No doubt that Dawn Marie Moore-Ahmed can sing the George M. Cohan 1917 hit, because she was over there in Iraq, and getting paid by the US Army for her services, but Dawn Marie’s pay is not excludable from US income tax. And the correctly-spelled Special Trial Judge, STJ Lewis (Way to Spell It, Judge) R. Carluzzo puts Dawn Marie wise in the eponymous off-the-bencher at Docket No. 10438-13S, filed 3/28/14.

Dawn Marie started as a high school dropout, but finished up eventually and even took some college courses. After eleven years’ service with the active-duty Army, she was released due to injuries sustained.

Dawn Marie got hired as what we used to call, and for all I know may still call, a DAC (Department of the Army civilian). And for the years at issue, Dawn Marie was sent to Iraq and spent time there as a DAC.

Dawn Marie’s paid preparer (after consulting Dawn Marie) excluded a part of her income, claiming Section 911 treatment and also that she was in a combat zone.

As to Section 911, even though Iraq might have been Dawn Marie’s tax home, the money she earned wasn’t foreign earned income “because the wages were ‘paid by the United States or an agency thereof to an employee of the United States or an agency thereof.’  Sec. 911(b)(1) and (2).”  Order, at p. 7.

If Uncle Sam paid you, whatever he paid you is not foreign earned income, wherever you were when he paid you.

Besides, being paid while in a combat zone is only part of the Section 112 exclusion from income. “Section 112 provides that ‘gross income does not include compensation received for active service as a member below the grade of commissioned officer in the Armed forces of the United States’ for service during certain periods which such member ‘served in a combat zone.’ Sec. 112(a).” Order, at p. 8.

Dawn Marie wasn’t a member of the armed forces of the United States, so Section 112 doesn’t help her.

I’m sure Jim Daly, whose Iraq and Afghanistan experiences I blogged in my blogpost “At Home Abroad”, 6/6/13, is pleased that Executive Order 12744 designated Iraq as a combat zone, even though the Secretary of the Treasury never got around to doing so.

But civilian Dawn Marie is out of luck. However, her educational background spares her the accuracy penalty.

That’s what every taxpayer is entitled to in Appeals, a new look from an impartial AO, that is, one who took no part in any prior activity with the taxpayer.

But that isn’t what Patricia A. Moosally got, when AO S, who had previously bounced her OIC, got assigned her CDP off a Letter 3172 and a NFTL.

Judge Wells gives IRS the bad news: Patty Moo gets to go back to Appeals, with a fresh looker checking out her CDP. The case is Patricia A. Moosally, 142 T. C. 10, filed 3/27/14.

Patty Moo is fighting over TFRPs, and some unpaid personal income taxes. She admits she owes them, but claims she lost her job and can’t pay.

AO S started reviewing Patty Moo’s OIC before she lost her job, bucked it to COIC who said she could pay, and bounced the OIC without issuing a NOD. Meanwhile, IRS issued a NFTL and Letter 3172, from which Patty Moo appealed. This appeal got handed to AO K, but when the computer discovered at AO S had the OIC, the file got handed to her.

AO S upholds the lien, and Patty Moo petitions Tax Court.

Judge Wells on the basics: “If a taxpayer requests a hearing in response to an NFTL pursuant to section 6320, a hearing must be conducted by an impartial officer or employee of the Appeals Office. Sec. 6320(b)(1), (3). An impartial officer or employee is one who has had no prior involvement with respect to the unpaid tax specified in section 6320(a)(3)(A) before the first hearing under section 6320 or section 6330.” 142 T. C. 10, at p. 8. (Footnote omitted).

What is “prior involvement”? Judge Wells: “Sec. 301.6320-1(d)(2), A-D4, Proced. & Admin. Regs., also provides that ‘[p]rior involvement exists only when the taxpayer, the tax and the tax period at issue in the CDP hearing also were at issue in the prior non-CDP matter, and the Appeals officer or employee actually participated in the prior matter.’ We note, however, that at least one Federal court has stated that the provision is invalid. See Cox v. Commissioner, 514 F.3d 1119, 1127 n.10 (10th Cir. 2008), rev’g 126 T.C. 237 (2006). We also note that the provision does not affect the instant case, which, as we explain below, involves a taxpayer, tax, and tax periods that were at issue in both the CDP hearing and a prior non-CDP proceeding and an Appeals officer that participated in both matters.” 142 T. C. 10, at p. 9, footnote 4.

But though the Cox case is distinguishable from this case, that doesn’t help IRS. The Cox case AO’s involvement was “peripheral”, but here it was spot-on. And AO bias isn’t the issue; friendly or unfriendly, the AO cannot have been in on the prior doings, whether or not a NOD was issued.

And even though it might be easier to let the same AO consider both the OIC and the NFTL, thus letting Tax Court consider both, that isn’t what Section 6330(c)(2)(A)(iii) says. And Tax Court’s jurisdiction is strictly limited. Judge Wells cannot rewrite the law, however convenient it might be. The only way to consider a bounced OIC is off a NOD, and AO S never issued one for that, only for the NFTL.

Patty Moo goes back to Appeals and a fresh AO, who has never laid eyes on Patty Moo or her case.

I will not translate this phrase, but Judge Morrison is a fan of trusts, and proves it in Frank Aragona Trust, Paul Aragona, Executive Trustee, 142 T. C. 9, filed 3/27/14. There’s an independent trustee as well, but he only oversees capital invasions and plays no part in the decision.

Question: can a trust avail itself of real estate professional treatment, per Section 469(c)(7)? It’s not a closely-held C Corp, and it isn’t an individual, but enough of its trustees work on the rental real estate corpus, or through the LLC which the trust wholly owns. The late Frank set the deal up, and son Paul is the boss, with his several siblings either actively working the realty, or along for the ride.

If the personal services and 750-hour tests are met by the trustees, that’s good enough for professional grade.

Judge Morrison: “The IRS argues that a trust is incapable of performing ‘personal services’ because the regulation defines ‘personal services’ to mean ‘any work performed by an individual in connection with a trade or business’. Sec. 1.469-9(b)(4), Income Tax Regs. We reject the IRS’s argument. A trust is an arrangement whereby trustees manage assets for the trust’s beneficiaries. 1 Restatement, Trusts 3d, sec. 2 (2003) (a trust ‘is a fiduciary relationship with respect to property, * * * subjecting the person who holds title to the property to duties to deal with it for the benefit of’ others); see also sec. 301.7701-4(a), Proced. & Admin. Regs. (‘In general, the term ‘trust’ as used in the Internal Revenue Code refers to an arrangement created either by will or by an inter vivos declaration whereby trustees take title to property for the purpose of protecting or conserving it for the beneficiaries under the ordinary rules applied in chancery or probate courts.’). If the trustees are individuals, and they work on a trade or business as part of their trustee duties, their work can be considered ‘work performed by an individual in connection with a trade or business.’ Sec. 1.469-9(b)(4), Income Tax Regs. We conclude that a trust is capable of performing personal services and therefore can satisfy the section 469(c)(7) exception.” 142 T. C. 9, at pp. 17-18.

So Judge Morrison need not decide if the trustee fees are expenses of the real estate operation, because they are active and not passive.

This is a case of first impression. My bet is IRS appeals.

Judge James S. (“Big Jim”) Halpern sends long-suffering IRS Attorney John (“Scholar”) Schmittdiel, Esq., to the head of the class in Tax Court Law and Procedure.

Remember Scholar John? No? Then you didn’t read my blogposts “Tax Court Admission Exam”, 9/6/13, and “He Passed the Exam”, 1/9/14.

Judge Big Jim chastised Scholar John for not opposing the intervenor’s motion for summary judgment in Stephanie Lynn Christie A.K.A. Stephanie Lynn Foran, Petitioner, and John Foran A.K.A. Arthur J. Maurello, Intervenor, Docket No. 24515-12S, filed 9/6/13.

Judge Big Jim hit Scholar John with an exam that would rattle the bones of even the most battle-hardened veteran of the Tax Court wars.

Remember these conundra now? ““May an intervenor move for summary adjudication in a proceeding brought pursuant to section 6015(e)? If so, does intervenor present an issue for which there is no genuine dispute as to any material fact and with respect to which a decision may be rendered as a matter of law? See Rule 121(b), Tax Court Rules of Practice and Procedure. In answering the last question, discuss whether interpretation of the judgment presents an issue of fact. If the issue presented by intervenor is ripe for summary adjudication, does petitioner’s claim for relief in this proceeding raise any issue identical to an issue decided in the judgment, by the State Court? If so, are the other elements of collateral estoppel satisfied? If they are, what is the issue and what effect does it have on us to determine the appropriate relief we may accord petitioner under section 6013(e)[sic; should be 6015(e)]. Respondent may address any other issues that he deems relevant.”” Order, op. cit., at p. 2.

Well, although Scholar John apparently passed the exam, we never got to see the answers.

But Judge Big Jim, anxious that all may know the answers, tells all in Stephanie Lynn Christie, a.k.a. Stephanie Lynn Foran, Petitioner, and John Foran, a.k.a. Arthur J. Maurello, Intervenor, 2014 T. C. Sum. Op. 27, filed 3/26/14. And Scholar John is IRS’ lead counsel on this one.

Here’s the answers: “We have not previously determined whether an individual intervening in a case pursuant to section 6015(e)(4) and our Rules has standing to move for summary judgment. We decide that he does. Rule 24(a)(1) of the Federal Rules of Civil Procedure provides that, on timely motion, anyone who is given an unconditional right to intervene by a Federal statute must be permitted to intervene. Federal District Courts have held that, under rule 24 of the Federal Rules of  Civil Procedure, an intervenor in an action or proceeding is, for all intents and purposes, an original party.” 2014 T. C. Sum. Op. 27, at pp. 3-4. (Citations omitted).

Whatever Steph could do, John a.k.a Arthur can do.

But that’s all, because John a.k.a. Arthur’s claim that the State Court divorce proceedings estop Steph from contesting that she’s liable for half the deficiency doesn’t fly.

In the first place, the State court proceeding resulted in a stipulation, and that’s not a judgment (per Restatement of the Law, Judgments 2d), but even if it was given the effect of a judgment, IRS wasn’t a party to the divorce proceeding, and can do what it wishes. And John a.k.a. Arthur admits as much. The State court proceeding only said Steph would pay what IRS decided she should pay, didn’t mention Tax Court or innocent spousery per Section 6015.

So no issue preclusion or claim preclusion. Maybe John a.k.a Arthur has some State court claim against Steph, who really bushwacked him, but that’s for another day and another court.

In the meantime, there are the usual fact questions, so, while John a.k.a Arthur can move for summary judgment, he loses.

And all these a.k.a.’s remind me of Sigmund Freud’s famous remark in his letter to Wilhelm Fliess, August 1, 1899: “I am also getting used to considering every sexual act as a process involving four individuals.” Sig would have loved Tax Court.

No, not the Neiman-Marcus helicopters and similar spousal toys of yore, but rather the tax items of spouses on joint returns, and how to put these asunder.

It’s a small-claimer, Stephen D. Bowerman and Jani A. Bowerman, 2014 T. C. Sum. Op. 26, filed 3/25/14, from the desk of Judge Goeke.

Steve has some dodgy deductions and costs of good sold in his construction business, and Jani hasn’t reported some income, so the combined Bowerman outlook isn’t too bright. But Steve finds some documentation for some of what he claims.

And Jani wants to bail on Steve’s shenanigans. They’re still married, but Section 6015(b) is there to help.

Jani is out of luck as regards her own items (interest and dividends paid to her) and some unemployment comp to Steve, because Jani can’t prove she had no way of knowing about this.

But she does get lucky about Steve’s business stuff, and that’s the moral of this story, how to use Section 6015(b) to help the unknowing spouse. You can’t cite the case, but you can sure use the reasoning and the cases Judge Goeke does cite. And I won’t omit them from this excerpt, so as to save you the trouble of reading Judge Goeke’s opinion to find them.

“When the understatement of tax liability results from improper deductions, courts have applied a reasonably prudent person standard to evaluate knowledge. Courts have generally found that a taxpayer knew or had reason to know of an understatement if a reasonably prudent person in the taxpayer’s position would have known the return contained a substantial understatement. Reser v. Commissioner, 112 F.3d 1258, 1267 (5th Cir. 1997), aff’g in part, rev’g in part T.C. Memo. 1995-572; Resser v. Commissioner, 74 F.3d 1528, 1536 (7th Cir. 1996), rev’g T.C. Memo. 1994-241; Kistner v. Commissioner, 18 F.3d 1521, 1527 (11th Cir. 1994), rev’g T.C. Memo. 1991-463; Hayman v. Commissioner, 992 F.2d 1256, 1261 (2d Cir. 1993), aff’g T.C. Memo. 1992-228; Erdahl v. Commissioner, 930 F.2d 585, 589 (8th Cir. 1991), rev’g T.C. Memo. 1990-101. In applying this standard, we consider four factors: (1) the taxpayer’s education, (2) the taxpayer’s involvement in the family’s financial affairs, (3) the presence of unusual or lavish expenses beyond the family’s norm, and (4) the other spouse’s evasiveness or deceitfulness concerning the family’s finances. Price v. Commissioner, 887 F.2d at 965.” 2014 T. C. Sum. Op. 26, at p.16.

And here’s how this works out in realtime. “On the basis of the four factors of the Price test, we hold that Mrs. Bowerman did not know or have reason to know of the understatement. First, although there is no specific evidence in the record of Mrs. Bowerman’s education, her employment as an administrative assistant for UPS does not indicate any specialized knowledge of finance, business, or taxation. Second, we find credible Mr. Bowerman’s testimony that Mrs. Bowerman was entirely unaware of the details of Mr. Bowerman’s business. Third, nothing in the record indicates changes in family income or spending, but petitioners bear the burden of proving that no changes occurred. Because petitioners have presented no evidence on the matter, this factor weighs in respondent’s favor. See Rule 142(a). Finally, we do not find that Mr. Bowerman consciously deceived Mrs. Bowerman or hid his erroneous deductions from her. However, the record demonstrates that he did not involve Mrs. Bowerman in managing his business or maintaining his records. Considering these factors, we hold Mrs. Bowerman had no reason to know of her husband’s erroneous deductions.” 2014 T. C. Sum. Op. 26, at p. 17.

While the Bowermans, pro se of course, didn’t have the best case, it was good enough for Jani to win on Steve’s business items.

Takeaway- Read and heed.

John Purciello sure thought he did, and the US District Court for New Jersey gave him summary judgment for legal fees against the IRS, when IRS tried to nail Honest John for TFRPs, even though he was just a salesman and never a “responsible person”.

His Honor Big Julie a/k/a Judge Julian Jacobs, hereinafter HHBJJJJ, tells the story in 2014 T. C. Memo. 50, filed 3/24/14.

There’s a complicated timeline here, but, cutting to the proverbial, IRS lost the file, grabbed Honest John’s tax refund to the extent of $59K, yoicked Honest John around while IRS tried to show he was responsible for the FICA withholdings that his bosses didn’t remit, and when IRS finally caved at Appeals, they told Honest John to file for a refund and then bounced his claim, arguing Honest John’s claim was barred by the SOL.

Judge Cavanaugh in New Jersey District Court wasn’t having any of it. He gave Honest John summary judgment when Honest John sued for the refund. Judge Cavanaugh said IRS couldn’t concede they’d grabbed Honest John’s refund wrongfully, yoick him around and then claim he’s too late asking for his money. And Honest John gets his legal fees, as IRS was no way justified in claiming SOL.

Now Honest John wants his administrative fees for the time he spent with Appeals.

But HHBJJJJ says no. IRS caved, but the magic date is when a notice of decision is issued to a taxpayer, per Section 7430. But IRS claims they caved before they issued a notice of determination, and when they did they agreed with Honest John that he wasn’t a responsible person and that they grabbed his refund improperly (although they claimed it was too late for him to do anything about it).

Now IRS shucked and jived around, but they never issued a notice of determination. Honest John says that shucking and jiving was just to thwart him, but that’s tough, says HHBJJJJ. “At first blush, it would appear that our holding might be inconsistent with that of the District Court, which had awarded petitioner litigation costs. But it is not. In the situation involved in the District Court, the IRS Appeals Office denied petitioner’s request for a refund on the basis that petitioner’s refund claim was untimely, a position the District Court found not to be substantially justified. In the situation involved in this case, the IRS Appeals Office agreed with petitioner, resulting in the IRS’ abating the trust fund recovery penalty assessment, a position all agree was substantially justified.” 2104 T. C. Memo. 50, at pp. 12-13.

Quoting Kwestel v. Commissioner, 2007 T. C. Memo. 135, anent the narrow statutory language of Section 7430(c)(7), HHBJJJJ regretfully denies Honest John his administrative costs: “taxpayers * * * who do a good job at the administrative level of resolving issues and getting respondent to realize the error of his ways are precluded from recovering administrative costs incurred in achieving those favorable results. To the contrary, taxpayers who do not do as good a job at the administrative level and who receive adverse Appeals Office notices of decision or notices of deficiency, but who later convince respondent to concede issues or who substantially prevail in litigation on the issues, are able to seek a recovery of administrative costs. In effect, taxpayers who do a better job at the administrative level of resolving issues raised by respondent on audit are prejudiced in their ability to recover administrative costs under section 7430.” 2014 T. C. Memo. 50, at p. 14.

Honesty and competence of counsel are their own rewards. If that makes sense, you’ll do just fine in Tax Court–if you mess up.

You might remember all the blogposts I expended on the subject of appraisals of facades (I counted ten of them, but maybe there are more), in connection with the Section 170(h) giveaway.

Well, those who played fast-and-loose with the numbers, or pulled numbers from thin air, or who otherwise have been deemed by Karen Hawkins and her myrmidons at OPR to have transgressed, have been sent to the penalty box for an extended stay.

Check out IR-2014-31, 3/19/14. It’s a five-year vacation for the unnamed malfeasors.

As the IRS press releasors put it: “The appraisers agreed to a five-year suspension of valuing facade easements and undertaking any appraisal services that could subject them to penalties under the Internal Revenue Code. The appraisers also agreed to abide by all applicable provisions of Circular 230.

“‘Appraisers need to understand that they are subject to Circular 230, and must exercise due diligence in the preparation of documents relating to federal tax matters,’ said Karen L. Hawkins, Director of OPR. ‘“Taxpayers expect advice rendered with competence and diligence that goes beyond the mere mechanical application of a rule of thumb based on conjecture and unsupported conclusions.”’

Apparently the defrocked appraisers were the Mark Primoli safe-harborers.

“The appraisers prepared reports valuing facade easements donated over several tax years. On behalf of each donating taxpayer, an appraiser completed Part III, Declaration of Appraiser, of Form 8283, Noncash Charitable Contributions, certifying that the appraiser did not fraudulently or falsely overstate the value of such facade easement. In valuing the facade easements, the appraisers applied a flat percentage diminution, generally 15 percent, to the fair market values of the underlying properties prior to the easement’s donation.

“Specifically, the appraisers admitted violating Circular 230, Section 10.22(a)(1), for failing to exercise due diligence in the preparation of documents relating to IRS matters, and Section 10.22(a)(2) for failing to determine the correctness of written representations made to the Department of the Treasury.”

The appraisers consented to the press release, from which the foregoing is excerpted. Devotees of the Rule of Completeness can check out the whole story at:

 http://www.irs.gov/uac/Newsroom/IRS-Bars-Appraisers-from-Valuing-Facade-Easements-for-Federal-Tax-Purposes-for-Five-Years

Readers yesterday will note that I alluded to an earlier comment from John Henry Ryskamp (see my blogpost “Enough”, 1/8/14). I do not hide from those who want to post derogatory material about me.

However, I was obliged just now to delete John Henry’s comment, as I received the following e-mail. As I telephoned the sender and obtained oral permission to post it here, I will do so, in extenso.  I suggest it as a caution to those who wish to vent their spleen; no incitement, please.

From: Derrick Fitzgerald <donotreply@wordpress.com>
To: ltaishoff <ltaishoff@netscape.net>
Sent: Fri, Mar 21, 2014 1:24 pm
Subject: [The Taishoff Law Firm] Contact Us

Name: Derrick Fitzgerald
Email: derrick.fitzgerald@usdoj.gov
Comment: Mr. Lew Taishoff,

The United States Marshal Service (USMS) has the responsibility of 
safeguarding the United States Federal Judicial process by providing
protection to U. S. Federal Judges and other members of the 
Judiciary.  The USMS is able to fulfill the Court Security mission 
by investigating all reports of threatening and inappropriate 
communications directed at USMS protected persons.
On March 21, 2014 I was informed of a threatening statement which 
currently appears on your firms website at 
https://taishofflaw.com/2014/01/08/enough/#comments. 
See below 
“Since the Appeals office serves as the trial court (this by the way
is the reasoning of the dog Mark Holmes, who ought to be executed, 
the Notice of determination etc…”  
The statement dated 21 January 2014, 1400 at hrs. bears the 
signature John Riskamp.  This investigation has disclosed the 
existence of a John Henry Ryskamp who is a litigant appearing before
the U.S. Tax Court.  My present interpretation of the statement is
that it is a violation of 18 U.S.C.  2385 Advocating the overthrow 
of the government of the United States.  The statement may also fall
with the realm of 18 U.S.C. 115 Influencing, impeding, or 
retaliating against a Federal official by threatening or injuring 
etc…
The U.S. Marshal Service has the immediate protective interest in 
requesting the removal of the statement from your web site.  I 
appreciate your attention in addressing the security matter.  
Please advise if additional information is required to facilitate 
the request.
 
Thank you,
 
Derrick Fitzgerald
Protective Intelligence Investigator
U.S. Marshal Service D/DC
Office (202)353-0663
BlackBerry (202)359-7920
Fax (202)273-5036
Company: U.S. Marshal Service

In the absence of any T. C.s, and only one designated hitter that illustrated a sad situation rather than any point of law, I turn to an order from Judge Nega to John Henry Ryskamp, Docket No. 8888-13, filed 3/20/14.

Remember John Henry? Hint: he is a leading exponent of the proposition that flattery will get one nowhere. See my blogpost “Enough”, 1/8/14.

Judge Holmes booted John Henry. But John Henry wasn’t through. He had some remaining jibes. He responded to my blogpost. He sent me a lengthy rant in his usual ingratiating style, all of which is attached to my blogpost as a comment.

Delusion seems to be John Henry’s strong suit. Here’s a sample: “Dream on. Judge Nega is about to restore 013681-11L to the docket and vacate the decision. See 8888-13. You are a fool.”

There’s more, but I’ll spare you. Having served in the United States Army in wartime, and practiced law in New York City for 47 years, insults and jibes do not affect me. I have received them from better men than John Henry.

John Henry thought he won. Needless to say, Judge Nega was setting him up.

John Henry made six (count ‘em, six) motions. I won’t catalog them, except to say they were the usual.

Judge Nega: “On February 10, 2014, the Court allowed the parties to address the above- referenced motions, and both respondent and petitioner were heard on each motion. Without exception, petitioner made only arguments that are without merit in support of his motions. For example, petitioner asserted meritless arguments including the constitutionality of the Federal income tax, the authority and legality of the Internal Revenue Service, and the jurisdiction of the Tax Court. Petitioner made other meritless arguments which are more fully evidenced by the transcript of the Court’s February 10, 2014, San Francisco, California, trial session.” Order, at p. 1.

But John Henry is still entitled to due process. So Judge Nega gives him his chance.

“At the time the motions were heard on February 10, 2014, the Court scheduled this case for trial on that same afternoon. The case was called for trial on February 10, 2014. There was no appearance by or on behalf of petitioner. Voicemail messages were left for petitioner that his trial was rescheduled for February 11, 2014. The case was again called for trial on February 11, 2014. Again, there was no appearance by or on behalf of petitioner. At that time, respondent orally moved to dismiss the case for lack of prosecution. Respondent’s motion to dismiss will be addressed in a separate order.” Order, at p. 2.

I’ll bet it will, Judge. Do I hear a Section 6673 chop in the distance?

Anyway, Judge Nega kicks all six (count ‘em, six) of John Henry’s motions.

I suppose John Henry will move to vacate Judge Nega’s orders. And lose.

Enough.

The story of Jennifer Lynn Fields, featured in 2014 T. C. Memo. 48, filed 3/19/14, is an example of the truth of this headline, cribbed from my blogpost “Cracking Up”, 2/27/14.

Jenny had a 401(k) with that alleged corporate badguy Wal-Mart. When Jenny and Wally parted ways, Jenny took her 401(k) by check, asking Wally to withhold whatever tax she owed.

Wally took 20%, sent it to the Feds, and gave Jenny a 1099-R. Jenny reports the income and the withholding. Jenny was less than 59-1/2 years of age on the last day of the year in question. Jenny prepared her own return.

Need I say more? Battle-hardened practitioners can see the SNOD coming.

Judge Vasquez is sorry, but of course has no choice; Jenny owes the 10% excise tax on this early distribution. “…petitioner admits that the distribution was not used to pay medical expenses, health insurance premiums, or expenses attributable to a disability, or to make a first home purchase.” 2014 T. C. Memo. 48, at p. 3. So Jenny can’t use the safe harbors of Section 72(t)(2).

“Petitioner argues that she should not be required to pay any additional tax because she asked that all taxes be withheld at the time of the distribution. Despite her good intentions, petitioner should have reported a 10% additional tax on the distribution on line 58 of her return. Petitioner’s failure to do so caused her to improperly claim a $639 refund.” 2014 T. C. Memo. 48, at p. 5.

Judge Vasquez is “sympathetic to petitioner’s plight”, but the law is clear. Jenny owes the 10%.

And Jenny, don’t trust Wal-Mart to give you tax advice.