If you take distributions from an IRA or qualified plan "early" (normally before age 59 1/2), you'll be subject to a 10% tax on the distribution, commonly known as the "early withdrawal penalty." However, there are various exceptions to this 10% penalty, including death, payment of medical expenses and/or health insurance, or payments for higher education expenses, among others.

Disability can also be an exception to the penalty, although the code and regulations have been a bit vague in their definition of "disability" here. Two recent Tax Court decisions helped clarify that definition.

The Internal Revenue Code defines "disabled" as "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." (Say that three times fast.) In the Tax Court cases I mentioned, the court focused on the term "indefinite."

According to the Tax Court, and based upon the appropriate regulations, determination of disability is based on the facts of each individual case. However, from the court's rulings, it's clear that:

1. The disability must prevent the taxpayer from engaging in his or her customary substantial gainful activity, or any comparable labor, considering the taxpayer's education, training, and work experience.

2. The disability must also be indefinite. That means it would not diminish enough in the foreseeable future to allow the taxpayer to resume "substantial gainful activity."

In the first case (Beverly Johnson TC Summary Opinion 2006-62), the taxpayer took a leave of absence from her job and received state disability payments from June 2003 through February 2004. At the end of 2003 (when she was age 52), the taxpayer received $48,944 from her employer's pension plan. The taxpayer reported the distribution as income on her 2003 tax return, but claimed an exception to the 10% penalty because of disability.

The taxpayer provided notes from her physician that she was totally incapacitated for a 60-day period beginning October 2, 2003, and then for another 60-day period beginning February 1, 2004. The physician also certified that the taxpayer was "released to full duty" effective June 7, 2004. At least partly because of this "release" by her physician, the Tax Court determined that her disability was not indefinite, and that the distribution was subject to the 10% early distribution penalty tax.

But in the second case (Charles Rideaux TC Summary Opinion 2006-74), the Tax Court took the opposite view. In this case, the taxpayer was engaged in hard physical labor for more than 20 years. He had a history of job-related back and shoulder problems. Additionally, he suffered a job-related knee injury in 2001 which required surgery from which he never returned to work. In March 2003, the taxpayer received a distribution from his retirement plan when he was 50 years old. He reported the amount as income on his 2003 tax return, but claimed exemption from the 10% penalty.

The taxpayer's doctor certified that he was "temporarily totally disabled" from March 2002 through December 2005. While the taxpayer's doctor described his disability as "temporary," the Tax Court concluded that there was "no reasonable indication, nor could it be reasonably anticipated or be foreseen at the time of the distribution in 2003, when or if (the taxpayer) would be able to return to work." The Tax Court also concluded that even if the injuries were initially "temporary," over time, they became indefinite. The inability to predict when, if ever, the taxpayer would be able to return to work made the disability indefinite.

So, concluded the Tax Court, since the taxpayer's injuries were of lengthy, continued, and indefinite duration, and prohibited him from engaging in his customary or any comparable gainful activity, he was in fact disabled, and the 10% penalty tax was not applied to his distribution.

If you or anybody else you know is thinking about taking a distribution and excluding the penalty under the disability exception, please remember that the disability must meet the guidelines noted above in order to "stick" with the IRS. Tax laws are tricky. Make sure that you understand them before making decisions that could affect your financial well-being.

When he's not dealing with tax issues, Fool contributor Roy Lewis is a motivational speaker who lives in a trailer down by the river. He understands that The Motley Fool is all about investors writing for investors . You can take a look at the stocks he owns , as long as you promise not to ask him which stock to buy. He'll be glad to help you compute your gain or loss when you finally sell a stock, though.