Logsdon v. Commissioner

T.C. Memo. 1997-8

UNITED STATES TAX COURT

GARY BENTON LOGSDON AND KAREN RUTH LOGSDON, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 10919-94. Filed January 6, 1997.

Gary Benton Logsdon and Karen Ruth Logsdon, pro se.

Kathey I. Shaw, for respondent.

MEMORANDUM OPINION

HAMBLEN, Judge: Respondent determined a deficiency in

petitioners' 1991 Federal income tax of $25,281 and an accuracy-

related penalty of $4,870 pursuant to section 6662(a). Unless

otherwise indicated, all section references are to the Internal

Revenue Code in effect for the year at issue, and all Rule
 - 2 -

references are to the Tax Court Rules of Practice and Procedure.

After concessions, the principal issue for decision is whether

the lump-sum credit from the Civil Service Retirement System

(CSRS) is includable in petitioners' gross income pursuant to

sections 72(e) and 402(a). If the lump-sum credit is taxable,

the subsidiary issue for decision is whether a portion of any

deemed deposit or deemed redeposit in respect of that lump-sum

credit is includable in petitioners' gross income pursuant to

section 72(b) rather than pursuant to section 72(e).

Background

All of the facts have been stipulated pursuant to Rule 122.

The stipulated facts and the attached exhibit are incorporated in

our findings by this reference. At the time the petition was

filed, petitioners resided in Portland, Oregon. Petitioners'

1991 joint Federal income tax return (1991 return) was prepared

and filed on the cash receipts and disbursements method.

During 1991, Gary B. Logsdon retired from the Federal

Government and received a lump-sum payment in the amount of

$62,873. On their 1991 return, petitioners reported $11,808 of

the above amount on lines 17a (Total pensions) and 17b (Taxable

amount). No other entry or reference was made by petitioners on

their 1991 return for the $51,065 balance of the lump-sum

payment. Respondent determined that petitioners were required to

include the lump-sum payment in their gross income in 1991.
 - 3 -

Discussion

Petitioners bear the burden of proving that respondent's

determinations in the notice of deficiency are erroneous. Rule

142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). The fact

that the case was submitted fully stipulated does not alter

petitioners' burden of proof or the effect of a failure of proof.

Rule 122(b); Borchers v. Commissioner, 95 T.C. 82, 91 (1990),

affd. 943 F.2d 22 (8th Cir. 1991).1

Federal employees eligible to participate in the CSRS make

mandatory contributions from their salary to the Civil Service

Retirement and Disability Fund (Fund). 5 U.S.C. secs. 8334(a),

8331(5) (Supp. 1991). The employing agency withholds such

mandatory contributions from the employee's salary. 5 U.S.C.

sec. 8334(a)(1). The amount so withheld for CSRS from an

employee's salary is taxable in the year in which the mandatory

1
Petitioners stipulated that Mr. Logsdon received a lump-sum
payment in the amount of $62,873 but reported only $11,808 as
income. After trial, petitioners seek relief from the above
stipulation with regard to the amount received, attaching a copy
of Mr. Logsdon's Form 1099R to their reply brief. Mr. Logsdon's
Form 1099R had not been admitted into evidence when this case was
accepted as fully stipulated on Oct. 2, 1995. Such evidence must
be presented to the Court in accordance with the Rules governing
trials. See Rule 143(b). On Oct. 2, 1995, the record in this
case was closed. Accordingly, Mr. Logsdon's Form 1099R is not
admitted into evidence and is not a part of the record.
Moreover, by suggesting this change to the stipulation for the
first time in their posttrial brief, petitioners are advancing a
position that respondent was unable to develop for trial and that
would prejudice respondent's case. Consequently, we shall not
permit petitioners to qualify the parties' stipulation. Rule
91(e); Louisiana Land & Exploration Co. v. Commissioner, 90 T.C.
630, 648-649 (1988).
 - 4 -

contribution is withheld. Malbon v. United States, 43 F.3d 466,

467 (9th Cir. 1994). Contributions by the employing agency and

any accrued interest are taxable upon distribution to the

eligible employee. Secs. 72, 402(a).

Federal employees who met the retirement eligibility

requirements and retired after June 5, 1986, could elect the

basic annuity or the alternative annuity. 5 U.S.C. secs.

8342(a), 8343a. The basic annuity is determined by years of

service and salary at retirement. 5 U.S.C. sec. 8339. The

alternative annuity provides the employee with a lump-sum credit

and a reduced annuity. 5 U.S.C. sec. 8343a. A lump-sum credit

is the unrefunded amount of the employee's contributions and

deposits covering earlier service. 5 U.S.C. sec. 8331(8).2 The

present value of the alternative annuity is designed to be the

2
5 U.S.C. sec. 8331(8) (Supp. 1991) defines a lump-sum
credit, in part, as the unrefunded amount consisting of:

(A) retirement deductions made from the basic pay of an
employee * * *;

(B) amounts deposited by an employee * * * covering
earlier service, including any amounts deposited under
section 8334(j) of this title; and

(C) interest on the deductions and deposits at 4
percent a year to December 31, 1947, and 3 percent a
year thereafter compounded annually to December 31,
1956, or, in the case of an employee * * * separated or
transferred to a position in which he does not continue
subject to this subchapter before he has completed 5
years of civilian service, to the date of the
separation or transfer * * *
 - 5 -

actuarial equivalent to the present value of the basic annuity.

5 U.S.C. sec. 8343a(c).

I. Taxability of a Lump-Sum Credit

Section 72(e) governs the taxation of amounts received under

an annuity contract but not received as an annuity. Sec.

72(e)(1)(A).3 Section 72(e)(2)(A) provides that any amount

subject to section 72(e) (i.e., an amount received under an

annuity contract but not received as an annuity) shall be

included in gross income if it is received on or after the

annuity start date.4 Section 72(e)(5)(E), however, excludes such

an amount from gross income to the extent the amount received is

in full discharge of a contract.5 Section 72(d) provides, for

3
Sec. 72(e)(1)(A) provides:

In general.--This subsection shall apply to any amount
which--

(i) is received under an annuity, endowment, or
life insurance contract, and

(ii) is not received as an annuity, if no
provision of this subtitle (other than this subsection)
applies with respect to such amount.
4
Sec. 72(e)(2) provides in pertinent part:

General rule.--Any amount to which this subsection
applies--

(A) if received on or after the annuity starting
date, shall be included in gross income * * *
5
Sec. 72(e)(5)(E) provides:
(continued...)
 - 6 -

purposes of section 72, "employee contributions * * * under a

defined contribution plan may be treated as a separate contract."

To be treated as a separate contract under section 72(d),

contributions must be made under a defined contribution plan.

Section 414(k)(2) creates a hybrid plan, one with both a defined

benefit and a defined contribution component. Section 414(k)(2)

allows a defined benefit plan to be treated as a defined

contribution plan to the extent the benefits are based on the

separate account of a participant and as a defined benefit plan

with respect to the remaining portion of benefits under the

plan.6

5
(...continued)
Full refunds, surrenders, redemptions, and maturities.-
-This paragraph shall apply to--

(i) any amount received, whether in a single
sum or otherwise, under a contract in full discharge of
the obligation under the contract which is in the
nature of a refund of the consideration paid for the
contract, and

(ii) any amount received under a contract on
its complete surrender, redemption, or maturity.

In the case of any amount to which the preceding sentence
applies, the rule in paragraph [72(e)](2)(A) shall not
apply.
6
Sec. 414(k) provides in part:

SEC. 414(k). Certain Plans.--A defined benefit
plan which provides a benefit derived from employer
contributions which is based partly on the balance of
the separate account of a participant shall--

* * * * * * *
(continued...)
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The parties agree that Mr. Logsdon elected under 5 U.S.C.

section 8343a to receive an alternative annuity consisting of a

lump-sum credit and a reduced annuity. The parties also agree

that Mr. Logsdon's contributions to the CSRS should be recovered

tax free. Consequently, this case does not involve the question

of whether Mr. Logsdon can recover his contributions tax free but

rather when that recovery should occur.

While petitioners acknowledge that the CSRS plan, in which

Mr. Logsdon participates, is a defined benefit plan, they argue

that Mr. Logsdon's contributions were made to a separate account

in the CSRS, thus satisfying the separate-account requirement of

section 414(k). Thus, petitioners assert that his receipt of the

lump-sum credit in 1991 was simply a tax-free return of his

contributions. Respondent, however, contends that case law is

settled that the lump-sum credit must be reported as taxable

income in the year received pursuant to section 72(e)(2).

Petitioners concede that for a separate account to be

recognized as a defined contribution plan for purposes of section

414(k), it must have some of the characteristics of a defined

contribution plan. Section 414(i) defines a defined contribution

6
(...continued)
(2) for purposes of [section] 72(d) * * * be
treated as consisting of a defined contribution plan to
the extent benefits are based on the separate account
of a participant and as a defined benefit plan with
respect to the remaining portion of benefits under the
plan * * *
 - 8 -

plan as "a plan which provides for an individual account for each

participant and for benefits based solely on the amount

contributed to the participant's account, and any income,

expenses, gains, and losses, and any forfeitures of accounts of

other participants which may be allocated to such participant's

account." Although petitioners acknowledge that a defined

contribution plan must provide for an individual account for each

participant, and the benefits therefrom must be based on the

amounts contributed, they contend that gains and losses are not

required to be allocated to a participant's account and that

maintaining individual records of the participant's contributions

is sufficient. Petitioners focus on the inclusion of the terms

"any" and "may" in section 414(i) in defining a defined

contribution plan.

In support of their contention, petitioners rely upon the

decision in Guilzon v. Commissioner, 985 F.2d 819 (5th Cir.

1993), affg. on other grounds 97 T.C. 237 (1991), in which the

Court of Appeals for the Fifth Circuit rejected the Government's

assertion that earnings and losses must be allocated to the

participant's account. The Court of Appeals focused on the

language of section 414(i) and concluded that an account can

qualify as a separate account without having gains and losses

being credited to the participant's account. Id. at 822. While

ultimately concluding that the taxpayer's lump-sum credit was
 - 9 -

taxable,7 the court found that the individual accounting for

Guilzon's contributions satisfied the separate-account

requirement of section 414(k). Id.

The Court of Appeals for the Ninth Circuit addressed

petitioners' argument in Malbon v. United States, 43 F.3d 466

(9th Cir. 1994), the controlling decision in the Court of Appeals

to which an appeal in this case would lie. See Golsen v.

Commissioner, 54 T.C. 742 (1970), affd. 445 F.2d 985 (10th Cir.

1971). In Malbon v. United States, supra, the taxpayer retired

under the CSRS in 1987 and elected the alternative annuity under

5 U.S.C. sections 8342(a) and 8343a, receiving a lump-sum credit

and a reduced annuity. Malbon also contended that his

contributions were placed into a separate account in the CSRS,

constituting a separate account pursuant to section 414(k) and,

consequently, were not taxable. The Ninth Circuit rejected

Malbon's argument and the reasoning of the Fifth Circuit in

Guilzon. Malbon v. United States, supra at 469-470. Instead,

the court reasoned that

A defined benefit plan provides a benefit regardless of
the contribution amount or the success of the
investments. The amount of the benefit is guaranteed
based on years of service and salary at time of
retirement. A defined contribution plan, however,
provides a benefit dependent on the investment
performance of the contributions. The employee is not

7
The Court of Appeals for the Fifth Circuit held that
Guilzon's lump-sum credit was taxable because the CSRS did not
provide a benefit derived from employer contributions as required
by sec. 414(k).
 - 10 -

guaranteed any particular benefit, but rather is
provided with the account balance at retirement.
Section 414(k) provides that where a defined benefit
plan provides a benefit based on the separate account
of a participant, it may [be] treated as a defined
contribution plan. In essence, section 414(k) creates
a hybrid plan consisting of both a defined benefit and
defined contribution plan. In so doing, the separate
account of the participant must therefore maintain the
characteristics of a defined contribution plan. Merely
maintaining records to keep track of an individual's
contribution does not satisfy this requirement. [Id. at
470-471; emphasis added.]

The Ninth Circuit went on to observe that, because Malbon's

benefits were determined on the basis of average salary and years

of service and because the return of his contributions included

no increment for earnings thereon, there was no benefit based

upon the balance of the separate account of the taxpayer as

required by section 414(k). Without such a benefit, the court

concluded that the CSRS did not have a defined contribution

component, and Malbon's lump-sum credit was taxable in the year

received. Accord Montgomery v. United States, 18 F.3d 500 (7th

Cir. 1994); Green v. Commissioner, T.C. Memo. 1994-340.

Although petitioners concede that "the clear language of the

statutes * * * must control the outcome of this case," they also

assert that the legislative history and other nonstatutory

evidence requires a different conclusion. The Ninth Circuit in

Malbon v. United States, supra at 471, fn. 11, considered

sections 72 and 414 to be unambiguous and refused to rely upon

legislative history. Consequently, in this framework,

petitioners' argument misses the mark.
 - 11 -

The Ninth Circuit, the Courts of Appeals in three other

circuits, this Court, and the Court of Federal Claims all

concluded that a lump-sum credit does not fall within the

definition of a defined contribution plan. Malbon v. United

States, supra; Montgomery v. United States, supra; George v.

United States, 30 Fed. Cl. 371 (1994), affd. 90 F.3d 473 (Fed.

Cir. 1996); Guilzon v. Commissioner, supra at 242; Green v.

Commissioner, supra; Shimota v. United States, 21 Cl. Ct. 510

(1990), affd. 943 F.2d 1312 (Fed. Cir. 1991). We have carefully

considered petitioners' other arguments and have concluded that

they cannot prevail against the above decisions, even though, to

some extent, they have differing strands of reasoning.

Accordingly, we hold that the CSRS plan does not have a

defined contribution plan component because the separate account

requirement of section 414(k) was not met. Mr. Logsdon's lump-

sum credit is not treated as received under a separate contract

for purposes of section 72(d) and is not excludable pursuant to

section 72(e)(5)(E). Finally, we sustain respondent's

determination requiring petitioners to include the entire lump-

sum credit of $62,873 in their gross income in 1991 pursuant to

section 72(e)(2).
 - 12 -

II. Deemed Deposits

Some CSRS participants owed the Fund either a deposit or

redeposit for civilian service. The former represents the amount

retiring Government participants must pay into CSRS to obtain a

credit in determining the retirement annuity for a period in

which they were Federal employees but did not contribute to the

Fund. 5 U.S.C. sec. 8334(c) The latter represents a redeposit

of CSRS contributions that had previously been withdrawn by the

participant but which may be redeposited to obtain credit in

determining the retirement annuity for the period during which

such withdrawn contributions were originally made. 5 U.S.C. sec.

8334(d); see George v. United States, supra at 380-382.

The CSRS deemed those participants who elected the

alternative annuity and owed the Fund either a deposit or

redeposit as having paid the amount due (deemed deposit or

redeposit, respectively) in the year in which they received their

lump-sum credit. 5 C.F.R. sec. 831.2206 (1991). The CSRS

reduced the lump-sum credits of the participants by the deemed

deposit or redeposit but regarded the unreduced amount as taxable

to the participants for Federal income tax purposes. Id.

Petitioners argue that, if we hold that Mr. Logsdon's lump-sum

credit must be included in their gross income, then the amounts

representing deemed deposits or deemed redeposits should be taxed
 - 13 -

on a prorated basis pursuant to section 72(b).8 We need not

address whether any portion of Mr. Logsdon's lump-sum credit is

includable pursuant to section 72(b), for petitioners have not

established that Mr. Logsdon made a deemed deposit or redeposit.

In any event, a similar argument as to a deemed deposit was

rejected by the Ninth Circuit in Malbon v. United States, 43 F.3d

at 471-472, concluding that the economic substance of the

arrangement required that the deemed deposit be taxed as part of

the lump-sum payment in accordance with section 72(e).

III. Section 6662(a)--Accuracy-Related Penalty

Respondent determined that petitioners are liable for an

accuracy-related penalty of $4,870 pursuant to section 6662(a)

for 1991. Section 6662 imposes a 20-percent penalty on any

portion of any underpayment that is attributable to any

substantial understatement of income tax. Sec. 6662(a)(2),

8
Sec. 72(b) provides in pertinent part:

SEC. 72(b). Exclusion Ratio.--

(1) In general.-- Gross income does not include
that part of any amount received as an annuity under an
annuity, endowment, or life insurance contract which
bears the same ratio to such amount as the investment
in the contract (as of the annuity starting date) bears
to the expected return under the contract (as of such
date).

(2) Exclusion limited to investment.-- The portion
of any amount received as an annuity which is excluded
from gross income under paragraph (1) shall not exceed
the unrecovered investment in the contract immediately
before the receipt of such amount.
 - 14 -

(b)(2). Respondent based the determination of the section

6662(a) penalty on petitioners' underpayment being due to a

substantial understatement. See sec. 6662(b)(2). Section

6662(d)(1)(A) treats an understatement as substantial when it

exceeds the greater of $5,000 or 10 percent of the amount of tax

required to be shown on the return. The understatement is

reduced for purposes of section 6662(d)(1)(A) by that portion of

the understatement which is attributable to the tax treatment of

any item (1) if there is or was substantial authority for such

treatment or (2) if the relevant facts affecting the item's tax

treatment are adequately disclosed in the return or in a

statement attached to the return. Sec. 6662(d)(2)(B).

To determine whether the treatment of any portion of an

understatement is supported by substantial authority, we must

consider whether the weight of authorities in support of the

taxpayer's position is substantial in relation to the weight of

authorities supporting contrary positions. Norgaard v.

Commissioner, 939 F.2d 874 (9th Cir. 1991), affg. in part and

revg. in part T.C. Memo. 1989-390; Antonides v. Commissioner, 91

T.C. 686, 702-703 (1988), affd. 893 F.2d 656 (4th Cir. 1990);

sec. 1.6662-4(d)(3), Income Tax Regs.

With respect to the penalty under section 6662, the burden

of proof is on petitioners. Rule 142(a). Petitioners do not

argue that they had substantial authority for their position.

Rather, they argue that the penalty should not apply because they
 - 15 -

adequately disclosed the lump-sum credit to respondent. In their

reply brief, petitioners argue that they had attached a copy of

Mr. Logsdon's Form 1099R from the OPM to their tax return, and

such an attachment serves as adequate disclosure. The parties,

however, stipulated that petitioners reported $11,808 of Mr.

Logsdon's lump-sum credit as income but that the return contains

no other entries or references to the balance of $51,065.

The interpretation of a stipulation is determined primarily

by ascertaining the intent of the parties, and such intent is a

question of fact. Stamos v. Commissioner, 87 T.C. 1451, 1455

(1986). Ordinarily, a stipulation of fact is binding on the

parties, and we are constrained to enforce it. Rule 91. We

shall not permit a party to a stipulation to qualify, change, or

contradict the stipulation except where justice requires. Rule

91(e). The Court may modify or set aside a stipulation that is

clearly contrary to the facts revealed on the record. Cal-Maine

Foods, Inc. v. Commissioner, 93 T.C. 181, 195 (1989).

Petitioners' position seeks to qualify the otherwise

unambiguous stipulations. Petitioners have not argued that

justice requires that we permit them to qualify the stipulations.

There is no evidence in the record to support petitioners'

contention that Mr. Logsdon's Form 1099R was attached to their

return. The parties filed a copy of petitioners' 1991 return as

a joint exhibit. No Form 1099R attachment was included with that

exhibit. Accordingly, we conclude that petitioners did not
 - 16 -

establish that they adequately disclosed the balance of the lump-

sum credit.

The accuracy-related penalty pursuant to section 6662(b)(2)

does not apply to any portion of an underpayment if it is shown

that there was reasonable cause for that portion of the

underpayment and that the taxpayers acted in good faith with

respect to such portion. Sec. 6664(c)(1). The determination of

whether petitioners acted with reasonable cause and in good faith

depends upon the pertinent facts and circumstances. Sec. 1.6664-

4(b)(1), Income Tax Regs. The most important factor is the

extent of the taxpayers' effort to assess their proper tax

liability for the taxable year. Id. After carefully examining

the record, we find no basis on which we can conclude that

petitioners acted with reasonable cause and in good faith with

respect to any portion of the understatement determined by

respondent. By their own admission, petitioners acknowledge that

Mr. Logsdon is a "professional accountant and is well versed in

tax reporting procedures," yet they do not present any evidence

of their effort to assess their proper tax liability.

Petitioners have failed to prove that they had substantial

authority, that they adequately disclosed the relevant facts

concerning the lump-sum credit, or that they acted with

reasonable cause and in good faith with respect to any portion of

the understatement. Because petitioners' understatement for the

1991 taxable year is substantial, we sustain respondent's
 - 17 -

determination on this issue. We have considered all of the other

arguments made by petitioners and, to the extent we have not

addressed them, find them to be without merit.

Decision will be entered

under Rule 155.