• About Us
    • Small Businesses
    • Mid-Size Businesses
    • Individual Taxpayers
  • Tax
    • Business Tax Preparation
    • Individual Tax Preparation
    • Trust and Estates Tax Preparation
    • IRS Audit
    • Unfilled Tax Returns
    • Tax Consulting
  • International Tax
    • Expat Taxation
    • New US Residents
    • Foreign Assets Reporting
    • Inbound International Tax
    • Outbound International Tax
    • Dual Status Taxpayers
    • Foreign Trust Taxation
    • Foreign Investment in US
    • FATCA compliance
    • Int’s Bookkeeping
  • Accounting
    • Financial Statements Preparation
    • Review of your Books
    • Quickbooks
    • Xero Accounting
  • Advisory
    • Business Best Practices Coaching
    • Entity Structure & Tax Elections
    • Accounting System Analysis & Implementation
  • Pricing
    • Free Initial Meeting
    • Tax Return Fees
    • Manageable Cost for Service Year Around
  • Portal
  • Contact Us
Victoria Bogdanovich CPAVictoria Bogdanovich CPA
Victoria Bogdanovich CPAVictoria Bogdanovich CPA
  • About Us
    • Small Businesses
    • Mid-Size Businesses
    • Individual Taxpayers
  • Tax
    • Business Tax Preparation
    • Individual Tax Preparation
    • Trust and Estates Tax Preparation
    • IRS Audit
    • Unfilled Tax Returns
    • Tax Consulting
  • International Tax
    • Expat Taxation
    • New US Residents
    • Foreign Assets Reporting
    • Inbound International Tax
    • Outbound International Tax
    • Dual Status Taxpayers
    • Foreign Trust Taxation
    • Foreign Investment in US
    • FATCA compliance
    • Int’s Bookkeeping
  • Accounting
    • Financial Statements Preparation
    • Review of your Books
    • Quickbooks
    • Xero Accounting
  • Advisory
    • Business Best Practices Coaching
    • Entity Structure & Tax Elections
    • Accounting System Analysis & Implementation
  • Pricing
    • Free Initial Meeting
    • Tax Return Fees
    • Manageable Cost for Service Year Around
  • Portal
  • Contact Us

Tax Court denies medical exception for early pension distribution

Home Tax UpdatesTax Court denies medical exception for early pension distribution

Tax Court denies medical exception for early pension distribution

June 21, 2023 Posted by Victoria Tax Updates

A taxpayer was subject to income tax on a distribution he received from his Sec. 401(k) plan and was not entitled to an exception from the 10% additional tax imposed by Sec. 72(t)(1) for early distributions because his medical condition did not cause him to be disabled as defined in Sec. 72(m)(7), the Tax Court held.

The taxpayer’s diabetes did not prevent him from engaging in substantial gainful activity, the court holds.

Facts: Robert Lucas worked as a software developer at a company called Life Cycle Engineering until 2017, when he lost that job and experienced financial difficulties. To supplement his income, Lucas obtained a $19,365 distribution from his 401(k) plan. When he received the distribution, Lucas had not yet attained the age of 59½. The plan administrator reported the distribution as an early distribution “with no known exceptions” (box 7, Code 1) on Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.

Lucas reported the distribution on his 2017 Form 1040, U.S. Individual Income Tax Return, but did not include the distribution in taxable income, claiming that it was excludable from gross income because he had diabetes, which was first diagnosed in 2015 while he was working at Life Cycle.

The IRS issued a deficiency notice determining that Lucas’s 2017 tax return should have included the distribution from his 401(k) plan in gross income. In addition, since Lucas took the distribution before he attained age 59½, the Service also assessed the 10% additional tax imposed by Sec. 72(t)(1) for early distributions because his medical condition, in the IRS’s opinion, did not cause him to qualify for the exception to the addition to tax in Sec. 72(t)(2)(A)(iii) for disabled taxpayers.

Issues: Gross income, by definition, includes distributions from employees’ trusts for “any amount received as an annuity (whether for a period certain or during one or more lives) under an annuity, endowment, or life insurance contract” (Secs. 61(a) and 72(a)(1)). One type of trust is a 401(k) plan, which is a qualified cash or deferred arrangement “of an employer for the exclusive benefit of his employees or their beneficiaries” (Sec. 401(a)).

Lucas claimed that the distribution should not have been included as gross income because he had diabetes. In coming to this conclusion, Lucas relied on a website that, in his view, addressed the issue.

Distributions from a qualified retirement plan are subject to an additional 10% tax if the taxpayer is under 59½ years of age and cannot claim an applicable exception. One such exception is if the distribution is attributable to an employee’s being disabled within the meaning of Sec. 72(m)(7) (Sec. 72(t)(2)(A)(iii)).

You also might be interested in

Key tax provisions in the Senate reconciliation bill

Aug 19, 2022

By a vote of 51 to 50, the U.S. Senate[...]

CPA wary of IRS service lapses as tax season begins

Jan 12, 2022

CPA tax professionals greeted the launch of tax season with[...]

Taxpayers can now submit information online in response to 9 IRS notices

Feb 27, 2023

Taxpayers and tax practitioners can now submit information online in[...]

Recent Posts

  • IRS reduces user fee for estate tax closing letters June 6, 2025
  • Deduction for Theft Loss and Legal Fees Denied June 2, 2025
  • The Home Sale Gain Exclusion in Today’s Market May 29, 2025
  • Tax planning for physicians May 23, 2025
  • Lower Auto Depreciation Limits Issued for First Time in at Least 3 Years March 13, 2025
Experience something completely different. Start Here

Contact Info

  • Victoria Bogdanovich, CPA
  • 3321 Bee Cave Rd Ste 201
  • 512-814-8311
  • info@victoria-cpa.com
  • www.victoria-cpa.com

Fresh from blog

  • IRS reduces user fee for estate tax closing letters
  • Deduction for Theft Loss and Legal Fees Denied
  • The Home Sale Gain Exclusion in Today’s Market
  • Tax planning for physicians

© 2025 victoria-cpa.com

  • Home
  • About
  • Contact
Prev Next