James E. Copley and Cynthia R. Copley - Page 10

               Petitioner does not argue that he falls within the scope of            
          any of the above exceptions.  With respect to the distribution of           
          $16,831.81, however, petitioner argues that Fidelity withheld the           
          10-percent penalty prior to distributing the balance of the                 
          account to him.  As noted above, petitioner confuses the penalty            
          for premature distribution with the penalty for early withdrawal            
          and the tax imposed on a distribution by section 402(a).  The               
          distribution of $16,831.81 stems from a lump sum distribution               
          from a qualified plan and a tax-free rollover into a qualified              
          IRA.  Because the distribution does not fall within the scope of            
          any of the exceptions under section 72(t), petitioner is liable             
          for the penalty imposed thereunder.                                         
               The transcript identified above indicates that the payments            
          of $464 and $580 were reported to the Internal Revenue Service by           
          the payers on Forms 1099-R.  Petitioner stipulated that he                  
          received these payments from qualified plans.  Thus, we conclude            
          that the payments of $464 and $580 were received by petitioner              
          from qualified plans.  Consequently, petitioner is liable for the           
          penalty imposed by section 72(t) on the premature distributions             
          in the aggregate amount of $17,875.81.                                      
          Issue 6.  Rental Expenses                                                   
               In 1985, petitioners purchased 24583 Sunny Ridge Drive,                
          Moreno Valley, California (the California property) and rented              
          the property through Inland Property Management Co. (Inland).  On           
          February 1, 1989, petitioners sold the California property.  On             

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