U n i t e d S t a t e s G o v e r n m e n t

MEMORANDUM

FORM G-115f (1-92)

R a i l r o a d R e t i r e m e n t B o a r d

February 22, 2002

L-2002-02

TO: James A. Verplaetse

Chief of Payment Analysis and Systems

FROM:

SUBJECT: Federal Tax Reports for Cancelled Annuities

This is in reply to your inquiry of January 23,2002, requesting my advice as to

whether you may alter the method whereby the Board reports to the Internal

Revenue Service annuities paid based upon a cancelled application under the

Railroad Retirement Act (RRA). For the reasons discussed below, I find no legal

objection to your proposed changes.

Your memorandum states that you anticipate a number of annuitants will cancel

their current annuity application and re-file to qualify under the provisions of the

Railroad Retirement and Survivors' Improvement Act of 2001 (RRISA). Where

an applicant has received annuity payments based upon the prior annuity

application, all payments must be repaid. Your memorandum states that the

Board currently: (1) does not report to the Internal Revenue Service (IRS)

annuities paid when the annuity application is cancelled before the end of the first

tax year in which the annuity is paid; and (2) files “corrected" reports to the IRS

showing nothing paid to the annuitant (“zero reports") when the annuity payments

based on the cancelled application were issued during a prior tax year, and were

previously reported as payments made to the annuitant during that year.

Effective for tax statements issued in calendar 2002, you propose to report

annuities paid on an application which is later cancelled as actually paid, whether

payment was made only in the year of cancellation, or in prior years as well.

Repayment of the cancelled annuities would be reported only in the year

repayment occurs.

Section 5(b) of the Railroad Retirement Act provides that an application for an

annuity under the Act shall be made and filed in such manner and form as the

Board may prescribe. Pursuant to this authority, the Board has promulgated Part

217 of the regulations (20 CFR 217), which prescribes requirements for filing

Steven A. Bartholo'

General C o u n sel/
James A. Verplaetse

annuity applications. Section 217.26(a) provides that an annuity application,

previously filed, may be cancelled if the applicant files a written cancellation

before the date the annuity is awarded. Once payment is made, the application

may be cancelled by the applicant only if (1) any other person who would lose

benefits due to the cancellation consents in writing, and (2) all annuity payments

already made based on that application “are repaid or will be recovered." 20 CFR

217.26(b). Section 217.27 further provides in part that “When a person cancels

an application the effect is the same as though an application was never filed."

As noted above, the Board promulgated section 217.27 of the regulations under

the authority granted by Congress to the Board to administer the Railroad

Retirement Act. The Internal Revenue Code, however, is administered by the

Internal Revenue Service of the Department of Treasury. The judgment of the

Board that withdrawal of an application under the RRA shall have the same effect

as if no application has been filed is perforce limited to the effect of that

application under the RRA. The effect under the Internal Revenue Code of

cancellation of an annuity application and repayment of any benefits received on

the basis of that application must be determined by reference to the Code, not to

the regulations of the Board.

As you know, the methods whereby annuities under the RRA may be included as

taxable income to the annuitant are specified by sections 86 and 72 of the

Internal Revenue Code of 1986. Section 86 of the Code (26 U.S.C. 86) provides

that the “social security equivalent" portion of the tier I annuity component, and

any monthly annuity paid under the social security minimum guaranty provision

of the RRA (RRA section 3(f)(3)), are subject to taxation on the same basis as

benefits under the Social Security Act. Section 86(d)(2) of the Code further

provides:

(2) Adjustment for repayments during year. (A) In general. For

purposes of this section the amount of social security benefits received

during any taxable year shall be reduced by any repayment made by the

taxpayer during the taxable year of a social security benefit previously

received by the taxpayer (whether or not such benefit was received during

the taxable year.)

Code section 6050F(a) (26 U.S.C. 6050F(a)) imposes upon the Board a duty to

file with the IRS a return for social security equivalent benefits which sets forth

the:

(1 )(A) aggregate amount of social security benefits paid with respect to

any individual during any calendar year,
James A. Verplaetse

(B) aggregate amount of social security benefits repaid by such individual

during such calendar year * * * and

(2) the name and address of such individual.

Subsection 6050F(b) further requires that the Board:

(b) * * * shall furnish to each individual whose name is required to be set

forth in such return a written statement showing—

(1) the name of the agency making the payments, and

(2) the aggregate amount of payments, of repayments, and of

reductions, with respect to the individual required to be shown on

such return.

The written statement required under the preceding sentence shall be furnished

to the individual on or before January 31 of the year following the calendar year

for which the return under subsection (a) was required to be made.

Section 72(r) of the Code (26 U.S.C. 72(r)) provides that the remaining portion of

an annuity under the RRA shall be income to the employee to the same extent as

a private pension under an employer plan. That section does not include a

provision for allocating repayments comparable to 86(d)(2). Further, section

6050G of the Code (26 U.S.C. 6050G) requires the Board to file a return to the

IRS showing:

(1) the aggregate amount of benefits paid under the Railroad

Retirement Act of 1974 (other than [social security equivalent] * * *

benefits * * * ) to any individual during any calendar year,

(2) the employee contributions (to the extent not previously taken

into account under section 72(d)(1) which are treated as having

been paid for purposes of section 72(r),

(3) the name and address of any such individual, and

(4) such other information as the Secretary may require.

Section 6050G(b) directs the Board to furnish annuitants with a written statement

showing “the aggregate amount of payments to such individual, and of employee

contributions with respect thereto, required to be shown on the return”.
James A. Verplaetse

Legal Opinion 91-84 considered the effect of various adjudicative actions on the

Board’s obligations under sections 6050F and 6050G. The General Counsel

advised that the “Board’s obligation in preparing its Form 1099’s and W -2P’s is to

reflect annuities received by or made available to the annuitant * * * in the year to

which the statements relate. * * * A determination of nonentitlement in a

subsequent tax year does not require a change in tax statements for the year for

which nonentitlement is determined." Later, Legal Opinion L-94-38 specifically

considered the absence from section 6050G of the requirement to report

aggregate repayments as well as aggregate amounts paid. That opinion advised

that:

[wjith respect to social security equivalent benefits, the Board must report

to the IRS and the annuitant the gross amount of benefits paid in a

calendar year and the gross amount repaid. These amounts are not

netted and the amounts repaid are reported without regard to the calendar

year to which the repayment relates. * * * In view of the absence of the

word “repayment” in section 6050G as well as the absence of a netting

rule in section 72(r) * * * there would appear to be no requirement to report

repayments under section 6050G.

From the perspective of the Code, an annuitant’s cancellation of his annuity

application is a subsequent event which relates back to prior payment years

comparable to an untimely notice of death received in a subsequent year. At

minimum, section 6050F requires only that the Board report repayment of the

social security equivalent benefit portion of a cancelled annuity in the year

repayment is made. Your proposal to discontinue issuing “zero" reports for prior

years when an annuity retroactively withdraws the application is therefore

consistent with advice this office previously provided that prior year tax

statements need not be revised in such a case.

Your second proposal, to begin reporting current year payments and repayments

where cancellation occurs in the first year of payment, is clearly consistent with

the agency’s duty under section 6050F to report payments and repayments of

social security equivalent benefit amounts in a calendar year. Moreover, in my

opinion the language of 6050G requires that the Board report payment of any

non-social security equivalent benefit portion of cancelled annuities in the year

paid.

For the foregoing reasons, I therefore have no legal objection to your proposed

changes in the method of reporting under the Internal Revenue Code payments

made to annuitants on the basis of cancelled annuity applications.

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