T.C. Summary Opinion 2003-77
UNITED STATES TAX COURT
WALLACE W. BURKE, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 14533-01S. Filed June 18, 2003.
Wallace W. Burke, pro se.
J. Craig Young, for respondent.
DINAN, Special Trial Judge: This case was heard pursuant to
the provisions of section 7463 of the Internal Revenue Code in
effect at the time the petition was filed. The decision to be
entered is not reviewable by any other court, and this opinion
should not be cited as authority. Unless otherwise indicated,
subsequent section references are to the Internal Revenue Code in
effect for the year in issue.
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Respondent determined a deficiency in petitioner’s Federal
income tax of $812 for the taxable year 1999.
The issue for decision is what portion of the retirement
benefits petitioner received during 1999 are includable in gross
income.
Some of the facts have been stipulated and are so found.
The stipulations of fact and the attached exhibits are
incorporated herein by this reference. Petitioner resided in
Raleigh, North Carolina, on the date the petition was filed in
this case.
Petitioner is a retired teacher. Over the years, petitioner
contributed $57,665.65 to the Teachers and State Employees
Retirement System of North Carolina (TSERS). Petitioner was
taxed on the funds which he used to make $18,905.42 of these
contributions. The remaining contributions of $38,760.23 were
made with funds which were not subject to taxation in the years
in which they were earned.
During the year in issue, petitioner received a distribution
of $38,422.50 from TSERS.
For the year in issue, petitioner was issued a Form 1099-R,
Distributions From Pensions, Annuities, Retirement or Profit-
Sharing Plans, IRAs, Insurance Contracts, etc. This form
indicated that petitioner received $38,422.50 in total
distributions during that year, that the taxable portion of the
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distributions was $37,477.26, and that the nontaxable portion was
$945.24.
Petitioner filed an individual Federal income tax return for
1999. On this return, petitioner reported total pension and
annuity distributions of $37,477.26, and he reported that the
taxable portion of the distributions was $34,599.02. In the
statutory notice of deficiency, respondent determined that the
information reported on the Form 1099-R was correct.
Petitioner does not dispute receiving distributions of
$38,422.50 from TSERS during the year in issue. Petitioner
argues that respondent’s calculation of the taxable portion of
these distributions is in error.
Gross income generally includes all income from whatever
source derived, including pensions and annuities. Sec. 61(a)(9),
(11); sec. 72(a). However, portions of annuity payments may be
excludable from income under section 72(b). The excludable
portion of a payment generally is that portion which bears the
same ratio to such payment as the “investment in the contract”
bears to the expected return under the contract, determined at
the time the annuity payments begin. Sec. 72(b)(1). While the
term “investment in the contract” is defined generally as “the
aggregate amount of premiums or other consideration paid for the
contract”, sec. 72(c)(1)(A), contributions made by an employer on
behalf of an employee-taxpayer which were not includable in the
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taxpayer’s gross income generally are not part of the taxpayer’s
investment in the contract, sec. 72(f). Therefore, in the
context of this case, a taxpayer’s investment in a contract
includes only the amount of “after-tax contributions” and does
not include any “pre-tax contributions”.
On his 1999 return, petitioner elected to use the section
72(b) “safe harbor” provisions provided in Notice 88-118, 1988-2
C.B. 450, which were to be used for certain annuity payments made
from section 401(a) qualified plans, section 403(a) employee
annuities, and section 403(b) annuity contracts.1 Neither party
questions the applicability of these safe harbor provisions to
the case at hand; the dispute centers solely on the calculation
made thereunder. As discussed below, the sole remaining issue is
the proper amount of petitioner’s investment in the contract.
For purposes of illustration, the following are summaries of
the calculations made by petitioner and respondent pursuant to
the applicable worksheet provided by the Internal Revenue Service
(the relevant line numbers of the worksheet are indicated):2
1
Similar provisions were codified in sec. 72(d). This
subsection does not apply to the case at hand because it is
inapplicable to annuities which started prior to November 19,
1996. Small Business Job Protection Act of 1996, Pub. L. 104-
188, sec. 1403(b), 110 Stat. 1791.
2
Although we use these worksheets to illustrate the dispute
in this case, we note that the IRS guidance exists merely to
assist taxpayers in filing tax returns; neither the Commissioner
nor this Court is bound by such guidance where it is contrary to
(continued...)
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Petitioner Respondent
1. Total distributions received in 1999 $37,477.26 $38,422.50
2. Cost in the plan (i.e., investment in the contract) 57,665.65 18,905.42
4. Cost divided by 240 month recovery period (monthly exclusion) 240.27 78.77
5. Multiplied by 12 (yearly exclusion) 2,883.24 945.24
9. Taxable distributions received in 1999 (line 1 minus line 5) 34,594.02 37,477.26
There are two points of contention between petitioner and
respondent--the amounts reflected on lines 1 and 2. The
remaining lines in the calculation are computational and are
based upon the first two amounts.
First, petitioner in his calculation used total
distributions (line 1) of $37,477.26, rather than the $38,422.50
used by respondent. Petitioner has agreed that the latter amount
represents the total distributions he received in 1999, thus
respondent’s use of this amount in his calculation is correct.
Second, petitioner used a total cost in the plan, or
investment in the contract (line 2), of $57,665.65. The amount
used by petitioner represents the total contributions petitioner
made to the plan, using both taxed and untaxed funds. However, a
taxpayer’s investment in a contract generally includes only the
amount of after-tax contributions and does not include pre-tax
contributions. Sec. 72(f). Thus, the amount of $18,905.42 used
by respondent--the amount representing only those contributions
which were made using previously taxed funds--is the correct
amount.
2
(...continued)
the law. Dixon v. United States, 381 U.S. 68 (1965); Automobile
Club v. Commissioner, 353 U.S. 180 (1957).
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The calculations reflected on lines 4, 5, and 9 effectively
reduce the amount of the gross distribution received by
petitioner during 1999 by a ratable portion of the taxed
contributions he made to his retirement plan, as allowed by
section 72(b).
Petitioner argues in his petition that the “IRS alleges the
gross distribution retirement pension amount (Form 1099-R, Box 1)
is the Federal taxable amount of my pension for computing my
Federal income tax on Form 1040, Line 16a.” We note that the
amount of the gross distribution which appears in box 1 of Form
1099-R and which should be on line 16a of Form 1040 is not the
amount included in petitioner’s gross income. This amount, while
meant to be listed on the Form 1040, does not directly figure
into the computation of gross income. The amount included in
gross income is the amount which has been reduced to reflect the
taxed contribution portion, and which appears in box 2a on Form
1099-R and which should be on line 16b of Form 1040.
Because respondent used the proper investment in the
contract in his calculation of the portion of the annuity
payments includable in petitioner’s gross income, we sustain
respondent’s determination in the notice of deficiency.
Reviewed and adopted as the report of the Small Tax Case
Division.
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To reflect the foregoing,
Decision will be entered
for respondent.