T.C. Memo. 1996-264

UNITED STATES TAX COURT

ALLAN R. POWELL AND JOAN K. POWELL, Petitioners v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 3499-93. Filed June 11, 1996.

Edward L. Blanton, Jr., for petitioners.

Alan R. Peregoy, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

DAWSON, Judge: 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
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1 Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect for the taxable year in

issue, and all Rule references are to the Tax Court Rules of

Practice and Procedure.

 

2 In the notice of deficiency, respondent characterized the

deficiency as a deficiency in income tax rather than excise tax. 

It would appear that respondent erred in this regard.

 

3 Sec. 4980A imposes a 15-percent excise tax on excess

distributions from qualified retirement plans. This tax is

included within ch. 43 of the I.R.C. and is subject to the

deficiency procedures set forth in subch. B of ch. 63 of the

I.R.C. See sec. 6211(a).

 

4 Respondent concedes that petitioner Joan K. Powell is not

liable for the deficiency in issue herein.

Rules 180, 181, and 183.1 The Court agrees with and adopts the

Opinion of the Special Trial Judge, which is set forth below.

OPINION OF THE SPECIAL TRIAL JUDGE

ARMEN, Special Trial Judge: Respondent determined a

deficiency in petitioners' Federal excise tax2 under section

4980A for the taxable year 1990 in the amount of $45,991.3 In an

amended petition, petitioners claimed an overpayment of income

tax by electing to use the 10-year forward averaging provisions

under section 402(e)(1).

After a concession by respondent,4 the primary issue for

decision is whether petitioner Allan R. Powell is liable for the

15-percent excise tax under section 4980A for the taxable year

1990. The resolution of this issue turns on whether a Transfer

Refund distribution was paid from a qualified employer plan

pursuant to section 4980A(e)(2). If we decide that the Transfer
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Refund distribution was paid from a qualified employer plan under

section 4980A(e)(2), then we must also decide whether such

distribution qualifies for 10-year forward averaging under

section 402(e)(1).

FINDINGS OF FACT

Some of the facts have been stipulated, and they are so

found. Petitioners resided in Hagerstown, Maryland, at the time

their petition was filed with the Court.

Petitioner Allan R. Powell (petitioner) was a teacher for 41

years in the Baltimore and Hagerstown Public Schools until his

retirement, effective July 1, 1992. At the time of trial,

petitioner was employed as a part-time professor at Hagerstown

Junior College. As an employee of the Baltimore and Hagerstown

Public Schools, petitioner was a member of the Maryland State

Teachers' Retirement System (the Retirement System) until he

transferred to the Maryland State Teachers' Pension System (the

Pension System) on June 1, 1990.

In determination letters dated June 23, 1982, respondent

determined that the Retirement System and the Pension System were

qualified plans under section 401(a) and that they maintained

trusts that were exempt from income tax under the provisions of

section 501(a). In 1984, 2 years after respondent issued the

determination letters, the Maryland State legislature amended

some of the provisions of the Retirement System. Respondent did

not re-evaluate the provisions of the Retirement System after the
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enactment of the 1984 amendments by the Maryland State

legislature.

The Retirement System requires mandatory nondeductible

employee contributions. In contrast, the Pension System does not

generally require such contributions. The State of Maryland

contributes to both the Retirement System and the Pension System

on behalf of the members of those systems.

On May 1, 1990, petitioner elected to transfer from the

Retirement System to the Pension System, effective June 1, 1990. 

As a result of the election to transfer, petitioner received a

distribution (the Transfer Refund) from the Retirement System in

the amount of $477,088.30. Petitioner received the Transfer

Refund in the form of a check dated June 29, 1990.

Petitioner's Transfer Refund consisted of $20,477.11 in

previously taxed contributions made by petitioner during his

employment tenure with Baltimore and Hagerstown Public Schools,

and $456,611.19 of taxable earnings in the form of interest. The

earnings; i.e. $456,611.19, constitute the taxable portion of the

Transfer Refund.

When petitioner transferred from the Retirement System to

the Pension System, and when he received his Transfer Refund, he

had attained the age of 64. 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,
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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 became entitled, upon retirement, 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 is 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.

On March 17, 1992, petitioner applied for a normal service

retirement from the Pension System, effective July 1, 1992. 

Petitioner is currently receiving a pension from the Pension

System.

On their Federal income tax return (Form 1040) for 1990,

petitioners reported "total pensions and annuities" in the amount

of $477,088. Of this amount, petitioners reported $456,611 as

the taxable amount.
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5 See supra note 4 regarding respondent's concession; see

supra note 2 regarding respondent's mischaracterization of

petitioners' excise tax deficiency.

In the notice of deficiency, respondent determined a

deficiency in petitioners' excise tax under section 4980A in the

amount of $45,991.5 In an amended petition, petitioners claimed

an overpayment of income tax by electing to use the 10-year

forward averaging provisions under section 402(e)(1). Respondent

contends that petitioners do not qualify for 10-year forward

averaging because the Transfer Refund did not constitute a "lump

sum distribution" within the meaning of section 402(e)(4)(A).

OPINION

The primary issue for decision is whether petitioner Allan

R. Powell is liable for the 15-percent excise tax under section

4980A for 1990. As previously noted, the resolution of this

issue turns on whether the Transfer Refund was paid from a

qualified employer plan within the meaning of section

4980A(e)(2).

Section 4980A imposes a 15-percent excise tax on excess

distributions from qualified retirement plans. Sec. 4980A(a). 

As relevant herein, an "excess distribution" is defined as the

aggregate amount of "retirement distributions" with respect to

any individual during any calendar year to the extent that such

amount exceeds $150,000. Sec. 4980A(c)(1). The definition of an

excess distribution is modified, however, for a "lump sum
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distribution" to which a forward averaging election under section

402(e)(4)(B) applies. Thus, as relevant herein, if the aggregate

retirement distributions with respect to any individual include a

lump sum distribution to which an election under section

402(e)(4)(B) applies, an "excess distribution" exists to the

extent that the retirement distributions exceed $750,000; i.e.,

five times the amount of the limitation otherwise provided by

section 4980A(c)(1). Sec. 4980A(c)(4).

Retirement distributions are the amount distributed to an

individual under an individual retirement plan or any "qualified

employer plan" with respect to which such individual is or was

the employee. Sec. 4980A(e)(1). As relevant herein, section

4980A(e)(2) defines a qualified employer plan as "a plan

described in section 401(a) which includes a trust exempt from

tax under section 501(a)" and a plan which, at any time, has been

determined by the Commissioner to be such a plan.

Petitioners contend that the Retirement System does not

satisfy the definition of a qualified employer plan for two

primary reasons. First, petitioners argue that the term

"qualified employer plan" as used in section 4980A(e)(2) and

section 54.4981A-1T(a-3)(c)(2), Temporary Qualified Pension Plan

Excise Tax Regs., 52 Fed. Reg. 56750 (Dec. 10, 1987), does not

contemplate governmental plans such as the Retirement System. 

Second, petitioners argue that the amendments made to the

Retirement System in 1984 violate various provisions of section
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401(a) and terminated its qualified status so that the Retirement

System was not a qualified employer plan at the time that it

issued petitioner's Transfer Refund in 1990. Petitioners further

argue that the excise tax under section 4980A should not apply to

petitioner's Transfer Refund unless the Retirement System was a

qualified employer plan at the time that it distributed the

Transfer Refund.

We have previously considered and rejected petitioners'

contention in Montgomery v. Commissioner, T.C. Memo. 1996-263. 

We see no need to revisit the issue. Therefore, for the reasons

stated in Montgomery v. Commissioner, supra, we hold that

petitioner received a retirement distribution under section

4980A(e)(1) in the amount of $456,611.

We now turn to petitioners' alternative argument. If the

Retirement System is a qualified employer plan, petitioners

contend the following: (1) The Transfer Refund was a lump sum

distribution, (2) petitioner elected forward averaging under

section 402(e), and (3) there was no excess distribution because

petitioners's lump sum distribution and annuity payments did not

exceed $750,000. The resolution of this issue turns on whether

the Transfer Refund constitutes a lump sum distribution within

the meaning of section 402(e)(4)(A).
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A "lump sum distribution" is defined in section 402(e)(4)(A)

as follows:

(A) Lump sum distribution.--For purposes of this

section * * * , the term "lump sum distribution" means

the distribution or payment within one taxable year of

the recipient of the balance to the credit of an

employee which becomes payable to the recipient--

(i) on account of the employee's death,

(ii) after the employee attains age 591/2,

(iii) on account of the employee's separation from the 

 service, or

(iv) after the employee has become disabled * * * 

from a trust which forms a part of a plan described in

section 401(a) and which is exempt from tax under

section 501 * * * . For purposes of this subsection,

the balance to the credit of the employee does not

include the accumulated deductible employee

contributions under the plan (within the meaning of

section 72(o)(5)). [Emphasis added.]

There is no dispute that the Transfer Refund was received by

petitioner after he attained the age of 591/2, nor is there any

dispute that the Transfer Refund was distributed within a single

taxable year. Moreover, for purposes of deciding whether

petitioner received a lump sum distribution, there is no dispute

that the Retirement System is a plan described in section 401(a)

and that the trust forming a part of the Retirement System is

exempt from tax under section 501. Therefore, the only issue is

whether petitioner received the "balance to the credit" when he

received the Transfer Refund

In determining a taxpayer's "balance to the credit", section

402(e)(4)(C) provides in relevant part:

(C) Aggregation of certain trusts and plans.--For

purposes of determining the balance to the credit of an

employee under subparagraph (A)--
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(i) all trusts which are part of a plan shall

be treated as a single trust, all pension

plans maintained by the employer shall be

treated as a single plan * * * . [Emphasis

added.]

This Court has previously held that section 402(e)(4)(C)

requires that we treat the Retirement System and the Pension

System as a single pension plan. Dorsey v. Commissioner, T.C.

Memo. 1995-97; Brown v. Commissioner, T.C. Memo. 1995-93; Hoppe

v. Commissioner, T.C. Memo. 1994-635; Hamilton v. Commissioner,

T.C. Memo. 1994-633; see Wheeler v. Commissioner, T.C. Memo.

1993-561; see also Sites v. United States, 75 AFTR 2d 95-2503,

95-1 USTC par. 50,280 (D. Md. 1995). Thus, as a consequence of

aggregating the Retirement System and the Pension System, we have

held that a taxpayer's transfer from the Retirement System to the

Pension System allows the taxpayer to receive the balance to his

or her credit in two parts, an initial single payment (the

Transfer Refund) and a reduced monthly annuity (based on all of

the taxpayer's years of creditable service and on the taxpayer's

salary during those years). Thus, we have consistently held that

a Transfer Refund does not constitute a taxpayer's entire

"balance to the credit" in the Retirement and Pension Systems and

is therefore not a lump sum distribution within the meaning of

section 402(e)(4)(A).

In view of the foregoing, we hold that the Transfer Refund

did not constitute a lump sum distribution within the meaning of

section 402(e)(4)(A) because petitioner did not receive the
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"balance to the credit" when he transferred from the Retirement

System to the Pension System. Accordingly, petitioners are not

entitled to the increased threshold amount, i.e., $750,000, set

forth in section 4980A(c)(4) in determining the amount of

petitioner's excess distributions for purposes of the excise tax

under section 4980A.

Because petitioner received a retirement distribution under

section 4980A(e)(1) in the amount of $456,611, we sustain

respondent's determination that petitioner received an excess

retirement distribution in the amount of $306,611 ($456,611 less

$150,000) and petitioner is therefore liable for the 15-percent

excise tax under section 4980A.

We have considered petitioners' remaining arguments

regarding section 4980A and find them unpersuasive.

Finally, we reject petitioners' claim of an overpayment of

income tax because the Transfer Refund does not qualify for 10-

year forward averaging under section 402(e)(1). The law is clear

that if a distribution is not a "lump sum distribution" within

the meaning of section 402(e)(4)(A), then such distribution does

not qualify for forward averaging under section 402(e)(1). E.g.,

Clark v. Commissioner, 101 T.C. 215, 218-219 (1993). We have

already held, supra at p. 10, that the Transfer Refund did not

constitute a lump sum distribution because petitioner did not

receive the "balance to the credit" when he transferred from the
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Retirement System to the Pension System. Consequently, the

Transfer Refund does not qualify for forward averaging.

In order to give effect to our disposition of the disputed

issues, as well as respondent's concession,

Decision will be entered

under Rule 155.