Kim v. Commissioner
679 F.3d 623
7th Cir.2012Background
- Kim, age 56, left a law firm and rolled funds from the firm’s retirement plan into an IRA in 2005.
- In 2006 Kim withdrew about $240,000 from the IRA, paid income tax but not the 10% additional tax under §72(t).
- The IRS asserted the 10% tax and, due to substantial underpayment, an accuracy-related penalty under §6662.
- The Tax Court limited the dispute to education-related expenditures not subject to the 10% tax and upheld the 10% tax on remaining withdrawals and the penalty.
- Kim challenged the outcome, arguing the 10% tax should not apply and challenging the §6662 penalty under a reasonable-basis defense; the Seventh Circuit affirmed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Does §72(t) 10% tax apply to Kim’s IRA withdrawal before 59½? | Kim | Commissioner | Yes, 10% tax applies |
| Is the §72(t)(2)(A)(v) exception available when the withdrawal is from an IRA, not an employer plan? | Kim | Commissioner | No; exception does not apply |
| Whether §6662(d)(2)(B)(ii)(II) reasonable-basis defense can relieve substantial underpayment penalties here? | Kim | Commissioner | No substantial authority; no adequate record to support defense |
Key Cases Cited
- Neonatology Associates, P.A. v. CIR, 115 T.C. 43 (Tax Court 2000) (reasonable-basis defense requires competent adviser reliance)
- United States v. Boyle, 469 U.S. 241 (Supreme Court 1985) (reasonable basis standard for penalties and reliance on advice)
- CIR v. McCoy, 484 U.S. 3 (Supreme Court 1987) (procedural framework for tax penalties disclosures)
- Bourekis v. CIR, 110 T.C. 20 (Tax Court 1998) (guide on penalties and substantial authority)