Cohen v. Comm'r of Internal Revenue
| Citation | 63 T.C. 267 |
| Decision Date | 26 November 1974 |
| Docket Number | Docket No. 5053-72. |
| Parties | LAWRENCE J. COHEN AND MARILYN P. COHEN, PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | United States Tax Court |
OPINION TEXT STARTS HERE
James J. McGannon and Patrick J. Regan, for the petitioners.
Earl Goldhammer, for the respondent.
Held: Fact that statute requires agreement of Federal civil service employee to a portion of his salary being withheld and placed in civil service retirement fund to provide a retirement annuity for him does not cause the withheld amount to be excludable from his taxable income reported on the cash basis as deferred compensation, since the statutory rights of the employee in the fund are a benefit currently procured for him at least to the value of the withheld amounts. Our holding in Cecil W. Taylor, 2 T.C. 267 (1943), affirmed sub nom.Miller v. Commissioner, 144 F.2d 287 (C.A. 4, 1944), has not been invalidated by our holdings in James F. Oates; 18 T.C. 570 (1952, affd. 207 F.2d 711 (C.A. 7, 1953), and Ray S. Robinson, 44 T.C. 20 (1965), and similar cases, that binding contracts for deferred compensation between a taxpayer and a private employer result in the deferred compensation not being includable in the income of a cash basis taxpayer until received.
Respondent determined deficiencies in petitioners' Federal income tax for the calendar years 1969 and 1970 in the amounts of $436.03 and $448.62, respectively.
Some of the issues have been disposed of by agreement of the parties, leaving for decision whether petitioners are entitled to exclude from their gross income for the calendar years 1969 and 1970 amounts which were withheld from the payroll checks of petitioner Lawrence J. Cohen, an employee in the civil service of the United States, pursuant to the provisions of the Civil Service Retirement Act.
All of the facts have been stipulated and are found accordingly.
At the time of the filing of their petition in this case, Lawrence J. and Marilyn P. Cohen, husband and wife, were residents of San Diego, Calif. They filed joint Federal income tax returns for the calendar years 1969 and 1970, reporting their income on the cash basis.
During the calendar years 1969 and 1970 petitioner Lawrence J. Cohen (hereinafter petitioner) was employed by the Federal Government in a classified civil service position subject to the Civil Service Retirement Act, 5 U.S.C.sec. 8331 et seq. (1964 ed.) (hereinafter the Act). This Act covers all appointive and elective officers and employees in or under the executive, judicial, and legislative branches of the United States Government, and in the municipal government of the District of Columbia, except those excluded by law or by regulation. All eligible employees are required to be covered by the Act, except Members of Congress and certain employees in the legislative branch who have the option of being covered by the Act by giving written notice to the official by whom they are paid of their desire to be covered. Sec. 8331(1) of the Act.
In the past 10 years over 90 percent of the Members of Congress have exercised the option to be covered by the Act.
Under section 8334(a)1 of the Act as it was in force during 1970, 7 percent of the basic pay2 of an employee covered by the Act was required to be withheld from his payroll check and deposited with the Treasury of the United States to the credit of the ‘Civil Service Retirement and Disability Fund’ (hereinafter fund). In 1969 the withholding was at the rate of 6 1/2 percent. In each of these years an amount equal to the amount withheld from an employee's basic pay was deposited in the Treasury of the United States to the credit of the fund by the Government agency which employed the employee covered by the Act. An amount equal to the amount withheld from an employee's basic pay was entered on that individual employee's retirement record pursuant to section 8334(f) of the Act. Amounts standing to the credit of an employee in the fund are not assignable, are not subject to execution or levy or other legal process; and are exempt from creditors' claims except that the Government may offset against any amount payable to an employee under the Act any indebtedness owing by that employee to the United States or its agencies. An employee has no access to his lump-sum credit except upon conditions set forth in the Act which in general are retirement, death, disability, or termination of service. The amounts deposited by the Government agency employing the individual employee are not credited to any individual employee's retirement record.
Pursuant to the provisions of section 8334 of the Act in effect for the years 1969 and 1970, the sums of $996 and $1,276, respectively (rounded off to the nearest dollar), were withheld from petitioner's wages and deposited with the Treasury to the credit of the fund. An equal amount in each of these respective years was deposited in the United States Treasury to the credit of the fund by the Government agency which employed petitioner.
For executive branch employees, the percentage rates of the section 8334 deductions under the Act from its original enactment on May 22, 1920, have been as follows:
+----------------------------------------------------------+
¦ ¦Percentage rates ¦
+---------------------------------------+------------------¦
¦ ¦for deductions ¦
+---------------------------------------+------------------¦
¦Date of service ¦from basic pay ¦
+---------------------------------------+------------------¦
¦ ¦ ¦
+---------------------------------------+------------------¦
¦From May 22, 1920, through July 1920 ¦0 ¦
+---------------------------------------+------------------¦
¦From August 1920 through June 1926 ¦2-1/2 ¦
+---------------------------------------+------------------¦
¦From July 1926 through June 1942 ¦3-1/2 ¦
+---------------------------------------+------------------¦
¦From July 1942 through June 1948 ¦5 ¦
+---------------------------------------+------------------¦
¦From July 1948 through September 1956 ¦6 ¦
+---------------------------------------+------------------¦
¦From October 1956 through December 1969¦6-1/2 ¦
+---------------------------------------+------------------¦
¦From January 1970 to present ¦7 ¦
+----------------------------------------------------------+
All benefits and administrative costs were initially paid from current section 8334 deductions from employees' salaries as the Government did not make an initial contribution to the fund. Subsequently in years prior to 1957, Congress appropriated substantial amounts for the fund from time to time but it did not do so regularly and systematically; Beginning July 1, 1957, Government agencies have been making employer contributions to the fund equal to those amounts deducted from the basic pay of the employee pursuant to section 8334 of the Act.3
Pursuant to section 8334(b) of the Act, each employee is deemed to consent and agree to the deductions from basic pay provided for under section 8334(a) of the Act (hereinafter section 8334 deduction).4
A Federal employee covered by the Act may make voluntary contributions to the fund in multiples of $25, but the total amount may not exceed 10 percent of the employee's basic pay for service rendered since August 1, 1920. Voluntary contributions earn 3-percent interest, compounded annually. The voluntary contributions purchase an additional annuity at retirement. A person may withdraw his voluntary contributions and accrued interest at any time before he retires. Sec. 8343(a), (b), and (d) of the Act.
The unrefunded amounts entered on an individual employee's retirement record include the employee's section 8334 deductions, sums deposited by an employee covering prior service for which no section 8334 deductions had been made or, if made, were refunded, and certain interest on such deductions and deposits. Such sums constitute an employee's ‘lump sum credit’ under section 8331(8) of the Act. Interest is allowable on such deductions and deposits as follows: If the person has 5 or more years of civilian service, the amount credited to him will include interest to December 31, 1956, and no interest is allowable beyond that date; if the person has more than 1 and less than 5 years of civilian service, interest is credited to the date of termination of employment; and no interest is allowable if the person had 1 year or less of service with the Government. Interest, when it is credited, is computed at the rate of 4 percent to December 31, 1947, and at 3 percent thereafter; compounded annually.
Under section 8336 of the Act an employee is entitled to an annuity after becoming 55 years of age and completing at least 30 years of service; after becoming 60 years of age and completing at least 20 years of service; and under section 8338(a) of the Act after becoming 62 years of age and completing 5 years of service. Total disability payments are payable after 5 years of service under section 8337(a) of the Act. Generally employees covered by the Act are required to retire at age 70 if they have completed 15 years of service. Pursuant to section 8333(a) and (b) of the Act there are two general requirements which a classified employee must meet before he or his survivors are eligible for an annuity: (1) He must have completed at least 5 years of civilian service with the Government; (2) he must have been subject to the provisions of the Act for at least 1 year out of the last 2 years preceding separating from the service unless separation is due to death or disability. If a separated employee; unless he is separated from the civil service because of death or disability, has completed less...
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