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Early distribution 10% extraction is a tax, not a penalty requiring written supervisory approval

Early distribution 10% extraction is a tax

The U.S. Tax Court today issued an opinion holding that the written supervisory approval requirement under section 6751(b)(1) does not apply with regard to the section 72(t) extraction on early distributions from a qualified retirement plan because the amount under section 72(t) is a “tax” and not a “penalty,” “addition to tax” or “additional amount.”

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The case is: Grajales v. Commissioner, 156 T.C. No. 3 (January 25, 2021). Read the Tax Court’s opinion [PDF 62 KB] 

Summary

The taxpayer received early distributions from a qualified retirement plan. The IRS determined that under section 72(t), the taxpayer was liable for a 10% exaction on these distributions.

The taxpayer argued that she was not liable for the section 72(t) exaction because the IRS’s initial determination lacked “written supervisory approval,” as required under section 6751(b)(1). In other words, she claimed that written supervisory approval was required because the section 72(t) exaction was either a penalty or an “additional amount” within the meaning of section 6751(c). The IRS admitted that there was no such written supervisory approval, but nevertheless argued that none was required because the section 72(t) exaction is not a “penalty,” “addition to tax” or “additional amount” within the meaning of section 6751(b) and (c), but instead is a “tax.”

The Tax Court agreed with the IRS and held that the section 72(t) exaction is a “tax” rather than a “penalty,” “addition to tax” or “additional amount” and thus is not subject to the written supervisory approval requirement of section 6751(b).  

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