Bohner v. Comm'r
| Decision Date | 23 September 2014 |
| Docket Number | 143 T.C. No. 11,Docket No. 24166-12. |
| Parties | DENNIS E. BOHNER, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
While P worked for the Federal Government, he participated in the Civil Service Retirement System (CSRS). After P retired, he received a letter explaining that he could elect to increase his CSRS retirement annuity by remitting a fixed sum. P remitted the funds to CSRS. Because P did not have sufficient funds in his bank account, he borrowed a portion of the fixed sum. P paid off the loan and replenished his bank account by making withdrawals from his traditional individual retirement account (IRA).
P did not report any of the amounts he withdrew from his IRA as taxable income. P contends that he engaged in a tax-free rollover.
R contends that rollover contributions cannot be made to CSRS.
Held: Because CSRS did not accept his remittance as a rollover, P must include his withdrawals in his taxable income for the year at issue.
Kathryn L. Everlove-Stone, for petitioner.
Joel D. McMahan, for respondent.
KERRIGAN, Judge: Respondent determined a deficiency of $4,590 with respect to petitioner's Federal income tax for tax year 2010.
Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the year in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.
The sole issue for consideration is whether a tax-free rollover occurred when petitioner withdrew funds from his traditional individual retirement account (IRA) to cover a deposit of the same amount to the Civil Service Retirement System (CSRS).
Some facts have been stipulated and are so found. Petitioner resided in Florida when he filed the petition.
Petitioner was an employee of the Social Security Administration in 2009 and retired before April 13, 2010. He was eligible to participate in Federal Government retirement plans offered through the Office of Personnel Management (OPM), and he participated in CSRS during his years of Government service.
After petitioner retired, OPM mailed him a letter on April 13, 2010, explaining that he could elect to increase his CSRS retirement annuity by remitting $17,832 with respect to creditable Government service for a period during which no retirement contributions had been withheld from his salary. The letter required that petitioner remit the funds within 15 days of the date of the letter. The letter was silent as to whether the remittance could be made through a tax-free rollover contribution.
Petitioner elected to remit to CSRS the $17,832 to increase his retirement annuity. Because petitioner did not have sufficient funds to make the entire payment directly from his bank account, he borrowed a portion of the $17,832 from a friend. On April 27, 2010, petitioner mailed a check to OPM for $17,832.
During 2010 petitioner maintained a traditional IRA with Fidelity Investments (Fidelity). Petitioner made two separate requests to withdraw funds from his Fidelity IRA, one in April 2010 and another in May 2010. Petitioner's monthly Fidelity investment report for April 2010 shows that he requested a$5,000 distribution, of which $4,500 was sent to him on April 15, 2010, and $500 was withheld to satisfy Federal income tax liability in connection with the distribution. Petitioner's Fidelity investment report for May 2010 shows that he requested a $12,832 distribution, which was sent entirely to him on May 3, 2010; no Federal tax was withheld. Petitioner used the funds he received from Fidelity to reimburse his friend and to replenish his bank account.
Fidelity issued petitioner a Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., in which it reported $17,832 in distributions and listed the entire $17,832 as taxable income. On his Form 1040A, U.S. Individual Income Tax Return, for tax year 2010 petitioner reported receipt of the $17,832 in distributions from his Fidelity IRA on line 11a, IRA Distributions. He did not report any of the $17,832 as taxable income as a result of those distributions on line 11b, Taxable Amount.
On July 2, 2012, respondent issued petitioner a notice of deficiency which determined a deficiency of $4,590 and treated the $17,832 withdrawal from the IRA as taxable income.
OPINIONGenerally, the Commissioner's determinations in a notice of deficiency are presumed correct, and the taxpayer bears the burden of proving those determinations are erroneous. Rule 142(a)(1); Welch v. Helvering, 290 U.S. 111, 115 (1933). The parties do not dispute any material facts; therefore, the burden of proof is not at issue.
CSRS is a statutorily created retirement plan designed to provide retirement benefits in the form of annuities and lump-sum benefits to Federal civil service employees. See generally 5 U.S.C. secs. 8331-8351 (2006). The statutory provisions governing CSRS do not include a provision allowing pretax employee contributions. Id. An eligible employee contributes portions of his or her salary to CSRS, and the employing agency withholds the contributions from the employee's salary. Id. sec. 8334(a)(1)(A); Malbon v. United States, 43 F.3d 466, 467 (9th Cir. 1994); see also Logsdon v. Commissioner, T.C. Memo. 1997-8, slip op. at 3-4. Matching contributions are made from funds appropriated for the employing agency. 5 U.S.C. sec. 8334(a)(1)(B)(i).
To assure that income will be taxed only once, the Internal Revenue Code deems an annuity, such as one for a CSRS participant, to have two components:one taxable, one not. See sec. 72; Montgomery v. United States, 18 F.3d 500 (7th Cir. 1994). The employing agency withholds a mandatory contribution from the employee's salary, and that withheld amount is after-tax income because it is taxable for the year in which it is withheld. Malbon, 43 F.3d at 467. On distribution that portion is nontaxable because it was already subject to tax. See Montgomery, 18 F.3d at 500. The amount contributed by the employing agency and any interest earned on the employee's investment are not taxed to the employee until distributed. Secs. 72, 402(a). This portion of the distribution is the taxable component. Montgomery, 18 F.3d at 500.
Petitioner contends that all distributions from CSRS are taxable and that unless the distributions from his IRA are excluded from income, he will be subject to double taxation. Petitioner will not be subject to double taxation, however, because under section 72 he will be able to exclude from his gross income CSRS distributions attributable to his previously taxed contributions to the plan. See sec. 72(c)(1)(A). Section 72(c)(1)(A) and (B) defines "investment in the contract" as of the annuity starting date as "the aggregate amount of premiums or other consideration paid for the contract, minus * * * the aggregate amount received under the contract before such date, to the extent that such amount was excludable from gross income under this subtitle or prior income tax laws."
CSRS provisions include that "[e]ach employee or Member credited with civilian service after July 31, 1920, for which retirement deductions or deposits have not been made, may deposit with interest an amount equal to * * * [certain statutorily defined] percentages of his basic pay received for that service". 5 U.S.C. sec. 8334(c). This provision allows civil service employees to elect to make a deposit for creditable Government service and thus increase their CSRS retirement annuity. See Dela Cruz v. OPM, 553 Fed. Appx. 977 (Fed. Cir. 2014).
In general, any amount paid or distributed out of an individual retirement plan is included in the gross income of the payee or distributee as provided in section 72. Sec. 408(d)(1); Arnold v. Commissioner, 111 T.C. 250, 253 (1998). This general rule does not apply to a rollover contribution. See sec. 408(d)(3)(A). A rollover contribution is any amount paid or distributed out of an IRA or individual retirement annuity to the individual for whose benefit the account or annuity is maintained if the entire amount received is paid into an eligible retirement plan no later than 60 days after receipt. Sec. 408(d)(3)(A)(ii); see also Schoof v. Commissioner, 110 T.C. 1, 7 (1998). An "eligible retirement plan" is defined as any (1) qualified trust; (2) annuity plan described in section 403(a);(3) eligible deferred compensation plan described in section 457(b) which is maintained by an eligible employer described in section 457(e)(1)(A); or (4) annuity contract described in section 403(b). Secs. 408(d)(3)(A), 402(c)(8)(B). A "qualified trust" is any employees' trust described in section 401(a) which is exempt from tax under section 501(a). Sec. 402(c)(8)(A). Respondent does not dispute that CSRS is a qualified trust.1
Respondent contends, however, that petitioner's deposit to CSRS does not constitute a rollover contribution under section 408(d)(3) because CSRS does not, and is not required to, accept rollovers.2
Even though there is no specific provision in the Internal Revenue Code concerning whether a qualified trust must accept a rollover that is an indirect transfer from an IRA in order to constitute an eligible retirement plan for purposes of section 408(d)(3), this issue is contemplated in similar circumstances. Section 401(a)(31)(E) and the legislative history associated with the rollover provision of section 402 address this issue in the context of transfers from other qualified trusts. For the purpose of a direct transfer of eligible rollover distributions, a qualified trust plan must permit distributees to elect to have a distribution paid directly to an eligible retirement plan, which for this purpose must be a defined contribution plan that permits the acceptance of rollover distributions. The Senate report explaining this provision includes the following statement: "As under present law, a...
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