In Uncategorized on 03/10/2020 at 21:18

When a substantive Constitutional right or freedom is not involved (and it rarely is when taxation is concerned), the only test for the constitutionality of a statute is the rational basis test: could the legislature conclude that the enactment would promote a legitimate governmental purpose.

Of course, the enactment must not involve a hostile and oppressive discrimination against a suspect class.

In such cases, it doesn’t matter if the courts could formulate a better approach.

Thus, Judge Emin (“Eminent”) Toro, newest ornament on the Tax Court bench, disposes of the Constitutional challenge to Section 72(t) mounted by Sandra M. Conard, 154 T. C. 6, filed 3/10/20, while your blogger was busy with a real estate closing that turned into a sitcom, with one-liners flying all over the place.

Sandra claims the 10% additional tax, s/a/k/a the “early withdrawal penalty,” for those who grab their IRA or other pension-like monies before becoming either disabled or 59-1/2 years old violates the equal protection component of her Fifth Amendment right to due process of law.

Judge Eminent finds that the Supremes have found that neither age nor disability is a suspect class where taxes are concerned. And most importantly, there is an eminently rational basis (sorry, guys) for the age and disability carve-outs in Section 72(t).

“In proposing the enactment of section 72(t) as part of what became the Tax Reform Act of 1986 (TRA), Pub. L. No. 99-514, sec. 1123(a), 100 Stat. at 2472, the Senate Finance Committee reasoned that ‘[t]he absence of withdrawal restrictions in the case of some tax-favored arrangements allows participants in those arrangements to treat them as general savings accounts with favorable tax features rather than as retirement savings arrangements.’ S. Rept. No. 99-313, at 612 (1985), 1986-3 C.B. (Vol. 3) 612 (1985).” 154 T. C. 6, at pp.10-11 (Footnote omitted).

“If taxpayers face no disincentive for withdrawing amounts from qualified retirement plans long before their retirement years and without suffering any disability, it is easy to imagine that such amounts might be ‘diverted to nonretirement uses,’ thereby frustrating Congress’ objective of encouraging taxpayers to save for periods of their lives when they might not be able, or wish, to work. By the same token, allowing a disabled person–defined by the statute as a person who ‘is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or to be of long-continued and indefinite duration,’ sec. 72(t)(2)(A)(iii), (m)(7)–to receive distributions from a qualified retirement plan without paying the additional tax would be fully consistent with Congress’ objective of encouraging taxpayers to provide for times when they might not be able to work.” 154 T. C. 6, at pp. 12-13 (Footnote omitted, but it says even if judges might draw the lines elsewhere, that does not rise to a Constitutional impairment).

Be it tax or penalty, the 10% early withdrawal hit has a rational basis.

Sharon falls down under “her heavy burden of ‘negat[ing] every conceivable basis which might support’ the legislative arrangement under section 72(t).” 154 T. C. 6, at p. 13 (Citations omitted).




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