Tax on early distributions is constitutional

By James A. Beavers, CPA, CGMA, J.D., LL.M.

The Tax Court held that the Sec. 72(t)(1) 10% tax on early distributions from a qualified retirement plan does not violate the Due Process Clause of the Fifth Amendment to the Constitution.


In 2008, Sandra Conard received nine distributions totaling $61,777 from a qualified retirement plan. At that time, she was not yet 59½ years old, disabled, or otherwise eligible for any of the Sec. 72(t)(2) exceptions to the Sec. 72(t)(1) additional 10% tax on early distributions from a qualified retirement plan. Conard included the distributions in income on her federal return for 2008, but she neither reported nor paid with that return the additional tax. Instead, Conard included with her return a statement that the additional tax was arbitrary and capricious, and she claimed a refund of the additional tax that she had paid for 2005, 2006, and 2007.

The IRS disagreed and issued a statutory notice of deficiency for 2008, showing a deficiency of $6,177 for the additional tax on the distributions in 2008. Conard then timely filed a petition in Tax Court. She claimed that, in light of the exceptions to the tax in Sec. 72(t)(2) — particularly the exceptions for distributions made to taxpayers who are at least 59½ years old or who are disabled — applying the additional tax to the distributions that she received violates "the U.S. Constitution's guarantee of equal treatment under the law."

Due Process Clause

The Due Process Clause of the Fifth Amendment to the U.S. Constitution provides that no person shall be "deprived of life, liberty, or property, without due process of law." It imposes on the federal government requirements comparable to those that the Equal Protection Clause of the Fourteenth Amendment imposes on the states. Under Section 1 of the Fourteenth Amendment, a state cannot "deny to any person within its jurisdiction the equal protection of the laws."

The Tax Court's decision

The Tax Court held that the Sec. 72(t)(1) additional tax on early distributions from a qualified retirement plan does not violate the Due Process Clause. The court applied the rational-basis test in making its decision.

The Tax Court examined Supreme Court precedent to determine the proper framework for evaluating equal protection claims regarding statutes affecting economic rights, such as Conard's claim regarding Sec. 72(t). It found, citing Exxon Corp. v. Eagerton, 462 U.S. 176 (1983), that statutes affecting economic rights that neither invade a substantive constitutional right or freedom nor utilize a suspect classification such as race are subject to only a low level of judicial scrutiny — the rational-basis test. Under Supreme Court precedent, under the rational-basis test, the court determines whether the classification bears a reasonable relationship to some legitimate government purpose. If it does, the court must uphold the statute.

Conard did not contend that Sec. 72(t) concerned a substantive constitutional right or freedom or that it relied on a suspect classification. Therefore, the court found that Sec. 72(t), as applied to Conard, should be reviewed under the rational-basis test. The Tax Court found that Sec. 72(t) easily met the requirement under the rational-basis test that the legislature in enacting a statute could have reasonably concluded that the challenged classification would promote a legitimate government purpose.

Based on the legislative history, the Tax Court found that Congress believed that tax incentives for retirement savings are inappropriate unless the savings generally are not withdrawn before retirement for nonretirement uses, and to discourage early withdrawals of retirement savings and recapture some of the tax benefits provided, an early-withdrawal tax should be applied to all tax-favored retirement arrangements.

The Tax Court found that these explanations for the additional tax on early withdrawals were "entirely rational." It observed that if taxpayers faced no disincentive for making withdrawals from retirement plans long before retirement and without suffering any disability, it was "easy to imagine" that taxpayers might take withdrawals for nonretirement uses, counter to Congress's objective of encouraging taxpayers to save for retirement or a time when they could not work due to a disability. The court further found that although Sec. 72(t) provides different rules for differently situated taxpayers, as it had acknowledged previously, this was excusable because it was impossible to devise a scheme of taxation that was "free of all discriminatory impact." Because Conard had failed to carry her burden of negating every conceivable reason that might support the additional tax on early distributions in Sec. 72(t), the court held that the tax does not violate the equal protection component of the Due Process Clause of the Fifth Amendment.


As any tax practitioner knows, even with the 10% additional tax on early withdrawals, many people will forget about tomorrow and withdraw retirement money for all sorts of reasons — good, bad, and somewhere in between. The rational-basis test has a very low threshold, and Congress's desire to discourage taxpayers from making early withdrawals from qualified retirement plans meets this threshold.

Conard, 154 T.C. No. 6 (2020)

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