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constitute gross income, and although the loan was for a laudable
purpose, petitioners’ contention ignores the fact that Mr. White
borrowed pretax dollars, i.e.; compensation that had not
previously been taxed. Accordingly, the defaulted loan from Mr.
White’s 401(k) account became taxable (pursuant to section
72(p)(1)(A)) in the same manner that a distribution from such
account would have been taxable if Mr. White had simply closed
the account and withdrawn the balance therein. In each instance,
the amount distributed would be taxable (pursuant to section
402(a)) because such amount represented income that had not
previously been taxed.
Consistent with the foregoing, we hold for respondent on
this issue.
Issue 2.
Section 72(t)(1) imposes an additional tax on an early
distribution from a qualified retirement plan equal to 10 percent
of the portion of such distribution that is includable in gross
income.4 As previously discussed, failure to make an installment
payment when due in accordance with the terms of a loan from a
qualified retirement plan may result in a taxable distribution.
Sec. 72(p)(1). Accordingly, a loan balance that constitutes a
taxable distribution is subject to the 10-percent additional tax
4 Mr. White’s 401(k) account constitutes a qualified
retirement plan for purposes of sec. 72(t). See sec. 4974(c)(1).
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