T.C. Memo. 1996-264
UNITED STATES TAX COURT
ALLAN R. POWELL AND JOAN K. POWELL, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 3499-93. Filed June 11, 1996.
Edward L. Blanton, Jr., for petitioners.
Alan R. Peregoy, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
DAWSON, Judge: This case was assigned to Special Trial
Judge Robert N. Armen, Jr., pursuant to the provisions of section
7443A(b)(4) of the Internal Revenue Code of 1986, as amended, and
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Rules 180, 181, and 183.1 The Court agrees with and adopts the
Opinion of the Special Trial Judge, which is set forth below.
OPINION OF THE SPECIAL TRIAL JUDGE
ARMEN, Special Trial Judge: Respondent determined a
deficiency in petitioners' Federal excise tax2 under section
4980A for the taxable year 1990 in the amount of $45,991.3 In an
amended petition, petitioners claimed an overpayment of income
tax by electing to use the 10-year forward averaging provisions
under section 402(e)(1).
After a concession by respondent,4 the primary issue for
decision is whether petitioner Allan R. Powell is liable for the
15-percent excise tax under section 4980A for the taxable year
1990. The resolution of this issue turns on whether a Transfer
Refund distribution was paid from a qualified employer plan
pursuant to section 4980A(e)(2). If we decide that the Transfer
1
Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the taxable year in
issue, and all Rule references are to the Tax Court Rules of
Practice and Procedure.
2
In the notice of deficiency, respondent characterized the
deficiency as a deficiency in income tax rather than excise tax.
It would appear that respondent erred in this regard.
3
Sec. 4980A imposes a 15-percent excise tax on excess
distributions from qualified retirement plans. This tax is
included within ch. 43 of the I.R.C. and is subject to the
deficiency procedures set forth in subch. B of ch. 63 of the
I.R.C. See sec. 6211(a).
4
Respondent concedes that petitioner Joan K. Powell is not
liable for the deficiency in issue herein.
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Refund distribution was paid from a qualified employer plan under
section 4980A(e)(2), then we must also decide whether such
distribution qualifies for 10-year forward averaging under
section 402(e)(1).
FINDINGS OF FACT
Some of the facts have been stipulated, and they are so
found. Petitioners resided in Hagerstown, Maryland, at the time
their petition was filed with the Court.
Petitioner Allan R. Powell (petitioner) was a teacher for 41
years in the Baltimore and Hagerstown Public Schools until his
retirement, effective July 1, 1992. At the time of trial,
petitioner was employed as a part-time professor at Hagerstown
Junior College. As an employee of the Baltimore and Hagerstown
Public Schools, petitioner was a member of the Maryland State
Teachers' Retirement System (the Retirement System) until he
transferred to the Maryland State Teachers' Pension System (the
Pension System) on June 1, 1990.
In determination letters dated June 23, 1982, respondent
determined that the Retirement System and the Pension System were
qualified plans under section 401(a) and that they maintained
trusts that were exempt from income tax under the provisions of
section 501(a). In 1984, 2 years after respondent issued the
determination letters, the Maryland State legislature amended
some of the provisions of the Retirement System. Respondent did
not re-evaluate the provisions of the Retirement System after the
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enactment of the 1984 amendments by the Maryland State
legislature.
The Retirement System requires mandatory nondeductible
employee contributions. In contrast, the Pension System does not
generally require such contributions. The State of Maryland
contributes to both the Retirement System and the Pension System
on behalf of the members of those systems.
On May 1, 1990, petitioner elected to transfer from the
Retirement System to the Pension System, effective June 1, 1990.
As a result of the election to transfer, petitioner received a
distribution (the Transfer Refund) from the Retirement System in
the amount of $477,088.30. Petitioner received the Transfer
Refund in the form of a check dated June 29, 1990.
Petitioner's Transfer Refund consisted of $20,477.11 in
previously taxed contributions made by petitioner during his
employment tenure with Baltimore and Hagerstown Public Schools,
and $456,611.19 of taxable earnings in the form of interest. The
earnings; i.e. $456,611.19, constitute the taxable portion of the
Transfer Refund.
When petitioner transferred from the Retirement System to
the Pension System, and when he received his Transfer Refund, he
had attained the age of 64. If petitioner had not transferred to
the Pension System but rather had remained a member of the
Retirement System, he would have been entitled to retire at an
appropriate age and receive a normal service retirement benefit,
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including a regular monthly annuity. He would not, however, have
been entitled to receive a Transfer Refund because a Transfer
Refund is only payable to those who elect to transfer from the
Retirement System to the Pension System.
As a result of transferring from the Retirement System to
the Pension System, petitioner became, and presently is, a member
of the Pension System. As a member of the Pension System,
petitioner became entitled, upon retirement, to receive a
retirement benefit based upon his salary and his creditable years
of service, specifically including those years of creditable
service recognized under the Retirement System. However, because
petitioner received the Transfer Refund on account of
transferring from the Retirement System to the Pension System,
petitioner's monthly annuity is less than the monthly annuity
that he would have received if he had not transferred to the
Pension System but had ultimately retired under the Retirement
System.
On March 17, 1992, petitioner applied for a normal service
retirement from the Pension System, effective July 1, 1992.
Petitioner is currently receiving a pension from the Pension
System.
On their Federal income tax return (Form 1040) for 1990,
petitioners reported "total pensions and annuities" in the amount
of $477,088. Of this amount, petitioners reported $456,611 as
the taxable amount.
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In the notice of deficiency, respondent determined a
deficiency in petitioners' excise tax under section 4980A in the
amount of $45,991.5 In an amended petition, petitioners claimed
an overpayment of income tax by electing to use the 10-year
forward averaging provisions under section 402(e)(1). Respondent
contends that petitioners do not qualify for 10-year forward
averaging because the Transfer Refund did not constitute a "lump
sum distribution" within the meaning of section 402(e)(4)(A).
OPINION
The primary issue for decision is whether petitioner Allan
R. Powell is liable for the 15-percent excise tax under section
4980A for 1990. As previously noted, the resolution of this
issue turns on whether the Transfer Refund was paid from a
qualified employer plan within the meaning of section
4980A(e)(2).
Section 4980A imposes a 15-percent excise tax on excess
distributions from qualified retirement plans. Sec. 4980A(a).
As relevant herein, an "excess distribution" is defined as the
aggregate amount of "retirement distributions" with respect to
any individual during any calendar year to the extent that such
amount exceeds $150,000. Sec. 4980A(c)(1). The definition of an
excess distribution is modified, however, for a "lump sum
5
See supra note 4 regarding respondent's concession; see
supra note 2 regarding respondent's mischaracterization of
petitioners' excise tax deficiency.
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distribution" to which a forward averaging election under section
402(e)(4)(B) applies. Thus, as relevant herein, if the aggregate
retirement distributions with respect to any individual include a
lump sum distribution to which an election under section
402(e)(4)(B) applies, an "excess distribution" exists to the
extent that the retirement distributions exceed $750,000; i.e.,
five times the amount of the limitation otherwise provided by
section 4980A(c)(1). Sec. 4980A(c)(4).
Retirement distributions are the amount distributed to an
individual under an individual retirement plan or any "qualified
employer plan" with respect to which such individual is or was
the employee. Sec. 4980A(e)(1). As relevant herein, section
4980A(e)(2) defines a qualified employer plan as "a plan
described in section 401(a) which includes a trust exempt from
tax under section 501(a)" and a plan which, at any time, has been
determined by the Commissioner to be such a plan.
Petitioners contend that the Retirement System does not
satisfy the definition of a qualified employer plan for two
primary reasons. First, petitioners argue that the term
"qualified employer plan" as used in section 4980A(e)(2) and
section 54.4981A-1T(a-3)(c)(2), Temporary Qualified Pension Plan
Excise Tax Regs., 52 Fed. Reg. 56750 (Dec. 10, 1987), does not
contemplate governmental plans such as the Retirement System.
Second, petitioners argue that the amendments made to the
Retirement System in 1984 violate various provisions of section
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401(a) and terminated its qualified status so that the Retirement
System was not a qualified employer plan at the time that it
issued petitioner's Transfer Refund in 1990. Petitioners further
argue that the excise tax under section 4980A should not apply to
petitioner's Transfer Refund unless the Retirement System was a
qualified employer plan at the time that it distributed the
Transfer Refund.
We have previously considered and rejected petitioners'
contention in Montgomery v. Commissioner, T.C. Memo. 1996-263.
We see no need to revisit the issue. Therefore, for the reasons
stated in Montgomery v. Commissioner, supra, we hold that
petitioner received a retirement distribution under section
4980A(e)(1) in the amount of $456,611.
We now turn to petitioners' alternative argument. If the
Retirement System is a qualified employer plan, petitioners
contend the following: (1) The Transfer Refund was a lump sum
distribution, (2) petitioner elected forward averaging under
section 402(e), and (3) there was no excess distribution because
petitioners's lump sum distribution and annuity payments did not
exceed $750,000. The resolution of this issue turns on whether
the Transfer Refund constitutes a lump sum distribution within
the meaning of section 402(e)(4)(A).
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A "lump sum distribution" is defined in section 402(e)(4)(A)
as follows:
(A) Lump sum distribution.--For purposes of this
section * * * , the term "lump sum distribution" means
the distribution or payment within one taxable year of
the recipient of the balance to the credit of an
employee which becomes payable to the recipient--
(i) on account of the employee's death,
(ii) after the employee attains age 591/2,
(iii) on account of the employee's separation from the
service, or
(iv) after the employee has become disabled * * *
from a trust which forms a part of a plan described in
section 401(a) and which is exempt from tax under
section 501 * * * . For purposes of this subsection,
the balance to the credit of the employee does not
include the accumulated deductible employee
contributions under the plan (within the meaning of
section 72(o)(5)). [Emphasis added.]
There is no dispute that the Transfer Refund was received by
petitioner after he attained the age of 591/2, nor is there any
dispute that the Transfer Refund was distributed within a single
taxable year. Moreover, for purposes of deciding whether
petitioner received a lump sum distribution, there is no dispute
that the Retirement System is a plan described in section 401(a)
and that the trust forming a part of the Retirement System is
exempt from tax under section 501. Therefore, the only issue is
whether petitioner received the "balance to the credit" when he
received the Transfer Refund
In determining a taxpayer's "balance to the credit", section
402(e)(4)(C) provides in relevant part:
(C) Aggregation of certain trusts and plans.--For
purposes of determining the balance to the credit of an
employee under subparagraph (A)--
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(i) all trusts which are part of a plan shall
be treated as a single trust, all pension
plans maintained by the employer shall be
treated as a single plan * * * . [Emphasis
added.]
This Court has previously held that section 402(e)(4)(C)
requires that we treat the Retirement System and the Pension
System as a single pension plan. Dorsey v. Commissioner, T.C.
Memo. 1995-97; Brown v. Commissioner, T.C. Memo. 1995-93; Hoppe
v. Commissioner, T.C. Memo. 1994-635; Hamilton v. Commissioner,
T.C. Memo. 1994-633; see Wheeler v. Commissioner, T.C. Memo.
1993-561; see also Sites v. United States, 75 AFTR 2d 95-2503,
95-1 USTC par. 50,280 (D. Md. 1995). Thus, as a consequence of
aggregating the Retirement System and the Pension System, we have
held that a taxpayer's transfer from the Retirement System to the
Pension System allows the taxpayer to receive the balance to his
or her credit in two parts, an initial single payment (the
Transfer Refund) and a reduced monthly annuity (based on all of
the taxpayer's years of creditable service and on the taxpayer's
salary during those years). Thus, we have consistently held that
a Transfer Refund does not constitute a taxpayer's entire
"balance to the credit" in the Retirement and Pension Systems and
is therefore not a lump sum distribution within the meaning of
section 402(e)(4)(A).
In view of the foregoing, we hold that the Transfer Refund
did not constitute a lump sum distribution within the meaning of
section 402(e)(4)(A) because petitioner did not receive the
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"balance to the credit" when he transferred from the Retirement
System to the Pension System. Accordingly, petitioners are not
entitled to the increased threshold amount, i.e., $750,000, set
forth in section 4980A(c)(4) in determining the amount of
petitioner's excess distributions for purposes of the excise tax
under section 4980A.
Because petitioner received a retirement distribution under
section 4980A(e)(1) in the amount of $456,611, we sustain
respondent's determination that petitioner received an excess
retirement distribution in the amount of $306,611 ($456,611 less
$150,000) and petitioner is therefore liable for the 15-percent
excise tax under section 4980A.
We have considered petitioners' remaining arguments
regarding section 4980A and find them unpersuasive.
Finally, we reject petitioners' claim of an overpayment of
income tax because the Transfer Refund does not qualify for 10-
year forward averaging under section 402(e)(1). The law is clear
that if a distribution is not a "lump sum distribution" within
the meaning of section 402(e)(4)(A), then such distribution does
not qualify for forward averaging under section 402(e)(1). E.g.,
Clark v. Commissioner, 101 T.C. 215, 218-219 (1993). We have
already held, supra at p. 10, that the Transfer Refund did not
constitute a lump sum distribution because petitioner did not
receive the "balance to the credit" when he transferred from the
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Retirement System to the Pension System. Consequently, the
Transfer Refund does not qualify for forward averaging.
In order to give effect to our disposition of the disputed
issues, as well as respondent's concession,
Decision will be entered
under Rule 155.