I have a guy who just came to me with an unusual situation. He turned 55 and wanted to take out his 401(k) money. Hen was advised to roll it over into an IRA. However, a few months later and in the same tax year, he distributed all the money he had rolled into the IRA and closed the IRA. My question is whether he is precluded from using the Age 55, separation from service exception for the 10% penalty tax.

In my opinion, the fact that he rolled the money into an IRA does in fact preclude him from claiming the Age 55, separation from service exception for the 10% penalty tax.

I would assume the answer is the same even though he pulled it out in the same tax year (just a few months later). Can an argument be made re the bad advice and the rollover was in error.

Not really. The IRS follows the paradigm that iginorance of the law is no excuse, and your friend could have easily asked for advice on how to proceed from any competent tax professional or even from a tax forum like this one.