I am 59, was severed from my company. Had company 401k and took contribution out on this and did not roll it into IRA. Now am told have to pay 10% penalty but according to tax code 72(t)(2)(A)(v) since I am over 55, had company owned 401k, did not roll into IRA and was severed I can withdraw without the penalty. Also, I chose to have 20% taxes taken out to be on safe side. Do I have to pay penalty?

You are correct, Given the circumstances cited, you ARE exempt from the 10% Early Withdrawal Penalty.

But you must file Form 5329 and explain the circumstances to the IRS.