Petition for Writ of Certiorari — Shimota v. United States, 112 S. Ct. 1669 (1992) (No. 91-1241)

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IN THE

Supreme Court of the United States

OCTOBER TERM, 1991

JOHN E. SHIMOTA and NAN B. SHIMOTA,

Petitioners,

THE UNITED STATES,

Respondent.

Petition for Writ of Certiorari to the

United States Court of Appeals

for the Federal Circuit

PETITION FOR WRIT OF CERTIORARI

THOMAS J. O’ROURKE *

GEORGE J. SHAW, JR.

VIRGINIA H. JOHNSON

NEILL AND SHAW

815 Connecticut Avenue, N.W.

Suite 800

Washington, D.C. 20006

(202) 463-8400

* Counsel of Record Attorneys for Petitioners

cae anil

WILSON - EPES PRINTING Co.. INC. - 789-0096 - WASHINGTON. D.C. 20001

QUESTIONS PRESENTED

1. Whether the lower court * improperly determined

that a 1966 Treasury regulation, 26 C.F.R. $ 1.72-2(a)

(3) (1), governing the tax treatment of certain distribu-

tions from an annuity program, supercedes a subsequent

statutory enactment, 5 U.S.C. § 8343a, authorizing a dis-

tribution defined as a return of capital by 5 U.S.C.

$ 8331(8)?

2. Whether the lower court’s reliance on the single

contract doctrine of 26 C.F.R. § 1.72-2(a) (3) (i) and

its failure to consider the impact of the subsequently

enacted separate contract doctrine of 26 U.S.C. $ 721d)

and § 414(k) requires remand of this case for consid-

eration of these later statutes? **

* Any references in this Petition to the “lower court” refer to the

decision of the United States Claims Court as summarily affirmed by

the United States Court of Appeals. The Court of Appeals decision

is included at Appendix A and the Claims Court decision is included

at Appendix B.

** The single contract doctrine is set forth in 26 C.F.R. § 1.72-

2(a)(3)(i). Under this doctrine each separate annuity program of

an employer is considered a single contract. The separate contract

doctrine originates in 26 U.S.C. S§ 72(d) and 414(k). It requires

employee contributions to an annuity program to be treated as a

separate contract. To the extent distributions from a separate con-

tract represent a refund of employee contributions, they are non-

taxable.

(i)

PARTIES

The names of all parties to the proceedings are set

forth in the caption.***

*** The parties identified in the caption are the only formal par-

ties to the proceedings. The Office of Personnel Management has

informally advised counsel for petitioners, however, that approxi-

mately 268,000 federal retirees received a distribution similar to the

one at issue in this case. Thus, any opinion issued by this Court

could have a direct impact on the tax liability of each federal retiree

who received the lump-sum credit distribution.

TABLE OF CONTENTS

Page

QUESTIONS PRESENTED |... i

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TABLE OF AUTHORITIES 0oo...o...e.ececcccccccecceeeeeeeee iv

SER IER nee 1

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STATEMENT OF THE CASE 0000022... cececcceecececeee 2

REASONS FOR GRANTING PETITION FOR WRIT

I 4

ee dont wansissanaedllvannpnacons.sndareicevas 6

I. CONGRESS HAS EXPRESSLY PROVIDED

THAT THE LUMP-SUM PAYMENT TO

APPELLANT WAS A RETURN OF HIS

PREVIOUSLY TAXED CONTRIBUTIONS

I eisai sacs ncnexacececnsnesaasnininnsscnndsnn 6

II. THE LOWER COURT’S RELANCE ON THE

SINGLE CONTRACT DOCTRINE OF THE

TREASURY REGULATIONS IGNORES THE

SIGNIFICANCE OF THE SUBSEQUENT

STATUTORY SEPARATE CONTRACT DOC-

stance scasnesirsiosnicery-censanenaknaneence 9

Ill. THE LEGISLATIVE HISTORY OF THE 1986

CHANGES TO THE CSRS AND THE TAX

CODE CONFIRMS THAT THE LUMP-SUM

DISTRIBUTION AND THE SEPARATE CON-

TRACT DOCTRINE ARE RELATED AND

THAT THE PAYMENT TO THE PETI-

TIONER IS TAX FREE .................................... 13

a 17

TABLE OF CONTENTS—Continued

Page

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gg | |) sa aNe nn neNCan NEE SeECNERN ss ceCinath ce inadnbiaaemataateind ae 3a

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TABLE OF AUTHORITIES

CASES Page

Cohen v. Commissioner, 63 T.C. 267 (1974), aff'd,

543 F.2d 725 (9th Cir. 1976) 5

Crawford Fitting Co. v. J. T. Gibbons, Inc., 482

Ee 0. | eRe DATE es a eee 8

Dixon v. United States, 381 U.S. 68 (1965) .......... 13

Eller v. Commissioner, 77 T.C. 934 S: | 3 13

Federal Power Commission v. Memphis Light, Gas

and Water Division, 411 U.S. 458 (1978) .......... 15

Hogan v. United States, 513 F.2d 170 (6th Cir.

1975), cert. denied, 423 U.S. 836 3.) | 5

Morton v. Mancari, 417 U.S. 535 2 | | ee 5, 7

Ruckelshaus v. Monsanto Co., 467 U.S. 986

£: | See iedeieideatialpeaiddliniaeide ne an eee Ae 5, 7

Seatrain Shipbuilding Corp. v. Shell Oil Co., 444

Ri Oe Rate Ne Pe ees Dn oy 16

Shimota v. United States, 21 Cl. Ct. 510 (1990),

aff'd, 943 F.2d 1312 (Fed. Cir. | pr ere 1

Sioux Tribe of Indians v. United States, 316 U.S.

ee SE ier oe a et 16

Stewart v. Smith, 673 F.2d 485 (D.C. Cir. 1982) .. 7

United States v. Will, 449 U.S. 200 fee 7

STATUTES

Federal Employee Retirement System Act of 1986,

Pub. L. No. 99-335, 100 Stat. 514 (1966) ............ 14

Government Organization and Employees Act of

1966, Pub. L. No. 89-554, 80 Stat. 378 (1966)... 7

Omnibus Budget Reconciliation Act of 1990, Pub.

L. No. 101-508, 104 Stat. 1388 {| eee 4,16

Tax Reform Act of 1986, Pub. L. No. 99-514, 100

SPM Se RD oe eee passim

5 U.S.C. Chapter 83 (1980 & Supp. 1981) _............ 2,4

5 U.S.C. § 8331 (1980 & Supp.1991)... 6

5 U.S.C. § 8331(8) (1980 & Supp.1991) 2, 5, 6, 8,12

5 U.S.C. § 8331(8) (A) (1980 & Supp. | |) ne 12

TABLE OF AUTHORITIES—Continued

Page

5 U.S.C. § 8331(8) (C) (1980 & Supp. 1991) ............ 6

5 U.S.C. § 8334 (1980 & Supp. 1991) -...000 ee... 11

5 U.S.C. § 8334(f) (Supp. 1991) ......... Di et eee 13

Oe rs 0 A ITED ercttcccesetecesicecscenestescenabeos 6

5 U.S.C. § 8342 (1980 & Supp. 1991) 0... 7,9

Bets IE COIN SPE onicisnc enue ceccecnccecsncseecnecenes passim

5 U.S.C. § 8848a(b) (Supp. 1991) ............................. 6,12

5 U.S.C. § 8348a(b) (1) (Supp. 1991)... 8,11

5 U.S.C. § 8348a(c) (Supp. 1991) ................0.2. 6, 7

5 U.S.C. § 8348a(f) (1) (Supp. 1991) -..........2.2200... 4

26 U.S.C. § 72 (1988 & Supp. 1991) —.......... 3, 6, 7, 8, 10, 15

26 U.S.C. § 72(d) (1988 & Supp. 1991) —.....00000... passim

26 U.S.C. § 72(e) (5) (E) (1988 & Supp. 1991) ....... 2,7, 10

26 U.S.C. § 414(k) (1988 & Supp. 1991) -................ passim

28 U.S.C. § 1254(1) (1966 & Supp. 1991) ................ 1

28 U.S.C. § 1295(a) (3) (Supp. 1991) —....00.... 4

28 U.S.C. § 1491 (1973 & Supp. 1991) ........000220... 3

REGULATIONS

a I i 2

Berar cha Te IE BMI D sick pcsncesecaicnncendicichckaaushoceickes 11

ee cin CID CRIED vcscsiresncennsencenscescxsasccsceee 11

26 C.F.R. § 1.72-2(a) (8) (i) (1991) ............... 2,5, 9, 12, 15

LEGISLATIVE HISTORY

CONF. REP. No. 841, 99th Cong., 2d Sess. II-462 __.... 15

H.R. REP. No. 881, 101st Cong., 2d Sess. (1990) _..... 16

STAFF OF THE JOINT COMMITTEE ON TAXATION,

GENERAL EXPLANATION OF THE TAX REFORM

NE WE MIE sexeinceenens bah albsncssaasasennesebsdmmeasnid seca 11, 14, 15

ADMINISTRATIVE PUBLICATIONS/RULINGS

Rev. Rul. 70-150, 1970-1 C.B. 106 ............................... 7

IRS Notice 87-13, 1987-1 C.B. 482 (Q&A14) _........ 13

Lf -

FEELLANEOUS SOURCES

CoNnG. REC. H8356 (daily ed. Sept. 25, 1986)

(statement of Rep. Rostenkowski) -.................... 17

IN THE

Supreme Cot of the United States

OCTOBER TERM, 1991

No.

JOHN E. SHIMOTA and NAN B. SHIMOTA,

‘ Petitioners,

THE UNITED STATES,

Respondent.

Petition for Writ of Certiorari to the

United States Court of Appeals

for the Federal Circuit

PETITION FOR WRIT OF CERTIORARI

OPINIONS BELOW

Shimota v. United States, 948 F.2d 1312 (Fed. Cir.

1991) (set forth in Appendix A).

Shimota v. United States, 21 Cl. Ct. 510 (1990) (set

forth in Appendix B).

JURISDICTION

The decision of the United States Court of Appeals

for the Federal Circuit was entered on September 12,

1991. (See Appendix A.) The Court of Appeals denied

a timely Petition for Rehearing on November 6, 1991.

(See Appendix C.) The Court of Appeals subsequently

declined a timely Suggestion for Rehearing In Bane on

November 20, 1991. (See Appendix D.) Petitioners in-

voke jurisdiction of this Court under 28 U.S.C. § 1254(1).

STATUTES INVOLVED

The relevant statutes are 5 U.S.C. §§ 8331(8) and

8343a, and 26 U.S.C. §§ 72(d), 72(e) (5) (E) and 414(k).

The relevant regulation is 26 C.F.R. § 1.72-2(a) (3) (i).

Each of these provisions is set forth in Appendix E.

STATEMENT OF THE CASE

Petitioner, John E. Shimota, was an agent of the Fed-

eral Bureau of Investigation (“FBI’’) for more than

twenty years prior to his retirement in November, 1986.!

While employed by the FBI, he contributed $53,382.77 in

after-tax funds to the Civil Service Retirement System

(“CSRS”).? Following his retirement, Mr. Shimota

elected to receive a lump-sum credit distribution and

a reduced annuity pursuant to 5 U.S.C. § 8343a (Supp.

1991). The lump-sum credit is defined as a refund of

an employee’s contributions to the CSRS by 5 U.S.C.

§ 8331/8) (1980 & Supp. 1991).

The amount of Mr. Shimota’s lump-sum credit equaled

the exact amount of his after-tax contributions to the

CSRS—$53,382.77. In correspondence to Mr. Shimota

the Office of Personnel Management (“OPM”) charac-

terized the lump-sum credit as a refund of his contribu-

1 Petitioners John E. Shimota and Nan B. Shimota are husband

and wife who filed a joint income tax return for 1987. The disposi-

tive issues in this case concern Mr. Shimota’s retirement contribu-

tions to the CSRS. Throughout this Petition, counsel use the terms

“petitioner” and “petitioners” interchangeably.

2 The Civil Service Retirement System is a statutorily mandated

retirement program for employees of the federal government. It is

codified at 5 U.S.C. Chapter 83 (1980 & Supp. 1991). The CSRS is

administered by the Office of Personnel Management and the regula-

tions governing it are published at 5 C.F.R. § 831 (1987).

% The lump-sum credit is also defined to include certain deposits

by an employee as well as interest on pre-1957 contributions to the

CSRS. The lump-sum credit paid to Mr. Shimota, however, con-

sisted solely of a refund of his contributions.

tions to the CSRS. When Mr. Shimota received his

lump-sum credit distribution in 1987, he filed an appli-

cation for a private letter ruling with the Internal Rev-

enue Service (“IRS”). He requested the IRS to advise

him of the proper tax treatment of this distribution. In

a letter dated December 4, 1987, the IRS characterized

the lump-sum credit as “an amount equal to” his con-

tributions to the CSRS, but not a refund of those con-

tributions. The IRS determined that 5.9 percent of

the lump-sum credit was a non-taxable return of Mr.

Shimota’s contributions and that the remaining 94,1

percent of this distribution was taxable.

Petitioners filed a joint 1987 federal income tax re-

turn and reported the lump-sum credit distribution in

accordance with the guidance provided by the IRS. They

filed a timely administrative claim for refund of the

federal income taxes imposed on the lump-sum credit

with the IRS in June, 1988. When the IRS denied this

claim in a letter dated September 19, 1988, the Shimotas

initiated this case by filing a timely complaint in the

United States Claims Court. The Claims Court had

jurisdiction of this matter pursuant to 28 U.S.C. § 1491.

The Claims Court upheld the IRS’s position. It rea-

soned that the statutory definition of “lump-sum credit”

under the CSRS was not controlling for tax purposes.

Instead, the Claims Court concluded, the CSRS was

governed by the general annuity provisions of § 72 of

the Internal Revenue Code, contained in 26 U.S.C. § 72

(1988 & Supp. 1991). It rejected the taxpayers’ argu-

ment that the lump-sum credit and the reduced annuity

authorized by the CSRS at 5 U.S.C. § 8348a were sep-

arate elements or contracts. Rather, the Claims Court

* Both in the Claims Court and on appeal, petitioners argued

that the CSRS was not a contract. The Claims Court held, however,

that for tax purposes, the CSRS is treated as a contract even though

it is not a contract. All references to a contract in this petition are

for purposes of consistency with the conclusion of the lower court.

concluded that the lump-sum credit and the monthly

annuity were from a single contract in reliance on 26

C.F.R. § 1.72-2(a) (3) (i) (1991). Accordingly, the

Claims Court held that the lump-sum credit payment was

properly prorated between a 5.9% return of employee

contributions and a 94.1% payment of previously untaxed

government contributions. In reaching this conclusion,

the Claims Court did not mention the separate contract

doctrine added to the Tax Code by the Tax Reform Act

of 1986, Pub. L. No. 99-514, 100 Stat. 2085 (1986)

(“The Tax Reform Act of 1986”) and the Technical and

Miscellaneous Revenue Act of 1988, Pub. L. No. 100-647,

102 Stat. 3342 (1988) (“TAMRA”’).

Petitioners filed a timely Notice of Appeal to the

United States Court of Appeals for the Federal Circuit

(“the Court of Appeals”) invoking jurisdiction under

28 U.S.C. § 1295(a) (3). The Court of Appeals issued

an order on September 12, 1991, summarily affirming

the order of the Claims Court. Petitioners filed a timely

Petition for Rehearing with the Court of Appeals on

September 25, 1991. The Petition for Rehearing was

denied by order of the Court of Appeals dated Novem-

ber 6, 1991.

REASONS FOR GRANTING THE PETITION FOR

WRIT OF CERTIORARI

The issues in this case potentially affect approximately

268,000 retired federal employees and involve two federal

Statutes, the CSRS, codified at 5 U.S.C. Chapter 83, and

the Internal Revenue Code, codified at Title 26, United

States Code (the “Tax Code.”)* When a court is called

5 The lump-sum credit option was available for persons who re-

tired after June 6, 1986, and before December 1, 1990. The avail-

ability of this option was suspended for a period of five years by

the Omnibus Budget Reconciliation Act of 1990, 5 U.S.C. § 8348a

(f)(1) (Supp. 1991). The OPM has informally advised petitioners’

counsel that approximately 268,000 federal retirees elected this

option while it was available.

upon to interpret two statutes it must, to the extent pos-

sible, strive to interpret these statutes to give effect to the

provisions of both. Ruckelshaus v. Monsanto Co., 467 U.S.

986, 1018 (1984) ; Morton v. Mancari, 417 U.S. 535, 551

(1974). In prior cases involving tax issues arising under

the CSRS, the courts have followed this approach. They

have looked to the CSRS to determine the proper charac-

terization of the matter before the court and to the Tax

Code to determine the proper tax treatment. Hogan v.

United States, 513 F.2d 170 (6th Cir. 1975), cert. denied,

423 U.S. 836 (1975) ; Cohen v. Commissioner, 63 T.C. 267

(1974), aff'd, 543 F.2d 725 (9th Cir. 1976).

The lower court did not follow this approach. Rather,

it concluded that the CSRS definition of the lump-sum

credit as a return of capital was not controlling for tax

purposes. The lower court also held that, pursuant to 26

C.F.R. § 1.72-2(a) (3) (i), all distributions from the CSRS

should be treated as if they were from a single contract.

This regulation has not been revised since 1966 and does

not reflect the dramatic changes in the tax treatment of

annuity distributions enacted as part of the Tax Reform

Act of 1986 and TAMRA. Specifically, the regulation does

not reflect the separate contract doctrine first enacted in

1986 and now embodied in $$ 72(d) and 414(k) of the

Tax Code.

The very clear statutory provisions of both the CSRS

(5 U.S.C. §§ 8343a and 8331(8)) and the Tax Code (26

U.S.C. $$ 72(d) and 414(k)) establish that the distribu-

tion to Mr. Shimota was not taxable. The legislative his-

tory of these provisions confirms that these statutory pro-

visions were related. When Congress enacted these

provisions in 1986, its intention was to allow federal re

tirees to receive a tax free recovery of their contributions

to the CSRS.

ARGUMENT

I. CONGRESS HAS EXPRESSLY PROVIDED THAT

THE LUMP-SUM PAYMENT TO APPELLANT WAS

A RETURN OF HIS PREVIOUSLY TAXED CON-

TRIBUTIONS TO THE CSRS.

The Claims Court held that the lump-sum payment

elected by John Shimota was taxable based upon an ap-

plication of § 72 of the Tax Code, which governs annuities

and pensions. Treatment of the lump-sum payment as

taxable income under Code § 72 is flatly inconsistent with

the statute that authorized this payment in the first place.

That statute, the CSRS, specifically defines the lump-sum

payment as a return of previously taxed employee con-

tributions into the CSRS, thereby precluding the IRS from

characterizing it as a taxable retirement benefit. 5 U.S.C.

§ 8331 et seq.

Under the CSRS, a retiring employee has a right to an

annuity, calculated as a fixed percentage of average pay.

5 U.S.C. § 8339 (Supp. 1991). The lump-sum payment at

issue here was authorized by 5 U.S.C. § 8348a, enacted

by Congress in 1986. That provision offers a retiring em-

ployee the alternative of receiving “the lump-sum credit”

and a reduced annuity. 5 U.S.C. § 8348a(b).®° The lump-

sum credit, in turn, is statutorily defined as “the unre-

funded amount consisting of . . . retirement deductions

made from the basic pay of an employee.” 5 U.S.C.

§ 8331(8) (1980 & Supp. 1991).7 In short, the payment

6 The reduced annuity must have a present value equal to the

present value of the annuity that the employee would otherwise

receive, minus the lump-sum credit. 5 U.S.C. § 8343a(c) (Supp.

1991).

7 The credit may also include amounts deposited to the CSRS by

an employee and interest credited to amounts contributed to or

deposited by an employee in the CSRS before December 31, 1956.

5 U.S.C. § 8331(8)(B) and (C). To the extent that a particular

employee’s lump-sum payment included such interest—which is not

the case here—that portion would be taxable because, unlike re-

does not simply amount to—but actually consists of—

money that the employee had previously paid into the fund

from after-tax dollars.

The lump-sum credit existed in the CSRS long before

1986. Under 5 U.S.C. § 8342, an employee who leaves

government service before his right to an annuity accrues

has the option of receiving the lump-sum credit—i.e., all

of his payments into the fund—in return for relinquish-

ment of any right to a later annuity. 5 U.S.C. § 8342

(1980 & Supp. 1991). There is no dispute that this pay-

ment is not taxable. (Appendix B at 27a n.30) 26 U.S.C.

§ 72(e) (5) (E) (1988 & Supp. 1991). In 1986, Congress

simply mandated that a retiring employee had the option

of receiving precisely the same refund of his payments

upon separation from the government, coupled with a con-

comitant reduction in later annuity payments that he

would otherwise have received. 5 U.S.C. § 8348a(c).

When Congress passes a specific statute governing a

particular event that appears to be in conflict with a pre-

existing general statutory provision, a court’s first obli-

gation is to attempt to reconcile the two. See, e.g., Stew-

art v. Smith, 673 F.2d 485, 492 (D.C. Cir. 1982) [“When

faced with apparently conflicting statutes, our first task

is to examine their language to determine whether they

may be reconciled.” (citing United States v. Will, 449

U.S. 200 (1980)]. See also Ruckelshaus v. Monsanto Co.,

467 U.S. at 1018 and Morton v. Mancari, 417 U.S. at 551.

In the present matter, such a reconcilation is* possible,

since Code § 72 itself is properly read as not Yequiring

taxation of the lump-sum credit. See pp. 9 through 13,

funded deductions and deposits, interest does not represent money

that has already been taxed.

8 The present definition of the lump-sum credit first appeared in

the CSRS in 1966 with the passage of the Government Organization

and Employees Act of 1966, Pub. L. No. 89-554, 80 Stat. 378 (1966).

Prior to the passage of 5 U.S.C. § 8343a, the IRS had ruled that the

lump sum credit was a nontaxable refund of an employee’s contribu-

tions to the CSRS. Rev. Rul. 70-150, 1970-1 C.B. 106.

infra. If the two statutes were irreconcilable, however,

§ 8343a—the more recent and more specific provision—

would take precedence over an earlier general law. See,

e.g., Crawford Fitting Co. v. J. T. Gibbons, Inc., 482 U.S.

437, 445 (1987). There is no reason why this settled prin-

ciple should be any less applicable in tax cases than in

all others.

The lower court’s only answer to this straightforward

analysis was to misread § 8343a as providing that the

lump-sum credit was simply one part of a single “an-

nuity” payable to petitioner and thus taxable in accor-

dance with the general provisions of Code § 72.° (Appendix

B at 27a-28a) The court relied on the fact that § 8343a

requires “alternative forms of annuities” and then pro-

vides that one “alternative” should be “(A) payment of

the lump-sum credit... and (B) payment of [a reduced]

annuity...” 5 U.S.C. § 8343a(b) (1) (Supp. 1991) (em-

phasis supplied). The court then reasoned that this statu-

tory phrasing implies that the lump-sum credit is, itself,

part of a larger “annuity.” (Appendix B at 27a-28a) In

fact, however, no such implication can fairly be drawn

from the statute. On the contrary, the statute expressly

states that the “alternative” would consist of the “lump-

sum credit” and a separate annuity. Id.

More importantly, under any theory, it is clear that the

first phase of the “alternative” made available to em-

ployees was payment of the “lump-sum credit,” which is

expressly defined as a return of employee contributions. 5

U.S.C. § 8331(8). If Congress had intended merely to

authorize an early, taxable annuity payment of funds

equal in amount to those previously contributed by the em-

ployee, it could easily have done so. It chose instead to

incorporate a particular statutory phrase—the “lump-

sum credit’—which is defined as consisting of a return of

® All references to “Code” refer to the Internal Revenue Code of

1986, Title 26, United States Code, unless otherwise specifically

indicated.

contributions and which had previously been nontaxable

when paid under § 8342.

II. THE LOWER COURT’S RELIANCE ON THE SIN-

GLE CONTRACT DOCTRINE OF THE TREASURY

REGULATIONS IGNORES THE SIGNIFICANCE

OF THE SUBSEQUENT STATUTORY SEPARATE

CONTRACT DOCTRINE.

Although the relevant provisions of both the CSRS and

the Tax Code may be reconciled simply by comparing the

clear language of these statutes, the lower court did not

attempt any such reconciliation. Rather, it relied on the

single contract doctrine of 26 C.F.R. § 1.72-2(a) (3) (i)

(1991). This regulation has not been amended since 1966

and does not reflect either the 1986 or 1988 changes to

the CSRS and the Tax Code resulting in the adoption of a

separate contract doctrine. The lump-sum distribution

provided for in 5 U.S.C. § 8348a is exempt from taxation

under the separate contract doctrine of § 72(d) of the

Tax Code.

Section 72(d)"° of the Tax Code allows payments made

pursuant to certain kinds of pension programs to be

treated as if they were derived from two separate plans

rather than from a single integrated one. The CSRS

satisfies the criteria for treatment under Code § 72(d).

As a result, the payment to Mr. Shimota must be re-

garded as a nontaxable return of his contributions, rather

than a payment based on both his contributions and those

of his employer, as the lower court concluded.

#” While the Claims Court does cite Code § 72(d), it refers to the

pre-1986 version. Prior to the passage of the Tax Reform Act of

1986, Code § 72(d) was referred to as “the basis recovery rule” or

“the three-year recovery rule.” Under this provision, annuity

recipients were not taxed on any annuity distributions until they

fully recovered all of their contributions. Thereafter, all payments

to them were fully taxable. This provision was repealed by the

Tax Reform Act of 1986 and replaced by the separate contract

doctrine of the new Code § 72(d). The lower court did not address

the significance of this provision.

The lower court concluded that Code § 72 governs dis-

tributions under the CSRS, but nonetheless failed to apply

subsection (d) of that section. Subsection (d) provides

that, “(flor purposes of this section [7.e., Code § 72] em-

ployee contributions (and any income allocable thereto)

under a defined contribution plan may be treated as a

separate contract.” |! The effect of this rule is to permit

an employee to divide his benefits under certain kinds of

pension plans so that, for tax purposes, he can treat his

payments as having, in effect, come from two distinct

plans. In a plan where the employee has contributed

after-tax dollars, this rule may provide a tax benefit if

the plan provides for early distribution of benefits at-

tributable to those contributions.

Application of the separate contract rule to Mr. Shi-

mota would render his lump-sum payment a nontaxable

return of his own contributions pursuant to 26 U.S.C.

§ 72(e)(5)(E). The only real dispute is whether the

CSRS is a “defined contribution plan,” which is a require-

ment for treatment under Code § 72(d). The answer to

that question is contained in Code § 414(k).

Code § 414(k) expressly provides that certain “defined

benefit plans’ must be treated, in part, as defined con-

tribution plans for purposes of Code § 72(d). In relevant

part, Code § 414(k) states:

A defined benefit plan which provides & benefit de-

rived from employer contributions which is based

partly on the balance of the separate account of a

participant shall...

(2) for purposes of section 72(d) [and other sec-

tions] be treated as consisting of a defined contribu-

11 Subsection (d) was added to Code § 72 as part of the Technical

and Miscellaneous Revenue Act of 1988, Pub. L. No. 100-647, 102

Stat. 3342. As part of the same statute, Congress also eliminated

Code § 72(e)(9), which had contained essentially the same language

and which had been added as part of the Tax Reform Act of 1986.

Code § 72(d) was made effective as of the date of the 1986 Act.

tion plan to the extent benefits are based on the sep-

arate account of a participant and as a defined bene-

fit plan with respect to the remaining benefits under

the plan,...”

26 U.S.C. § 414(k) (1988 & Supp. 1991).

The CSRS satisfies the requisite criteria for the appli-

cation of this section.

The CSRS benefit is ultimately derived from employer

contributions. The overall annuity amount is fixed re-

gardless of the amount of employee contributions. 5

U.S.C. § 8334. At the same time, at least under the

“lump-sum credit” alternative of § 8343a(b) ( 1), the

benefit is based partly on the balance of employee con-

tributions, since that balance controls the amount of

the lump-sum payment. Consequently, under the plain

language of Code § 414(k), the CSRS “shall... for pur-

poses 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.” 26 U.S.C.

$ 414(k) (emphasis supplied).

The application of Code § 72(d)’s separate contract

rule to this case is straightforward."* The separate con-

tract here in question involves “{federal] employee con-

12 Code § 414(k) was amended to add the express refeygnce to

Code § 72(d) as part of the Technical and Miscellaneous Revenue

Act of 1986, Pub. L. No. 100-647, 102 Stat. 3342. This provision,

like Code § 72(d) itself, was made effective as of the date of passage

of the Tax Reform Act of 1986.

18 Under Code § 72(d), as the language suggests, either “[a] plan

[itself] may designate the contract from which a distribution is

made ... [or] a participant can be permitted to designate the

contract from which a distribution is made.” Staff of the Joint

Committee on Taxation, General Explanation of the Tax Reform

Act of 1986 at 724. In this case, of course, the CSRS designates the

lump-sum payment as coming from the employee’s account, a view

echoed by OPM—the plan administrator. 5 C.F.R. $§ 831.2202 and

831.2204(a).

tributions (and any income allocable thereto).” The

lump-sum credit received by Mr. Shimota, in turn, is

defined to be coextensive with the scope of that separate

contract—i.e., to equal the employee’s contributions

and allocable interest where appropriate. 5 U.S.C.

$$ 8343a(b) and 8331(8)(A). In particular, for em-

ployees such as petitioner whose contributions began after

1956, the CSRS provides at 5 U.S.C. § 8331(8)" that

no income is allocable to these contributions. Jd. Thus,

the full amount of the payment is a return of the em-

ployee’s contributions. Since those contributions were

all made with after-tax dollars, the lump-sum payment to

petitioner is completely nontaxable.

The iower court’s response to this separate contract

argument is misconceived. The court relied solely on a

Treasury regulation, 26 C.F.R. § 1.72-2(a) (3) (i), which

provides that “each separate program of the employer

consisting of interrelated contributions and benefits shall

be considered a single contract.” By its terms, this reg-

ulation is inapplicable: it addresses separate (but inter-

related) programs, while the CSRS is a single program.

In any event, the regulation predates the 1986 changes to

the Tax Code (and the subsequent technical amendments

implementing those changes). The subsequent addition

of the separate contract rule of Code § 72(d) plainly

modified the single contract theory of the earlier

regulation.

The respondent offers a different response to this sep-

arate contract theory, arguing that the CSRS is not

even in part a defined contribution plan under Code

§$ 414(k) and, therefore, that Code § 72(d) is inappli-

cable.’* In the proceedings below, the respondent cited

14 The IRS confirmed this understanding in its Dec. 4, 1987, letter

ruling to petitioner, stating that “[n]o interest was accrued on

[your] contributions.”

15 Although both petitioner and respondent briefed their respec-

tive positions in the lower court, the court did not address the

significance of the separate contract rationale.

only an informal IRS publication as authority for its

assertion that employee contributions to the CSRS are

not maintained “under a separate account to which ac-

tual earnings and losses are allocated.” IRS Notice 87-13,

1987-1 C.B. 432, 438 (Q & A 14) (emphasis supplied).

These underscored words are not contained in the statute.

Rather, they have simply been added by the respondent

without even the benefit of the formal regulatory proc-

ess, but rather by the expedient use of a highly informal

“Q & A.” Congress’s words cannot be so lightly dis-

regarded.'®

As the respondent’s position suggests, if Code § 72(d)

is applied according to its terms, then contributions under

the CSRS clearly amount to a separate contract under

that provision. Indeed, 5 U.S.C. § 8334 (f) provides that

amounts from an employee’s salary “shall be entered on

individual retirement records.” 5 U.S.C. § 8334(f)

(Supp. 1991) (Emphasis added). The lower court’s

failure to even address the applicability of Code $§ 72(d)

and 414(k) to the issues in this case requires remand

for consideration of this issue.

Ill. THE LEGISLATIVE HISTORY OF THE _ 1986

CHANGES TO THE CSRS AND THE TAX CODE

CONFIRMS THAT THE LUMP-SUM DISTRIBU-

TION AND THE SEPARATE CONTRACT DOC-

TRINE ARE RELATED AND THAT THE PAYMENT

TO THE PETITIONER IS TAX FREE.

Prior to 1986 the only retirement benefit payable to

retiring federal employees under the CSRS was in the

form of an annuity. The tax consequences of this an-

nuity were determined under the basis recovery rule

‘6 The Courts have held that such informal guidance is merely

the position of one of the parties to the litigation which is not

entitled to be accorded any significance as precedent. Diron v.

United States, 381 U.S. 68, 74 (1965 ), Eller v. Commissioner, 77 T.C.

934, 946 (1981).

of prior Code § 72(d).'7 The Tax Reform Act of 1986

repealed the basis recovery rule of the former Code

§$72(d) and in its place enacted a separate contract

rule in a new Code § 72(d) and in an amended Code

§$ 414(k)."8 The CSRS was also amended in 1986 by

adding 5 U.S.C. § 8343a which directed the Office of

Personnel Management (“OPM”) to offer a lump sum

credit distribution to retiring federal employees in ad-

dition to an annuity.’® These provisions and their legis-

lative history were not addressed in either the Claims

Court opinion or the summary affirmance by the Court

of Appeals.

The repeal of the basis recovery rule of prior Code

$ 72(d) and the enactment of the separate contract rule

of the new Code § 72(d) were directly related. The

rationale for enactment of the separate contract doctrine

of the present Code § 72(d) was explained as follows:

Under the Act, employee contributions to a defined

contribution plan or a separate account of a defined

benefit plan (and the income attributable thereto)

17 This reference to Code § 72(d) refers to a now-repealed provi-

sion of the Internal Revenue Code of 1954, as amended. When

mentioned in this Petition, this repealed provision is referred to as

the prior or former Code § 72(d). Prior Code § 72(d) was commonly

referred to as “the basis recovery rule” or “the three-year recovery

rule.” See footnote 10, supra.

18 The Staff of The Joint Committee On Taxation acknowledged

in footnotes 24 and 25 of General Explanation of the Tax Reform

Act of 1986 that a technical correction may be necessary to imple-

ment the intent of Congress regarding the separate contract treat-

ment. See Staff of The Joint Committee on Taxation General Ex-

planation of the Tax Reform Act of 1986 at 724. This technical

correction was made in TAMRA by adding a new Code § 72(d) and

by amending Code § 414(k). Both of these provisions were made

effective as of the date of passage of the Tax Reform Act of 1986.

See TAMRA §§ 1011A(b)(b) and 1011A(b)(3). |

19 This amendment to the CSRS was made as part of the Federal

Employee Retirement System Act of 1986, Pub. L. No. 99-335, 100

Stat. 514 (1986) (“the FERS Act”).

may be treated as a separate contract for purposes

of section 72.

Thus, under the Act, if an employee withdraws

amounts from such a separate contract either be-

fore or after the employee’s annuity starting date,

then for tax purposes, the distribution will be con-

sidered to be part nontaxable, ué., a return of em-

ployee contributions, and part taxable, 1.€., a dis-

tribution of earnings on those contributions.

STAFF OF THE JOINT COMMITTEE ON TAXATION, GENERAL

EXPLANATION OF THE TAX REFORM ACT OF 1986 at 724.

(“The Joint Committee Report’) .2°

The separate contract rationale was incorporated as

new Code § 72(d) and amended Code § 414(k) as part

of TAMRA; however, it was effective as of the date of

passage of the Tax Reform Act of 1986. These statutes

changed the single contract rationale in 26 C.F.R. § 1.72-2

(a) (3) (i). Accordingly, this regulation no longer ap-

plies in those situations governed by Code §$§ 72(d) and

414(k) and the lower court’s reliance on this regulation

is incorrect.

The CSRS was also amended in 1986 to provide retir-

ing federal employees the right to elect a lump-sum

credit. This amendment was incorporated into the CSRS

by adding 5 U.S.C. § 8348a. The lump-sum credit was

authorized in direct response to the repeal of the basis

recovery rule of prior Code § 72(d). The House Post

Office and Civil Service Committee explained that:

[Llump sum withdrawal of Federal employee con-

tributions at the time of retirement was designed

to alleviate a portion of the burden retroactively

*° This explanation is a restatement of the Conference Commit-

tee’s explanation of the separate contract rationale in the Conference

Report which accompanied the Tax Reform Act of 1986. See Conr.

REP. No. 841, 99th Cong., 2d Sess. II—462. This Court has also

relied upon the Joint Committee Report in interpreting tax statutes.

Federal Power Commission v. Memphis Light, Gas and Water Divi-

sion, 411 U.S. 458, 471 (1973).

| ee

imposed on Federal retirees by the repeal of the

‘three-year recovery rule’ in the Tax Reform Act

of 1986 (PL 99-514). In formulating the lump-

sum option, Congress intended that retirees would

be permitted to receive a return of previously taxed

employee contributions and a reduced annuity.

H.R. Rep. No. 881, 101st Cong., 2d Sess. (1990) at 170.”

The relationship of the 1986 changes to the Tax Code

and the 1986 changes to the CSRS is also illustrated by

comments made at the time the Tax Reform Act of 1986

was passed. Congressman Rostenkowski, the Chairman

of the House Ways and Means Committee, explained

certain understandings he had reached with Congressman

Ford, the Chairman of the House Post Office and Civil

Service Committee,“ regarding the relationship of the

1986 changes to the Tax Code and to the CSRS. He

stated that:

the employee receives a refund of excess contribu-

tions paid onto (sic) the Civil Service Retirement

System, [and] the refunded contributions are also

21 The quoted language was taken from the legislative history of

the Omnibus Budget Reconciliation Act of 1990, Pub. L. No. 101-

508, 104 Stat. 1388 (1990). This Court has stated that a congres-

sional committee’s statement made within five years of passage of a

prior statute which originated in that committee is virtually conclu-

sive as to the significance of the prior act. Sioux Tribe of Indians

v. United States, 316 U.S. 317, 329-330 (1942). See also Seatrain

Shipbuilding Corporation v. Shell Oil Company, 444 U.S. 572, 596

(1980).

22 The House Ways and Means Committee had primary responsi-

bility in the House for consideration of the Tax Reform Act of

1986. The House Post Office and Civil Service Committee had pri-

mary responsibility in the House for consideration of the FERS

Act which added the lump sum option of 5 U.S.C. § 8343a. Con-

gressman Rostenkowski was also a member of the Joint House

Senate Conference Committee which recommended repeal of the

basis recovery rule of prior Code § 72(d) and enactment of the

separate contract rules of the new Code §§ 72(d) and 414(k).

treated as part of a separate contract and, there-

fore, are treated as a nontaxable return of employee

contributions. (Emphasis supplied)

Conc. Rec. H8356 (daily ed. Sept. 25, 1986) (statement

of Rep. Rostenkowski) .**

In view of the foregoing, the legislative history of

§ 72(d) of the Tax Code and § 8348a of the CSRS con-

firms the clear meaning of these statutes. Specifically,

the repeal of the basis recovery rule, enactment of the

separate contract rule and authorization of the lump-

sum credit distribution were interrelated. These statu-

tory provisions were designed to ensure that federal

retirees had the option of electing to receive a nontaxable

refund of their own previously taxed contributions to the

CSRS.

CONCLUSION

The lower court’s failure to analyze the relationship

between the CSRS and the Tax Code and to implement

the clear language of these statutes is inconsistent with

fundamental principles of statutory construction. More-

over, the lower court’s failure to address the statutory

revision of the regulation it relied upon as the basis for

its opinion constitutes clear error,

Petitioners urge the Court to accept this case for re-

view and to reverse the lower court’s holding because of

its failure to interpret the CSRS and the Tax Code in

such a manner as to give effect to the relevant provisions

of both. Alternatively, petitioners respectfully request

the Court to remand this matter to the lower court and

direct it to consider the relationship of Code §§ 72(d)

and 414(k) to the issues in this case.

*8 While Congressman Rostenkowski’s comments did not relate to

the lump-sum credit, they do indicate that employee contributions to

the CSRS are maintained in a separate account and are tax free

when refunded.

For the foregoing reasons, a Writ of Certiorari should

issue to review the judgment and opinion of the United

States Court of Appeals for the Federal Circuit.

Respectfully submitted this 30th day of January, 1992.

* Counsel of Record

THOMAS J. O’ROURKE *

GEORGE J. SHAW, JR.

VIRGINIA H. JOHNSON

NEILL AND SHAW

815 Connecticut Avenue, N.W.

Suite 800

Washington, D.C. 20006

(202) 463-8400

Attorneys for Petitioners

APPENDICES

APPENDIX A

UNITED STATES COURT OF APPEALS

FOR THE FEDERAL CIRCUIT

91-5017

JOHN E. SHIMOTA and NAN B. SHIMOTA,

Plaintiffs-A ppellants,

THE UNITED STATES,

Defendant-A ppellee.

DECIDED: September 12, 1991

Before ARCHER, Circuit Judge, COWEN, Senior Circuit

Judge, and MAYER, Circuit Judge.

ARCHER, Circuit Judge.

John E. Shimota and Nan B. Shimota (Shimota) ap-

peal the judgment of the United States Claims Court,

Shimota v. United States, 21 Cl. Ct. 510 (1990), holding

that the lump-sum payment received by Mr. Shimota from

the Civil Service Retirement System (CSRS) after com-

mencement of his CSRS retirement annuity was includible

in income and subject to federal income taxation under

section 72 of the Internal Revenue Code of 1986 (26

U.S.C. § 72), and that the 10 percent additional tax under

section 72(t) was properly imposed on that payment. We

affirm.

The arguments presented by Shimota in this appeal

were fully considered and the issues correctly decided in

Judge Robinson’s thorough and well-reasoned opinion.

Accordingly, we adopt that opinion and affirm the Claims

Court’s judgment. See also Guilzon v. Commissioner, 97

T.C. 14 (1991).

AFFIRMED

APPENDIX B

IN THE UNITED STATES CLAIMS COURT

No. 106-89T

September 10, 1990

JOHN E. SHIMOTA and NAN B. SHIMOTA,

. Plaintiffs,

THE UNITED STATES,

Defendant.

Tax; Summary judgment; Application of IRC

§§ 401(a), 402(b), 501(a), 72(e) and 72 (t);

Taxation of CSRS lump-sum distribution under

5 U.S.C. § 8343a as annuity contract.

Thomas J. O’Rourke, with whom was Virginia J.

Townsend and G. Jerry Shaw, Washington, D.C., for

defendant.

Kenneth C. Gobetz with whom was Gerald B. Leedom

and Assistant Attorney General Shirley D. Peterson,

Washington, D.C., for defendant.

OPINION

ROBINSON, Judge.

This case is before the court on the parties’ cross-

motions for summary judgment. John E. Shimota and

Nan B. Shimota (plaintiffs) seek a tax refund in the

amount of $17,784.30 for tax year 1987. The issue pre-

sented in the case is whether the lump-sum distribution

which John E. Shimota (plaintiff) elected under 5 U.S.C.

§ 8343a to receive from the Civil Service Retirement and

Disability Fund (the Fund)' is “an amount received

under an annuity contract” and “not received as an an-

nuity” and is therefore taxable under § 72(e) of the In-

ternal Revenue Code (IRC) of 1986 or whether it is a tax

free return of capital. If the lump-sum distribution is

taxable under § 72(e), the issue is then whether plaintiffs

are liable for the penalty under § 72(t) of the IRC. For

the following reasons, the court will hold that the lump-

sum distribution is taxable as an annuity contract under

§ 72(e) and that the 10 percent additional tax provision

of § 72(t) applies. Therefore, the court will deny plain-

tiffs’ motion for summary judgment and will grant de-

fendant’s cross-motion for summary judgment on both

issues.

Factual Background

Plaintiffs are husband and wife who filed joint tax re-

turns in 1987 and 1988 in accordance with instructions

they received from the Internal Revenue Service (IRS)

in two December 4, 1987 letters.* Plaintiff was a law en-

forcement officer for the Federal Bureau of Investigation

(FBI) from June 24, 1963, until his retirement on No-

vember 26, 1986." While employed with the FBI, he par-

1The Fund consists of contributions made by federal employees

and Government agencies, together with earnings on these amounts.

The Fund is an Independent Trust. 31 U.S.C. § 1321(88). Em-

ploying agencies deduct a specified amount from each employee's

salary and contribute an equal amount. 5 U.S.C. § 8334(a) (1);

5 C.F.R. § 831.111.

2 The parties stipulated to the pertinent facts in a document filed

October 13, 1989. RUSCC 56(d)(3). This factual background relies

primarily upon the stipulated facts.

3 In addition, Mr. Shimota served in the U.S. Navy from January

1, 1957 through June 3, 1959, and the U.S. Marine Corps from

June 3, 1959 through May 29, 1963. Plaintiff elected to deposit a

total of $1,297.34 to the CSRS in order to receive retirement credit

under the CSRS for his military service. This deposit was con-

tributed through withholding from his salary from October 15,

1983 through September 29, 1984.

ticipated in the Civil Service Retirement System (CSRS).

Federal employees hired prior to January 1, 1984 partici-

pate in the CSRS and are required to contribute part of

their salary to the CSRS. 5 U.S.C. § 8334. Under this

system, plaintiff's mandatory contributions were withheld

from his zross salary. His total contributions to the CSRS

were $53,382.77.

The amounts withheld from plaintiff’s salary were

taxed in the years in which the deductions were made.

See Hogan v. United States, 513 F.2d 170, 175 (6th Cir.

1975). However, the amounts the FBI contributed and

the interest earned on plaintiff's and the FBI’s invest-

ments in the Fund were not taxed. 26 U.S.C. § 402(a).

Taxes on the FBI’s contributions and earned interest

would only become due upon distribution. 26 U.S.C.

§ 402 (a).

If a federal employee covered by CSRS left government

service, he previously had two opticns available to him:

elect to receive a refund of his contributions to the CSRS

under 5 U.S.C. § 8342, which would void his right to an

annuity; or, elect to receive the basic or full annuity

under 5 U.S.C. § 8336 and 5 U.S.C. § 8339. However,

with the recent enactment of 5 U.S.C. § 8348a, the em-

ployee could choose to receive an alternative form of an-

nuity consisting of a lump sum credit and payment of

an annuity under 5 U.S.C. § 8343a(b).

In this case plaintiff chose not to receive the basic or

full annuity (computed in accordance with 5 U.S.C.

$ 8339) or the basic annuity and a_ survivor annuity

(under 5 U.S.C. 8341(b) (1) and computed under 5 U.S.C.

$$ 8339 and 8341/(b)(1)). Rather, plaintiff chose the “al-

ternative form of annuity” described in 5 U.S.C.

8 8343a(b). He made his election on August 3, 1987 and

received a lump-sum distribution from the Fund of

$53,382.77, less withheld income taxes. The taxability of

the “alternative form of annuity,” specifically the lump-

sum payment of $53,382.77 provided for in 5 U.S.C.

§ 8343a(b), is the issue.‘

Annuity payments made under the “alternative form

of annuity” are computed in accordance with Office of

Personnel Management (OPM) Regulation 5 C.F.R.

§ 831.2205. That Regulation, in effect, reduces the an-

nuity payments that a retiree would otherwise have re

ceived based upon the present value of the lump-sum pay-

ment had he elected the ful! annuity option. Defendant

contends that under this OPM Regulation, which is de-

signed to comply with 5 U.S.C. § 8348a(c)*, the lump-sum

payment is treated as an accelerated payment of amounts

4 Plaintiff did not have available as an option the “lump sum

credit” described in 5 U.S.C. § 8336, since he did not leave federal

employment prior to meeting the requirements of 5 U.S.C. § 8336.

Assuming that he could have made such an election and had done

so, he would have lost all annuity rights based upon his service

and forfeited all matching Government contributions to the Fund.

But under 5 U.S.C. § 8343a no such forfeiture occurs.

5 831.2205—Computation of alternative form of annuity.—

(a) To compute the beginning rate of annuity payable to a re-

tiree who elects an alternative form of annuity, OPM will

first compute the monthly rate of annuity otherwise payable

under subchapter III of chapter 83 of Title 5, United

States Code, including all reductions provided under the sub-

chapter other than those in § 8343a. That monthly rate is

then reduced by an amount equal to the retiree’s lump-sum

credit divided by the vresent value factor for the retiree’s

attained age (in full years) at the time of retirement. The

reduced monthly rate is then rounded to the next lowest

dollar and becomes the rate of annuity payable.

(Emphasis added. )

®5 U.S.C. § 8343a(c) provides:

Each alternative provided for under subsection (b) shall, to

the extent practicable, be designed such that the present value

of the benefits provided under such alternative (including any

lump-sum credit) is actuarially equivalent to the present value

of the annuity which would otherwise be provided the em-

ployee or Member of this subchapter, as computed under sub-

sections (a)-(i) and (n) of section 8339 of this title.

oe eo ta Rel

that would otherwise be distributed to the retiree over the

expected duration of the CSRS annuity.

Plaintiff’s retirement was effective December 1, 1986.

His first payment under the full annuity option (with a

reduction to provide for a survivor annuity for his wife)

was due April 1, 1987. In a letter dated May 11, 1987,

OPM notified plaintiff that he had two annuity options

available to him—he could elect either a regular annuity

or an alternative annuity—but if he elected the alterna-

tive annuity, he would receive a reduced annuity and, that

“you will also receive a refund of all of your retirement

contributions.” In a second letter from OPM dated May

11, 1987, plaintiff was advised that his lump-sum “credit”

for income tax purposes was $53,382.77, and that this

amount consisted solely of his contributions to the CSRS.

On June 6, 1987, plaintiff elected to receive the alter-

native form of annuity provided for under 5 U.S.C.

§ 8343a(b). On August 3, 1987, he received from the

Fund a lump-sum distribution of $53,382.77, less withheld

income taxes. A reduction of $199 in his monthly CSRS

annuity was made to reflect the lump-sum payment.

Plaintiff requested the IRS to issue a private letter rul-

ing explaining the federal income tax consequences of the

payments he received from the Fund. The IRS, in two

separate letters dated December 4, 1987, advised plaintiff

that only 4.1 percent of the CSRS annuity payments and

only 5.9 percent of the lump-sum distribution were ex-

cludable from gross income.

Plaintiffs filed their 1987 federal income tax return in

accordance with the IRS’ guidelines, They also reported

that they were liable for a 10 percent early withdrawal

penalty even though the IRS failed to mention the appli-

cability of this penalty in its letter rulings. In June,

1988, plaintiffs filed a claim for refund, Form 1040X,

seeking a refund of $17,784.30 plus all interest allowable

by law based upon the position that payment of the

$53,382.77 was a nontaxable return of previously taxed

contributions and that the 10 percent penalty was not ap-

plicable. The IRS denied this refund claim in a letter

dated September 19, 1988. Thereafter, plaintiffs initiated

this suit.

Contentions of the Parties

The parties agree that plaintiffs are entitled to recover

all of Mr. Shimota’s previously taxed contributions to the

CSRS tax-free. Their disagreement is over the timing of

plaintiffs’ tax-free recovery of these contributions. Plain-

tiffs contend that the payment of $53,382.77 was a “lump-

sum credit” and a nontaxable return of capital. Thus, if

this position is correct, all annuity payments received

thereafter are fully taxable.

Plaintiffs claim their position is supported by “a fun-

damental principle” of federal income taxation that an

individual is taxed only on accretions to wealth and not on

a return of capital. They rely upon United States v.

Safety Car Heating & Lighting Co., 297 U.S. 88, 98

(1936); Burnet v. Logan, 283 U.S. 404, 413 (1981);

Commissioner v. Meyer, 139 F.2d 256, 259 (6th Cir.

1943); and Treasury Regulation § 1.72-1(a). Treasury

Regulation § 1.72-1(a) states:

In general, these rules provide that amounts subject

to section 72 are includable in the gross income of the

recipient except to the extent they are considered to

represent a reduction or return of premiums or other

considerations paid. (Emphasis added.)

Thus, plaintiffs maintain that if the payment is deter-

mined to be a return of their contributions to the CSRS,

the tax result is that the lump-sum distribution is a tax-

free return of capital.

Plaintiffs contend that the court should focus on the

Statutory definition of the term “lump-sum credit,” which

is not defined in the IRC, to determine the nature of the

payment. That definition, as found in 5 U.S.C. § 8331(8),

is “the unrefunded amount consisting of[:]”

(i) retirement deductions made from the basic pay

of an employee or Member;

(ii) amounts deposited by an employee or Member

covering earlier service, including any amounts

deposited under section 8334(j) of this title;

and

(iii) interest on the deductions and deposits at 4

percent a year to December 31, 1947, and 3 per-

cent a year thereafter compounded annually to

December 31, 1956, or in the case of an em-

ployee or Member separated or transferred to

a position in which he does not continue subject

to this subchapter before he has completed 5

years of civilian service, to the date of separa-

ration or transfer... .

Subparagraphs (i) and (ii) obviously include only the

employee’s after-tax contributions.

Plaintiffs note that the OPM specifically advised plain-

tiff that “You will also receive a refund of all of your

retirement contributions.” Plaintiffs further point out

that their lump-sum distribution for income tax purposes

Was $53,382.77, that this amount consisted entirely of

after-tax contributions to the Fund, that the IRS has no

authority unilaterally to “recharacterize” the applicable

Statutory definition found in the CSRS, and that histori-

cally the definition of “lump-sum credit” has remained

consistent since Pub. L. 89-554 was passed in 1966

amending 5 U.S.C. § 8331(8). Also plaintiffs argue that

in 1986, in establishing the Federal Employees Retire-

ment System (FERS), Congress left this definition intact

expressing its intent to approve this tax free treatment.

Further, they state that the IRS’ rulings (prior to 1986)

have consistently held that the lump-sum credit is non-

taxable to the extent of the taxpayer’s contribution.

Next, plaintiffs argue that 5 U.S.C. § 8343a(b) (1), in

using the word “and” in specification of the option to

10a

elect a lump-sum credit “and payment of an annuity,”

(emphasis added) signifies a Congressional intent to sepa-

rate the payment from the reduced annuity.’ Therefore,

plaintiffs conclude that the use of this conjunctive in the

statute, along with the applicable OPM regulations, 5

C.F.R. § 831.2204—which provide that an eligible em-

ployee “may elect to receive the lump-sum credit plus an

annuity” (emphasis added)—and the FERS Committee

print prepared by the Congressional Research Service

which discusses the nature of the property rights con-

ferred on CSRS participants in a manner indicating a

difference in the treatment to be accorded the payment.

and the annuity, means the lump-sum credit is “not re-

ceived under an annuity, but in addition to it.”

Further, plaintiffs contend that even if the payment

Was received “as an annuity” it was noncontractual in

nature based upon the FERS Committee Print’s descrip-

tion, page 95, of the nature of the pension, a statement in

the Print that contractual annuity principles do not ap-

ply, and the Print’s references to various cases support-

ing this view. Thus, plaintiffs conclude that since § 72(e)

only applies to contractual annuities, the lump-sum dis-

tribution is not subject to that provision.

Plaintiffs dispute defendant’s position that Treasury

Regulation § 1.72-11(f) applies. Plaintiffs argue that

since the payment in dispute is not received under an

annuity contract, that Regulation is inapplicable since it

only applies to “commercial annuity contracts,” and it

has never been cited as the basis for “any position.”

However, plaintiffs argue that even if IRS Reg. § 1.72-

11(f) is applicable, it cannot be used to redefine the

75 U.S.C. § 8343a(b) (1) provides as follows:

an alternative which provides for—

(A) payment of the lump-sum credit to the employee or Mem-

ber; and

(B) payment of an annuity to the employee or Member for

life; .

lla

statutory definition of the term “lump-sum credit,” since

this would be a nullity under the holding in Manhattan

General Equipment Co. v. Commissioner, 297 U.S. 129,

134 (1986).

Plaintiffs argue further that defendant fails to consider

the historical differences between private and government

plans. Plaintiffs contend that Congress has recognized

the distinction between the CSRS and a private sector

qualified plan and that courts have long recognized con-

sistently that the CSRS is mot contractual. Plaintiffs

state that the legislative history of 5 U.S.C. § 83434 sup-

ports their construction of the non-taxability of the lump-

sum credit. In their reply brief. they contend that an

affidavit of James Cowen relating to the passage of the

Tax Reform Act of 1986 shows that, in including 5

U.S.C. § 8348a as a part of FERS, Congress intended to

make the lump-sum distribution tax free.

Also, plaintiffs contend that the penalty prescribed by

$ 72(t), which was enacted as a part of the Tax Reform

Act of 1986, is inapplicable because the payment is a

non-taxable return of capital. But, if it is determined

that the payment is taxable, plaintiffs argue that since

§72(t), coupled with § 4974(¢).8 was meant to apply

only to tax favored retirement arrangements, and since

the CSRS is not such an arrangement, § 72(t) does not

apply. Further, plaintiffs contend application of the

$ 72(t) “penalty” to the CSRS lump-sum payment is

improper because the CSRS is not a “qualified plan” as

described in $ 401(a), a position they urge is supported

by the legislative history of the Employee Retirement In-

come Security Act uf 1974 (ERISA) and FERS as re-

ported in H. Rep. No. 938-533. H. Rep. No. 807, and

S. Rep. No. 166.

*$4974(c) defines a “qualified retirement plan” to include “. . . a

plan described in Code § 401(a) which includes a trust exempt from

tax under Code § 501(a).” § 4974(c) was also added to the Code by

the Tax Reform Act of 1986.

12a

Defendant contends §402(a) governs the taxability

of the lump-sum distribution to plaintiff and requires that

it be taxed under § 72. § 402(a) provides, in part:

Sec. 402. TAXABILITY OF BENEFICIARY OF EMPLOY-

EES’ TRUST.

(a) Taxability of Beneficiary of Exempt Trust.—

(1) General rule—Except as provided in

paragraph (4),° the amount actually distributed

to any distributee by any employees’ trust de-

scribed in section 401(a) which is exempt from

tax under section 501(a) shall be taxable to him,

in the year in which so distributed, under section

72 (relating to annuities).

Defendant’s argument is that because § 402(a) does not

distinguish between distributions that are income and

those that are return of capital, although there was such

a distinction made prior to the 1942 amendments to the

Code,’ the rules governing annuity contracts in § 72

apply to the plaintiff’s distribution. Defendant argues

that in enacting § 165(b), Congress intended that the

retiree be taxed upon the amount received by him to the

same extent as he would be taxed upon an annuity pur-

chased by him. Defendant contends that this treatment

has been continued in the 1954 and 1986 amendments to

the Code.

®In 1988, a technical correction to Section 402(a)(1) removed a

reference to former Section 402(a)(2). See § 1101A(b)(8)(A),

Technical and Miscellaneous Revenue Act of 1988, Pub. L. No. 100-

647, 102 Stat. 3342. Section 402(a)(2) was repealed by the Tax

Reform Act of 1986.

1 Under the 1939 Code § 165(b) which had its origin in the 1921

Code § 219(f), distributions from the Fund were taxable to the

retiree only after the amount received exceeded the retiree’s con-

tributions to the Fund. The 1942 Code § 162 changed the treatment

of these distributions so that § 165(b) of the 1939 Code, as amended,

provided that distributions from qualified pension plans would be

taxed under the same provisions applicable to annuity contracts.

— 18a

Defendant further contends that since 1952, the Fund

has been consistently ruled to be a qualified “employees’

trust described in § 401(a)” and therefore exempt from

income tax under § 501(a). Thus, Congressional acqui-

escence can be imputed to the IRS’ position that the Fund

is a qualified trust because since 1952 applicable Treasury

Regulations have been amended at least 16 times, § 72

has been amended at least 17 times, and there has been

no change in the interpretation of $ 401(a).

Defendant also argues that, even if the Fund is not an

employees’ trust described in §$401(a!, the payment to

plaintiff is taxable under § 402(b). Section 402(b) pro-

vides, in pertinent part:

(a) Taxability of beneficiary of nonexempt

trust,—

(1) Zn general.—Contributions to an employ-

ees’ trust made by an employer during

a taxable year... for which the trust is

not exempt from tax under § 501 (a)

shall be taxable to him [employee] in the

year in which so distributed o+ made

available, under section 72... .

Defendant contends that since both exempt and_non-

exempt trust distributions are taxed under § 72, jt is

immaterial whether the distribution is classified as ex-

empt or non-exempt."!

Defendant asserts that $72, which deals with pay-

iments received as annuities, generally provides that such

payments will be treated as both the receipt of income

and the return of “an aliquot portion” of the premium

'! Employer contributions to a non-exempt trust are includable in

the gross income of the beneficiary in the year in Which such con-

tributions are made in accordance with § 83 of the 1986 Code. An

employing agency’s contributions to the CSRS Fund are not taxable

to an employee until they are received. Defendant contends this

indicates that the Fund is actually exempt from tax under § 401(a).

l4a

paid for it. Thus, under § 72, plaintiff can only exclude

4.1 percent of the monthly annuity payments he received

from the Fund."

Defendant contends that under § 72(e) (1) plaintiffs’

lump-sum payment is an amount “not received as an

annuity” and since it was “received on or after the an-

nuity starting date,” § 72(e) (2) (A) requires that it be

included in gross income.'* Therefore, since § 72(e)

covers all amounts not received as an annuity, it is also

immaterial as to how the annuity contract characterizes

a lump-sum payment whether as a dividend or a return

of premium. Thus, whatever the characterization, the

exclusion ratio of 4.1 percent, representing the annuitant’s

investment, needs no recalculation but remains the same.”°

Defendant contends that the lump-sum payment was re-

ceived “after the annuity starting date” because plaintiff

received his first distribution from the Fund on April 1,

1987 and his lump-sum payment on August 3, 1987.

Moreover, defendant argues under the holding in Price

v. United States, 459 F. Supp. 362, 365 (D. Md. 1978),

§ 72(e) governs and the payment (subject to the exclu-

12 See § 72(a), (b), and (c). The entire annuity payment is in-

cluded in gross income and then the proportion of each annuity

payment which the annuitant’s investment in the annuity contract

bears to his total expected return therefrom is excluded from in-

come. The computation required for calculating the annual exclu-

sion from income is as follows:

Consideration for contract

x Annuity

Total expected return

This amount is subtracted from the annuity payment to arrive at

the portion remaining in income.

13 The “annuity starting date” is the “first day of the first period

for which an amount is received as an annuity under the contract.”

§ 72(c) (4), Code 1986.

14 The specific amount to be included in plaintiffs’ gross income is

not at issue.

15 § 72(a) and (b).

l5a

sion) is taxable in the year it was received by plaintiff

as ordinary income.

Defendant next disputes plaintiffs’ position that the

lump-sum payment and the annuity payments are “sepa-

rate and distinct” on the ground that that position is

unsupported by tax law and the CSRS statute. It argues

that Regulation §§ 1.72-2(a) (3) (i) and (ii) make it

clear that the two forms of distribution are interrelated

benefits received under the Same annuity contract for

purposes of § 72—first, because Congress defined the

lump-sum option as an “alternative form of annuity” and

included both forms in their establishment by 5 U.S.C.

§ 8343a(c) and, second, because the OPM under 5 C.F.R.

§ 831.2205 calculates the annuity to be received under

5 U.S.C. § 8348a by treating the lump-sum payment as

an accelerated distribution of annuity payments.

Defendant next argues that while the IRS has changed

its position regarding the taxability of the lump-sum

credit, it has always maintained that distributions from

the Fund are taxable under § 72. Further, Defendant

argues that there is a significant difference between the

tax treatment of the lump-sum credit received under 5

U.S.C. § 8342 and the lump-sum distribution to plaintiffs

under 5 U.S.C. § 8348a stemming from the fact that re-

ceipt of the lump-sum credit fully discharges all annuity

rights while receipt of the lump-sum payment does not.'®

Taxability of the lump sum payment is not governed by

§ 72(e) (5) but by § 72(e) (2).

Defendant argues that although under § 72(d), which

existed prior to 1986, the three annual lump-sum _ pay-

ments described in $ 72(d) to employees were not includ-

able in the employee’s gross income, the repeal by Con-

16 Receipt of the lump-sum credit permits the employee to only

include in gross income the difference, if any, between the amount

received and the amount invested. That difference might be interest

payable to employees who have not been employed for more than

five years. § 72(e) (5) ; © C.F.R. § 831.105. b)(3).

16a

gress of § 72(d) with the passage of the Tax Reform Act

of 1986 removed this favorable treatment accorded such

payments because of the inequity it represented to an-

nuitants.’? Further, defendant states that even if plain-

tiffs are correct in asserting that plaintiff’s lump-sum pay-

ment is described as a “refund” under the CSRS statute,

simply the “characterization” of the benefit as a “refund”

in that statute is not controlling for tax purposes, since

the CSRS statute is not a tax statute.

Finally, defendant contends plaintiffs are liable for the

10 percent additional tax imposed by § 72(t) because

§ 72(t) (1) applies the additional tax to any amounts re-

ceived from a “qualified retirement plan” which, because

the Secretary has ruled that the Fund is such a plan de-

scribed in § 401(a!, covers distributions from the Fund."

Moreover, defendant asserts Congress specifically excluded

from the additional tax amounts received from state and

local government pension plans thereby suggesting that

had Congress wished to exclude application of § 72(t) to

CSRS participants it could have easily done so in a sm-

ilar fashion—i.e., by the addition of another exclusion in

§ 72(t) (2).

Standard of Review

Summary judgment is appropriate if there are no

genuine issues of material fact in dispute and the movant

is entitled to judgment as a matter of law. RUSCC 56.

Judgment is entered on cross-motions for summary judg-

ment against a party “who fails to make a showing suffi-

cient to establish the existence of an element essential to

17S. Rep. No. 313, 99th Cong. 2d Sess. 609 reprinted in, 1936-3

C.B. (Vol. 3) at 609.

18 Although there are six exceptions to application of the 10 per-

cent additional tax which are set forth in § 72(t) (2), plaintiffs do

not argue that any of these apply to them. Plaintiffs’ argument is

simply that § 72(t) is inapplicable because the CSRS is not a quali-

fied retirement plan “and that §72(t) does not apply to CSRS

participants.”

17a

that party’s case, and on which that party will bear the

burden of proof at trial.” Celotex Corp. v. Catrett, 477

U.S. 317, 322 (1986). In this case, the court agrees with

the parties that there are no genuine issues of material

fact in dispute and that this case is appropriate for reso-

lution by summary judgment.

DISCUSSION

Plaintiffs seek an exemption from a tax which the Com-

missioner of the IRS has imposed.” It is axiomatic that

exemptions from taxation [are not] granted by implica-

tion. Harding Hospital, Inc. v. United States, 505 F.2d

1068, 1071 (6th Cir. 1974): see Founding Church of

Scientology v. United States, 188 Ct. Cl. 490 (1969);

Puritan Lawn Memorial Park Cemetery v. United States,

15 Cl. Ct. 234 (1988). To be sure. a Statute creating an

income tax exemption must be strictly construed with any

doubts to be resolved in favor of the taxing entity. Hard-

ing Hospital, Inc. v. United States, 505 F.2d 1068, 1071

(6th Cir. 1974). Furthermore, determinations of the

Commissioner are presumptively correct. Welch v. Helver-

ing, 290 U.S. 111, 115 (1933): Morowitz v. United States,

15 Cl. Ct. 621, 629 (1988). Plaintiff bears the burden of

producing “substantial evidence” as to the wrongfulness

of the Commissioner’s decision. KFOX, Inc. v. United

States, 206 Ct. Cl. 143, 151 (1975). With these principals

in mind, the court will now turn to an analysis of the spe-

cific issues in this case.

After a careful analysis of the parties’ arguments and

a review of the applicable statutes and regulations at is-

sue, the court finds that the lump sum distribution to

plaintiff under 5 U.S.C. § 8348a is taxed under IRC § 402

and IRC § 72. Section 402(a) of the IRC clearly states

'? Plaintiffs argue that the general rule that returns of capital are

tax free should apply. However, this opinion demonstrates that the

IRC has specifically provided that the lump sum payment shall be

taxed under IRC § 72.

18a

that “the amount actually distributed to any distributee

by any employees’ trust described in Section 401(a) which

is exempt from tax under Section 501(a) shall be taxable

to him, in the year in which so distributed, under section

72 (relating to annuities).”” (Emphasis added.) The

court finds that these statutes convey a plain meaning and

are not ambiguous.

While the court makes its holding under the plain mean-

ing rule of statutory construction, the court’s conclusion

is supported by the predecessor to § 402(a) which was

§ 165(b) of the IRC of 1939 which had its beginnings in

§ 219(f) of the Internal Revenue Act of 1921.*° Under

the old section 219(f), distributions to the distributee

were taxed only after the full amount of the distributee’s

contributions were distributed to him. However, this tax

treatment was changed when § 165(b) of the IRC of 1939

was enacted,*' so that distributions from qualified pension

20 Old section 219(f) provided:

(f) A trust created by an employer as a part of a stock bonus

or profit-sharing pian for the exclusive benefit of some or

all of his employees, to which contributions are made by

such employer, or employees, or both for the purpose of

distributing to such employees the earnings and principal

of the fund accumulated by the trust in accordance with

such plan, shall not be taxable under this section, but the

amount actually distributed or made available to any dis-

tributee shall be taxable to him in the year in which so

distributed or made available to the extent that it exceeds

the amounts paid in by him.

*1 Section 165(b) provided:

(b) Taxability of Beneficiary.—The amount actually distributed

or made available to any distributee by any such trust shall

be taxable to him, in the year in which so distributed or

made available, under section 22(b)(2) as if it were an

annuity the consideration for which is the amount con-

tributed by the employee, except that if the total distribu-

tions payable with respect to any employee are paid to the

distributee on account of the employee’s separation from

the service, the amount of such distribution to the extent |

exceeding the amount contributed by the employee, shall be

19a

plans were taxed the same as annuity contracts. Further-

more, contrary to plaintiffs’ argument that the lump sum

distribution is a tax free return of capital, § 402(a) of

the IRC of 1954 does not distinguish between distribu-

tions that are income and distributions which are allegedly

a return of capital; it simply directs that distributions

shall be taxed under § 72.

However, the Fund is an employees’ trust described in

$401(a) of the IRC. This is evident from the specific

exception identified in § 402(a) (1) and the legislative

history of § 402(a).%° The first clause of § 402(a) (1)

states “[e]xcept as provided in paragraph (4), ...” See-

tion 402(a) (4) provides:

(4) Distributions by United States to nonresident

aliens.—The amount includible under paragraph

(1) of this subsection in the gross income of a

nonresident alien individual with respect to a

distribution made by the United States in respect

of services performed by an employee of the

United States shall not exceed an amount which

bears the same ratio to the amount includible in

considered a gain from the sale or exchange of a capital

asset held for more than 6 months. -

As defendant correctly points out in its cross-motion for sum-

mary judgment, section 22(b) (2) of the IRC of 1939 requires that

distributees include in gross income annuity payments to the extent

of 3% of the amount contributed to the annuity. Distributions

beyond that amount were deemed a return of capital and were not

taxed until the total amount exceeded the investment in the plan.

*2 The court finds that the statutes at issue convey plain meaning,

and therefore, resort to legislative history is unnecessary. Ocean

Drilling & Exploration Co. v. United States, 220 Ct. Cl. 395 (1979):

J.H. Miles & Co. v. United States, 3 Cl. Ct. 10 (1983). Of course,

merely because the statutes have plain meaning does not preclude

an analysis of legislative history. Ocean Drilling & Exploration Co.

v. United States, 220 Ct. Cl. 395 (1979). The purpose of examining

the legislative history in this opinion is to show that, even if the

statutes are viewed as ambiguous, the court’s conclusions are never-

theless supported by the legislative history.

20a

gross income without regard to this paragraph

as—

(A) the aggregate basic pay paid by the United

States to such employee for such services,

reduced by the amount of such basic pay

which was not includible in gross income

by reason of being from sources without

the United States, bears to

(B) the aggregate basic pay paid by the United

States to such employee for such services.

In the ease of distributions under the civil service re-

tirement laws, the term “basic pay” shall have the mean-

ing provided in section 8331(3) of Title 5, United States

Code.

This special rule for the taxation of distributions from

the Fund to nonresident aliens would be superfluous if the

Fund were not an employees’ trust described in § 401(a).

A statute should never be read so as to render certain

provisions superfluous. Woodfork v. Marine Cooks &

Stewards Union, 642 F.2d 966 (5th Cir. 1981). More

over, defendant correctly cites the legislative history of

€ 402(a)(4) for the proposition that “[u]nder present

law civil service annuities and certain other retirement

benefits provided by the United States are treated as dis-

tributed under ‘qualified’ pension plans, and when distri-

butions are made to the annuitant he is not taxed on the

portion of the payment representing his own contributions

to the pension.” S. Rep. No. 1028, 86th Cong., 2d Sess. 1,

reprinted in, 1960-1 C.B.. 822. As a qualified employees’

trust, the Fund does not need to meet all of the require-

ments that private plans must meet, but they are to be

treated as if they do. The reason that governmental! plans

do not have to comply with all of the restrictions ap-

plicable to private plans is that governments are not sub-

ject to taxation and, therefore, do not require similar

controls. Thus, the beneficiaries of governmental plans

2la

are to be treated the same as private plan beneficiaries

whose distributions are taxable under § 402(a).

Regulation § 1.72-2(a) (3) (iii) expressly states that

“Section 72 shall be applied to distributions received un-

der the Civil Service Retirement Act.” Section 72 has

been amended at least 17 times since its enactment with-

out change. Under these circumstances, the court is per-

suaded that Congress has acquiesced in the IRS’ interpre-

tation respecting the nature of the Fund. Helvering v.

Winmill, 305 U.S. 79, 83 (1938) ; United States v. Correll,

389 U.S. 299, 305-06 (1967); First Nat. Bank v. United

States, 214 Ct. Cl. 585, 593 (1977). The court finds that

the Fund is a qualified trust described in § 401(a) of the

Code which is exempt from tax under §$501(a) of the

Code, and that distributions from the Fund including

lump-sum distributions are taxable under §§ 402(a) and

72 of the Code.?*

Although plaintiffs charge that since passage of the

Tax Reform Act of 1986 defendant has failed to issue

definitive regulations specifying that the Fund is a quali-

fied plan described in $401 (a), this fact is not sufficient

to prove plaintiffs’ contention that. the Fund is not a

qualified plan under that section, Since 1921, the IRS

has held that distributions from the Fund are taxable

under § 501(a).*4 This interpretation has been incorpo-

rated in the Regulations since 1960 and although amended

at least 16 times since their promulgation, no change has

been made in this consistent interpretation.”

*3 The tax treatment of the “lump-sum credit” as defined in the

CSRS is uncontested.

24 See T.D. 3112, 4 C.B. 76: see Rey. Rul. 74-136, 1974-1 C.R. 29;

Rev. Rul. 68. 486, 1968-2 CRB. 184; Rev. Rul. 58-472, 1958-2 C.B. 30,

32; 1.T. 4102, 1052-2 C.B. 173.

*5 See Treas. Reg. S§ 1.72-2(a) (3) (iii ), 1.72-2(a)(3) (iv) Ex. 4,

Treasury Regulations on Income Tax (26 C.F.R. ); T.D. 6497, 1960-

2 C.B. 19.

22a

Even if the Fund is not an employees’ trust described

in $401l(a) and therefore § 402(a) does not apply,

§ 402(b) would require that the lump sum distribution

be taxed under § 72. Section 402(b) provides:

(b) Taxability of beneficiary of nonexempt

trust.—

(1) In general.—

Contributions to an employees’ trust made by

an employer during a taxable year of the em-

ployer which ends within or with a taxable

year of the trust from which the trust is not

exempt from tax under section 501(a) shall be

included in the gross income of the employee

in accordance with section 83 (relating to

property transferred in connection with per-

formance of services), except that the value of

the employees’ interest in the trust shall be

substituted for the fair market value of the

property for purposes of applying such section.

The amount actually distributed or made

available to any distributee by any such trust

shall be taxable to him in the year in which so

distributed or made available, under section 72

(relating to annuities), except that distribu-

tions of income of such trust before the an-

unity starting date (as defined in section 72

of the employee without regard to section 72

(e) (5) (relating to amount not received as

annuities). (Emphasis added. )

This section clearly mandates that the amount distributed

to any distributee “by any such trust shall be taxable...

under section 72 (relating to annuities).” (Emphasis

added.) Therefore, even if the Fund is not an employees’

trust described in £$ 401(a), the distribution at issue in

this case because of § 402(b) would be taxed under § 72.

23a

As a result, the lump sum distribution made to plain-

tiff is taxable under § 72 of the IRC.26 Section 72 provides

for the taxation of any amounts received under annuity

contracts. These same rules apply to Fund distributions

pursuant to § 402(a). There is no dispute about the an-

nuity portion of plaintiff's distribution. It is taxed under

§§ 72(a), (b) and (e) which provide that each annuity

payment will be treated as both the receipt of income and

the return of an “aliquot” portion of the premium paid

for it. Garvey, Inc. v. United States, 1 Cl. Ct. 108, 125

(1983), aff'd, 726 F.2d 1569 (Fed. Cir.), cert. denied, 469

U.S. 823 (1984) .27

Section 72 provides for the taxation of amounts “not

received as an annuity” under annuity contracts.** If an

amount is received on or after the Starting date of the

annuity which is the first day of the first period for which

an amount is received as an annuity, it is includable in

gross income. See $$ 72(e) (2) (A) and 72(c) (4).

26 Regulation § 1.72-2(a) (3) (iii) states that section 72 shall apply

to distributions received under the CSRS.

“7 Pursuant to §§ 72(a) and (b) the entire annuity payment is

included in gross income and then the proportion of each annuity

payment which the annuitant’s investment in the annuity contract

bears to the total expected return therefrom is excluded from in-

come. Under explicit rules in these sections, regardless of the char-

acterization of the amount received, plaintiff may only exclude 4.1

percent of the monthly annuity payments he receives from the Fund.

*8 72(e)(1) provides:

(e) Amounts Not Received as Annuities.—

(1) Application of subsection.—

(A) In general.—This subsection — shall apply to any

amount which—

(i) is received under an annuity, endowment, or life

insurance contract, and

(ii) is not received as an annuity,

if no provision of this subtitle (other than this subsection )

applies with respect to such amount.

24a

Plaintiffs’ contention that §$ 72(e) does not apply is

without merit. In addition to the language in § 402(a)-—

and alternatively § 402(b)—which establishes that § 72

applies to all distributions from the Fund, courts have

consistently held CSRS retirement program payments for

income tax purposes are to be treated as amounts received

“under an annuity, endowment or life insurance con-

tract.” Miller v. Commissioner, 144 F.2d 287 (4th Cir.

1944); Heard v. Commissioner, 40 T.C. 7, 11-13 (1963),

aff'd, 326 F.2d 962 (8th Cir.), cert. denied, 377 U.S.

978 (1964); Taylor v. Commissioner, 2 T.C. 267, 271

(1943).

The lump-sum payment at issue is an “amount not re-

ceived as an annuity” because it is received in the form

of a one-time payment to which § 72 applies pursuant to

§$402\a). See Regulations § 1.72-2(b)(2). Clearly,

$$ 72(a) through (c) do not apply because as the Regu-

lations expressly state, those sections only cover amounts

which are payable at regular intervals over a period of

more than one full year from the date on which they

are deemed to begin, provided the total of the amounts

so payable or the period for which they are to be paid

can be determined as of that date.** There is no provision

in $72 other than § 72(e) which logically can apply to

plaintiffs’ }ump-sum distribution. The payments covered

by § 72(e) includes all amounts “not received as an an-

nuity, including dividends, or payments in the nature of

dividends or as a return of premiums. Thus, § 72(e) is

an all inclusive “catch all” for all payments that are non-

annuity payments, in which event the IRC directs applica-

tion of § 72.

In Price v. United States, 459 F. Supp. 362, 365 (D.

Md. 1978), the court held that the refund a retired teacher

2° Thus, the amounts plaintiffs receive as annuities are subject to

the capital recovery rules in §$§ 72(a) and (b) and require no

recalculations of the 4.1 percent exclusion ratio to reflect the lump-

sum payment.

25a

received of her excess contributions to a state retirement

fund was taxable as ordinary income. In agreeing with

the Government’s position that the refund was fully tax-

able in the year it was received, the court held:

-.. even though the payment to plaintiff . . . was the

return of excess contributions, it is clearly taxable

under § 72(e) and the applicable Treasury Regula-

tions as ordinary income.

Price v. United States, 459 F. Supp. 362, 365 (D.

Md. 1978).

In Price the court reasoned that the legislative history

of § 72(e) indicated that Congress had adopted the ap-

proach in § 72 of permitting the exclusion ratio to remain

constant while treating as taxable income “extraordinary

payments.” Price v. United States, 459 F. Supp. 362, 365

(D. Md. 1978). Plaintiff’s lump-sum distribution is a

similar extraordinary payment and under the Price ra-

tionale is properly treated as taxable income even though

the Price case involved a different “Fund.” Plaintiff re

ceived his first distribution from the CSRS Fund on April

1, 1987 and his lump-sum payment on August 3, 1987 or

well after the annuity starting date. This fact supports

defendant’s contention that the lump-sum payment was

not received as an annuity but under an annuity contract

and is includable in gross income. While the Price case

is not controlling authority, it provides persuasive prece-

dent for the proposition that § 72(e) governs the taxation

of this lump-sum payment.

Plaintiffs argue that the lump-sum payment is “sepa-

rate and distinct” from the annuity payments and that

the distribution is not received under an “annuity con-

tract.” However, the two forms of payment are received

under the same annuity contract. § 1.72-2(a) (3) (i) pro-

vides in pertinent part:

(3) (i) Sections 402 and 403 provide that certain

distributions by employees’ trusts and certain

26a

payments under employee plans are taxable

under section 72 .... For purposes of ap-

plying section 72 to such distributions and

payments (other than those described in sub-

division (iii) of this subparagraph), each

separate program of the employer consisting

of interrelated contributions and benefits shall

be considered a single contract. Therefore,

all distributions or payments (other than

those described in subdivision (iii) of this

subparagraph) which are attributable to a

separate program of interrelated contribu-

tions and benefits are considered as received

under a single contract.

Further, Section 1.72-2(a) (8) (iii) sets forth the treat-

ment of distributions from employees’ trusts other than

the Fund. This regulation provides that “Section 72 shall

be applied to distributions received under the Civil Serv-

ice Retirement Act in the manner prescribed in subdivi-

sion (i) of this subparagraph.”

Further, under 5 U.S.C. § 8343a the interrelated nature

of the two forms of benefit is apparent. That section pro-

vides that the alternative form of annuity—“including

any lump-sum credit’”’—should be actuarially equal to the

annuity that would otherwise be provided. Thus both com-

ponents of the alternative form of annuity are necessarily

interdependent since they must be equivalent to the basic

CSRS annuity. Further, OPM Regulations buttress this

correlation by treating the 5 U.S.C. § 8343a annuity as

an accelerated distribution of annuity payments that

would otherwise be paid to the retiree over the expected

duration of the CSRS annuity. See 5 C.F.R. § 831.2205.

Moreover, there is a highly significant difference be-

tween the tax treatment of the lump-sum distribution

made to plaintiffs and the “lump-sum credit.” Plaintiffs’

lump-sum distribution arises under 5 U.S.C. § 8343a,

27a

which permits the continued receipt of an annuity, while

the lump-sum credit arises under § 8342, which terminates

that right completely. Thus, under 5 U.S.C. § 8342,

§72(e) (5) applies and the employee only includes in

gross income the difference between the amount received

and the amount invested (which in the case of the lump-

sum credit might be interest on the employee’s contribu-

tion) .*4 However, since there is no full surrender of the

annuity under 5 U.S.C. § 8348a—it is only reduced by

the actuarial value of the lump-sum payment—S§ 72(e) (5)

does not apply. Accordingly, the taxability of this lump-

sum payment is governed by § 72(e) (2).

Plaintiff contends that the use of the language “lump

sum credit” and payment of an annuity for life indi-

cates Congressional intent to treat the two items as

Separate and distinct distributions and therefore they do

not fall under a single “annuity contract.” Plaintiffs

contend this argument is Supported by the OPM letter to

plaintiffs which uses the conjunctive “plus.” The court,

however, does not agree with that interpretation. 5 U.S.C.

§ 8343a(b) (1) defines “alternative form of annuity” as

“payment of the credit. . -; and payment of an annuity

to the employee . . . for life.” This section simply means

that the alternative form of annuity is a single package,

or single annuity contract for purposes of § 402(a) and

§ 72, which includes two parts: a lump sum distribution

and a reduced annuity for life,*?

30 § 72(e) (5), which provides that for certain distributions from

trusts described in § 401(a), the amount included in gross income is

only the amount by which the payment exceeds the investment in

the contract. Whether the payment is issued as a refund, surrender,

redemption or maturity, it fully discharges all contractual obliga-

tions. See § 72(e)(5)(E).

-$1 Under OPM regulations, an employee electing the lump-sum

credit under 5 U.S.C. § 8342 who has not been employed for more

than five years is entitled to interest on his contributions to the

Fund. 5 C.F.R. § 831.105(b) (38).

82 Plaintiffs’ analysis of 5 U.S.C. § 8343a(b) (1) is flawed. In

arguing that the lump-sum payment is not part of the “alternative

28a

Further, the conclusion that the “alternative form of

annuity” is not simply a reduced annuity as plaintiffs

contend but.consists of both of these payment items, is

supported by the clear Congressional intent to design an

alternative form of annuity which is actuarially equiva-

lent to the present value of the full annuity which would

otherwise be paid. To achieve this goal, of necessity, the

lump-sum payment is an integral part of the computation.

Finally, as pointed out by defendant, use of the word

“form” in the phrase, would be superfluous if the intent

was to refer only to the reduced annuity because it is

simply an annuity to begin with.

In these circumstances, the court concludes that the

plain language of § 8343a does not support plaintiffs’ posi-

tion that the lump-sum payment is not part of the “alter-

native form of annuity.” It clearly is an integral part

of that annuity which cannot be disregarded in determin-

ing the total amount each retiree is due in the aggregate

to receive under CSRS.

Plaintiffs argue that the general rule is that a return

of capital is tax free. However, where Congress, in clear

language, has specifically described, as it has in § 72, how

and when investments in annuity contracts are to be

deemed recovered, that general rule does not apply. Gar-

vey Inc. v. United States, 1 Cl. Ct. 108, 124 (1983), aff'd,

726 F.2d 1569 (Fed. Cir.), cert. denied, 469 U.S. 823

(1984). Rather, the general rule that the courts are to

give statutes their plain meaning applies. Ocean Drilling |

& Exploration Co. v. United States, 220 Ct. Cl. 399

(1979). To hold in accordance with the plaintiffs’ con-

tention that the lump-sum payment is simply a return

of capital would require the court to totally ignore the

form of annuity” defined in that section and therefore its taxation

is not governed by § 72, plaintiff has misread the plain language of

the section. 5 U.S.C. § 8343a(b)(1) defines the “alternative form

of annuity” as two payment items—the lump-sum credit plus the

annuity—and not just the annuity alone.

29a

provisions of §§ 402(a) and 72 which together establish

a comprehensive and logical scheme for taxation of all

distributions from the Fund. This court, however, can-

not ignore §$§ 402(a) and 72 or carve out an exception

for plaintiffs’ benefit.

The nature of the Fund is that it is an employee’s trust

and not a contract. Since this is so. $402 provides that

distributions therefrom are taxed in the same manner

as annuity contracts, regardless of whether the distribu-

tions are classed as income or return of capital. Further-

more, the trust is an exempt trust described in § 401(a)

which is exempt from tax under s 501(a), but it makes

no different whether the trust is classed as an exempt

trust or non-exempt trust. In either case the lump-sum

payment is taxable under $$ 72 and 402(a) or 402(b).

There is no clear exception in the statutes which would

exempt the lump-sum payment from taxation under those

IRS code sections. Whether or not the annuitant actually

recoups his entire investment is immaterial. Garvey Inc.

v. United States, 1 Cl. Ct. 108. 123 (1983), aff'd, 726

F.2d 1569 (Fed. Cir.), cert. denied, 469 U.S. 823 (1984).

Section 72 makes it clear that Congress favored pre-

dictability of tax liability over precision in determining

gain.

Section 72(e)(5)(E) defines a return of capital as

payment that is in full discharge of an obligation to pay

an annuity. But under the lump-sum option exercised by

plaintiff, his right to an annuity is not discharged. To

characterize the payment as a return of capital is inac-

curate. Moreover, such characterization cannot displace

the application of §§ 72 and 402 to the lump-sum _ pay-

ment. As previously noted, the lump-sum payment is

treated as an accelerated payment of amounts that would

otherwise be distributed to the retiree over the expected

duration of the CSRS annuity. 5 U.S.C. $ 8348a(e) and

0 C.F.R. § 831.2205 (a).

Finally, the repeal by Congress of § 72(d) helps to

illuminate Congressional intent with respect to the tax

30a

treatment to be accorded the lump-sum payment. Section

72(d), which allowed employees to exclude from gross

income their entire investment in retirement annuities

during the first three years of the annuity was repealed

by the 99th Congress shortly after it created the lump-

sum payment option in the Federal Employees’ Retire-

ment System Act of 1986 because “[t]he three-year basis

recovery rule provides favorable tax treatment to a lim-

ited class of taxpayers, which is inequitable to other tax-

payers.” S. Rep. No. 313, 99th Cong. 2d Sess. 609, re-

printed in, 1986-3 C.B. (Vol. 3) at 609.

This court cannot accept that the same Congress which

repealed the tax favored treatment given to certain em-

ployees under § 72(d) because of its concern with the

inequality inherent in the three year recovery statute as

to other annuitants, could have intended to create a

mechanism whereby civil servants could exclude from

gross income their entire investment in the Fund in the

first year of the annuity. Moreover, there is no express

statutory direction from Congress similar to that ap-

plicable to distributions to non-resident aliens. See

§ 402(a) (4). The absence of such a direction supports

defendant’s argument that Congress did not intend to

provide a tax favored haven for plaintiff or other retirees

in his status in creating the lump-sum option in the 1986

Act.

In summary, the court does not view the lump-sum pay-

ment plaintiff received as simply a “refund” of plaintiff’s

contributions under the CSRS statute as plaintiffs con-

tend, but as an accelerated distribution of amounts that

would otherwise be paid as part of an annuity payment

under a rather comprehensive and integrated system

33 The terminology used in the CSRS in describing the benefit as

a “refund” is not necessarily controlling particularly since the CSRS

is not a taxing statute. See, e.g., Aetna Life Insurance Co. v.

United States, 16 Cl. Ct. 364, 374 (1989).

litte f

3la

which prefers no one group of annuitants over others.**

Furthermore, there can be no serious question that if

plaintiff had received the lump-sum payment from a

private employer whether from a qualified or a non-

qualified plan, § 72 would have been applicable and con-

trolling over the language of the benefit statutes in

Title 5.

In their reply filed February 2, 1990, plaintiffs included

the affidavit of James Cowen, who states he served as

Minority Special and Chief Counsel to the Subcommittee

on Civil Service, Post Office and General Services Commit-

tee on Governmental Affairs, U.S. Senate, (subcommit-

tee) from April, 1978 to June, 1986, to support their

contention that the 1986 FERS legislation intended that

the lump-sum distribution would not be taxable. Mr.

Cowen alleges that the updated memorandum that he

wrote to Senator Ted Stevens (R. Ark.), a copy of which

was attached to his affidavit, was actually written in

early 1986 when the Tax Reform Act of 1986 was being

considered on the Senate floor and that its purpose was to

avoid the tax proration that would accrue under the pro-

visions of pending legislation. According to Mr. Cowen

pursuant to Senator Stevens instructions he discussed the

matter with Representative Ford to whom he attributes

the “brilliant” idea of the proposed tax change in order

to make the entire lump-sum distribution non-taxable.

His memorandum in the pertinent paragraph concludes

by stating that “We planned to keep this quiet until

passage because of the fear of the tax committee block-

ing us.”

Defendant contends that Mr. Cowen’s affidavit is en-

titled to no weight. We agree. First, as previously dis-

cussed, § 402 is not ambiguous. On its face it is all en-

compassing and directs that the lump-sum distribution is

taxable under § 72 of the IRC. Therefore the court need

not resort to legislative history in an effort to determine

the meaning of § 402. Second, the memorandum relates

32a

to 5 U.S.C. § 8343a and not to § 402. There is no lan-

guage in § 8343a which specifically provides for the taxa-

tion of the lump-sum payment. The memorandum shows

that apparently Senator Stevens after reading the memo-

randum wrote “see me” in response. There is no indica-

tion, however, that Senator Stevens or any other Congress-

man agreed with the thoughts expressed in the memo-

randum. Even if Mr. Cowen’s statements are accurate,

this court has determined to give them no weight. Selman

v. United States, 204 Ct. Cl. 675, 685 n. 6 (1974); Na-

tional School of Aeronautics, Inc. v. United States, 135

Ct. Cl. 3438, 351 (1956). Even if Senator Stevens and

Representative Ford had submitted affidavits similar to

Mr. Cowen’s affidavit in support of plaintiff’s position

respecting their interpretation of the relevant statutory

provisions, we would not be required to accord them any

weight. Selman v. United States, 204 Ct. Cl. 675, 685

n. 6 (1974); National School of Aeronautics, Inc. v.

United States, 135 Ct. Cl. 343, 351 (1956) .**

In these circumstances the court finds that plaintiffs

have failed to show a Congressional intent to provide an

34 An additional reason exists, however, for giving little or no

weight to Mr. Cowen’s affidavit. It appears from the face of the

attached memorandum that Mr. Cowen’s views, even if shared by

Senator Stevens and Representative Ford, were not widely dis-

seminated among other members of Congress, but kept secret to

avoid controversy over the change being proposed. In other words,

it is apparent from the memorandum that it was feared that if

Congress had fully understood that an attempt was being made to

maintain the purported tax exempt treatment for the lump-sum

distribution the legislation could have encountered tax committee

opposition. This would impliedly indicate that the tax committee in

Congress, at least if advised of the secret strategy, might have been

much opposed to a tax free distribution of the lump-sum payment

particularly in view of the immediate negative effect upon much

needed tax revenues. Perhaps this secret strategy partially accounts

for the fact that the Cowen Memorandum was never made part of

the official legislative history of either the Tax Reform Act of 1986

or the Federal Employees’ Retirement Act of 1986.

33a

exception to the unambiguous rule set forth in § 402.*5

See Lutheran Mutual Life Ins. Co. v. United States, 221

Ct. Cl. 77, 82 (1979), cert. denied, 446 U.S. 936 (1980).

Hart v. United States, 218 Ct. Cl. 212, 222 (1978):

Aparacor, Inc. v. United States, 215 Ct. Cl. 596, 605

(1978).

The Additional Tax Imposed by § 72(t)

Section 72(t) (1) provides for a 10 percent additional

tax to any amounts received from a “qualified retirement

plan.” Section 72(t) (1) provides:

(t) 10-Percent Additional Tax on Early Distribu-

tions From Qualified Retirement Plans.—

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

payer 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.

That term, as defined in § 4974 (ce) (1), is a “plan de-

scribed in § 401(a) which includes a trust exempt from

tax under § 501(a)” and a “plan” which the Secretary

at any time has determined to be such a plan. As previ-

ously noted, the IRS has since 1952 ruled that the Fund

is a qualified trust under § 401(a) of the Code and ex-

empt from income tax under § 501(a). See Rev. Rul.

74-136, 1974-1 C.B. 29; Rev. Rul. 68-486, 1968-2 C.B.

184; Rev. Rule 58-472, 1958-2 C.B. 30, 32; I.T. 4102,

1952-2 C.B. 173. This interpretation has been incorpo-

rated into the applicable Treasury Regulations. Further-

35 The comments in the Cowen Memorandum also relate to enact-

ment of 5 U.S.C. § 8343a, which is not a taxing statute.

34a

more, the court’s prior analysis has shown that the Fund

is a “qualified plan” described in § 401 (a).*°

Section 72(t) (2) provides six detailed exceptions to

application of the additional tax. None of these excep-

tions applies to the case sub judice. The court is per-

suaded that under the doctrine of expressio unius est

exclusio alterius, the absence of any additional exception

from § 72(t) (2) is persuasive evidence that Congress did

not intend to permit early lump-sum distributions from

the Fund to escape the additional tax. National Maritime

Union v. United States, 231 Ct. Cl. 59, 72 (1982). Con-

gress could easily have included with these six exceptions

in $ 72(t) (2) another exception to application of the ad-

ditional tax, had it meant for early lump-sum distribu-

tions from the Fund to escape the additional 10 percent

tax. The fact that the computation of the alternative form

of annuity is executed as if the lump-sum distribution

was an early distribution of annuity payments which

would otherwise be due supports the conclusion that the

payment at issue is such an “early” distribution.

Further, § 72(t)(1) refers to a “qualified retirement

plan (as defined in section 4974(c)).” This specific ref-

erence in §72(t)(1) strongly suggests that Congress

wished to except from the added tax amounts received

36 Plaintiffs contend that the Fund is not a qualified plan described

in IRC § 401(a). Plaintiffs rely principally upon the changes imple-

mented by ERISA and an analysis of Code Subchapter D as a whole.

The court is unconvinced by plaintiffs’ arguments on this issue, and

for the reasons stated in this opinion, will hold that the Fund is a

plan “described in” § 401(a). Further, contrary to plaintiffs’ con-

tention, the CSRS is, in certain ways, a “tax favored” retirement

arrangement. Under § 402(a) the employing agency’s contributions

to the Fund are not taxed to the employee when made. If it were

not such an arrangement, the agency’s contributions to the Fund

would be taxable under § 402(b), and in accordance with § 83, when

made to the Fund.

35a

from state and local government pension plans.** This

conclusion is also supported by the legislative history of

S$ 72(t) (1) which referred to non-application of the tax

to amounts distributed from unfunded deferred compen-

sation plans of tax exempt or State or local government

employees (§ 457 plans) .**

Notwithstanding the fact that the Fund is a plan de-

scribed in § 401(a), further support for the position that

$ 72(t) applies is found in the language of § 4974 (e@) (1)

which refers to “any plan, contract, account, or an-

nuity, which, at any time, has been determined by the

Secretary to be such a plan, contract, account, or an-

nuity.” As defendant correctly points out, Treasury Reg-

ulations §§ 1.72-2(a) (3) (iii) and 1.72-2(a) (3) (iv) hold

that § 72 shall be applied to distributions received under

the CSRS.

CONCLUSION

For the reasons stated in this opinion, the court finds

that plaintiffs have failed to meet their burden of show-

ing through substantial evidence that the Commissioner’s

assessment of the tax and penalty was erroneous. Thus,

the court finds that the lump-sum distribution to plain-

tiffs is taxable under $$ 402 and 72 of the IRC and is

not a tax free return of capital. Moreover, since the

Fund is a qualified plan described in $401l(a) of the

IRC, the additional 10 percent tax imposed by § 72(t)

applies. Accordingly, Ylaintiffs’ motion for summary

judgment is denied and defendant’s cross-motion for

87 Section 4974(c¢) distinguishes between “qualified pensions

plans” and “eligible deferred compensation plans.” The latter is

provided for under § 457(b) which applies only to deferred com-

pensation plans of state and local governments and tax-exempt

organizations.

38 H.R. Cong. Rep. No. 841, 99th Cong., 2d Sess. II-455, r« printed

in 1986-3 C.B. (Vol. 4) at II-455.

36a

summary judgment is granted.*® The Clerk is directed

to dismiss plaintiffs’ complaint. No costs.

IT IS SO ORDERED.

/s/ Wilkes C. Robinson

WILKES C. ROBINSON,

Judge

39 Due to the press coverage given this case, the court is indeed

mindful of the effect that this decision, should it become final, may

have upon the many CSRS retirees who have availed themselves of

the alternative form of annuity and have received or will receive

lump-sum payments and reduced annuities. However, it must be

remembered that it is not this or any other court’s responsibility to

judicially legislate a change in the applicable statutes and regula-

tions to avoid what some might regard as an unjust result. Under

our constitutional form of government, directing such a fundamental

change in our tax laws, particularly when that change would have

an immediate and highly negative impact upon the budget, is clearly

the sole province of the United States Congress. Obviously, plain-

tiffs and all others aggrieved by this decision are free to seek

appropriate legislative relief from the Congress.

37a

IN THE UNITED STATES CLAIMS COURT

-_——

No. 106-89 T

JOHN E. SHIMOTA AND

NAN B. SHIMOTA

THE UNITED STATES

JUDGMENT

| Filed Sep. 11, 1990]

Pursuant to the opinion of September 10, 1990, deny-

ing plaintiffs’ motion for summary judgment and grant-

ing defendant’s cross-motion for summary judgment,

IT IS ORDERED AND ADJUDGED this date, pur-

suant to Rule 58, that the complaint is dismissed. No

costs.

FRANK T. PEARTREE

Clerk of Court

By: /s/ Linda A. Eddin

Deputy Clerk

September 11, 1990

NOTE: As to appeal, 60 days from this date, see

RUSCC 72. Filing fee is $105.00

38a

APPENDIX C

UNITED STATES COURT OF APPEALS

FOR THE FEDERAL CIRCUIT

91-5017

JOHN E. SHIMOTA AND

NAN B. SHIMOTA,

Plaintiffs-A ppellants,

THE UNITED STATES,

Defendant-A ppellee.

ORDER

| Filed Nov. 6, 1991]

Before ARCHER, Circuit Judge, COWEN, Senior Cir-

cuit Judge, and MAYER, Circuit Judge.

A petition for rehearing having been filed in this case,

and a response thereto having been invited by the court

and filed,

UPON CONSIDERATION THEREOF, it is

ORDERED that the petition for rehearing be, and the

same hereby is, denied.

The suggestion for rehearing in bane is under consid-

eration.

The mandate will issue on November 138, 1991.

FOR THE COURT,

s’ Francis X. Gindhart

FRANCIS X. GINDHART

Clerk

Dated: November 6, 1991

ee: THOMAS J. O'ROURKE

GARY R. ALLEN

39a

APPENDIX D

UNITED STATES COURT OF APPEALS

FOR THE FEDERAL CIRCUIT

91-5017

JOHN E. SHIMOTA AND

NAN B. SHIMOTA,

Plaintiffs-A ppellants,

THE UNITED STATES,

Defendant-A ppellee.

ORDER

[Filed Nov. 20, 1991]

A suggestion for rehearing in bane having been filed

in this case, and a response thereto having been invited

by the court and filed,

UPON CONSIDERATION THEREOF, it is

ORDERED that the suggestion for rehearing in banc

be, and the same hereby is, declined.

FOR THE COURT,

/s/ Francis X. Gindhart

FRANCIS X. GINDHART

Clerk

Dated: November 20, 1991

cc: THOMAS J. O’ROURKE

GAni R. ALLEN

40a

APPENDIX E

5 U.S.C. § 8343a. Alternative forms of annuities

(a) The Office of Personnel Management shall pre-

scribe regulations under which an employee or Member

may, at the time of retiring under this subchapter (other

than under section 8337 of this title), elect annuity bene-

fits under this section instead of any other benefits under

this subchapter (including any benefits under section 8341

of this title) based on the service of the employee or

Member.

(b) Subject to subsection (¢), the Office shall by regu-

lation 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—

(A) payment of the lump-sum credit to the

employee or Member; and

(B) payment of an annuity to the employee

or Member for life; ...

5 U.S.C. § 8331—Definitions

(8) “lump-sum credit” means the unrefunded amount

consisting of —

(A) retirement deductions made from the basic pay

of an employee of Member;

(B) amounts deposited by an employee or Member

covering earlier service, including any amounts

deposited under section 8334(j) of this title;

and

interest on the deductions and deposits at 4 per-

cent a year to December 31, 1947, and 3 percent

a year thereafter compounded annually to De-

cember 31, 1956, or, in the case of an employee

—

_—

4la

or Member separated or transferred to a posi-

tion in which he does not continue subject to this

subchapter before he has completed 5 years of

civilian service, to the date of the separation or

transfer;

but does not include interest—

(i) if the service covered thereby aggregates 1 year

or less; or

(ii) for the fractional part of a month in the total

service; ...

26 U.S.C. § 72(d)

TREATMENT OF EMPLOYEE CONTRIBUTIONS UNDER DE-

FINED CONTRIBUTION PLANS AS SEPARATE CONTRACTS.—

For purposes of this section, employee contributions (and

any income allocable thereto) under a defined contribu-

tion plan may be treated as a separate contract.

26 U.S.C. § 72(e)

AMOUNTS NoT RECEIVED AS ANNUITIES.—

(2) GENERAL RULE.—Any amount to which this sub-

section applies—

(A) if received on or after the annuity starting

date, shall be included in gross income, or

(B) if received before the annuity starting date—

(i) shall be included in gross income to the

extent allocable to income on the contract, and

(ii) shall not be included in gross income to

the extent allocable to the investment in the contract. . .

(5) RETENTION OF EXISTING RULES IN’ CERTAIN

CASES.—

42a

(E) FULL REFUNDS, SURRENDERS, REDEMPTIONS, AND

MATURITIES.—This paragraph shall apply to—

(i) any amount received, whether in a single sum or

otherwise, under a contract in full discharge of

the obligation under-the contract which is in the

nature of a refund of the consideration paid

for the contract, and

(ii) any amount received under a contract on its

complete surrender, redemption, or maturity.

In the case of any amount to which the preceding sen-

tence applies, the rule of paragraph (2)(A) shall not

apply.

26 U.S.C. § 414(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—

(1) for purposes of section 410 (relating to mini-

mum participation standards), be treated as a

defined contribution plan,

(2) for purposes of sections 72(d) (relating to treat-

ment of employee contributions as separate con-

tract) 411(a)(7) (A) (relating to minimum

vesting standards), 415 (relating to limitations

on benefits and contributions under qualified

plans), and 401(m) (relating to nondiscrimina-

tion tests for matching requirements and em-

ployee contributions), be treated as consisting of

a defined contribution plan to the extent benefits

are based on the separate account of a partici-

pant and as a defined benefit plan with respect

to the remaining portion of benefits under the

plan.

43a

26 C.F.R. § 1.72-2(a) (3) (i)

Sections 402 and 403 provide that certain distribu-

tions by employees’ trusts and certain payments un-

der employee plans are taxable under section 72...

For purposes of applying section 72 to such distribu-

tions and payments (other than those described in

subdivision (iii) of this subparagraph), each sepa-

rate program of the employer consisting of interre-

lated contributions and benefits shall be considered

a single contract.

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.