Magazine article The CPA Journal

Tax Court Rules Taxpayer's Depression Not Disability for Early Withdrawal Penalty

Magazine article The CPA Journal

Tax Court Rules Taxpayer's Depression Not Disability for Early Withdrawal Penalty

Article excerpt

Dwyer v. Commissioner, the Tax Court ruled that a taxpayer diagnosed with a biochemical depression was not disabled for purposes of avoiding the 10% penalty on early distributions from a qualified retirement plan. Dwyer is important because a number of aging Americans now facing corporate downsizing and/or early retirement may make early withdrawals from retirement plans. IRC Sec. 72(t) imposes an additional 10% tax on any taxable amounts received from qualified retirement plans by taxpayers under age 59V. Included among the exceptions is one for disabled taxpayers, which Sec. 72(m) defines as taxpayers who are "unable to engage in any substantial gainful activity due to a medically determinable physical or medical impairment which can be expected to result in death or be of a long-continued and indefinite duration."

Reg. Sec. 1.72-17A(f) indicates that substantial gainful activity is the work, or comparable work, the taxpayer did prior to the disability. The severity and nature of the impairment, as well as the taxpayer's education, training, and work experience, will determine whether the taxpayer can do such work. A remediable impairment is not a disability. "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."

Several examples of impairments are given in Reg. Sec. 1.72-17A()(2). Included are the loss of use of two limbs, brain damage causing severe loss of judgement, certain progressive diseases, heart disease that does not respond to medical treatment, etc. Examples of mental impairments are psychosis or severe psychoneurosis, which require "continual institutionalization or constant supervision of the individual." These categories of impairments, if they prevent the taxpayer from working, would qualify as disabilities.

In Dwyer, Robert Dwyer, a stock trader, organized Hampton Partners in 1989. Dwyer was the general partner, and one of the three limited partners. Together these partners invested $1,750,000. The partnership lost a substantial amount in 1989. Although Dwyer made payments to the other partners, they sued him. In October 1989, Dwyer, age 53, withdrew $208,802 from his individual retirement account and used it to trade more stocks. …

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