Great points everyone.
My son doesn't have an older sister, but a younger one, and no older friends so I don't believe he is learning from his peers.
My gut tells me he is doing this (peeing when in time-out) bacausse he CAN.
This is the same kid who brings a pail of sand from the sandbox, and when I tell him to put it back IN the sandbox, he dumps it on his feet with a smile on his face.
Last week, he grabbed his Nana's waterbottle, she asked him for it back, he looks at her, and dumps it on the ground. haha He's got a troublemaker personality that's for sure!
So just judging by his behaviour style, I dont't think he is doing this because his body simply can't handle the 'stress' of a time-out. He laughs in my face when I send him, and mostly dances around testing me while there. A handful of times, he actually cries but it hasnt been consistant with his peeing incidents.

Oh well. anyways, he hasnt done it since, but I like the idea of before him serving his time-out, that he sit on the potty first.