George v. Comm'r of Internal Revenue
| Decision Date | 18 February 1997 |
| Docket Number | No. 12931-95.,12931-95. |
| Citation | 108 T.C. 54,108 T.C. No. 5,20 Employee Benefits Cas. 2612 |
| Parties | George and Elam CAMPBELL, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Thomas F. DeCaro, Jr., for petitioners.
Alan R. Peregoy, for respondent.
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 Rules 180, 181, and 183.1 The Court agrees with and adopts the Opinion of the Special Trial Judge, which is set forth below.
ARMEN, Special Trial Judge:
For the taxable year 1991, respondent determined a deficiency in petitioners' Federal income tax, as well as a deficiency in Federal excise tax under section 4980A,2 in the total amount of $58,464.
After concessions by the parties,3 the only issue for decision is whether the distribution received by petitioner George Campbell in 1991 from his individual retirement account with Loyola Federal Savings and Loan is taxable under sections 408(d)(1) and 72.
This case was submitted fully stipulated under Rule 122, and the facts stipulated are so found. Petitioners resided in Prince Frederick, Maryland, at the time that their petition was filed with the Court.
George Campbell (petitioner) was employed by the Maryland State Highway Administration (the Highway Administration) in 1989 and 1991, and remained so employed at least through the time that this case was submitted for decision. As an employee of the Highway Administration, petitioner was a member of the Maryland State Employees' Retirement System (the Retirement System) until he transferred to the Maryland State Employees' Pension System (the Pension System), effective November 1, 1989.
The Retirement System is a qualified defined benefit plan under section 401(a) and requires mandatory nondeductible employee contributions. The Pension System is also a qualified defined benefit plan under section 401(a), but generally does not require mandatory nondeductible employee contributions. The State of Maryland contributes to both the Retirement System and the Pension System on behalf of the members of those systems. The trusts maintained as part of the Retirement System and the Pension System are both exempt from taxation under section 501(a).4
On October 4, 1989, petitioner elected to transfer from the Retirement System to the Pension System, effective November 1, 1989. As a result of his election to transfer, petitioner received a distribution (the Transfer Refund) from the Retirement System in the amount of $174,802.14, which petitioner received in the form of a check dated November 30, 1989.
Petitioner's Transfer Refund consisted of $11,695.84 in previously taxed contributions made by petitioner during his employment tenure with the Highway Administration, $693.52 in taxable employer “pick-up contributions”,5 and $162,412.78 of taxable earnings in the form of interest. The earnings and “pick-up contributions”, which total $163,106.30, constitute the taxable portion of the Transfer Refund.
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, 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 will be entitled 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 will be 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.6
Within 60 days of receiving the Transfer Refund, petitioner deposited the taxable portion thereof into two individual retirement accounts (IRA's), as follows:
On December 26, 1989, petitioner deposited $82,900 of the Transfer Refund into an IRA with Loyola Federal Savings and Loan (the Loyola IRA).
On January 2, 1990, petitioner deposited $81,206.39 of the Transfer Refund into an IRA with Delaware Charter Guarantee and Trust Co. (the Delaware Charter IRA).7
On or about April 11, 1991, Loyola Federal Savings and Loan distributed, and petitioner received, the account balance of petitioner's IRA; i.e., $90,662.11, which consisted of petitioner's initial deposit and earnings as follows:
+--------------------------------+
¦¦IRA deposit: ¦$ 82,900.00¦
++-------------------+-----------¦
¦¦Earnings: ¦7,762.11 ¦
++-------------------+-----------¦
¦¦ ¦ ¦
++-------------------+-----------¦
¦¦Total distribution:¦90,662.11 ¦
+--------------------------------+
Distribution of the Delaware Charter IRA
In a letter to Delaware Charter Guarantee and Trust Co., dated April 8, 1991, petitioner requested that his IRA be converted into a non-IRA account prior to April 15, 1991. In such letter, petitioner stated: “To avoid further IRS penalties I must have the IRA account closed by April 15, 1991.” Petitioner's IRA was converted into a non-IRA account on June 11, 1991.
The balance of petitioner's Delaware Charter IRA, upon conversion into a non-IRA account, was $90,818.53, which consisted of petitioner's initial deposit and earnings as follows:
+-------------------------------------------+
¦¦IRA deposit: ¦$ 81,206.39¦
++------------------------------+-----------¦
¦¦Earnings: ¦9,612.14 ¦
++------------------------------+-----------¦
¦¦ ¦ ¦
++------------------------------+-----------¦
¦¦Account balance on conversion:¦90,818.53 ¦
+-------------------------------------------+
Petitioners' 1989 Return
On their Federal income tax return for 1989, petitioners did not include in gross income any of the taxable portion of the Transfer Refund; i.e., $163,106.30. In 1991, petitioners amended their 1989 income tax return to include the taxable portion of the Transfer Refund in gross income. See Dorsey v. Commissioner, T.C. Memo. 1995-97 (); cf. Adler v. Commissioner, 86 F.3d 378 (4th Cir. 1996), vacating and remanding T.C. Memo. 1995-148 ().
On their Federal income tax return for 1991, petitioners disclosed the receipt of distributions from petitioner's IRA's in the total amount of $181,481. Of this amount, petitioners reported $8,762 as the taxable amount.
In the notice of deficiency, respondent determined that the difference between the amount distributed from petitioner's IRA's (i.e., $90,662.11 + $90,818.53 = $181,480.64) and the amount reported as taxable ($8,762); i.e., $172,719, was includable in petitioners' gross income for 1991. As a corollary, respondent also determined that petitioners were liable for the 15-percent excise tax imposed by section 4980A.
The distribution from petitioner's Delaware Charter IRA is deemed to have occurred before the due date of petitioners' income tax return for the year in which the contribution to that IRA was made. For that reason, respondent concedes on brief that petitioner's Delaware Charter IRA distribution qualifies for relief pursuant to section 408(d)(4), and that only the portion of such distribution representing earnings; i.e., $9,612.14, is includable in petitioners' gross income.8 As a result of this concession, the threshold amount that must be exceeded before the excise tax under section 4980A may be imposed is no longer satisfied; thus, respondent also concedes that petitioners are not liable for such excise tax.9
Petitioners concede that the earnings on petitioner's contributions to petitioner's Delaware Charter IRA and Loyola IRA are includable in petitioners' gross income.
In view of the foregoing concessions, the only issue remaining for decision is whether $82,900 of the distribution received by petitioner from his Loyola IRA (i.e., $90,662.11 less $7,762.11 that petitioners concede is taxable earnings) is taxable under sections 408(d)(1) and 72.
Generally, a taxpayer is entitled to deduct the amount contributed to an IRA. Sec. 219(a); sec. 1.219-1(a), Income Tax Regs. The deduction in any taxable year, however, may not exceed the lesser of $2,000 or an amount equal to the compensation includable in the taxpayer's gross income for such taxable year. In addition, the amount of the deduction is limited where the taxpayer was, for any part of the taxable year, an “active participant” in a retirement plan qualified under section 401(a) or a plan established for its employees by the United States, by a State or political subdivision thereof, or by any agency or instrumentality of any of the foregoing. Sec. 219(g)(1), (5)(A)(i), (iii). In the case of an...
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