10% Early Distribution Penalty Is a Tax

It’s not a penalty despite being called one. That’s what the Tax Court said when a 42-year old worker who took a distribution from the New York State pension plan. She reported the distribution of $9,026 but didn’t pay the 10% penalty, arguing it was not a mere addition to tax, but a penalty requiring written IRS supervisory approval (Grajales, 156 TC No. 3).

The Tax Court has repeatedly stated that the 10% extraction is a tax and not a penalty. It’s an addition to tax or additional amount. The court rejected her urging that it adopt a “functional approach” that the U.S. Supreme Court used in 2012 to hold the individual mandate in the Affordable Care Act constitutional. There is no constitutional issue in contention in the present case.