Wills, Trusts & Estates Prof Blog

Editor: Gerry W. Beyer
Texas Tech Univ. School of Law

Friday, November 16, 2012

Taxpayer Does Not Meet Early Distribution Rule

IRS 2A tax court recently addressed whether a taxpayer should be subject to the 10% penalty on distributions he received from his qualified retirement plan.The taxpayer in that case owned several qualified retirement accounts. In 2009, he withdrew $52,600 from his retirement plans. For that tax year, he reported the income as he was required to do so, but the IRS still determined that he had a deficiency for that year. The IRS argued that the taxpayer was subject to the 10% penalty subject to IRC Section 72(t)(1), which created the deficiency. 

In Hartley v. Commissioner, the taxpayer tried to argued that he was not subject to the additional 10% penalty because his actions fell under the exception provided in IRC Section 72(t)(2)(c). In other words, the taxpayer alleged that he should not be subject to penalty because a court ordered him withdraw funds from his qualified retirement to pay alimony to his ex-wife. Under the exception, the taxpayer does not incur a penalty if the distribution is made to an "'alternative payee' pursuant to a qualified domestic relations order, as provided by IRC Section 414(p)." Section 414(p) does define that person to be a former spouse. The tax court rejected the taxpayers argument, claiming that he received the distribution directly and not the "alternative payee." The court further remarked that the provisions cited above did not apply because there was no formal domestic relations order. The court ordered the taxpayer to pay the additional 10% penalty.

See Andrea Zakko, Taxpayer Runs Afound of Early Distribution Rule, Wealth Management, Nov. 14, 2012.

Special thanks to Jim Hillhouse (Professional Legal Marketing (PLM, Inc.)) for bringing this article to my attention.


Income Tax, Non-Probate Assets | Permalink

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