IRA

distributions.

     In addition, the record demonstrates that Mrs. Keeley was

not disabled during the years in issue or that any exception to


     14
      (...continued)
he was not able to perform substantial gainful activity.
However, we note further that Mr. Keeley began working at ATI in
December 1997 and in 1998 earned a gross salary of $44,352 from
ATI.
                               - 13 -

the imposition of additional tax under section 72(t) applies to

her.    Therefore, we also sustain respondent’s determination as to

Mrs. Keeley’s pension distribution.

       We note that although petitioners do not expressly rely on

section 72(t)(2)(E)15 for the distributions they received in

1998, they testified that one purpose for the distributions was

to pay for their daughter’s college loans.    However, petitioners

did not present any evidence for this Court to determine whether

this exception applies in the present case.

       In closing, we think it appropriate to observe that we found

petitioners to be very conscientious taxpayers who obviously take

their Federal tax responsibilities quite seriously.    We are also

sympathetic to the hardship that Mr. Keeley’s mental health

problems have brought to petitioners’ lives, and we acknowledge

that petitioners used the IRA and pension distributions for

laudable purposes.    Nevertheless, we are constrained to hold for

respondent based on the applicable law.

       Reviewed and adopted as the report of the Small Tax Case

Division.

       To give effect to our disposition of the disputed issue, as



       15
        The exception from the additional tax for qualified
higher education expenses applies only “to distributions after
Dec. 31, 1997, with respect to expenses paid after such date (in
taxable years ending after such date), for education furnished in
academic periods beginning after such date”. Taxpayer Relief Act
of 1997, Pub. L. 105-34, 111 Stat. 809.
                             - 14 -

well as respondent’s concession,



                                   Decision will be entered

                              under Rule 155.
