T.C. Mem o. 2 01 5- 50

UNITED STAT ES TAX COURT

DENNIS J. MC CARTHY AND HOL LY W . MCCAR THY, Peti ti on ers v. COMM ISSI ONER OF INTERNAL REVENUE, Resp on de nt

Doc ke t No . 73 52 -1 4. Fi le d M arch 18 , 20 15
.
Den ni s J . McCa rth y

an d Ho ll y

W . McCa rth y , pro ses e. Gary R. Shul er, J r., forres po nd en t.

MEMORANDUM OPINION DAW SON, Ju dg e: Res po nd en t d et erm in eda de fic ie nc y of $ 1,2 73 in pe ti ti on ers ’ 20 11 Fed eral in co m e ta x. Th e is su es forde ci si on are: (1) whet he r pe ti ti on ers un de rrep orte d b y $1 8,4 67 tax ab le ret ire m en t i nc om e th atHol ly McC arthy recei ve d i n 2 01 1 fr om th e St at e Teach ers Ret ire m en t Syste m of Oh io- 2 -

[* 2] (STRS Oh io ) an d (2 ) whe th er p et it io ne rs m us t i nc lu de inth ei r gr os s i nc om e $3 ,86 8 o f th e to ta l So ci al Secu rit y be ne fit s Den ni s M cCarth y rece iv edin20 11
. Bac kg ro un d Thi s ca se was s ub m it te d fu ll y st ip ul at edpurs ua ntto Ru le 12 2, an d the 1 st ip ul at edfact s ar e so fou nd . W e in co rp or at e b y refe ren ce the pa rti es ’ st ip ul at io n of fact s an d the acco m

pa nyin g e xh ib it s. At t he ti m e th e p et it io n was fil ed , pe ti ti on ers res id edinOhi o. Bo th were the n a ge 82 an d re ti red
. Pet it io ne r Hol ly W . McCa rth y rece iv eda ba ch el or ’s deg ree i n n ur si ng in 19 55 an d am as te r’s de gr ee i n e du cat io n i n 1 99 1. Sh e worke d a s a n ur se with the North eas te rnSch oo l Di stric t i n C larkCo un ty, Ohi o, fo r ov er 2 4 years. Sh e ret ire d in 19 98 . Peti ti on er Den ni s J . McCarth y ha s a b ach el or ’s deg ree i n a cco un ti ng . He ret ire d i n 1 99 6. The Sta te Teach ers Ret ire m en t Syste m of Oh io In19 76 th e In te rn al Rev enue Serv ic e ap pr ov edth e STRS Oh io as asec ti on 40 1( a) qua li fie d p lan. Th e p lan o pe rat edinth atst atus at a ll rel ev an t t im es . Mrs . McC arthy is an STRS Oh io m em be r. STRS Oh io pro vi de s re ti rem en t, h eal th , di sabi li ty, an d s urvi vo r be ne fit s t o Oh io hi gh er educ at io n a ndK-12 publ ic All Ru le refe ren ces are t o the Tax C ourt Rul es of P ract ic e an d P ro cedur e. 1 All sec ti onrefe ren ces are t o the Int ern al Rev enue Co de ineffe ctforth e y ear i n is su e.- 3 -

[* 3] educ at or s. Itpro vi de s the se be ne fit s t o fu ll -ti m e St at e em pl oyees o f K-1 2 a nd hi gh er educ at io n p ro fes so rs . STRS Oh io m em

be rs sel ectfro m

th ree p lan o pt io ns : (1 ) th e d efi ne d b en efi t pl an , whi chpro vi de s re ti rem en t i nc om e th atis “ de fin ed ” in adva nc e an d i nc lu de s su rv iv oran d d is ab il ity

pro te ct io n wh il e th e m em be r is tea ch in g; (2) th e d efi ne d
co nt rib ut io n p lan, wh ic h p ro vi de s re ti rem en t i nc om e th atis ba se d o n the pe rfo rm an ce o f in ve st m en t ch oi ces sel ect edby the m em be r fro m th e v ari ou s in ve st m en t o pt io ns STRS Oh io m an ag es ; an d (3 ) th e co m bi ne d p lan, wh ic h o ffer s bo th a de fin edbe ne fitan d ade fin edco nt rib ut io n c om po ne nt . Reg ard le ss of t he pl anop ti on sel ect ed , m em be rs co nt rib ut e a p erce nt ag e o f th ei r earne d s al ary whi le em pl oyers co nt rib ut e a p erce nt ag e o f th e m em be r’s
an nu al sal ary. Und er the co m bi ne d p lan, the m em

be r m ak es a co nt rib ut io n t o the de fin edco nt rib ut io n p orti on whi le th e em pl oyer m ak es a co nt rib ut io n t o the de fin edbe ne fitpo rti on . The St at e Teach ers Ret ire m en t Bo ardest ab li sh es th e co nt rib ut io n ra te s, wh ic h are s ub ject t o c ha ng e. STRS Oh io pre pa redtwo ex pl an at ory bro ch ur es forit s 2 01 0- 11 m em be rs , in cl ud in g “ Und ers tand in g Yo ur STRS Oh io Ben efi ts - Plan S umm ary” (to pro vi de
anov erv ie w of the ret ire m en t s y st em) an d “ Serv ic e Ret ire m en t an d P lans of Paym en t” (fo r m em

be rs enro ll edinit s d efi ne d b en efi t p lan) . In the bro ch ur es- 4 -

[* 4] STRS Oh io in fo rm edit s m em be rs th at : (1 ) So ci al Securit y be ne fit s m ay

be reduc edor e li m in at edbe cau se of S TRS b en efi ts ; (2 ) be gi nn in g wi th th e m em be r’s fir stret ire m en t d is tri bu ti on , ret ire m en t b en efi ts wil l b e ta xabl e; (3) if Fe de ral tax is
no t wi th he ldfro m

be ne fit s, the in di vi du al wil l b e res po ns ib le form ak in g the Fed eral qu art erl y

est im at edtax pa ym en ts ; an d (4 ) in fo rm at io n re ga rd in g a ny am ountex cl ud ab le fro m

tax at io n wi ll be refl ect edon a Fo rm 10 99 -R, Dis tri bu ti on s Fr om

Pen si on s, An nu it ie s, Re ti rem en t o r Pro fit -Sh ari ng Plans , IRAs, In su ran ce Co nt ract s, et c., se ntto be ne fitreci pi en ts fol lo win g the en d o f eac h cal en da r y ear. Mrs . McCarth y ’s Defin edBen efi t Pl anDis tri bu ti on Dur in g h er ca reeras asch oo l nur se Mrs . McCa rth y co nt rib ut eda po rti on of he r sa lary to a de fin edbe ne fitpl anwith S TRS Oh io . For 2 01 1 S TRS Oh io is su ed a Fo rm 10 99 -R t o h er re po rti ng a gr os s re ti rem en t d is tri bu ti on of $ 27 ,70 1.1 6 a nda ta xabl e am ou ntof $ 27 ,41 2.6 8. STRS Ohi o d idno t wi th ho ldan y Fed eral in co m e ta x fr om th e d is tri bu ti on pa idto Mrs . McCa rth y . It rep orte d $ 28 8.4 8 o f th e di st rib ut io n a s an “ Em

pl oyee co nt rib ut io ns /Des ig na te d R ot h c on tri bu ti on s o r in su ran ce p rem iu m s” an d n ottax ab le . By us e o f a “ 7” for

th e b ox 7 d is tri bu ti on co de , STRS Ohi o i nd ic at edth atth is was ano rm al di strib ut io n.- 5 -

[* 5] Mr. Mc Cart hy’ s So ci al Secu rit y Ben efi ts Mr. Mc Carthy recei ve d S oc ia l Se cu rit y be ne fit s o f $1 9,1 32 in20 11
. Pet it io ne rs ’ 20 11 Fed eral Inc om e Tax Return Pet it io ne rs ti m el y

fil eda joi ntFed eral in co m e ta x re tu rnfor20 11 rep orti ng th e fo ll owi ng : (1 ) pe ns io ns an d a nn ui ti es to ta li ng $9 ,23 3.7 2 (l in e 1 6a ) with the ta xabl e am ou ntas $ 8,9 45 .24 (li ne 16 b) an d (2 ) So ci al Secu rit y be ne fit s t ot al in g $3 7,6 00 .24 (li ne 20 a) wi th a zero tax ab le am ount(li ne 20 b)
. Not ic e o f Defi ci en cy Inhi s Dec em

be r 30 , 20 13 , no ti ce o f de fic ie nc y , res po nd en t d et erm in eda $1 ,27 3 d efi ci en cy

inpe ti ti on ers ’ 20 11 Fed eral in co m e ta x. Re sp on de nt de te rm in edth atpe ti ti on ers were re qu ire d b utfai le d t o i nc lu de inth ei r 20 11 in co m e $ 18 ,46 7 o f th e to ta l $ 27 ,41 2 re ti rem en t d is tri bu ti on th atMrs . McCa rth y rece iv edfro m

STRS Oh io . Res po nd en t al so de te rm in edth atpe ti ti on ers sh ou ld ha ve in cl ud edinth ei r gr os s i nc om e $ 3,8 68 of M r. McC arthy’ s So ci al Secu rit y be ne fit s re cei ve d i n 2 01 1. Dis cu ss io n Inge ne ral , th e d et erm in at io ns of t he Co m m is si on er i n ano ti ce o f de fic ie nc y are p res um edco rrec t, an d the bu rd enis on th e ta xp ay er t o s ho w th atth e- 6 -

[* 6] de te rm in at io ns are i nc orrect . Rul e 1 42 (a); W el chv. Hel ve rin g, 2 90 U.S. 11 1 (1 93 3)
. Defi ne d B en efi t Pl anDis tri bu ti on Gro ss in co m e g en eral ly inc lu de s i nc om e fro m what ev er s ou rce d eri ve d, in cl ud in g i nc om e fro m

pe ns io ns an d a nn ui ti es . Secs . 61 (a)( 9) , (11 ), 72 (a). Sect io n 4 02 (a) p ro vi de s tha t the am ou nt s d is tri bu te d u nd er a p lan d es cri be d i n se ct io n 4 01 (a), s uc h a s a qua li fie d d efi ne d b en efi t p lan, g en eral ly sha ll be tax ab le to th e d is tri bu te e und er s ect io n 7 2. Tax pa y ers see ki ng anex cl us io n fr om gro ss in co m e m us t d em on st rat e th ey

are el ig ib le forth e ex cl us io n a ndbri ng th em se lv es

“ withi n the cle ar s co pe of t he ex cl us io n.” Dob ra v . Comm is si on er, 1 11 T.C. 33 9, 34 9 n .16 (19 98 ). The pa rti es ag ree t ha t M rs . McCa rth y co ntrib ut edto a qu al ifi edde fin ed be ne fitpl anwith S TRS Oh io un de r se ct io n 4 01 (a). In20 11 sh e rec ei ve d a $2 7,4 12 tax ab le di st rib ut io n fr om STRS Oh io fro m

whi chno Fed eral in co m e ta x was withh el d. Di st rib ut io ns fro m qu al ifi edpl an s ar e g en eral ly treat edas a nn ui ti es an d s ub ject t o t ax to th e ex te ntpro vi de d i n s ect io n 7 2. Se e, e.g ., Wrig htv. Co m m is si on er, T.C. Mem o. 2 00 5- 5. Itis cle ar fro m th e rec or d tha t p et it io ne rs fai le d t o e st ab li sh th atth ey are l eg al ly ent it le d t o e xc lu de fro m th ei r gr os s i nc om e th e STRS Oh io di st rib ut io n o f $2 7,4 12 th atMrs . McCa rth y rece iv edin20 11
.- 7 -

[* 7] Pet it io ne rs rep orte d S oc ia l Se cu rity be ne fit s o f $3 7,6 00 .24 an d atax ab le ret ire m en t d is tri bu ti on of $ 8,9 45 .24 . By cla ss ifyin g apo rti on of the STRS Oh io di st rib ut io n a s So ci al Secu rity be ne fit s, p et it io ne rs so ug htto m in im iz e ta x o n the
un ta xe d b en efi ts Mrs . McCa rth y accrue d dur in g h er ca reer . So ci al Secu rit y

Ben efi ts Sect io n 8 6( a)(1 ) ge ne ral ly pro vi de s tha t g ro ss in co m e in cl ud es So ci al Secu rit y be ne fit s i n a n a m ou ntequa l t o the les se r of (A) on e-h al f of

th e So ci al Secu rit y be ne fit s re cei ve d dur in g the tax ab le y ear o r (B) o ne -h al f of th e ex ces s de sc rib edinsubs ect io n (b )(1 ). Sect io n 8 6( b) (1 ) ap pl ie s i f th e su m of t he m od ifi ed ad jus te d g ro ss in co m e o f th e ta xp ay er fo r th e ta xabl e y ear p lu s o ne -h al f of th e So ci al Secu rit y

be ne fit s re cei ve d dur in g the tax ab le y ear e xc eed s the ba se am ou nt . Subs ect io n (c )(1 )(B) pro vi de s, i n the cas e o f a joi ntreturn, tha t the ba se am ou ntis $3 2,0 00 , andsubs ect io n (c )(2 )(B) pro vi de s, i n the cas e o f a joi ntreturn, tha t the ad jus te d b as e am ou ntis $4 4,0 00 . In g en eral , pu rs ua ntto sec ti on 86 (d )(1 )(A),

“ So ci al Secu rity

be ne fit ” m ean s an y

am ou ntrece iv edby the tax pa y er b y reas on of
en ti tl em en t t o am on th ly ben efi t u nd er the So ci al Secu rit y Act. Sect io n 8 6 re qu ire s tha t, i f a t ax pa y er’s m od ifi edad jus te d g ro ss in co m e p lu s on e-h al f of

hi s o r he r So ci al Securit y be ne fit s ex ceed s a c ert ai n b as e am ou nt , a po rti onof t he tax pay er’s So ci al Secu rit y be ne fit s s ha ll be in cl ud edingro ss- 8 -

[* 8] in co m e. Pet it io ne rs di d n otoff er an y ev id en ce o r m ak e an y

arg um en ts with
res pe ctto res po nd en t’s d et erm in at io n re ga rd in g thi s i ss ue . Accor di ng ly, we ho ld th atpe ti ti on ers are l iabl e fo r ta x o n M r. McC arthy’ s So ci al Secu rit y be ne fit s pu rs ua ntto sec ti on 86 as d et erm in edby resp on de nt . Pet it io ne rs ’ m od ifi edad

jus te d g ro ss in co m e fo r 20 11 pl us on e-h al f of Mr. McC arthy’ s So ci al Secu rit y be ne fit s fo r th aty ear ( to ge th er, the ir “ pr ov is io na l in co m e”) i s i n e xc es s o f th e b as e am ou nt , andacco rd in gl y th ey m us t i nc lu de in in co m e anam ou ntof b en efi ts whi chis th e le ss er o f on e-h al f of th e an nu al be ne fit s rece iv edor o ne -h al f of

th e am ou ntth atrem ai ns aft er s ub tra ct in g the ap pr op ria te ba se am ountfro m

th ei r pr ov is io na l i nc om e. Insu m , Mr. Mc Cart hy recei ve d $ 19 ,13 2 i n p en si on /ann ui ty inc om e fro m th e So ci al Secu rit y

Adm in is tra ti on in20 11 . Peti ti on ers in co rrec tl y li st edtax ab le So ci al Secu rit y

be ne fit s as zero on th ei r 20 11 return. We agre e wit h re sp on de nt th atth e co rrec t t ax ab le am ou ntis $3 ,86 8 as s etforth inth e n ot ic e o f de fic ie nc y . 2

Gro ss in co m e o f $3 0,1 69 pl us on e-h al f of So ci al Secu rit y

be ne fit s o r 2 $9 ,56 6 e qu al s m od ifi edad jus te d g ro ss in co m e o f $3 9,7 35 les s the ba se am ou ntof $3 2,0 00 equa ls anex ces s ab ov e b as e am ou ntof $ 7,7 35 ; o ne -h al f of ex ces s b as e am ountis $3 ,86 7.5 0; on e-h al f of So ci al Securit y

be ne fit s i s $ 9,5 66 ; the am ou nt in cl ud ib le ingro ss in co m e is $3 ,86 7.5 0 (r ou nd edup to th e n eare stdo ll ar, $ 3,8 68 ).- 9 -

[* 9] Pet it io ne rs reque stth e Co urt t o m ak e “ anequi tabl e res ol ut io n” inth is cas e. 3 Unf ortu na te ly for p et it io ne rs , th e la w si m pl y do es no t p ro vi de th e rel ie f th ey see k. Ineffe ct , th ey

are as ki ng us to leg is la te ch an ge s i n the st atut ory pro vi si on s en act ed by Con gr es s. Th e p owe r to leg is la te is ex cl us iv el y th e p owe r of

Co ng res s an d n ot of th is Co urt. See Ise li n v . Uni te d S ta te s, 2 70 U.S. 24 5, 2 50 -2 51 (19 26 ). W e m us t en fo rce t he laws as wri tt enan d i nt erp ret ed . See Ma rs h & McLen na n C os . v. Uni te d S tate s, 3 02 F.3d13 69 , 13 81 (Fed . Cir . 20 02 ); P hi la . & Read in g C or p. v . Uni te d S tate s, 9 44 F.2d10 63 , 10 74 (3dCir . 19 91 ). Whi le pe ti ti on ers m ay pe rcei ve th e res ul t t o b e h ars h, we ca nn otig no re the pl ai n l an gu ag e o f th e st atut es an d re writ e th em

to ach ie ve whatpe ti ti on ers advo cat e as a m or e equi tabl e res ul t. See Ean es v. Co m

m is si on er, 8 5 T.C. 1 68 , 17 1 (1 98 5)
. Pet it io ne rs st at e inth ei r Ans weri ng Bri ef: 3 Iness en ce, wh atwe se ekis “ Ju di ci al Redres s” of t he fin an ci al in equi ty creat edby two d iff eren t Arm s o f Gov ern m en t (S SA an d IR S) de fin in g the same m on ie s (2 /3 of t he STRS Pen si on ) intwo co m pl et el y op po si te way s ea chto th e d etriment o f th e ta xp ay er. Thi s se em s t o v io la te Co urt Ru li ng s tha t the Gov ern m en t “ Can ’t Have Its Cak e AndEat It ”. It s ho ul d b e n ot edth at , whi le th e STRS Pe ns io n i s b as ed10 0% on un ta xe d c on tri bu ti on s, So ci al Secu rit y Pen si on s ar e b as ed50 % on un ta xe d c on tri bu ti on s (Em pl oyer sh are) . Bas edonth is , th e Redres s co ul d b e to all ow 5 0% o f wha t the SSA cl ai m s i s SS in cl ud edinth e STRS Pe ns io n (Em

pl oyer sh are) to be tre at edas S S o n o ur Tax Returns .- 10 -

[* 10 ] W e h av e co ns id eredall of t he arg um en ts m ad e b y pe ti ti on ers , and , to th e ex te ntno t ex pr es sl y

di sc us se d abo ve , we fin d tha t tho se arg um en ts do no t s up po rt a res ul t co nt rary to tha t re ach edhe rei n. To re fle ctth e fo reg oi ng , Deci si on wil l b e en te redfor
res po nd en t.