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On April 15, 2000, petitioners filed a Form 1040, U.S.
Individual Income Tax Return, for the 1999 taxable year (1999 tax
return). They reported “Total pensions and annuities” of $27,880
and included $12,880 of that amount as part of their total income
for the 1999 taxable year. However, petitioners did not report
any additional tax under section 72(t)(1) with respect to the
$12,880 distribution from their TSP.
Respondent issued petitioners a notice of deficiency dated
September 10, 2002, determining a deficiency in Federal income
tax of $1,288 for the 1999 taxable year. Respondent contends
that, with respect to the $12,880.04 distribution from
petitioner’s TSP, petitioners are subject to a 10-percent
additional tax on an early distribution from a qualified
retirement plan under section 72(t)(1).
Petitioners contend that they are not subject to the 10-
percent additional tax under section 72(t)(1) for one of two
reasons. First, they rely upon Larotonda v. Commissioner, 89
T.C. 287 (1987), and contend that the form of the transaction
complies with the requirements of the exception under section
72(t)(2)(E) when petitioners used $12,880.04 from the TSP to pay
Villanova University for tuition and education fees during the
1999 taxable year. In the alternative, petitioners seek to
disavow the transaction under the doctrine of substance over
form. In other words, petitioners seek to recharacterize the
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