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.

T.C. Memo. 1996-263

UNITED STATES TAX COURT

RICHARD J. MONTGOMERY AND ADELE S. MONTGOMERY, Petitioners v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 8028-94. 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

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

Opinion of the Special Trial Judge, which is set forth below.
- 2 -

 

2 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).

 

3 Respondent concedes that petitioner Adele S. Montgomery is

not liable for the deficiency in issue herein.

OPINION OF THE SPECIAL TRIAL JUDGE

ARMEN, Special Trial Judge: Respondent determined a

deficiency in petitioners' Federal excise tax under section 4980A

for the taxable year 1990 in the amount of $7,569.2 In the

petition, petitioners claimed an overpayment of income tax in the

amount of $30,139 with respect to the additional tax imposed

under section 72(t).

After a concession by respondent,3 the issues for decision

are: (1) Whether petitioner Richard J. Montgomery is liable for

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

1990; and (2) whether petitioners are liable for the 10-percent

additional tax imposed under section 72(t) on early distributions

from qualified retirement plans for the taxable year 1990. The

resolution of these issues turns on whether a Transfer Refund

distribution was paid from a qualified plan pursuant to sections

4980A(e)(2), 72(t), and 4974(c).

FINDINGS OF FACT

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

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

that their petition was filed with the Court.
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Petitioner Richard J. Montgomery (petitioner) is a teacher. 

He was employed by the Hagerstown, Maryland Community College

(the Hagerstown Junior College) in 1990 and remained so employed

at least through the time that this case was submitted for

decision. As an employee of the Hagerstown Junior College,

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 in the Retirement System. Respondent did

not re-evaluate the provisions of the Retirement System after the

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.
- 4 -

 

4 See sec. 414(h)(2). The parties stipulated that

petitioner received $403.70 of employer pick up contributions and

interest; however, the record demonstrates that petitioner

actually received $402.70 of such contributions and interest.

On May 15, 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 $338,451.01. Petitioner received the Transfer

Refund in the form of two checks dated June 29, 1990, and

November 30, 1990.

Petitioner's Transfer Refund consisted of $37,064.27, in

previously taxed contributions made by petitioner during his

employment tenure with Hagerstown Junior College, $402.70 in

employer "pick-up contributions"4 and interest thereon, and

$300,984.04 of taxable earnings in the form of interest. The

earnings, "pick-up contributions", and interest on the pick-up

contributions; i.e. $301,386.74, 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 56. If petitioner had not transferred to

the Pension System but had remained a member of the Retirement

System, he would have been entitled to retire and receive a

normal service retirement benefit, including a regular monthly

annuity, at age 60. He would not have been entitled to receive a
- 5 -

Transfer Refund because a Transfer Refund is payable only as a

result of transferring 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 is 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 is

less than the monthly annuity that he would have received if he

had not transferred to the Pension System but had retired under

the Retirement System.

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

petitioners reported "total pensions and annuities" in the amount

of $338,451. Of this amount, petitioners reported $301,387 as

the taxable amount. Petitioners attached Form 5329 (Return for

Additional Taxes Attributable to Qualified Retirement Plans

(Including IRAs), Annuities, and Modified Endowment Contracts) to

their return. In Part II of such form, petitioners reported

liability for the additional tax under section 72(t) in the

amount of $30,139.
- 6 -

 

5 See supra note 3 regarding respondent's concession.

In the notice of deficiency, respondent determined a

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

amount of $7,569.5 In the petition, petitioners claimed an

overpayment of income tax in the amount of $30,139 with respect

to the additional tax imposed under section 72(t).

OPINION

The issues for decision are whether petitioner Richard J.

Montgomery is liable for the 15-percent excise tax under section

4980A, and whether petitioners are liable for the 10-percent

additional tax under section 72(t). As previously noted, the

resolution of these issues turns on whether the Transfer Refund

was paid from a qualified plan within the meaning of sections

4980A(e)(2), 72(t) and 4974(c).

1. Section 4980A Issue

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). Retirement

distributions are the amounts 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. 
- 7 -

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)". A qualified employer plan includes any plan which, at

any time, has been determined by the Commissioner to be such a

plan.

Petitioners contend that the Retirement System has never met

the definition of a qualified employer plan. In advancing this

contention, petitioners rely on section 54.4981A-1T(a3)(c)(2)(i), Temporary Qualified Pension Plan Excise Tax Regs.,

52 Fed. Reg. 46750 (Dec. 10, 1987). This regulation provides, as

relevant herein, that "an employer plan will be considered to

have been treated as a qualified employer plan if any employer

maintaining the plan has at any time filed an income tax return

and claimed deductions that would be allowable under section 404

(and that were not disallowed) only if the plan was a qualified

employer plan under section 401(a) or 403(a)." Petitioners argue

that this regulation is an exclusive definition of the term

"qualified employer plan" and that such definition only includes

those plans where the employer maintaining the plan is required

to file a Federal income tax return. Thus, petitioners contend,

the term "qualified employer plan" does not include governmental

plans.

We disagree with petitioners. Sec. 54.4981A-1T(a3)(c)(2)(i), Temporary Qualified Pension Plan Excise Tax Regs.,
- 8 -

does not offer an exclusive definition of qualified employer

plans, rather, it illustrates one example of when a plan will be

treated as a qualified employer plan. Under the plain language

of section 4980A(e)(2), a qualified employer plan includes a plan

which, at any time, has been determined by the Commissioner to be

a qualified plan; i.e., by means of a determination letter, as in

the present case. Thus, the fact the Retirement System is a

governmental plan does not preclude it from satisfying the

definition of a qualified employer plan.

Petitioners also contend that the amendments made to the

Retirement System in 1984 violate various provisions of section

401(a) and terminated its qualified status so that the Retirement

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

petitioner's Transfer Refund in 1990. Petitioners 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.

Respondent contends that, for purposes of section 4980A(a),

the qualified status of the Retirement System at the time of

petitioner's distribution is irrelevant. Specifically,

respondent contends that, under the plain language of section

4980A(e)(2), once the Commissioner determines that a plan is a

qualified employer plan, the plan's status for purposes of

section 4980A is not changed by subsequent events that might
- 9 -

 

6 A possible explanation for this definition of a qualified

employer plan is that such a definition prevents an employer

maintaining a small employer plan from intentionally

disqualifying the plan (by violating one of the technical sec.

disqualify the plan. Thus, respondent contends that the

Retirement System is a qualified employer plan because respondent

issued a determination letter to that effect on June 23, 1982. 

We agree with respondent.

Section 4980A(e)(2) defines a qualified employer plan to

include any plan which, at any time, has been determined by the

Commissioner to be such a plan. The regulations promulgated

under section 4980A further provide: "Distributions under any

plan * * * that has at any time been treated as a qualified

employer plan * * * will be treated for purposes of section * * *

[4980A] as distributions from a qualified employer plan * * *

whether or not such plan * * * satisfies the applicable

requirements at the time of the distribution." Sec. 54.4981A1T(a-3)(c)(2), Temporary Qualified Pension Plan Excise Tax Regs. 

[Emphasis added.]

Petitioners' contention that the Retirement System is

required to have been a qualified plan on the date of

petitioner's distribution is inconsistent with the plain meaning

of the words used in section 4980A(e)(2). That section merely

requires that a plan be determined to be a qualified employer

plan at some point in time and not necessarily on the date of the

retirement distribution.6 In the instant case, respondent issued
- 10 -

401(a) requirements) prior to making a distribution, in order to

avoid the excise tax on excess distributions.

a determination letter on June 23, 1982, providing that the

Retirement System was a plan described in section 401(a) that

included a trust exempt from tax under section 501(a). Thus,

under the plain language of section 4980A(e)(2), and under

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

Excise Tax Regs., the Retirement System satisfies the definition

of a qualified employer plan because it has been treated by

respondent to be such a plan.

The only technical arguments advanced by petitioners concern

the qualified status of the Retirement System under section

401(a). Petitioners do not set forth any compelling reason why

section 4980A(e)(2) should not be applied to give effect to the

plain meaning of the words used therein. Where a statute is

clear on its face, as in this case, we require unequivocal

evidence of contrary purpose before construing the statute in a

manner that overrides the plain meaning of the statutory words. 

Huntsberry v. Commissioner, 83 T.C. 742, 747-748 (1984). No such

contrary purpose has been shown here.

Because we are satisfied that our analysis of section

4980A(e)(2) leads to the conclusion that the Retirement System

was a qualified employer plan under section 4980A, we sustain

respondent's determination that petitioner is liable for the 15-

percent excise tax under section 4980A.
- 11 -

2. Section 72(t) Issue

Section 72(t) provides for a 10-percent additional tax on

early distributions from qualified retirement plans. Paragraph

(1), which imposes the tax, provides in relevant part as follows:

(1) Imposition of additional tax.--If any taxpayer

receives any amount from a qualified retirement plan (as

defined in section 4974(c)), the taxpayer's tax under this

chapter for the taxable year in which such amount is

received shall be increased by an amount equal to 10 percent

of the portion of such amount which is includible in gross

income.

As relevant herein, section 4974(c) 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 the Commissioner at any time has determined to be such a

plan.

The 10-percent additional tax does not apply to certain

distributions. For example, section 72(t)(2)(A) provides that

the 10-percent additional tax does not apply to distributions

that are: (1) Made on or after the date on which the taxpayer

attains age 59-1/2; (2) made to a beneficiary (or to the estate

of the taxpayer) on or after the death of the taxpayer; (3)

attributable to the taxpayer's being disabled; or (4) made to a

taxpayer after separation from service after attainment of age

55. Petitioners do not contend that they qualify for any of the

statutory exceptions under section 72(t)(2), and indeed they do

not satisfy any of those exceptions.
- 12 -

Petitioners advance the same arguments with regard to

section 72(t) as they did with respect to section 4980A, namely,

that the additional tax under section 72(t) does not apply to

petitioner's Transfer Refund because, due to the 1984 plan

revisions, the Retirement System was not a qualified retirement

plan within the meaning of section 4974(c) at the time that it

issued petitioner's Transfer Refund.

Respondent contends that the Retirement System is a

qualified retirement plan under the plain language of section

4974(c) because respondent issued a determination letter on June

23, 1982, providing that the Retirement System was such a plan. 

Respondent further contends that under the plain language of

section 4974(c), the qualified status of the Retirement System at

the time of petitioner's distribution is irrelevant.

As relevant herein, the definition of a "qualified

retirement plan" under section 4974(c) is virtually identical to

the definition of a "qualified employer plan" under section

4980A(e)(2). Significantly, the definition of a qualified

retirement plan under section 4974(c) specifies, as does the

definition of a qualified employer plan under section

4980A(e)(2), that a qualified retirement plan includes a plan

that, at any time, has been determined by the Commissioner to be

such a plan.

Under the plain language of section 4974(c), the Retirement

System meets the definition of a qualified retirement plan
- 13 -

because, on June 23, 1982, respondent determined it to be such a

plan. Although petitioners contend that the Retirement System

must be qualified on the date of petitioner's Transfer Refund in

order to be a qualified employer plan, such requirement is

inconsistent with the plain meaning of the words used in section

4974(c). Because petitioners offer no compelling reason to

construe the words of section 4974(c) in such a way that would be

inconsistent with their plain meaning, we give effect to the

plain meaning of the words used therein and sustain respondent's

determination that petitioners are liable for the 10-percent

additional tax under section 72(t).

We have considered petitioners' remaining arguments and find

them unpersuasive.

3. Conclusion

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.