I think that the general public believes that the answers to questions of law, in general, and tax law, in particular, are found by investigating arcane points of case law and statutory construction. Of course, that is often the case. However, just as often, answers turn on facts and knowledge that is outside of the hermetic world of cases and statutes. Oliver Wendell Holmes was right: "the path of law is experience, not logic." This basic precept was ignored by the U.S. Tax Court in the case of Keeley v. Commissioner.
In 1996, Mr. Keeley left a well-paying job because in each of the previous 3 to 4 years at the job his compensation had been cut. He attempted to become a commissioned life insurance agent without success. As a consequence, in 1997 he had a mental breakdown. He suffered from and was treated for moderate to severe depression. His income from employment suffered as a result.
In 1997 and 1998, as a result of this diminution in income, he and his wife had to make premature withdrawals from their qualified retirement plans. In order to avoid the imposition of the 10% penalty on these premature withdrawals, they attempted to invoke the provisions of I.R.C. Section 72(t)(2)(A)(iii). That section provides that a premature withdrawal of funds from a qualified plan is not subject to the penalty if the taxpayer is disabled within the meaning of Code Section 72(m)(7) which provides that "an individual shall be considered to be disabled if he is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or to be of long-continued and indefinite duration. An individual shall not be considered to be disabled unless he furnishes proof of the existence thereof in such form and manner as the Secretary may require."
Section 1.72-17A(f)((2)(vi) of the Treasury Regulations gives, as an example of a disability, "Mental diseases (e.g., psychosis or severe psychoneurosis) requiring continued institutionalization or constant supervision of the individual." The Regulations also provide that an impairment that is remediable does not constitute a disability. Specifically, Treas. Reg. Section 1.72-17A(f)(4) provides that: "An individual will not be deemed disabled if, with reasonable effort and safety to himself, the impairment can be diminished to the extent that the individual will not be prevented by the impairment from engaging in his customary or any comparable substantial gainful activity."
The Court concluded that Keeley did not suffer from a mental disease because he did not require continued institutionalization or constant supervision. Additionally, the Court concluded, without any real discussion, that Keeley's condition was not irremediable.
The first part of the Court's conclusion is based on precedent (i.e., logic) not real world experience. Anyone who has walked through the District of Columbia or any other major city should be aware of the mentally impaired homeless who populate the streets. They're there because we have medications available that allow us to dump them there and we thus avoid the expense of "continued institutionalization or constant supervision" of these individuals. Nevertheless, no one would argue that they suffer from mental illness. To pretend otherwise is simply to ignore reality. And, in this case, it was clear from the evidence presented that Keeley actually suffered from mental illness. However, the court applied the restrictive definition of the concept found in the regulations (but absent from the statute).
The court may have reached the conclusion that Keeley's condition was not irremediable based on the fact that, by 1998, he had been able to obtain gainful employment. However, the test of whether the disability is reasonably expected to be of long-continued and indefinite duration should be made based upon the condition of the taxpayer when the withdrawal from the qualified plan is made. In this case, at least in 1997, it seemed clear that Keeley's depression met this standard and there was no evidence to the contrary.
The case is also troubling because the court ties the overly restrictive test for disability set forth in the regulations to the statutory provision in Section 72 that requires the taxpayer to provide "proof of the existence [of a disabling mental illness] in such form and manner as the Secretary may require." Here, the court mistakes the grant of authority to set forth the manner in which the disability must be reported with a grant of authority to the Treasury define what constitutes a long-term disability for purposes of the statute.
The best part of the decision is that it is a summary disposition and cannot be treated as precedent for any other case. Thus, the Court is not bound by the opinion and free to ignore the holding in the future.