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III. Ten-Percent Additional Tax on Early Distributions
Section 72(t)(1) imposes an additional tax of 10 percent on
the portion of a distribution from a qualified retirement plan
that is includable in gross income, unless the distribution falls
under one of the exceptions in section 72(t)(2). Section
72(t)(2)(A)(iii) provides the additional 10-percent tax does not
apply to a distribution that is attributable to the employee’s
being disabled within the meaning of section 72(m)(7). For
purposes of section 72(t) as relevant here, the term “employee”
includes any participant. Sec. 72(t)(5).
Petitioner argues that the 10-percent additional tax should
not apply to Mrs. Barkley’s half of the distribution because she
was a vested plan participant by virtue of State community
property law, and she received the distribution on account of her
disability. According to petitioner, section 72(t)(5) “broadens
the definition of employee to include a plan participant who is
otherwise not an employee”. Petitioner relies on the definitions
of “vested participant” and “inactive participant” in sections
417(f)(1) and 418D(e) to support his contention that Mrs. Barkley
was a plan participant.
Respondent does not address whether Mrs. Barkley was a
participant. Rather, he argues that although Mrs. Barkley may
have been disabled, she was not an employee for purposes of the
exception in section 72(t)(2)(A)(iii). Therefore, respondent
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Last modified: May 25, 2011