Kirgizia I. Grajales v. Commissioner
In Kirgizia I. Grajales v. Commissioner, the U.S. Tax Court, relying on well-established jurisprudence, found the Petitioner/taxpayer liable for $90.86 of additional tax under the Section 72(t) exaction with respect to her early distributions from her qualified retirement plan. 1
The facts are simple. In 2015, the Petitioner, a 42-year-old woman, took early distributions from her New York State qualified retirement plan. She failed to report the distributions of $9,026 on her 2015 income tax returns. The Commissioner of Internal Revenue issued a notice of deficiency determining that the distributions should have been included in her income and were subject to a 10% additional tax on early distributions under Section 72(t).
The parties agrees that only $908.62 of the Petitioner’s 2015 qualified retirement plan distributions is taxable as early distributions. The sole issue is whether the early distributions give rise under Section 72(t) to a 10% additional tax of $90.86.
The Commissioner bears the burden of production with respect to “any penalty, addition to tax, or additional amount,” pursuant to Section 7491(c). This burden includes producing evidence establishing that the initial determination of an assessment of a penalty was personally approved by the immediate supervisor of the individual making such determination, as required by Section 6751(b)(1). “Penalties” includes “any addition to tax or any additional amount,” per Section 6751(c).
Under Section 72(t), if a taxpayer receives any amount from a qualified retirement plan, the taxpayer’s tax shall increase by 10% of the portion of such amount that is includible in gross income.
The Petitioner contended that she was not liable for the Section 72(t) exaction because written supervisory approval is required under Section 6751(b)(1) and it was not obtained prior to issuing the determination. The Tax Court disagreed.
In other contexts, the Tax Court has repeatedly characterized the Section 72(t) exaction is a “tax” rather than a “penalty,” “addition to tax,” or “additional amount.” The Tax Court has found “additional amounts” to be a term of art that refers exclusively to the civil penalties enumerated in Chapter 68, subchapter A.
In this case, the Tax Court found no reason to characterize it differently. It found that the Section 72(t) exaction is a “tax” within the meaning of Section 6751(b) and (c). It is not an “additional amount” because Section 72(t) is not a civil penalty enumerated in Chapter 68. Consequently, the written supervisory approval requirement of Section 6751(b) is inapplicable to the Section 72(t) exaction.
The Tax Court also disregarded the Petitioner’s argument that the Supreme Court’s decision in Nat’l Fed’n of Indep. Bus. v. Sebelius (“NFIB”), did not support the characterization of the section 72(t) exaction as a “tax.” 2 In NFIB, the Court held that the individual mandate of the Affordable Care Act is a “penalty” for one purpose but a “tax” for another, depending on the context. The instant case does not present a constitutional issue, so the analysis employed by the Court in NFIB is inappropriate. Rather, the issue here is one of statutory construction, and Section 72(t) expressly labels its exaction a “tax.”
The Tax Court found in favor of the Commissioner because the Taxpayer failed to produce facts or evidence showing that she should not be liable for the Section 72(t) exaction with respect to the early distributions that she took on her qualified retirement plan. The Taxpayer failed to persuade the Tax Court to stray from its strong precedence holding that the Section 72(t) exaction is a “tax” rather than a “penalty,” “addition to tax,” or “additional amount.”
Frank Baldino is an estates and trusts attorney who helps people throughout the greater Washington, DC area protect assets for their families and future generations through careful estate tax planning. For more information, contact Frank at (301) 657-0175 or firstname.lastname@example.org.