T.C. Summary Opinion 2003-77

UNITED STATES TAX COURT

WALLACE W. BURKE, Petitioner v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 14533-01S. Filed June 18, 2003.

Wallace W. Burke, pro se.

J. Craig Young, for respondent.

DINAN, Special Trial Judge: This case was heard pursuant to

the provisions of section 7463 of the Internal Revenue Code in

effect at the time the petition was filed. The decision to be

entered is not reviewable by any other court, and this opinion

should not be cited as authority. Unless otherwise indicated,

subsequent section references are to the Internal Revenue Code in

effect for the year in issue.
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Respondent determined a deficiency in petitioner’s Federal

income tax of $812 for the taxable year 1999.

The issue for decision is what portion of the retirement

benefits petitioner received during 1999 are includable in gross

income.

Some of the facts have been stipulated and are so found. 

The stipulations of fact and the attached exhibits are

incorporated herein by this reference. Petitioner resided in

Raleigh, North Carolina, on the date the petition was filed in

this case.

Petitioner is a retired teacher. Over the years, petitioner

contributed $57,665.65 to the Teachers and State Employees

Retirement System of North Carolina (TSERS). Petitioner was

taxed on the funds which he used to make $18,905.42 of these

contributions. The remaining contributions of $38,760.23 were

made with funds which were not subject to taxation in the years

in which they were earned.

During the year in issue, petitioner received a distribution

of $38,422.50 from TSERS.

For the year in issue, petitioner was issued a Form 1099-R,

Distributions From Pensions, Annuities, Retirement or ProfitSharing Plans, IRAs, Insurance Contracts, etc. This form

indicated that petitioner received $38,422.50 in total

distributions during that year, that the taxable portion of the
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distributions was $37,477.26, and that the nontaxable portion was

$945.24.

Petitioner filed an individual Federal income tax return for

1999. On this return, petitioner reported total pension and

annuity distributions of $37,477.26, and he reported that the

taxable portion of the distributions was $34,599.02. In the

statutory notice of deficiency, respondent determined that the

information reported on the Form 1099-R was correct.

Petitioner does not dispute receiving distributions of

$38,422.50 from TSERS during the year in issue. Petitioner

argues that respondent’s calculation of the taxable portion of

these distributions is in error.

Gross income generally includes all income from whatever

source derived, including pensions and annuities. Sec. 61(a)(9),

(11); sec. 72(a). However, portions of annuity payments may be

excludable from income under section 72(b). The excludable

portion of a payment generally is that portion which bears the

same ratio to such payment as the “investment in the contract”

bears to the expected return under the contract, determined at

the time the annuity payments begin. Sec. 72(b)(1). While the

term “investment in the contract” is defined generally as “the

aggregate amount of premiums or other consideration paid for the

contract”, sec. 72(c)(1)(A), contributions made by an employer on

behalf of an employee-taxpayer which were not includable in the
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1Similar provisions were codified in sec. 72(d). This

subsection does not apply to the case at hand because it is

inapplicable to annuities which started prior to November 19,

1996. Small Business Job Protection Act of 1996, Pub. L. 104-

188, sec. 1403(b), 110 Stat. 1791.

 

2Although we use these worksheets to illustrate the dispute

in this case, we note that the IRS guidance exists merely to

assist taxpayers in filing tax returns; neither the Commissioner

nor this Court is bound by such guidance where it is contrary to

(continued...)

taxpayer’s gross income generally are not part of the taxpayer’s

investment in the contract, sec. 72(f). Therefore, in the

context of this case, a taxpayer’s investment in a contract

includes only the amount of “after-tax contributions” and does

not include any “pre-tax contributions”.

On his 1999 return, petitioner elected to use the section

72(b) “safe harbor” provisions provided in Notice 88-118, 1988-2

C.B. 450, which were to be used for certain annuity payments made

from section 401(a) qualified plans, section 403(a) employee

annuities, and section 403(b) annuity contracts.1 Neither party

questions the applicability of these safe harbor provisions to

the case at hand; the dispute centers solely on the calculation

made thereunder. As discussed below, the sole remaining issue is

the proper amount of petitioner’s investment in the contract.

For purposes of illustration, the following are summaries of

the calculations made by petitioner and respondent pursuant to

the applicable worksheet provided by the Internal Revenue Service

(the relevant line numbers of the worksheet are indicated):2
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2(...continued)

the law. Dixon v. United States, 381 U.S. 68 (1965); Automobile

Club v. Commissioner, 353 U.S. 180 (1957).

 Petitioner Respondent

1. Total distributions received in 1999 $37,477.26 $38,422.50

2. Cost in the plan (i.e., investment in the contract) 57,665.65 18,905.42

4. Cost divided by 240 month recovery period (monthly exclusion) 240.27 78.77

5. Multiplied by 12 (yearly exclusion) 2,883.24 945.24

9. Taxable distributions received in 1999 (line 1 minus line 5) 34,594.02 37,477.26

There are two points of contention between petitioner and

respondent--the amounts reflected on lines 1 and 2. The

remaining lines in the calculation are computational and are

based upon the first two amounts.

First, petitioner in his calculation used total

distributions (line 1) of $37,477.26, rather than the $38,422.50

used by respondent. Petitioner has agreed that the latter amount

represents the total distributions he received in 1999, thus

respondent’s use of this amount in his calculation is correct.

Second, petitioner used a total cost in the plan, or

investment in the contract (line 2), of $57,665.65. The amount

used by petitioner represents the total contributions petitioner

made to the plan, using both taxed and untaxed funds. However, a

taxpayer’s investment in a contract generally includes only the

amount of after-tax contributions and does not include pre-tax

contributions. Sec. 72(f). Thus, the amount of $18,905.42 used

by respondent--the amount representing only those contributions

which were made using previously taxed funds--is the correct

amount.
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The calculations reflected on lines 4, 5, and 9 effectively

reduce the amount of the gross distribution received by

petitioner during 1999 by a ratable portion of the taxed

contributions he made to his retirement plan, as allowed by

section 72(b).

Petitioner argues in his petition that the “IRS alleges the

gross distribution retirement pension amount (Form 1099-R, Box 1)

is the Federal taxable amount of my pension for computing my

Federal income tax on Form 1040, Line 16a.” We note that the

amount of the gross distribution which appears in box 1 of Form

1099-R and which should be on line 16a of Form 1040 is not the

amount included in petitioner’s gross income. This amount, while

meant to be listed on the Form 1040, does not directly figure

into the computation of gross income. The amount included in

gross income is the amount which has been reduced to reflect the

taxed contribution portion, and which appears in box 2a on Form

1099-R and which should be on line 16b of Form 1040. 

Because respondent used the proper investment in the

contract in his calculation of the portion of the annuity

payments includable in petitioner’s gross income, we sustain

respondent’s determination in the notice of deficiency.

Reviewed and adopted as the report of the Small Tax Case

Division.
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To reflect the foregoing,

Decision will be entered

for respondent.