TAX COURT OPINION

Case: Paul C. Nordberg & Debra L. Nordberg
Docket Number: 1426-17
Judge: Gustafson
Opinion Type: bench
Filed: 11/07/2018
Pages: 10

UNITED STATES TAX COURT WASHINGTON, DC 20217 PAUL C. NORDBERG & DEBRA L. NORDBERG, Petitioners, v. CLC ) ) ) ) ) Docket No. 1426-17. COMMISSIONER OF INTERNAL REVENUE, Respondent ) ) ) ORDER Pursuant to Rule 152(b) of the Tax Court Rules of Practice and Procedure, it is ORDERED that the Clerk of the Court shall transmit herewith to petitioner and to respondent a copy of the pages of the transcript of the proceedings in the above case before the undersigned judge at Boston, Massachusetts, containing his oral findings of fact and opinion rendered at the trial session at which the case was heard. In accordance with the oral findings of fact and opinion, decision will be entered under Rule 155. (Signed) David Gustafson Judge Dated: Washington, D.C. November 7, 2018 SERVED Nov 07 2018 Bench Opinion by Judge David Gustafson October 17, 2018 Paul C. Nordberg & Debra L. Nordberg v. Commissioner of 3 Internal Revenue Docket No. 1426-17 THE COURT: The Court has decided to render the following as its oral Findings of Fact and Opinion in this case. This Bench Opinion is made pursuant to the authority granted by section 7459(b) of the Internal Revenue Code, and Tax Court Rule 152; and it shall not be relied on as precedent in any other case. By a notice of deficiency ("SNOD") dated October 31, 2016 (Ex. 2-J), the Internal Revenue Service ("IRS") determined deficiencies in the 2014 Federal income tax of petitioners Paul C. Nordberg and Debra L. Nordberg. (Stip. 3.) On their petition the Nordbergs state an address in Massachusetts. After concessions (see Stip. 6- 10), the sole issues for decision are whether some portion of the annuity payments Mr. Nordberg received pursuant to the Civil Service Retirement System ("CSRS") is taxable (we hold that it is) and, if so, what that portion is (a question that will be resolved under Rule 155). The case was tried in Boston, Massachusetts, on October 15, 2018. The Nordbergs represented themselves, and the Commissioner was represented by Molly H. Donohue. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Cribers $733406-2250|operatiomeexrtermetlwww.exriberuet FINDINGS OF FACT 4 Applying the burden of proof principles set out in the opinion below, we find the following facts: Mr. Nordberg was an employee of a Member of the House of Representatives from 1975 through 1992. During that time, mandatory contributions totaling $46,476 were withheld from his after-tax wages and were contributed to the CSRS (Ex. 4-J), pursuant to 5 U.S.C. sec. 8334(a)(1)(A). His employer was obliged to make corresponding contributions, pursuant to 5 U.S.C. sec. 8334(a)(1)(B)(i). Mr. Nordberg left that employment in 1992 and thereafter was otherwise employed. In April 2008 at age 65 he began to receive annuity payments from the CSRS. As of June 2018, he had received annuity payments totaling $379,368. (Ex. 4-J.) Mr. Nordberg reckons (see Ex. 10-P), and for purpose of this opinion we assume, that if, instead of making mandatory contributions to the CSRS, he had invested those amounts in an index fund, then his investment would have yielded an amount greatly in excess of what his CSRS pension will pay. (See petitioners' pretrial memorandum ("PTM") filed October 10, 2018, at 5-8.) In 2014 the annuity payments that Mr. Nordberg received from the CSRS totaled $22,044. The Office of Personnel Management ("OPM") reported that amount on Form 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Cribers 1099-R (Ex. 3-J), and also reported in box 2a that the "Taxable amount" of that total was $20,494, thus treating 5 as non-taxable only $1,550 of his total 2014 annuity payments. (For 2013 the same amount--$1,550--was evidently treated as non-taxable, even though the total annuity payments for 2013 were only $21,720, an amount $324 smaller than the 2014 total. See PTM, Attachment A.) The Nordbergs filed their 2014 Federal income tax return in 2015. (Stip. 1.) They did not report Mr. Nordberg's annuity payments on that return but left blank line 16a ("Pensions and annuities") and line 16b ("Taxable amount"). On October 31, 2016, after receiving information about the annuity payments from OPM on Form 1099-R, the IRS issued to the Nordbergs a notice of deficiency (Ex. 2-R) that determined a deficiency in their 2014 income tax. The Nordbergs timely filed their petition in this Court on January 18, 2017, challenging the IRS's determination. OPINION I. Burden of proof The IRS's determination in the SNOD is presumed correct, and the taxpayer generally bears the burden to prove any adjustment to the income tax the IRS determined. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). Mr. Nordberg disputes OPM's tally of his total annuity 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 cfibers (973)406-2250|operationsees:rterssetlwww.escribersaet payments since 2008; but he does not propose an alternative amount and offers no documentation to 6 substantiate any other total. More important, he does not dispute the total amount of 2014 annuity payments. II. The taxability of CSRS annuities "Gross income" subject to income tax explicitly includes "Annuities" and "Pensions"--"[e]xcept as otherwise provided". Sec. 61(a)(9), (11). For Mr. Nordberg to prevail, he must be able to point to an exception. Respondent acknowledges that a portion of pension payments may be non-taxable--i.e., the portion that consists of a taxpayer's after-tax contributions made to the pension fund (3331 sec. 72(b), (m)). Those general rules apply to CSRS annuities. That is, "The amount is withheld from after-tax income and is therefore taxable the year the salary deduction is made. Contributions by the employing agency and any accrued interest are taxable upon distribution to the eligible employee. 26 U.S.C. §§ 72, 402(a)." Malbon v. United States, 43 F.3d 466, 467 (9th Cir. 1994). That resolves the issue in this case: Mr. Nordberg's CSRS annuity payments are not completely excluded from taxable income. Only a portion of them is non-taxable. Mr. Nordberg argues to the contrary, invoking a principle he perceives in the Internal Revenue Code: The 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 (973)406-2250|operationseescrbersætlwww.esalbersat Individual Retirement Account ("IRA") is a retirement benefit provision under which a taxpayer's qualified contributions to a qualifying plan are deductible (see sec. 219(a)), and the later distributions from the IRA are taxable. In 1997 Congress created the "Roth IRA" and provided that contributions to a Roth IRA are not deductible (see sec. 408A(c)(1)) and, correspondingly, that qualified distributions from a Roth IRA are generally not taxable (see sec. 408A(d)(1)). Drawing inferences from these IRA and Roth IRA rules, Mr. Nordberg perceives a general rule that where retirement contributions are deductible (as with a regular IRA), the payout is taxable, but that where retirement contributions are not deductible (as with a Roth IRA), then the payout must be non-taxable. The Roth IRA rules were enacted in 1997--after the Malbon opinion we cite above--so Mr. Nordberg dismisses that opinion and urges complete non-taxability for CSRS annuity payments. The principle flaw in Mr. Nordberg's argument is that there is no basis for it in the Code. The Roth IRA rules apply only to Roth IRAs. Mr. Nordberg points to no provision in the Code that they reach CSRS annuities, and we know of no such provision. Rather, CSRS annuity payments are income under section 61(a) "[e]xcept as otherwise provided", and the only "otherwise" we find in 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 cribers (973}406-2250|operationsgestriberutet]www.escHbers.net the Code is the provision in Rule 72(m) allowing for non- 8 taxability of only the portion of a pension that the taxpayer himself contributed. At trial Mr. Nordberg called the Court's attention to an excerpt (Ex. 8-P) from the "General Explanation of Tax Legislation Enacted in the 107th Congress" (Jan. 24, 2003), prepared by the Staff of the Joint Committee on Taxation. He highlighted the section "Deemed IRAs under employer plans", which explains the enactment of section 408(q) of the Code. Section 408(q) provides, "If ... a qualified employer plan elects to allow employees to make voluntary employee contributions to a separate account or annuity established under the plan, ... then such account or annuity shall be treated for purposes of this title in the same manner as an individual retirement plan". (Emphasis added.) And, as the Joint Committee Staff explained (at 88), the separate account so established "is deemed a traditional IRA or a Roth IRA, as applicable, for all purposes of the Code." (Emphasis added.) However, section 408(q) has no application to Mr. Nordberg and his receipt of CSRS annuities. His contributions were not voluntary, and the CSRS did not set up a separate account for Mr. Nordberg. It has simply paid him the benefit defined in 5 U.S.C. section 8339. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 (973)406-2250loperetionseescribersnet|www.escribersnet Mr. Nordberg points to CSRS Form 2802 (Ex. 9-P, 9 "Application for Refund of Retirement Deductions"), which in some circumstances permits a rollover of such a refund to a regular IRA or a Roth IRA. However, (1) Mr. Nordberg does not allege that he ever submitted such an application; and if he had (2), then according to the instructions on the form, a rollover to a Roth IRA would have been permitted only for his contributions, and (3) the "interest portion" of his interest in the CSRS would be "taxable in the year paid if you roll it into a Roth IRA." Nothing in CSRS Form 2802 purports to entitle him to non-taxable treatment of anything other than the portion of his CSRS annuity payments that he contributed. Mr. Nordberg urges that it is unfair for the Government to give him a pension that (he reckons) is so far below what a fair return on his money would have yielded and, at the same time, to add insult to injury by taxing him on that disappointing return on his money. However, we do not have authority to depart from the laws Congress has enacted and to instead devise rules of taxation based on felt fairness. Under the Internal Revenue Code, only a portion of Mr. Nordberg's CSRS annuity payments is non-taxable. III. The non-taxable portion of Mr. Nordberg's 2014 annuity payments 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 The Commissioner acknowledges that, under 10 section 72, the contributions that Mr. Nordberg previously made by withholding are non-taxable to him when distributed. Mr. Nordberg observes that if the non- taxable amount is as asserted by the Government here ($1,550 per year), then he will not recover his contributions of $46,476 as non-taxable income unless and until just barely less than 30 years of annuity payments have been made (30 x $1,550 = $46,500) and he has reached age 95. We hope he will do so, but we share his feeling that this would be excessively optimistic from an actuarial point of view. OPM began paying Mr. Nordberg's pension in 2008, and we note that the Social Security Administration's "Period Life Table, 2007" (2008 is not available) projects, for a male age 65, a life expectancy of about 17 years, not 30 years. See ssa.gov/OACT/STATS/table4c6_2007.html. (We do not rely on this information to find a life expectancy.) Neither party has proposed a specific, alternative non-taxable amount, but our reading of section 72 suggests as follows: It appears that under section 72(d)(1)(B), Mr. Nordberg's contributions (which totaled $46,476) were to be recovered over 260 months--i.e., at $179 per month, or $2,148 per year. That is, it appears that the non-taxable portion may have been not $1,550, as 1 2 3 4 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 (973)406-2250|cperationseescrbersmet|www.escdbetsmet OPM evidently figured, but rather $2,148. If, as it seems, the non-taxable amount is not $1,550, then the deficiency will have to be recomputed. If that 11 calculation of an alternative non-taxable amount of $2,148 is not correct, then the parties can propose the correct calculation, and to that end-- Decision will be entered pursuant to Rule 155. This concludes the Court's oral Findings of Fact and Opinion in this case. (Whereupon, at 3:42 p.m., the above-entitled matter was concluded.) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25