Source: https://casetext.com/case/malbon-v-us
Timestamp: 2018-12-11 02:32:16
Document Index: 762758587

Matched Legal Cases: ['§ 8343', '§ 8334', '§ 72', '§ 8339', '§ 8339', '§ 8342', '§ 8343', '§ 8343', '§ 72', '§ 72', '§ 1', '§ 72', '§ 72', '§ 72', '§ 72', '§ 72', '§ 72', '§ 72', '§ 414', '§ 8334']

Malbon v. U.S, 43 F.3d 466 | Casetext
Malbon v. U.S.
43 F.3d 466 (9th Cir. 1994)
United States Court of Appeals, Ninth CircuitDec 28, 1994
…Section 8343a provides in part: (a) The Office of Personnel Management shall prescribe regulations under…
Bohner v. Comm&apos;r
…sec. 8334(a)(1)(A); Malbon v. United States, 43 F.3d 466, 467 (9th Cir. 1994); see also Logsdon v.…
Argued and Submitted October 31, 1994.
Decided December 28, 1994.
Thomas J. O'Rourke, Shaw, Bransford O'Rourke, Washington, DC, for plaintiffs-appellants.
BEEZER, Circuit Judge:Page 467
The pertinent facts are undisputed. Sidney Malbon was an employee of the United States of America for more than 32 years. During that time period he participated in the CSRS and made mandatory contributions in the amount of $47,783.64. He retired on December 31, 1986. At the time of his retirement he was informed by the Office of Personnel Management ("OPM") that he could either receive his annuity or elect an alternative form of annuity pursuant to 5 U.S.C. § 8343a. The alternative form of annuity provided Malbon with a lump-sum payment of $48,135.64 and a reduced annuity.
The lump-sum payment included $47,778.28 in contributions, pre-1957 interest of $5.36 and a $352 deemed deposit. The deemed deposit represented the amount Malbon would have contributed for temporary employment prior to 1955 if he had been a participant in CSRS.
Malbon elected the alternative form of annuity. In 1987, Malbon received $47,783.64 in a lump-sum payment and $22,143 as an annuity. He calculated the tax on the income in accordance with the instructions received from the Internal Revenue Service. In 1991, Malbon filed an amended tax return claiming a refund of $13,525.14 for the 1987 tax year based on his conclusion that the lump-sum payment was a tax free refund of his after-tax contributions and that he had not actually received the deemed deposit. The Internal Revenue Service disallowed the refund claim and the district court entered summary judgment in favor of the United States of America. Malbon v. United States, 846 F. Supp. 900 (W.D.Wash. 1994).
Federal employees eligible to participate in the CSRS contribute a portion of their salary to the Civil Service Retirement and Disability Fund ("Fund"). The employing agency makes a mandatory deduction from the employee's salary. 5 U.S.C. § 8334(a)(1). 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).
Employees who leave federal service after meeting the eligibility requirements for retirement are entitled to a basic annuity. 5 U.S.C. § 8339. The amount of the basic annuity is determined by years of service and salary at retirement. 5 U.S.C. § 8339. In 1986, Congress provided that federal employees who met the retirement eligibility requirements and retired after June 5, 1986 could elect the basic annuity or an alternative form of annuity. 5 U.S.C. § 8342(a), 8343a. The alternative annuity provided the employee with a lump-sum payment at retirement equal to the employee's contributions and an annuity in a reduced sum. 5 U.S.C. § 8343a. The alternative form of annuity is ultimately designed to be "actuarially equivalent to the present value" of the basic annuity. 5 U.S.C. § 8343a(c).
(a) The Office of Personnel Management shall prescribe regulations under which an employee or Member may, at the time of retiring under this subchapter . . . elect annuity benefits under this section instead of any other benefits under this subchapter . . . based on the service of the employee or Member. (b) Subject to subsection (c), the Office shall by regulation provide for such alternative forms of annuities as the Office considers appropriate, except that among the alternatives offered shall be —
(1) an alternative which provides for —
(2) in the case of an employee or Member who is married at the time of retirement, an alternative which provides for —
Taxation of annuities is governed by 26 U.S.C. § 72. An annuity payment consists of both taxable income and a nontaxable return of the employee's contribution. Section 72 provides that the entire annuity payment is included in gross income and then a proportional amount of the nontaxable contribution is excluded. The amount of the non-taxable component is determined by dividing the amount of the employee's contribution by the number of annuity payments projected in life-expectancy tables. 26 U.S.C. § 72; 26 C.F.R. §§ 1.72-1; 1.72-9. The employee's contribution is recovered without further payment of income tax over the projected life of the annuity contract. LaFargue v. Commissioner, 800 F.2d 936, 938 (9th Cir. 1986). Where the annuity payments cease before the employee's entire contribution is recovered, the amount of the unrecovered contribution is allowed as a deduction on the taxpayer's final income tax return. 26 U.S.C. § 72(b)(3).
(a) General rule for annuities. — Except as otherwise provided in this chapter, gross income includes any amount received as an annuity (whether for a period certain or during one or more lives) under an annuity, endowment, or life insurance contract.
(b) Exclusion ratio. —
(1) In general. — Gross income does not include that part of any amount received as an annuity under an annuity, endowment, or life insurance contract which bears the same ratio to such amount as the investment in the contract (as of the annuity starting date) bears to the expected return under the contract (as of such date).
(2) Exclusion limited to investment. — The portion of any amount received as an annuity which is excluded from gross income under paragraph (1) shall not exceed the unrecovered investment in the contract immediately before the receipt of such amount.
The alternative form of annuity provides, however, that the employee may receive at retirement a lump-sum payment equal to the amount of the employee's contributions to the Fund. Section 72(e) governs any amount "received under an annuity, endowment, or life insurance contract, and . . . is not received as an annuity." 26 U.S.C. § 72(e)(1)(A). Section 72(e)(2)(A) provides that an amount subject to section 72(e) is included in gross income when "received on or after the annuity starting date." 26 U.S.C. § 72(e)(2)(A). Section 72(e)(5)(E), however, would exclude the amount of gross income to the extent it was in full discharge of the contract. Malbon contends that the lump-sum payment is excluded from gross income pursuant to section 72(e)(5)(E) because the lump-sum payment was a separate contract under section 72(d). Section 72(d) provides that "employee contributions . . . under a defined contribution plan may be treated as a separate contract."
Malbon received the lump-sum payment at issue after his annuity starting date.
Full refunds, surrenders, redemptions, and maturities. — This paragraph shall apply to —
26 U.S.C. § 72(e)(5)(E).
Whether or not a separate contract exists is crucial to the application of section 72. "An amount constituting an "investment in the contract' may only be offset against distributions under the same § 72 contract. A qualified plan could have several `contracts' for one individual. If an employee's contribution are attributable to one contract and the employer's contributions are to another, the employee could not offset his own contributions against the employer's contributions in determining the amounts taxable under § 72. Thus, the determination of what constitutes a `single contract' is important in applying § 72." 370 Tax Mgmt.2d. (BNA) A-25 (1994).
To be treated as a separate contract under section 72(d), contributions must be made under a defined contribution plan. Section 414(k) creates a hybrid plan, one with both a defined benefit and defined contribution component. Section 414(k) allows a defined benefit plan to be treated as a defined contribution plan only "to the extent benefits are based on the separate account of a participant and as a defined benefit plan. with respect to the remaining portion of benefits under the plan." 26 U.S.C. § 414(k)(2). Malbon argues that his contributions are placed into a separate account in the CSRS, thus constituting a separate account pursuant to section 414(k). He, therefore, asserts that the lump-sum payment is not taxable income.
(k) Certain plans. — A defined benefit plan which provides a benefit derived from employer contributions which is based partly on the balance of the separate account of a participant shall —
The separate account argument was accepted in Guilzon v. Commissioner, 985 F.2d 819 (5th Cir. 1993), although the claim was ultimately rejected on other grounds. The argument was rejected by Montgomery v. United States, 18 F.3d 500 (7th Cir. 1994), George v. United States, 30 Fed.Cl. 371 (Fed.Cl. 1994), and Shimota v. United States, 21 Cl.Ct. 510 (Cl.Ct. 1990), aff'd, 943 F.2d 1312 (Fed. Cir. 1991), cert. denied, ___ U.S. ___, 112 S.Ct. 1669, 118 L.Ed.2d 389 (1992).
In Guilzon the taxpayer was also a federal employee who elected an alternative form of annuity and received a lump-sum payment in the amount of his after tax contributions to the Fund. Although ultimately concluding that Guilzon's lump-sum payment was taxable, the Fifth Circuit concluded that Guilzon's contributions were maintained in a separate account and met the requirement of section 414(k) to be treated as a defined contribution plan. 985 F.2d at 822-23. The court, relying on the definition of a defined contribution plan in section 414(i), concluded that it was not required that individual gains and losses be credited to the participant's account and that merely establishing an account to collect contributions was sufficient to meet the separate account requirement of section 414(k). Id. The Fifth Circuit read the language of section 414(i) as permissive, concluding that "may be allocated" indicated the posting of gains and losses to the individual's account is not mandatory to maintain a separate account. Id.
Section 414(k) only applies to "[a] defined benefit plan which provides a benefit derived from employer contributions." The court in Guilzon ultimately concluded that the lump-sum payment was taxable because the benefits were not derived from employer contributions. The court based its conclusion on its determination that under the CSRS no employer contributions were made. As the magistrate judge correctly held, this conclusion is incorrect. The CSRS requires the employing agency to match the employee contribution. 5 U.S.C. § 8334(a)(1), 8348(c).
The alternative form did not create a hybrid consisting of a defined benefit component and a defined contribution component; it merely accelerated the payment of a portion of the annuity, a defined benefit. . . . The alternative form of annuity was a defined benefit plan with an acceleration feature arbitrarily tied to the employee's contributions but not on that account a defined contribution plan.
We believe the magistrate judge was incorrect in concluding that a separate account existed for the purposes of section 414(k). Instead, we adopt the analysis of the Seventh Circuit that a separate account must maintain the characteristics of a defined contribution plan, including the allocation of gains and losses to that account. A defined benefit plan provides a benefit regardless of the contribution amount or the success of the investments. The amount of the benefit is guaranteed based on years of service and salary at time of retirement. A defined contribution plan, however, provides a benefit dependent on the investment performance of the contributions. The employee is not guaranteed any particular benefit, but rather is provided with the account balance at retirement. Section 414(k) provides that where a defined benefit plan provides a benefit based on the separate account of a participant, it may treated as a defined contribution plan. In essence, section 414(k) creates a hybrid plan consisting of both a defined benefit and defined contribution plan. In so doing, the separate account of the participant must therefore maintain the characteristics of a defined contribution plan. Merely maintaining records to keep track of an individual's contribution does not satisfy this requirement. See Connolly v. Pension Benefit Guar. Corp., 581 F.2d 729, 733 (9th Cir. 1978) (holding recordation does not create a defined contribution plan in the ERISA context), cert. denied, 440 U.S. 935, 99 S.Ct. 1278, 59 L.Ed.2d 492 (1979).
Because the separate account requirements of section 414(k) were not met, the CSRS does not have a defined contribution plan component and the lump-sum payment may not be treated as a separate contract for the purposes of section 72. The lump-sum payment is taxable in the year received and the taxpayer is permitted to exclude from gross income a portion of each annuity payment for the return of contributions. We affirm the district court, albeit for different reasons.
It is important to note again that the United States of America accurately represents that this case does not determine whether the taxpayer will receive a return of contributions tax free. Because the contributions came from after tax income, there is no dispute that the taxpayer does not have to pay tax on the return of contribution. Rather the question is one of timing, whether the taxpayer should receive a credit for the contributions all at once for the lump-sum payment or over the life of the annuity.
Malbon argues that the legislative history mandates a different result. We, however, find the statutory language to be unambiguous, accordingly, we will not rely on the legislative history. Fernandez v. Brock, 840 F.2d 622, 632 (9th Cir. 1988).
(2) for purposes of [section] 72(d) . . . be treated as consisting of a defined contribution plan to the extent benefits are based on the separate account of a participant and as a defined benefit plan with respect to the remaining portion of benefits under the plan. . . .