James M. and Mary N. Gorski - Page 5

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                                     Discussion4                                      
          A.   Tax Treatment of Early IRA Distributions                               
               Section 408(d)(1) provides that any amount paid or                     
          distributed out of an individual retirement plan shall be                   
          included in gross income by the distributee in the year of                  
          distribution in the manner provided under section 72.  An IRA is            
          included in the definition of an individual retirement plan.                
          Sec. 7701(a)(37).  Petitioners properly reported the entire                 
          $25,000 distribution from their IRA as income on their 2001                 
          return.                                                                     
               Section 72(t)(1) imposes an additional 10-percent tax on               
          that portion of a distribution from a qualified retirement plan             
          that is includable in the taxpayer’s gross income, unless the               
          distribution satisfies an exception found under section 72(t)(2).           
          An IRA is a qualified retirement plan for purposes of the                   
          additional 10-percent tax.  Secs. 72(t)(1), 4974(c)(4).  The                
          additional tax does not apply to distributions from an IRA used             
          to pay for qualified higher education expenses.  Sec.                       
          72(t)(2)(E).  Petitioners do not argue that any other exception             

               4    Sec. 7491(a), concerning burden of proof, has no                  
          bearing on this case.  The issue with respect to the computer,              
          housewares, appliances, furniture, and bedding expenses is                  
          primarily one of law.  Regarding the book expense, sec. 7491(a)             
          is not applicable because petitioners have not satisfied the                
          substantiation requirement.  Sec. 7491(a)(2)(A).                            







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