Tax Court Corrects IRS (and the Taxpayer) On Computing Tax on IRA Distribution.

The petitioner made an initial contribution of $1000.00 to an IRA and did not claim any deduction for the contribution.  The petitioner took a distribution of $950.81 from the IRA in 2010 at a time when the petitioner was less than age 59.5.  The petitioner received a Form 1099-R for that amount, but did not include the amount in income.  The IRS claimed that the full amount should have been included in income.  The Tax Court concluded that I.R.C. Sec. 72(e) applied which allows the taxpayer's investment in the IRA to be taken into account when computing the amount of the distribution to be included in gross income.  The court rejected the taxpayer's argument that because the distribution was less than his investment that the distribution should be treated as a return of the petitioner's investment.  The court also rejected the notion that the distribution was fully taxable.  Instead, the court told the parties to compute the taxable amount by utilizing I.R.C. SEc. 72(e)(3) and include in income the untaxed increase in the IRA value attributable to interest and investment growth from 2008 until the time of the distribution.  Morles v. Comr., T.C. Sum. Op. 2015-13. 

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