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level amortization with quarterly or more frequent payments
required over the term of the loan. Sec. 72(p)(2)(A) to (C). A
loan from a qualified employer plan no longer satisfies the
requirement of section 72(p)(2)(C) when the participant fails to
make a loan payment either on the date that it is due or within
the allowed grace period. See, e.g., Molina v. Commissioner,
T.C. Memo. 2004-258; see also Estate of Gray v. Commissioner,
T.C. Memo. 1995-421.
Petitioner argues that the amount of the USAA SIP account
applied to her outstanding loan balance should be deemed a
distribution in 2000, the year that the loan was made, as opposed
to 2001. Petitioner’s loan satisfied the requirements of section
72(p)(2) at the time that it was made and throughout 2000. Thus,
the loan was not treated as a distribution in 2000. When
petitioner failed to repay the loan in 2001 under the terms of
the loan agreement, the application of her USAA SIP account
balance to the loan discharged her debt and became a taxable
distribution to her in 2001.
Section 72(t) provides for a 10-percent additional tax on
early distributions from a qualified retirement plan for the
taxable year in which the distribution is received. The
10-percent additional tax, however, does not apply to certain
distributions. Section 72(t)(2) sets forth specific exemptions.
Section 72(t)(2)(B) provides that the additional tax shall not
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