James E. Copley and Cynthia R. Copley - Page 9

          represented loan proceeds.3  We find that petitioner failed to              
          report taxable income in the amount of $580 from DOA.  Respondent           
          is sustained on this issue.                                                 
          Issue 5.  Penalty for Premature Distribution                                
               Respondent determined that petitioners were liable for a 10-           
          percent penalty in the amount of $1,787.58 under section 72(t) on           
          premature distributions of $16,831.81, $464, and $580 from                  
          qualified plans.  Petitioners dispute this determination.                   
               Section 72(t) provides for a 10-percent additional tax on              
          distributions from qualified plans, unless the distributions come           
          within one of the statutory exceptions.  Sec. 72(t)(1) and (2).             
          The exceptions include certain distributions: (1) Made on or                
          after the date on which an employee attains the age of 59-1/2;              
          (2) made to an employee after separation from service and the               
          attainment of age 55; (3) to a beneficiary on or after the death            
          of an employee; (4) attributable to an employee's disability; and           
          (5) to an employee to the extent they do not exceed certain                 
          deductible medical expenses.  Sec. 72(t)(2)(A) and (B).                     

               Because petitioner conceded this issue up until trial,                 
          respondent was not prepared to refute petitioner's argument with            
          supporting documents.  Nevertheless, respondent suggests that the           
          $580 may represent a forgiveness by DOA of an unpaid portion of a           
          loan taken by petitioner.  As a general rule, a debtor excused              
          from an obligation to repay must include the amount forgiven in             
          his or her gross income.  See sec. 108.  Although we find                   
          respondent's suggestion credible, without more, we are unable to            
          say with certainty that such a scenario is more likely than not.            

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