Mrs. Benz (no her first name is not Mercedes), made an election to receive substantially equal periodic payments from her IRA in January 2002 pursuant to IRC 72(t)(2)(A)(iv). By making this election, Mrs. Benz avoids the 10% additional tax on early distributions from qualified retirement plans. Two years later, Mrs. Benz took two additional distributions to pay for her son's college education. On her 2004 tax return she indicated the two additional distributions were not subject to the 10% additional tax because of the exception found in 72(t)(2)(E) for education expenses.
The IRS argued that Mrs. Benz's distributions in 2004 for education expenses constituted a modification in the substantially equal payments under 72(t)(4). Assuming this is true, since the modification occurred prior to her turning 59 1/2 and prior to the five-year period beginning with the first distribution in 2002, she would be liable for the 10% additional tax including interest.
The Tax Court rejects the Services's argument. The Court cites the statute's plain language and its legislative history. Yet another lesson in statutory construction for the IRS.