Early Distribution Penalty Violation

• Author: Seymour Goldberg
• Profession: Senior partner in the law firm of Goldberg & Goldberg, P.C., in Woodbury, New York
• Pages: 13-14

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EARLY DISTRIBUTION

PENALTY VIOLATION

In Kim v. Commissioner, the U.S. Court of Appeal s, Seventh Circuit, May

9, 2012, reviewed a decision of the U.S. Tax Court involving whet her or

not the taxpayer was subject to t he 10 percent additional tax regard-

ing certain distributions received from his IRA prior to age 59½ and

whether or not he was subject to the 20 percent accuracy-related pen-

alty. See Kim v. Commissioner, 679 F.3d 623, 625–26 (7th Cir. 2012), aff ’g

T.C. Docket No. 11902-10 (May 20, 2011) (bench opinion).

According to the facts, M r. Kim at age 56 left his position as a part-

ner in a law firm. He tra nsferred retirement fu nds from the law fir m’s

retirement plan to his individual retirement account during 2005.

The Seventh Circuit recognized that under the Interna l Revenue

Code, distributions to a n employee from a retirement plan after separa-

tion from serv ice after attainment of age 55 are subject to income tax but

are not subject to the 10 percent additional tax on early distributions.

In 2006, Mr. Kim withdrew about $240,000 from his I RA. Some of

the IRA f unds were used to pay his tuition and other educat ion expenses

while attending the London School of Economics and some were used

to pay for his daughter’s tuition and other education expenses at Bryn

Mawr College. According to t he Internal Revenue Code, those amounts

were not subject to the 10 percent additional tax. However, the Sev-

enth Circuit indicated t hat the IRA distribution amounts u sed for other

purposes were not subject to the age 55 exception from the 10 percent

additional tax.

According to the Tax Court, Mr. Kim owes $20,456.50 as a 10 per-

cent additional tax because the IRA dist ribution he received in excess of

the higher education expense except ion is subject to the 10 percent addi-

tional tax. T he Tax Court also found that Mr. Kim owes a 20 percent

accuracy-related penalty of $4,091.30 (20 percent of $20,456.50).

Mr. Kim argued t hat because the 10 percent additional tax does

not apply if an employee receives retirement plan distributions after

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