The opinion
T.C. Summary Opinion 2005-78
UNITED STATES TAX COURT
HOSSAM HELMY EL-BIBANY AND SALMA HASSAN KANDIL, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 9960-04S. Filed June 8, 2005.
Hossam Helmy El-Bibany and Salma Hassan Kandil, pro sese.
Anthony J. Kim and Aaron Stonecash, for respondent.
ARMEN, Special Trial Judge: This case was heard pursuant to
the provisions of section 7463 of the Internal Revenue Code in
effect at the time that the petition was filed.1 The decision to
be entered is not reviewable by any other court, and this opinion
should not be cited as authority.
1
Unless otherwise indicated, all subsequent section
references are to the Internal Revenue Code in effect for 2001,
the taxable year in issue, and all Rule references are to the Tax
Court Rules of Practice and Procedure.
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Respondent determined a deficiency in petitioners’ Federal
income tax for the taxable year 2001 of $4,498. The deficiency
is attributable solely to the 10-percent additional tax under
section 72(t) on an early distribution from a qualified
retirement plan.
After respondent’s concession,2 the issue for decision is
whether petitioners are liable under section 72(t) for the 10-
percent additional tax on an early distribution from petitioner
Hossam Helmy El-Bibany’s (Mr. El-Bibany) retirement plan. We
hold that they are to the extent provided herein.
Background
Some of the facts have been stipulated, and they are so
found. We incorporate by reference the parties’ stipulation of
facts, supplemental stipulation of facts, and accompanying
exhibits.
At the time that the petition was filed, petitioners resided
in Menlo Park, California.
Mr. El-Bibany obtained a Ph.D. from Stanford University in
1992 and joined the faculty at Penn State University in 1993,
until his job ended in 1999. At that time, petitioners had two
small children, and petitioner Salma Hassan Kandil (Mrs. Kandil)
2
Respondent concedes that petitioners are entitled to an
exception from the early distribution penalty under sec.
72(t)(2)(E) of $846 for qualified higher education expenses for
books and supplies.
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wanted to obtain her teaching credentials, so they returned to
California.3
In the fall of 2000, Mrs. Kandil became a full-time graduate
student at San Jose State University (SJSU). As part of her
studies, Mrs. Kandil became a student teacher at Jordan Middle
School in August 2001, and she obtained her teaching credentials
in elementary education in April 2002. Currently, Mrs. Kandil is
a sixth-grade teacher of math and science at Jordan Middle
School.
During the high-tech bubble in 2000, Mr. El-Bibany worked in
“some nonemployment type of activities” related to high-tech
investments. In the beginning of September 2001, Mr. El-Bibany
left the United States on an employment contract as an
international faculty member in the United Arab Emirates. Mr.
El-Bibany, however, soon returned to the United States because of
the general atmosphere resulting from the terrorist events of
September 11, 2001. Aside from the 2 weeks he worked in the
United Arab Emirates, Mr. El-Bibany remained unemployed during
2001. At a time not disclosed in the record, Mr. El-Bibany
applied for unemployment compensation, but was not eligible
because he had not worked in California for a specified period of
time.
3
Mrs. Kandil has a bachelor’s degree in civil engineering.
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In 2001, Mr. El-Bibany withdrew $48,720 from his retirement
fund.4
Respondent does not dispute that petitioners incurred the
following expenses in 2001:5
Room and board for petitioners’
family collectively
Apartment rent $33,875
Utilities 1,200
Food 7,200
Subtotal $42,275
Health insurance for petitioners’
family collectively
(including health insurance
premiums and health care expenses) $1,800
Transportation for Mrs. Kandil 1,981
Books and supplies for Mrs. Kandil 846
Total $46,902
Petitioners timely filed a Form 1040, U.S. Individual Income
Tax Return, for 2001. On their return, petitioners disclosed the
$48,720 distribution and reported $44,982 as the taxable amount.
Petitioners did not report the 10-percent additional tax imposed
by section 72(t) on line 55 “Tax on qualified plans, including
IRAs, and other tax-favored accounts”, but attached Form 5329,
Additional Taxes on Qualified Plans (Including IRAs) and Other
Tax-Favored Accounts, to their return. On Form 5329, petitioners
4
There is no evidence in the record describing Mr. El-
Bibany’s retirement fund. In respondent’s trial memorandum and
on brief, respondent indicated that this fund was a “qualified
retirement fund with TIAA-CREF”. But see Rule 143(b) regarding
ex parte statements in briefs and the like.
5
Mrs. Kandil received a scholarship that covered her
tuition expense.
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indicated that the early distribution was not subject to tax
under exception 7 (Individual retirement account (IRA)
distributions made to unemployed individuals for health insurance
premiums) and exception 8 (IRA distributions made for higher
education expenses).
In the notice of deficiency, respondent determined that
petitioners are liable for the 10-percent additional tax on an
early distribution from a qualified retirement plan.
Petitioners timely filed a petition with the Court disputing
the determined deficiency.
Discussion6
Section 72(t)(1) imposes an additional tax on distributions
from a qualified retirement plan equal to 10 percent of the
portion of such amount that is includable in gross income unless
the distribution comes within one of several statutory
exceptions.7
As relevant herein, section 72(t)(2) exempts the following
distributions from the additional tax if the distributions are
made for: (1) Health insurance premiums for an unemployed
individual, sec. 72(t)(2)(D); or (2) qualified higher education
6
We decide the issue in this case without regard to the
burden of proof because the issue is essentially one of law.
7
Although the record does not describe Mr. El-Bibany’s
retirement plan, the parties have proceeded on the basis that the
distribution was from an individual retirement plan within the
scope of sec. 72(t).
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expenses for the taxpayer or the taxpayer’s spouse to the extent
such distributions do not exceed the taxpayer’s qualified higher
education expenses for the taxable year, sec. 72(t)(2)(E), (7).
A. Health Insurance Premiums
A distribution qualifies under section 72(t)(2)(D) if it was
made from an individual retirement plan to an individual after
separation from employment: (1) If such individual has received
unemployment compensation for 12 consecutive weeks under any
Federal or State unemployment compensation law by reason of such
separation, sec. 72(t)(2)(D)(i)(I); (2) if such distribution was
made during any taxable year during which such unemployment
compensation is paid or the succeeding taxable year, sec.
72(t)(2)(D)(i)(II); and (3) to the extent such distribution does
not exceed the amount paid during the taxable year for insurance,
sec. 72(t)(2)(D)(i)(III). A self-employed individual shall be
treated as having satisfied the requirement of section
72(t)(2)(D)(i)(I) if, under Federal or State law, the individual
would have received unemployment compensation but for the fact
that the individual was self-employed. Sec. 72(t)(2)(D)(iii).
Respondent does not dispute that petitioners incurred health
insurance expenses of $1,800. Respondent contends, however, that
the exception under section 72(t)(2)(D) does not apply because
Mr. El-Bibany does not satisfy the statutory requirements. We
agree.
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The record is clear that Mr. El-Bibany did not receive any
Federal or State unemployment compensation at any relevant time.
See sec. 72(t)(2)(D)(i)(I). Mr. El-Bibany, however, testified
that he worked in “some nonemployment activities” related to
high-tech investments in 2000. Mr. El-Bibany’s testimony raises
the question whether he was self-employed. See sec.
72(t)(2)(D)(iii). Assuming arguendo that he was self-employed,
there was no evidence to suggest that Mr. El-Bibany continued to
work in such “nonemployment activities” in 2001. Indeed, Mr. El-
Bibany was employed for only 2 weeks during 2001 in the United
Arab Emirates. Moreover, Mr. El-Bibany presented no evidence
that he would have been eligible to receive any Federal or State
unemployment compensation. By his own testimony, Mr. El-Bibany
applied for unemployment compensation, but he was not eligible
because he had not worked for a specified period in California.
In view of the foregoing, we conclude that petitioner does
not satisfy the requirements under section 72(t)(2)(D).
Accordingly, we sustain respondent’s determination on this issue.
B. Qualified Higher Education Expenses
Qualified higher education expenses for purposes of section
72(t)(2)(E) are defined by section 529(e)(3).8 Sec. 72(t)(7)(A).
Section 529(e)(3)(A) defines qualified higher education expenses
8
Sec. 529 sets forth criteria for higher education
entities to be exempt from taxation as a qualified tuition
program.
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specifically as “tuition, fees, books, supplies, and equipment
required for the enrollment or attendance” of the taxpayer or the
taxpayer’s spouse or child, among others, at an eligible
educational institution. In addition, an eligible student
attending school at least half-time shall also include reasonable
costs for an academic period (as determined under the qualified
State tuition program) incurred by such student for room and
board while attending such institution. Sec. 529(e)(3)(B)(i).
Section 529(e)(3)(B)(ii), however, limits the amount of room and
board expenses that may be treated as qualified higher education
expenses as follows:9
The amount treated as qualified higher education
expenses by reason of the preceding sentence [sec.
529(e)(3)(B)(i)] shall not exceed the minimum amount
(applicable to the student) included for room and board
for such period in the cost of attendance (as defined
in section 472 of the Higher Education Act of 1965, 20
U.S.C. 1087ll, as in effect on the date of the
enactment of this paragraph) for the eligible
educational institution for such period.
9
As described in the conference report, the Taxpayer
Relief Act of 1997, Pub. L. 105-34, sec. 211(a), 111 Stat. 810,
expands the definition of “qualified higher education
expenses” under section 529(e)(3) to include room and
board expenses (meaning the minimum room and board
allowance applicable to the student as determined by
the institution in calculating costs of attendance for
Federal financial aid programs under sec. 472 of the
Higher Education Act of 1965) for any period during
which the student is at least a half-time student.
H. Conf. Rept. 105-220, at 361 (1997), 1997-4 C.B. (Vol. 2) 1457,
1831.
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The statute thus mandates that room and board expenses are
limited to the minimum amount as determined in the “cost of
attendance”, as defined in the Higher Education Act of 1965, Pub.
L. 89-329, 79 Stat. 1219, as amended by the Higher Education
Amendments of 1986, Pub. L. 99-498, sec. 406 (adding sec. 472 to
the Higher Education Act of 1965), 100 Stat. 1454, codified at 20
U.S.C. sec. 108711(3) (Supp. IV 1998), as in effect on the date
of the enactment of this paragraph.10
Section 529(e)(3) was added by the Taxpayer Relief Act of
1997, Pub. L. 105-34, sec. 211(a), 111 Stat. 810. This
paragraph, however, was effective as if it were included in the
amendments to the Small Business Job Protection Act of 1996, Pub.
L. 104-188, sec. 1806, 110 Stat. 1895, which enacted section 529.
Accordingly, our analysis must be guided by 20 U.S.C. sec.
1087ll(3) (1998), as in effect on August 20, 1996, the effective
date of section 529(e)(3).
As of August 20, 1996, and as applicable to the issue in
this case, the term “cost of attendance” was defined as:
10
The Higher Education Act of 1965, Pub. L. 89-329, 79
Stat. 1219, 20 U.S.C. sec. 108711(3) (1994) was first enacted on
Nov. 8, 1965, to strengthen college and university resources and
to provide financial assistance to students in postsecondary and
higher education. As relevant herein, the Higher Education
Amendments of 1986, Pub. L. 99-498, sec. 406, 100 Stat. 1454, 20
U.S.C. sec. 108711(3) (Supp. IV 1998) added sec. 472 to the
Higher Education Act of 1965. The purpose of this section was to
define “cost of attendance” in determining a student’s financial
need for student financial aid assistance.
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an allowance (as determined by the institution) for
room and board costs incurred by the student which --
(A) shall be an allowance of not less than
$1,500 for a student without dependents
residing at home with parents;
(B) for students without dependents residing
in institutionally owned or operated housing,
shall be a standard allowance determined by
the institution based on the amount normally
assessed most of its residents for room and
board; and
(C) for all other students shall be an
allowance based on the expenses reasonably
incurred by such students for room and board,
except that the amount may not be less than
$2,500. [Emphasis added.]
20 U.S.C. sec. 1087ll(3) (Supp. IV 1998).11
Petitioners contend that their total room and board expenses
of $42,275 qualify as higher education expenses. In contrast,
respondent contends that the amount of room and board expenses
that qualify as higher education expenses is limited under
section 529(e)(3)(B)(ii). We agree with respondent.
There is no dispute that room and board expenses related to
Mrs. Kandil’s education qualify as higher education expenses.
The amount that can qualify as higher education expenses,
however, is specifically limited by statute. As stated earlier,
11
We note that the Higher Education Amendments of 1998,
Pub. L. 105-244, sec. 471(2)(B), 112 Stat. 1729, deleted the
phrase “except that the amount may not be less than $2,500”,
effective for tax years beginning after Dec. 31, 2001. This
amendment, however, does not apply in the instant case.
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section 529(e)(3)(B)(ii) allows such expenses up to the minimum
amount included for room and board in the cost of attendance as
defined by 20 U.S.C. sec. 1087ll(3) (1998). Based on the
applicable law, room and board expenses are limited to $2,500
(the minimum amount for off-campus students).
We recognize that college and graduate students may incur
expenses beyond those projected by the educational institution.12
Congress, however, has imposed limitations on the amount of room
and board expenses that qualify for favorable tax treatment.
However unfair this statute might seem to petitioners, the Court
is bound to apply the law as written. See Estate of Cowser v.
Commissioner, 736 F.2d 1168, 1171-1174 (7th Cir. 1984), affg. 80
T.C. 783 (1983). Accordingly, we conclude that petitioners are
entitled to qualified higher education expenses for room and
board of $2,500.
With regard to transportation expenses, respondent, at trial
and in his trial memorandum, conceded that Mrs. Kandil’s
qualified higher education expenses included transportation costs
up to the amount allowed as determined by SJSU. On brief,
however, respondent argues that the concession was in error. In
essence, respondent now contends that petitioners are not
entitled to an allowance for transportation expenses because such
12
For example, SJSU’s cost of attendance for a student
living off-campus for the academic year 2001-2 was $7,613.
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expenses do not qualify as higher education expenses under
section 529(e)(3)(A).
Respondent’s change in position raises the issue of
equitable estoppel against respondent. “Equitable estoppel is a
judicial doctrine that ‘precludes a party from denying his own
acts or representations which induced another to act to his
detriment.’” Hofstetter v. Commissioner, 98 T.C. 695, 700 (1992)
(quoting Graff v. Commissioner, 74 T.C. 743, 761 (1980), affd.
673 F.2d 784 (5th Cir. 1982)). It is well settled, however, that
equitable estoppel does not bar or prevent respondent from
correcting a mistake of law, even where a taxpayer may have
relied to his detriment on that mistake. Dixon v. United States,
381 U.S. 68, 72-73 (1965); Auto. Club of Mich. v. Commissioner,
353 U.S. 180, 183 (1957); see also Schuster v. Commissioner, 312
F.2d 311, 317 (9th Cir. 1962), affg. in part and revg. in part 32
T.C. 998 (1959); Zuanich v. Commissioner, 77 T.C. 428, 432-433
(1981). An exception exists only in the rare case where a
taxpayer can prove he or she would suffer an unconscionable
injury because of that reliance. Manocchio v. Commissioner, 78
T.C. 989, 1001 (1982), affd. 710 F.2d 1400 (9th Cir. 1983).
Moreover, equitable estoppel is applied “against the Government
with utmost caution and restraint”. Schuster v. Commissioner,
supra at 317.
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The doctrine of estoppel is not applicable unless the party
relying on it establishes all of the following elements at a
minimum: (1) A false representation or wrongful, misleading
silence by the party against whom estoppel is to be invoked; (2)
an error in a statement of fact and not an opinion or statement
of law; (3) ignorance of the true facts; (4) the party claiming
estoppel must be adversely affected by the acts or statements of
the person against whom an estoppel is claimed; and (5) detriment
suffered by the party claiming estoppel because of his or her
adversary’s false representation or wrongful, misleading silence.
Norfolk S. Corp. v. Commissioner, 104 T.C. 13, 60 (1995), affd.
140 F.3d 240 (4th Cir. 1998); Estate of Emerson v. Commissioner,
67 T.C. 612, 617-618 (1977); Megibow v. Commissioner, T.C. Memo.
2004-41; see also Lignos v. United States, 439 F.2d 1365, 1368
(2d Cir. 1971).
The doctrine of equitable estoppel was raised for the first
time by respondent on brief.13 Initially, respondent conceded
that qualified higher education expenses include transportation
costs. In respondent’s trial memorandum, respondent relied on
section 1.221-1(e)(2)(i), Income Tax Regs., for the proposition
13
Although the Court offered petitioners the opportunity
to file a response to respondent’s brief, petitioners did not do
so.
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that transportation costs qualify as higher education expenses.14
Section 1.221-1(e)(2)(i), Income Tax Regs., defines qualified
higher education expenses as the “cost of attendance (as defined
in section 472 of the Higher Education Act of 1965, 20 U.S.C.
1087ll, as in effect on August 4, 1997)” and further states that
consistent with 20 U.S.C. sec. 1087ll (Supp. IV 1998) the cost of
attendance includes an allowance for transportation.15
For purposes of section 72(t)(2)(E), however, section
529(e)(3) defines qualified higher education expenses as tuition,
fees, books, supplies, equipment, and room and board. Clearly,
transportation expenses are not included within this definition.
With regard to the definition of qualified higher education
expenses under section 529(e)(3)(B)(ii), the term “cost of
attendance” is applicable only in the context of determining the
minimum allowance for room and board expenses. On brief,
respondent admitted that respondent’s position was misguided by
section 1.221-1(e)(2)(i), Income Tax Regs. Thus, respondent’s
misconceived concession was an erroneous representation of law.
As such, equitable estoppel does not bar respondent from changing
respondent’s position to correct a mistake of law unless
14
Sec. 221 and the regulations thereunder set forth the
criteria to deduct interest paid on qualified education loans.
15
The Higher Education Act of 1965 sec. 472, currently
codified at 20 U.S.C. 1087ll(2) (2000), provides that the term
“cost of attendance” means an allowance for transportation as
determined by the institution.
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petitioners would suffer an unconscionable injury because of
their reliance on respondent’s concession at trial. Although
petitioners did not file a brief in response, the record in its
entirety fails to demonstrate that petitioners suffered an
unconscionable injury because of their reliance on respondent’s
misrepresentation. Accordingly, we conclude that Mrs. Kandil’s
transportation expenses do not constitute qualified higher
education expenses for purposes of section 72(t)(2)(E).
Conclusion
We have considered all of the other arguments made by
petitioners, and, to the extent that we have not specifically
addressed those arguments, we conclude that they are without
merit.
Reviewed and adopted as the report of the Small Tax Case
Division.
To reflect our disposition of the disputed issue, as well as
respondent’s concession,
Decision will be entered
under Rule 155.