Client will reach 59.5 after taking funds from account but before the 60 day period for the rollover is up. Is any amount not rolled over to new IRA subject to 10% penalty or just income tax?

According to IRC section 72(t), the 10% premature distribution penalty will apply unless the distribution is made on or after the date the taxpayer reaches age 59-1/2, unless one of the other exceptions apply.

Look at Form 1099-R when the payor issues it. Box 7 will contain a code. A code "1" means that there is no known exception to the penalty. Code "7" reflects a regular distribution. Maybe your client will get lucky and the 1099-R will be coded with a 7

Hope this is of help.

I was hoping that 72(t)(i) might have a little flexibility like (t)(v)which says "after attainment of age 55" but doesn't really mean it. Thank you Michael.

Interesting! So the fellow should roll the funds into an IRA and then withdraw them (at which time he would be over 59-1/2)?

If you take the withdrawal before the actual date that you attain age 59½, you WILL be penalized. There is no grace period. A distribution that is not rolled over within 60 days relates back to the date of the original withdrawal.