T.C. Memo. 1996-212
UNITED STATES TAX COURT
LOUIS R. AND GREGORIA S. GOMEZ, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 16990-94. Filed May 1, 1996.
Louis R. Gomez and Gregoria S. Gomez, pro se.
Gerald L. Brantley, for respondent.
MEMORANDUM OPINION
COHEN, Judge: Respondent determined deficiencies in
petitioners’ Federal income taxes as follows:
Year Deficiency
1987 $32,142
1988 3,829
1989 6,977
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Unless otherwise indicated, all section references are to the
Internal Revenue Code in effect for the years in issue, and all
Rule references are to the Tax Court Rules of Practice and
Procedure.
After concessions, the issue remaining for decision is
whether any portion of a lump-sum payment to Louis R. Gomez from
the Civil Service Retirement System in the amount of $52,227.53
in 1987 is includable in petitioners' gross income.
Background
All of the facts have been stipulated, and the stipulated
facts are incorporated in our findings by this reference. At the
time the petition was filed, petitioners resided in Las Cruces,
New Mexico.
Louis R. Gomez (petitioner) was employed by the National
Aeronautics and Space Administration (NASA) from July 30, 1964,
until his retirement on December 19, 1986. As an employee of
NASA, petitioner was subject to the Civil Service Retirement
System (CSRS). Because petitioner’s creditable service included
service with the U.S. Army, the date for computation of his
benefit commenced July 30, 1961. At retirement, petitioner had
accumulated service for computing his retirement benefit of
25 years and 10 months.
Petitioner’s total contributions plus deemed deposits and
redeposits in his CSRS account were $53,419 on the annuity
starting date. Petitioner’s highest three salary periods (used
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to compute his benefits) were 1983, 1984, and 1985 in the amounts
of $53,661, $55,807, and $57,759, respectively.
Upon his retirement, petitioner elected to receive the
survivor’s annuity for his spouse and a lump-sum payment under
the annuity option. Taking into consideration the survivor’s
annuity option, the gross monthly rate of the annuity benefit was
$1,925. Taking into consideration both the survivor’s annuity
and the lump-sum option, the gross monthly rate of the annuity
benefit was $1,796.
During 1987, petitioner received CSRS payments that totaled
$71,835.03, $52,227.53 of which was paid as a lump-sum payment
and $19,607.50 of which was paid as an annuity payment.
Discussion
Respondent determined that, based on the exclusion ratio
calculated pursuant to section 72(b), petitioners were required
to include a portion of the lump-sum payment from petitioner’s
CSRS in their gross income in 1987. Petitioners argue that such
inclusion would result in double taxation of petitioner’s
investment in the CSRS and that the lump-sum payment should be
treated as a separate account for purposes of section 72 because
the CSRS plan in which petitioner participated qualifies, in
part, as a defined contribution plan.
The amount withheld for CSRS from an employee’s salary is
taxable in the year in which the deduction is made. Malbon v.
United States, 43 F.3d 466, 467 (9th Cir. 1994); Hogan v. United
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States, 513 F.2d 170, 175 (6th Cir. 1975); Shimota v. United
States, 21 Cl. Ct. 510, 512 (1990), affd. 943 F.2d 1312 (Fed.
Cir. 1991). The amount contributed by the employing agency and
any interest earned on the employee’s investment are not taxed to
the employee until distribution. Secs. 72, 402(a).
The parties agree that petitioner’s contributions to the
CSRS should be recovered tax-free. Petitioner, however,
maintains that he is entitled to recover his contributions, free
of tax, "up front" because the lump-sum payment he received from
the CSRS represents a refund of his contributions. Respondent
relies on section 72(b), which excludes a portion of each annuity
payment from gross income, allowing for the tax-free recovery of
the participant’s contributions over the life of the annuity.
Petitioner’s lump-sum distribution was made pursuant to 5
U.S.C. sec. 8343a (Supp. 1987), which permits the continued
receipt of an annuity, reduced by the actuarial value of the
lump-sum payment. The total of the lump-sum payment plus the
reduced annuity should be actuarially equivalent to the basic
annuity that petitioner would have received in accordance with
the CSRS plan. Id. As explained in Malbon v. United States,
supra at 471:
The fact that the contribution amount was the measure
of the lump-sum does not affect the ultimate amount of
the benefit as a whole. The difference merely depends
on whether the former employee received the entire
benefit spread out over the life of the annuity, or
whether a portion was accelerated to be paid at the
time of retirement. * * *
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Thus, the lump-sum distribution is an accelerated distribution of
annuity payments that would otherwise be paid to the retiree over
the expected duration of the CSRS annuity. Montgomery v. United
States, 18 F.3d 500, 502 (7th Cir. 1994); George v. United
States, 30 Fed. Cl. 371, 377 (1994); Shimota v. United States,
supra at 522.
The distributions that petitioner received from the CSRS are
subject to taxation under section 72 pursuant to section 402(a).
Section 72 is applicable to distributions received pursuant to
the CSRS. Malbon v. United States, supra at 468; Guilzon v.
Commissioner, 97 T.C. 237, 242 (1991), affd. 985 F.2d 819 (5th
Cir. 1993); Shimota v. United States, supra at 519-520; sec.
1.72-2(a)(3)(iii), Income Tax Regs. Section 402(a) provides:
the amount actually distributed to any distributee by
any employees’ trust described in section 401(a) which
is exempt from tax under section 501(a) shall be
taxable to him, in the year in which so distributed,
under section 72 (relating to annuities). * * *
The CSRS is a plan that meets the requirements of section 401(a).
Guilzon v. Commissioner, supra at 241; Shimota v. United States,
supra at 519-520. A lump-sum payment from the CSRS is a payment
from a plan described in section 401(a) and is treated as a
payment under an annuity contract and is subject to tax under
section 72(e)(2). Guilzon v. Commissioner, supra at 242-243;
Shimota v. United States, supra at 523.
Petitioners’ argument that double taxation will occur is
without merit. Petitioner will recover his investment in the
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CSRS tax-free. This recovery, however, will be spread over the
life of the retirement annuity pursuant to the section 72(b)
exclusion ratio.
Petitioner also contends that the lump-sum payment should
not be included in gross income because it constitutes a
distribution from a defined contribution plan. Section 72(d)
provides that employee contributions under a defined contribution
plan may be treated as a separate contract. The result of such
treatment would be that the lump-sum payment received by
petitioner would be viewed in isolation from the annuity
payments, and, thus, the lump-sum payment would be a simple
return of his investment and nontaxable. See sec. 72(e)(5)(E);
Montgomery v. United States, supra at 501.
We have considered petitioners’ argument and have concluded
that the lump-sum payment does not fall within the definition of
a defined contribution plan. The cited decisions of the Fifth,
Seventh, and Ninth Circuit Courts of Appeals and the Court of
Federal Claims have used different reasoning to reach this same
result, and it is unnecessary at this time to resolve the
differences in approaches of the appellate decisions. See Green
v. Commissioner, T.C. Memo. 1994-340.
To reflect the foregoing and concessions of the parties,
Decision will be entered
under Rule 155.