In the English language, an indefinite article refers to people or things in general. In the language of tax law, “indefinite” has a specific meaning within the rules for determining whether a taxpayer is disabled. As defined in the regulations, indefinite means it cannot reasonably be anticipated that the impairment will, in the foreseeable future, be so diminished as no longer to prevent substantial gainful activity (treasury regulation 1.72-17A(f)(2)).
In Docket No. 25409-14S (Prendergast), the tax court considered whether alcoholism is a disability expected either to continue for a long and indefinite period.
The taxpayer, a licensed insurance broker, developed a serious drinking problem in 1985 or 1986. In 1990, he was diagnosed with acute alcoholism and abnormal liver function. In 1991, after an arrest for driving while intoxicated, he was admitted to the hospital for treatment.
After his hospitalization, the taxpayer admitted himself into a two-week inpatient substance abuse facility and then received six weeks of outpatient treatment. After some success in remaining sober, he relapsed in 2001, 2002, 2003, and 2004, resulting in additional admissions to the treatment facilities. During this time, he was fired from a security sales job for drinking.
He and his wife incorporated his insurance business as an S corporation and he maintained a sole proprietorship for his financial services. He was the only one operating these businesses and income for both businesses steadily declined. In 2012, the gross receipts from the insurance business were generated from customers renewing their insurance policies and not from the taxpayer’s services. He was unable to work for the business in any meaningful way in 2012.
In 2012, the taxpayer experienced a relapse that resulted in three hospital visits, including a trip to the emergency room for falling down in his house while intoxicated. Throughout 2012, the taxpayer had only short bouts of sobriety and spent most of his time on his couch, intoxicated and unable to perform basic functions for himself such as eating and bathing. His wife was his caretaker during this time.
The taxpayer’s physician has opined, “It is highly doubtful that [the taxpayer] could have sustained any gainful employment in 2012 due to his condition” and that any continued use of alcohol “will prevent any type of continued employment and will be the cause of [his] death.”
The taxpayer took three trips in 2012. He went to Des Moines, Iowa for continuing education and licensing. He went to Louisville, Kentucky, for a company product trip overnight. In addition, he went to Tampa, Florida, for continuing education and licensing. He flew to Des Moines but drove himself to Louisville and Tampa. During at least two of the trips, the taxpayer experienced acute bouts of alcoholism. He had to extend his time in Tampa for several days before he could make it safely home.
During 2012, the taxpayer, who was not yet 59-1/2 years old, received a $57,881 distribution from a qualified retirement plan. He reported the distribution on his 2012 federal income tax return but did not report the 10% additional tax under section 72(t).
The IRS says the taxpayer is liable for the additional tax because the alcoholism does not qualify as a disability.
The taxpayer says he is not liable for the additional tax because he was disabled during 2012 and an exception applies.
From Internal Revenue Code Section 72(t)(1) and (2)(A) (i): Generally, if a taxpayer receives a distribution from a qualified retirement plan before attaining the age of 59-1/2, the tax on the amount distributed is increased by 10% of the total distribution.
From Internal Revenue Code Section 72(t)(2)(A)(iii): The additional tax is not imposed, however, if the distribution is “attributable to the employee’s being disabled within the meaning of subsection (m)(7).”
From Internal Revenue Code 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 such form and manner as the Secretary may require.
From Treasury regulation 1.72-17A(f)(3): In order to meet the requirements of section 72(m)(7), an impairment must be expected either to continue for a long and indefinite period or to result in death. Ordinarily, a terminal illness because of disease or injury would result in disability. The term “indefinite” is used in the sense that it cannot reasonably be anticipated that the impairment will, in the foreseeable future, be so diminished as no longer to prevent substantial gainful activity. For example, an individual who suffers a bone fracture which prevents him from working for an extended period of time will not be considered disabled, if his recovery can be expected in the foreseeable future; if the fracture persistently fails to knit, the individual would ordinarily be considered disabled.
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The taxpayer’s physician diagnosed him with alcoholism in 1990 and the taxpayer continues to be afflicted with this disease today. He therefore has a “medically determinable physical or mental impairment.”
The IRS contends the taxpayer’s impairment has not rendered him unable to engage in any substantial gainful activity because his businesses were going concerns in 2012 and generated gross receipts and business expenses, and because the taxpayer took three trips in 2012 related to his work.
However, the gross receipts were a result of (1) a single transaction the taxpayer was able to conduct during a brief period of sobriety, and (2) insurance policy renewals that did not require him to perform substantial services. Because the taxpayer was the only one operating these businesses, it is clear that in prior years when his alcoholism was less severe he provided much more meaningful and substantial service to the businesses.
The relapse in 2012 caused him to spend most of his time on the couch unable to care for himself let alone operate the two businesses. Although he attempted to undertake three business trips in 2012, the taxpayer was unable to remain sober throughout the trips and had to extend the Tampa trip by several days before he was sober enough to travel home.
We therefore find that the taxpayer was unable to engage in his customary, or any comparable, substantial gainful activity because of his alcoholism.
To meet the requirements of section 72(m)(7), the taxpayer’s alcoholism at the time of the distribution must have been expected either to continue for a long and indefinite period or to result in death. Although the taxpayer had periods in previous years where his drinking fluctuated in severity, the 2012 relapse was particularly severe, with multiple hospital trips and only intermittent and brief bouts of sobriety.
Considering the severity of the taxpayer’s condition and his physician’s letter stating that alcoholism will likely cause his death, during 2012 it was not reasonably foreseeable when, if ever, the taxpayer would be able to return to his regular activities in the businesses.
Moreover, the taxpayer’s alcoholism was not “remediable” because it was so chronic and severe in 2012 that it rendered him unable to take the steps necessary to break his more than 20-year chain of addiction with reasonable effort and safety.
The taxpayer was unable to operate his businesses throughout 2012 with the exception of one transaction. Multiple treatment programs and interventions from 1990 up to and including 2012 were unable to break his cycle of addiction.
We find that the taxpayer was disabled within the meaning of that term in section 72(m)(7) in 2012, and that he is not liable for the additional tax under section 72(t).