Disability Under the Tax Code

There are a number of exceptions to the rule requiring a 10% penalty on distributions from qualified plans, including IRAs, before age 59 ½. The Tax Code provides a disability exception to distributions from employer plans and IRAs, but the code’s definition of disabled person is very limited.

Section 72(m)(7) provides that, “An individual shall be considered to be disabled if he is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment, which can be expected to result in death or to be of long-continued and indefinite duration. An individual shall not be considered to be disabled unless he furnishes proof of the existence thereof…”

In Issacs v. Commissioner, T.C. Memo 2011-175 (2011), the Tax Court assessed a 10% penalty against Simeon Isaacs, a lawyer and doctor who claimed to be disabled. Isaac took distributions of $342,487, $16,000, and $148,807 from his RA accounts in 2003, and he withdrew another $8,000 in 2005—all before he turned 59 ½ years old. Isaacs skipped the 10% penalty and the IRS challenged the 2003 and 2005 returns in 2009, claiming the 10% penalty applied. Isaacs claimed he was disabled, testifying that his depression led to a suicide attempt and that he was currently seeing a psychiatrist.

The Tax Court ruled that Issac’s condition did not meet the Tax Code’s definition of disabled, noting that Issac’s testimony was the only evidence provided.

See Ed Slott, When a Disability Isn’t Disabling, Financial Planning, Nov. 1, 2011.

Special thanks to Jim Hillhouse (WealthCounsel) for bringing this article to my attention.