Litigation

In May 2009 the IRS has issued Chief Counsel advice 200922041 which offers guidance on the meaning of "disabled" as it relates to IRC 72(m)(7), the disability exception to the 10%, pre 59 1/2 distribution penalties from IRAs and annuities (the use of  "annuities" in this case does not include structured settlement annuities). This information may be useful to financial planners, settlement planners, lawyers and settlement consultants who are reviewing resources to pay for care and living expenses and developing strategies for a plaintiff's recovery. Provided a person qualifies and has offsetting deductions, it may be more advantageous to break an IRA under the exception and take in taxable income, to take advantage of tax exempt build up and payout in a structured settlement.

Per CCA 200922041, in order to be considered disabled as defined in Code section 72(m)(7),

1. The individual has to establish that he was not able to work in the year of the distribution at an activity comparable to the one in which he would customarily engage. 
2. The individual must also meet the criteria of the Regulations such that with reasonable effort and safety to himself, the impairment cannot be diminished to the extent that the individual will not be prevented by the impairment from engaging in his customary or any other comparable substantial gainful activity

The criteria also require that the disability be one that "can be expected to result in death or to be of long-continued and indefinite duration." The exception is not designed to preclude the 10% penalty in the case of a temporarily disability.

Relevant Case Law

1. In Re Black, 204 BR 701 (1996)
2. Dwyer v Commissioner, 106 T.C. 337 (1996)