John and Michele McGovern - Page 4

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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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