Substantially Equal Periodic Payments

[susieq]

Taxpayer is under 59 1/2. He withdrew $6,000 per year in 03, 04 and early '05 for Higher education expenses from an IRA. In April of 2005 he set up SEPP (Sect 72t) from his retirement plan in the amount of $2052. per month. He received 2 -1099's for 2005 for the withdrawals. He paid the tax with no penalty calculated due to the exceptions allowed.

In 2006, he called Fidelity and asked if he could take a withdrawal for higher education expenses he was told "yes" (being concerned about penalties). He received 12 payments of $2,052 plus a payment of $6,000 for the tuition. His 1099R for 2006 is coded a #1 in Box 7.

Was he not allowed to take the $6,000 penalty free for higher education expenses? Does this withdrawal substantially modify the payment schedule? If there are penalties - how are they calculated?

[New York Enrolled Agent]

I think you may have some problems here . It appears you significantly altered the "substantially equal payments". I would suggest you go to the Tax Court website and read a case which might answer your question. Arnold 111 T.C. No. 12