CCA 200920052: Self-employed taxpayers need evidence of unemployment eligibility for the medical-insurance exception

Plain-English summary

Chief Counsel explained the section 72(t)(2)(D) exception for certain retirement-plan distributions used to pay medical-insurance costs after a job loss. The individual generally must have received unemployment compensation for 12 consecutive weeks, take the distribution during the year that compensation is paid or the following year, and limit the exception to insurance costs paid during the tax year. A self-employed person can satisfy the unemployment-compensation condition by showing that federal or state law would have allowed benefits but for the person’s self-employment. Counsel therefore said a self-employed taxpayer must provide evidence of that eligibility. The email also noted that no regulations had been issued and pointed to a Tax Court summary opinion while cautioning that it was not precedent.

Ruling snapshot

• Question: What must a self-employed taxpayer show to use the section 72(t)(2)(D) medical-insurance exception?
• Outcome: Advice given: the taxpayer must present evidence that unemployment compensation would have been available under federal or state law but for self-employment.
• Key authorities: IRC § 72(t)(2)(D); Tax Court Summary Opinion 2005-78.

Full text (IRS public release)

ID: CCA_2009040814001550 Number: 200920052
Release Date: 5/15/2009
Office: --------------------------
UILC: 72.00-00

From: --------------------
Sent: Wednesday, April 08, 2009 2:00:19 PM
To: ----------------------
Cc: --------------------
Subject: RE: 72(t) exceptions

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There have not been any regulations issued regarding section 72(t)(2)(D).

A distribution qualifies under section 72(t)(2)(D) if it was made from an individual retirement plan to an individual after separation from employment:

(1) If such individual has received unemployment compensation for 12 consecutive weeks under any Federal or State unemployment compensation law by reason of such separation, sec. 72(t)(2)(D)(i)(I);

(2) if such distribution was made during any taxable year during which such unemployment compensation is paid or the succeeding taxable year, sec. 72(t)(2)(D)(i)(II); and

(3) to the extent such distribution does not exceed the amount paid during the taxable year for insurance, sec. 72(t)(2)(D)(i)(III).

A self-employed individual shall be treated as having satisfied the requirement of section 72(t)(2)(D)(i)(I) (number (1) above) if, under Federal or State law, the individual would have received unemployment compensation but for the fact that the individual was self-employed. Sec. 72(t)(2)(D)(iii). Thus, if the taxpayer is self-employed, the taxpayer has to present evidence that he would have been eligible to receive any Federal or State unemployment compensation, but for the fact that the taxpayer was self employed.

Although not able to cite as precedence, see the attached Tax Court Summary Opinion 2005-78 and how the Tax Court handled a S case dealing with section 72(t)(2)(D)(iii).