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cannot be avoided by offset of the distribution by
qualified education expenses. * * * any qualified
education expense offset is limited to expenses paid
during the taxable year of distribution.
Petitioners timely filed a petition with the Court disputing
the determined deficiency. Paragraph 4 of the petition states:
I used an early distribution from a qualified plan for
educational expenses. I was forced to make a decision,
by my employer, and I thought I interpreted the tax
code correctly. The monies that I used were entirely
my contributions. I was told that had I rolled them
over for “one day”, they would be exempt from the
penalty (10%). I feel I am being penalized (harshly)
for such a finite misinterpretation. I would greatly
appreciate a favorable ruling.
Discussion3
Petitioners contend that the distribution from Mrs.
Domanico’s 401(k) plan is excepted from the 10-percent additional
tax on early distributions because they used the funds to pay for
Mrs. Domanico’s higher education expenses incurred from 1999
through 2003. In support of their contention, petitioners rely
on paragraph 2179 of the Master Tax Guide that states in
pertinent part:
2179. Early Distributions. Distributions from a
traditional IRA to a participant before the individual
has reached age 59 � are generally subject to the same
10% penalty that applies to early distributions from
qualified plans. Many of the exceptions to the early
distribution penalty also apply to early distributions
from a traditional IRA. * * * The following
3 The facts are not in dispute, and the issue is
essentially one of law. Accordingly, we decide the issue without
regard to sec. 7491.
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Last modified: May 25, 2011