By Barry C Picker, CPA/PFS, CFP
Section 72(t) of the Internal Revenue Code provides that there is a 10% additional tax for early withdrawals from a retirement plan. That section also states the exceptions to this 10% tax. The Courts have consistently said that if you meet one of the exceptions, you don’t have to pay the tax. However, if you don’t meet one of the exceptions, the Court will not expand the list as enumerated in the tax law.
This has not stopped taxpayers from going to Court arguing that they should not pay this additional 10% tax. Some have argued they should be excepted because of hardship, some have argued that they should not pay the tax because of errors in tax software, and some of argued that they should not pay the tax because they would have met one of the exceptions if they had done the transaction differently, and the Court should view it as if they had done the transaction correctly.
In each of these cases the Court has refused to expand the definition of the exceptions, and has agreed with the Internal Revenue Service that the tax was in fact due.
Now along comes Mr. Nasuti to argue that he should not have to pay the 10% tax. What is his excuse? Coercion.
Not coercion in the fact that somebody put a gun to his head and demanded that he withdraw the money from his IRA. (Which in fact probably would’ve at least gotten him an extension of the 60 day rollover period which would allow him to put the money back). No, “coercion” in that he states that he was forced to withdraw $19,030 from his IRA because he was illegally terminated, he alleges, from his employment. Since his termination was illegal, he claims, he needed the money from his retirement account to pay expenses and due to his unemployment his withdrawal from the money was not voluntary. This means, he says, this section 72(t) 10% additional tax should not apply.
The Court viewed this very simply as a claim of financial hardship. These claims have been made many times before, and each time has been rejected by the Tax Court.
And so in this case, that is exactly what the Tax Court did; it rejected his claim.
The taxpayer tried one last argument. He cited his negative adjusted gross income for 2008, the taxable year in question in this case, and stated that since his income was negative the section 72(t) penalty should not apply. The Court dismissed this argument, asserting that the 10% additional tax is applied to the amount of the early distribution from the IRA, and is totally independent of any other income tax that is due for the tax year in question.
Apparently unable to take no for an answer, the taxpayer actually went and appealed the decision to the First Circuit Court of Appeals.
It took the Court of Appeals about three sentences to affirm the Tax Court’s opinion stating “… that the appellant’s coercion and duress defenses fail as pleaded.”.
So now taxpayers can cross coercion off their list of potential arguments to the Tax Court, along with financial hardship, bad tax software, “I could’ve done it differently”, and anything else that is not specifically enumerated in section 72(t).
