,~ t - T 6 i 132 T .C . No . 1 5 UNITED STATES TAX COUR T GREGORY T . AND KIM D . BENZ, Petitioners v .

COMMISSIONER OF INTERNAL REVENUE, Responden t

Docket No . 15867-07

. Filed-May 11, 2009 .

In 2002 P-W elected to receive a series of substantially equal periodic payments from her individual retirement account (IRA) that qualified fo r a statutory exception to the 10-percent additional tax' imposed on early distributions pursuant to sec .

72 (t) (2) (A) (iv) , I .R .C . Sec . 72(t)(4), I .R .C ., provides that an employee who modifies a series of periodic payments within the first 5 years (other than by reason of the employee's death or disability) is liable for the 10-percent additional tax . In 2004 P-W . received distributions from her IRA for higher education expenses pursuant to sec . 72(t)(2)(E), I .R .C ., in addition to .the elected periodic payment that qualified for a statutory exception to the 10percent additional tax . R determined that P-W no longer qualifies for the periodic payment exception for 2004 because the distribution for higher education expenses is an impermissible modification of her election {to receive a series of substantially equal periodic payments .

SERVED May 11 2009

Held : A distribution for higher education expenses is not a modification of P-W's election to receive a series of substantially equal periodic payments .

,t Howard S . Levy , for petitioners .

:_ : Richard J . Hassebrock , for respondent .

OPINIO N rr GOEKE, Judge : Respondent determined a Federal income tax deficiency of $8,959 for 2004 . The deficiency results from the imposition of the 10-percent additional tax under section 72(t) on early distributions from an individual retirement account (IRA) .' The sole issue-for decision is whether a distribution for qualified higher education expenses is an impermissible modification of a series of substantially equal periodic payments : .We hold that a distribution for qualified higher education expenses is not a .modification of a series of substantially equal periodic payments .

.11 Background This case was submitted to the Court fully stipulate d pursuant to Rule 122 . The stipulation of facts and the-attache d 'Unless otherwise indicated, all section references are to the Internal Revenue Code, and all Rule references are to the Tax Court Rules of Practice and Procedure .

3 -exhibits are incorporated herein by this reference . Petitioners resided in Ohio at the time the petition was filed .

While employed by Proctor & Gamble, petitioner wife maintained an IRA . In January 2002'after separating from her employment with Proctor & Gamble, petitioner wife made anelection to receive distributions from her IRA in a,seriesof substantially, equal periodic payments . This election included a n annual fixed distribution of $102,311 . .50 to be made'on January 1 5 each year for a period based on petitioner wife's life expectancy . On or-before January 15, 2004, petitioner wife received a $102,311 .50 distribution from her IRA in accordance with-her election to receive a series of-substantially equal periodic payments . During 2004 petitioner wife received two additional distributions from the IRA : A $20,000 distribution in January 2004 and a $2,500 distribution in December 2004 .

Petitioner wife had not attained age 59-1/2'when she received these additional distributions . Petitioner wife used the $20,000 and $2,500 distributions for qualified higher'-education expenses as defined in section 72(t)(7) relating to ;her son's college expenses . . For 2004 petitioners spent $35,221 .50 in qualified higher education expenses for their son . -Petitioners timely filed Form 1040, U .S . Individual Income Tax Return, for 2004, reporting-the $124,811 .5 .0 in distributions from petitioner wife's IRA during 2004 . Petitioners did not of the employee or the joint lives (or joint 'life expectancies) of such employee and his designated beneficiary" .2 If the series of substantially equal periodic payments is modified within 5 years of the date of the first distribution (other than by, reason of death or disability),, then the 10-percent additional tax . will be imposed . retroactively on prior distributions made before th e taxpayer attains age 59-1/2 (referred to as the recapture tax), plus interest . Sec . 72(t)-(4)(A) (ii) (I ) . . The recapture tax also . applies'when a modification occurs after the initial 5-year period but before the employee has attained age 59=1/2 . Sec .

72 (t) (4) (A) (ii) (II )

Independent from the equal periodic payment exception, section 72(t)(2)(E) provides an except-ion from the 10-percent additional tax for distributions for qualified higher education expenses . Section 72(t)(2)(E) provides :

Distributions from individual retirement plans for higher education expenses .--Distributions to an individual from an individual retirement plan to the extent such distributions do not exceed the qualified higher education expenses (as defined in paragraph (7)) of the taxpayer for the taxable year . Distributions ,shall not be taken into account under the precedin g sentence if such distributions are described i n subparagraph (A), (C), or (D) or to the-extent paragraph (1) does not apply to such distributions by reason of subparagraph (B) .

By specifically creating an exception for distributions used for higher education expenses, Congress recognized,"it is appropriate and important to allow individuals to withdraw amounts from their IRAs for purposes of paying higher education expenses without . incurring an additional 10-percent early withdrawal tax ." H . Rept . 105-148, at 330 (1997), 1997-4 (Vol . 1) C .B . 319, 652 . Distributions for qualified higher education expenses serve one of numerous purposes Congress identified as deserving special treatment . Those purposes include paying a tax levy, paying for medical care, paying for health insurance during periods of unemployment, . and purchasing a first home . Sec . 72 (t) (2) (A) (vii) , (B) , (C) , (D) , and (F )

.Petitioner wife's two additional distributions for qualified higher education expenses were made within 5 years of the first annual periodic payment and before petitioner wife had attaine d age 59-1/2 . Respondent maintains that the two additiona l distributions constitute an impermissible modification to the periodic payment election under section 72 .(t)(4) . According to respondent, the substantially equal periodic payment exception is no longer effective for the 2004 distribution . Respondent concedes that $35,221 .50 of the total 2004 distributions satisfied the exception for qualified higher education expenses under section 72(t)(2)(E) and is not subject to the 10-percent additional tax .

The sole issue for decision is whether a distribution that qualifies for a statutory exception to the 10-percent additional tax under section 72(t)(1) constitutes a .modification of a series of substantially equal periodic payments triggering the recapture tax under section 72(t)(4) . Respondent argues that an employee who elects°a series of substantially equal, periodic payments .is not allowed any further distributions within the,f-irst 5 . years of the election irrespective of whether the distribution would qualify for another statutory exception to the section 72(t) tax unless the employee dies or becomes disabled . Petitioners argue that a distribution used fora purpose that qualifies for a statutory exception is not a modification of a series of substantially equal periodic payments that triggers the recapture tax under section 72(t)(4) . .'In Arnold v . Commissioner , 111'T .C . . 250, 255-256 (1998), the Court held that an additional distribution that,did not qualify for a statutory exception was an impermissible modification=to a series of substantially equal periodic payments . In Arnold , we stated : "In order to avoid the section 72(t) tax, petitioners must show .that the November 1993 distribution falls within one of the exceptions provided under section 72(t)(2)(A) . They have not done so ." Id . at 255 . Today we also recognize .that distributions under section 72(t)(2)(E), 8 -enacted in 1997 and after the year in issue in Arnold , do not trigger the section 72(t) additional tax where the taxpayer receives the distribution within 5 years after the taxpaye r begins receiving, distributions under a series of substantially equal periodic payments .

The last sentence of section 72(t)(2)(E) recognizes that an, employee may qualify for more than one statutory exception to the 10-percent additional tax . It provides that the amount o f distributions attributable-to higher education expenses does no t take into account distributions described in subparagraph (A) , (B), (C), or (D) . Sec . 72(t) (2) (E) . If a distribution qualifies for more than,one statutory exception, the employee is exempt from the 10-percent additional tax on the basis of the applicable exception under subparagraph .(A), (B), (C), .or (D) and need only rely on the higher education expense exception for the additiona l .amount of the distribution . Subparagraph (A) includes, the periodic payments exception . Similar language is included in subparagraphs (B) (relating to distributions for medical expenses) and (F) (relating to distributions for first home purchases) . Sec . 72(t) (2) (B .) and (F)' . A modification occurs for purposes of section 72(t)(4) when the method of determining the periodic payments changes to a method that no longer qualifies' for the exception . The legislative history explains the 5-year distributions within the first 5 .years of the election to receive periodic payments .

The legislative purpose of the 10-percent additional tax under section 72(t) is that "Premature distributions from IRAs frustrate the intention of saving for retirement, and section 72(t) discourages this from happening ." Dwyer v . Commissioner , 106 T .C . 337, 340 (1996) (citing S . Rept . 93-383, at 134 (1973), 1974-3 C .B, . (Supp .) 80, 213) . This legislative purpose is not frustrated where an employee receives distributions for more than one of the purposes that Congress has recognized as deserving special treatment .

We . hold that a distribution that satisfies the statutory exception for higher education expenses is not a modification o f a series of substantially equal periodic payments . Because we find that a distribution for higher education expenses is not a modification, the 5-year rule prohibiting modifications except in the case of death or disability is not violated .

To reflect the foregoing, Decision will b e entered for petitioners .