Watson v. Commissioner is not very relevant since it deals with someone who separated from service before the year they reached age 55 (separation from service occurred at age 53) and therefore did not qualify for the exception regardless of which way 72(t)(2)(A)(v) is enforced. Watson v. Commissioner is not to be treated as precedent, so the fact that section 72(t)(2)(A)(v) was (unnecessarily for the purpose of the case) interpreted differently than in IRS Notice 87-13 should not replace the statement in Notice 87-13, but could indicate how the Tax Court might rule if the IRS chooses to ignore its own guidance in Notice 87-13.
If the plan follows the rule as stated in Notice 87-13, the plan should be reporting the distribution with code 2 no matter when during the year the employee reached age 55. The IRS is unlikely to disagree with a code-2 reported by the plan.
