Opposition Brief — Shimota v. United States, 112 S. Ct. 1669 (1992) (No. 91-1241)

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No. 91-1241 : 1932

OFFICE OF lr wee A

ee oe.

Jn the Supreme Court of the United States

OCTOBER TERM, 1991

JOHN E. SHIMOTA AND NAN B. SHIMOTA, PETITIONERS

UNITED STATES OF AMERICA

ON PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE FEDERAL CIRCUIT

BRIEF FOR THE UNITED STATES IN OPPOSITION

KENNETH W.STARR

Solicitor General

JAMES A. BRUTON

Acting Assistant Attorney General

RICHARD FARBER

BRUCE R. ELLISEN

Attorneys

Department of Justice

Washington, D.C. 20530

(202) 514-2217

QUESTION PRESENTED

Whether the lump-sum payment petitioner received

from the Civil Service Retirement and Disability Fund

pursuant to his election of an “alternative form[] of

annuity” under 5 U.S.C. 8348a was taxable under Section

72(e) of the Internal Revenue Code.

TABLE OF CONTENTS

Page

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TABLE OF AUTHORITIES

Cases:

American Tobacco Co. v. Patterson, 456 US. 63 (1982)... 15

Consumer Product Safety Comm'n v. GTE Sylvania,

WEE ih BE CPI) von aconsnsnnsedseveniicccensccesadcccssecce 15

Garvey, Inc. v. United States, 1 Cl. Ct. 108 (1983), aff’d,

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

aa aia ch hak a Uacpuccbcesenssstdeccaseacessindéeesedevccec<s 8

Guilzon v. Commissioner, 97 T.C. 237 (1991) ....ccccc0c00000--. 4,10

Hogan vy. United States, 513 F.2d 170 (6th Cir.), cert.

Genied, 423 U.S. 836 (1975)...............0cs..sescccsoscoseoseccoeee.. 5

Kaufman Co. vy. Lantech, Inc., 807 F.2d 970 (Fed. Cir.

SER MRIAaTiabsdeakadalinededice Ucarusiccnaeavaseunexeiseone.osicceacecnes 10,

Miller v. Fairchild Indus., Inc., 797 F.2d 727 (9th Cir.

Ia Iara rueeadicGaliclduahtubinceexkadnesen Cheese. cssuasdcescecass,ccaceesae 10

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

Richards vy. United States, 369 U.S. 1 (1962)................... 15

Singleton v. Wulff, 428 U.S. 106 (1976)...ccccccccccccececececeees. 10

United States v. Wells Fargo Bank, 485 U.S. 351 (1988).. 16

Weinberger v. Rossi, 456 U.S. 25 (1982)..........ccccccccc00-5---.. 15

Statutes and regulations:

Federal Employees’ Retirement System Act of 1986, Pub.

Eis POM MOPOD, MOO SEAL. BIG.........creccccccceceecsscccecccccec..... 14

§ 204(a), 100 Stat. 591-592... coc. seadasdees 14

Internal Revenue Code (26 U.S.C.):

§ 7 ttesseeeeesesensesseessssseessesessesessserssseeessesssssseseetdy 4, D, 7, 8, 9, 13

1. BASRA Sn he Ae 8

(IIT)

: IV

Statutes and regulations—Continued: Page

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1, SI eansannrskandcr educates casera 10, 11, 12, 13, 16

Bs WE alactacninens uiisrix i ecigene roaceccce nen eae 3, 4, 8, 9, 15, 17

MOIR IRIN crtapsauisovehreescnveralane mateemniance ie eas 8

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cape TATE ANE ELEN DY AERA SICA RIO 3, 9, 10

ace, LL OLED UNREST 13, 14

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Ti, SER SERS ARE Rt MOD re AEN VARIA 4

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eg IE aeRO Ki OR TRAN? RRR AM SA 11, 12

MB cece, EEL TELAT AOA ee SOO ALT A eA Pe 11

| en EAA Oy ETC ARS ARE 10, 11, 12, 13

Omnibus Budget Reconciliation Act of 1990, Pub. L. No.

dieser Meena Nt cs RE NN Ent Ae a 14

§ 7001(a), 104 Stat. 1388-327 to 1388-328........0ccc.... 14, 17

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

$ 1J22(ch3)M(A), 100 Stat. 2468 0.0.0.0... .ccccsccccsceseceee 10

Technital and Miscellaneous Revenue Act of 1988, Pub.

L. No. 100-647, § 1011A(b)(2), 102 Stat. 3472.................. 11

Me ee cee A ON TIE ED 6

Wh Se Br a cinchacmcstscittesen cin Ce 14

Been IED negerdccivenstodcerctaincsaeti ee 5

ee INN camiannikcsascascrapdsoeamktonceiinein as 12

PAP ae avidineirannucrcsaccimoni nck 2, 5, 6

MEE ecuessaiaaienceecaic ee eee 2, 5, 6, 11

Bh Pee abi tade exakeuecduudeaieenecse Vorecee te meek Gin s 6, 13

SPs MNT cc mensitbindscobzcarisaicocen eee 5, 6

a SA CRRA a eli oe ORNL EN RAs 2, 4, 6, 12, 13, 14, 15, 17

DSc UNM iss siicrmacriescscctigiebs ie 6

be SOR AE LEM ROR A A Did Sy SMA AS NEL SAT teas 5

Statutes and regulations—Continued: Page

sgl ieee ec agg Te NEST RAN A RNG nee 5

5 C.F.R.: o

SOOTHE TIPLE MMO siieinsicdicccsci ice, 7

OC CE MN inisss Austen 14

Treas. Reg.:

a ee MOTD ATTN idx A a eta 8

DB Fee IN vanerisenseuievacndceesnce ee 7

Miscellaneous:

132 Cong. Rec. 26,207-26,208 (1986) ........ccccccccscesecececesseee. 16

2 H.R. Conf. Rep. No. 841, 99th Cong., 2d Sess. (1986)..... 11

H.R. Conf. Rep. No. 606, 99th Cong., 2d Sess. (1986)....... 14

H.R. Conf. Rep. No. 964, 101st Cong., 2d Sess. (1990) ...... 15

H.R. Rep. No. 881, 101st Cong., 2d Sess. (1990)...........0.... 15, 16

H.R. Rep. No. 2333, 77th Cong., 2d Sess. (1942)............... a

Lt. 4202, 19502 CB 18. 7

Notice 87-13, 1987-1 C.B. 482 .............c0cccccsscccsocoosesesooseese.. 12

Rev. Rul. 58-472, 2958-2 C.B. 80..........cccccccoccsccsocecococeoeess.., 7

Rev. Rul. 68-486, 1968-2 C.B. 184 .......cccecccccccceccccccececeeeeee. 7

Rev. Rul. 70-150, 1970-1 C.B. 106............cccccccccoseoseseoceeeees, 7, 11

Rev. Rul. 74-138, 1974-1 C.B. 29.......cccccccccsccossosecececeseese... 7

Rev. Rul. 79-259, 1979-2 C.B. 197 ........0cecescossccesccccs.c....... 12

S. Rep. No. 445, 100th Cong., 2d Sess. (1988)........c00.00000-. 11

«i

§n the Supreme Court of the United States

OCTOBER TERM, 1991

No. 91-1241

JOHN EF. SHIMOTA AND NAN B. SHIMOTA, PETITIONERS

Vv.

UNITED STATES OF AMERICA

ON PETITION FOR A WRIT OF CERTIORARI

10 THE UNITED STATES COURT OF APPEALS

FOR THE FEDERAL CIRCUIT

BRIEF FOR THE UNITED STATES IN OPPOSITION

OPINIONS BELOW

The opinion of the court of appeals (Pet. App. la-2a)

is reported at 943 F.2d 1312. The opinion of the Claims

Court (Pet. App. 3a-36a) is reported at 21 Cl. Ct. 510.

JURISDICTION

The judgment of the court of appeals was entered on

September 12, 1991. A petition for rehearing was de-

nied on November 6, 1991 (Pet. App. 38a). A sugges-

tion for rehearing en bane was declined on November

20), 1991 (Pet. App. 39a). The petition for a writ of cer-

tiorari was filed on January 30, 1992. The jurisdiction

of this Court is invoked under 28 U.S.C. 1254(1).

(1)

STATEMENT

1. Petitioner John E. Shimota! was a federal em-

ployee who participated in the Civil Service Retire-

ment System (CSRS) and made contributions to the

Civil Service Retirement and Disability Fund (the

Fund). Petitioner retired in November 1986. His total

contributions to the Fund were $53,382.77. Pet. App.

4a-5a.

On April 1, 1987, petitioner began receiving pay-

ments under the basic CSRS annuity provided in 5

U.S.C. 8336, 8339. On June 6, 1987, however, he made

an election to receive the “alternative form[] of annu-

ity” provided in 5 U.S.C. 8348a. Section 8343a allows a

retiree to elect to receive a lump-sum payment of an

amount equal to his contributions to the Fund,

together with a reduced annuity. On August 3, 1987,

petitioner received his lump-sum payment in the

amount of $53,382.77, less withheld income taxes. His

monthly CSRS annuity was reduced by $199 in order

to reflect the lump-sum payment. Pet. App. 7a.

The IRS advised petitioner that 5.9% of the lump-

sum payment was excludible from his gross income.

Petitioner filed his 1987 income tax return in

accordance with the IRS’s advice, reporting as in-

come all but 5.9% of the lump-sum payment. In June

1988, however, petitioner filed a claim for refund of

the amount of tax paid with respect to the lump-sum

payment, based on the position that no part of the

payment was includible in his gross income. The IRS

denied the refund claim and petitioner brought this

refund action in the Claims Court. Pet. App. 7a-8a.

' Petitioner Nan B. Shimota is a party solely by virtue of

having filed a joint income tax return with her husband fer the

year in issue.

2. The Claims Court rejected petitioner’s argument

(Pet. App. 3a-36a). The court agreed with the govern-

ment that Sections 402 and 72 of the Internal Revenue

Code (Code or I.R.C.) (26 U.S.C.) governed the tax

treatinent of the lump-sum payment (Pet. App. 17a-

22a). Section 402(a)(1) provides that the amount dis-

tributed to a distributee by an employees’ trust de-

scribed in Section 401(a) “shall be taxable to him, in

the year in which so distributed, under section 72

(relating to annuities).” The court concluded that the

Fund is an employees’ trust described in Section

401(a) and that, accordingly, the lump-sum payment

was taxable under Section 72 (Pet. App. 19a-21a). The

court further observed that “[e]ven if the Fund is not

an employees’ trust described in § 401(a) and there-

fore § 402(a) does not apply, § 402(b) would require

that the lump sum distribution be taxed under § 72”

(id. at 22a).

Turning to Section 72, the Claims Court observed

that Section 72(e) sets forth rules governing the

taxation of any amount received under an annuity

contract that is “not received as an annuity” (Pet.

App. 23a-24a). The court concluded that “[t]he lump-

sum payment at issue is an ‘amount not received as an

annuity’ because it is received in the form of a one-

time payment” (id. at 24a). Section 72(e)(2)(A) gener-

ally provides that such an amount that is “received on

or after the annuity starting date, shall be included in

gross income.” The court concluded that the lump-

sum payment received by petitioner fell within this

provision and, accordingly, that it was includible in

his gross income (Pet. App. 23a-25a). The court also

re-jected petitioner’s argument that his lump-sum

payment could not be taxed under Section 72 because

it represented a “return of capital,” observing that

Section 402(a)(1) “does not distinguish between

aaa ae

distributions that are income and distributions which

are allegedly a return of capital; it simply directs that

distributions shall be taxed under § 72” (Pet. App.

19a). ?

The court of appeals affirmed (Pet. App. la-2a). The

court concluded that petitioner’s arguments “were

fully considered and the issues correctly decided in

[the Claims Court’s] thorough and well-reasoned

opinion” (id. at 2a). Accordingly, the court of appeals

“adopti[ed| that opinion and affirm[ed] the Claims

Court’s judgment” (ibid.). The court of appeals also

observed (ibid.) that the Tax Court, in Guilzon v.

Commissioner, 97 T.C. 237 (1991), had agreed with

the Claims Court that a lump-sum payment received

under 5 U.S.C. 8348a was taxable under Section 72(e)

of the Internal Revenue Code.

ARGUMENT

The decision below is correct and does not conflict

with any decision of this Court or of any other court

of appeals. Further review is therefore not warranted.

1. The issue in this case concerns the income tax

treatment of a lump-sum payment received by peti-

tioner from the Civil Service Retirement and

Disability Fund (the Fund) pursuant to his election of

an “alternative form||] of annuity” under 5 U.S.C.

&348a.* The Fund consists of contributions made by

* The Claims Court also held that the lump-sum payment

was subject to the ten-percent additional tax imposed by

Section 72(t) of the Internal Revenue Code (Pet. App. 38a-35a).

Petitioner does not challenge that holding in his petition.

* Contrary to the impression petitioner seeks to create, this

case does not involve the question whether an employee is enti-

tled to recover his contributions to the Fund tax-free, nor is

there any issue of double taxation. As the Claims Court pointed

out (Pet. App. 8a), an employee’s contribution to the Fund will

~»

federal employees and the government, together with

earnings on these amounts. See 5 U.S.C. 8348.

Congress has designated the Fund as a trust fund. 31

U.S.C, 1321(88). Employing agencies are required to

deduct and withhold a specified amount of each

employee’s salary and also to contribute to the Fund

an equal amount from the appropriation or fund used

to pay the employee’s salary. 5 U.S.C. 8334(a)(1).

Amounts withheld from the employee’s salary are

taxable in the year in which the withholding is made.

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

Cir.), cert. denied, 423 U.S. 836 (1975). Amounts

contributed by the employing agency are not taxed to

the employee until distribution. See I.R.C. § 402(a)(1):

Treas. Reg. § 1.402(a)-1(a)(1)(i).

When an employee meets the eligibility require-

ments set forth in 5 U.S.C. 8336, he is entitled to

retire and receive an immediate annuity computed

under 5 U.S.C. 8339. An individual who leaves federal

employment prior to meeting those requirements can

elect to receive a “lump-sum credit” under 5 U.S.C.

8342(a). The “lump-sum credit” is an amount consist-

ing of the amounts previously withheld from the

employee’s pay, amounts (if any) deposited by the

employee covering earlier service, and (in some

be recovered tax-free under the government’s position as well

as under petitioner’s position. The difference between the posi-

tions of the parties is simply one of timing. Under petitioner's

approach, he would be entitled to recover his contributions to

the Fund tax-free up front, with all payments in excess of the

amount of his contributions fully taxable. Under Section 72,

however, which we maintain governs the tax treatment of

petitioner’s lump-sum payment, petitioner will recover his con-

tributions to the Fund tax-free over the term of his annuity,

with a portion of each annuity payment being excludible from

tax and the remaining portion subject to tax.

circumstances) interest on those amounts. 5 U.S.C.

8331(8). The employee’s receipt of the lump-sum

credit “voids all annuity rights” under CSRS. 5

U.S.C. 8342(a).

In 1986, Congress enacted 5 U.S.C. 8348a, which

gave employees who retired after June 5, 1986, and

met the requirements of 5 U.S.C. 8336, an election to

receive “alternative forms of annuities” instead of the

basic annuity computed under Section 8339. The

“alternative form[] of annuity” elected by petitioner

has two components: payment of the lump-sum credit

(as defined in 5 U.S.C. 8331(8)); and payment of an

annuity. 5 U.S.C. 8348a(b). The lump-sum payment

that is part of this alternative annuity under Section

8343a differs from the lump-sum credit described in

Section 8342 in that receipt of the former, unlike the

latter, does not void an employee’s right to receive an

annuity. ‘ Congress provided in Section 8348a(c) that

the alternative annuity “shall, to the extent practica-

ble, 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 employee,” as computed under Section

8339. The annuity payments provided under the

“alternative form|] of annuity” are computed in accor-

dance with Office of Personnel Management (OPM)

regulations. OPM first computes the monthly rate of

annuity that would otherwise be payable to the

4 The amount of the “lump-sum credit” is the same under

both Sections 8342 and 8343a. There are, however, niaterial dif-

ferences between the distributions under the two Sections. To

avoid confusion, we will refer to the payment under Section

8342 as the “lump-sum credit” and “he payment under Section

8343a as the “lump-sum payment.”

retiree; “[t]hat monthly rate is then reduced by an

amount equal to the retiree’s lump-sum credit divided

by the present value factor for the retiree’s attained

age (in full years) at the time of retirement”; and the

reduced monthly rate “becomes the rate of annuity

payable.” 5 C.F.R. 831.2205(a). The regulation, in

effect, reduces the annuity payments that otherwise

would have been paid to the retiree by amounts whose

present value is equal to the lump-sum payment.

Section 402 of the Internal Revenue Code sets forth

the rules governing the taxability of beneficiaries of

employees’ trusts. Section 402(a)(1) provides that

amounts distributed by a “qualified” employees’ trust

described in Section 401(a) of the Code are taxable to

the distributee “under section 72 (relating to annu-

ities).” See H.R. Rep. No. 2333, 77th Cong., 2d Sess.

104 (1942). The Claims Court concluded that the Fund

is a qualified employees’ trust described in Section

401(a) (Pet. App. 19a-21la).° Although petitioner

argued in the Claims Court and the court of appeals

that the Fund was not “qualified” under Section

40 1(a) (see Pet. App. lla, 21a), he does not make that

argument in his petition. Accordingly, any amount

distributed by the Fund, including the payment in is-

sue here, is taxable under Section 72 of the Code.

Section 72 provides specific rules for determining

the tax treatment of amounts received under “an

annuity, endowment, or life insurance contract.”

» See Rev. Rul. 74-138, 1974-1 C.B. 29, 30 (the Fund is a

qualified trust under Section 401(a)); Rev. Rul. 70-150, 1970-1

C.B. 106 (same); Rev. Rul. 68-486, 1968-2 C.B. 184, 185 (same);

Rev. Rul. 58-472, 1958-2 C.B. 30, 32 (same); I.T. 4102, 1952-2

C.B. 173, 174 (same); see also Treas. Reg. § 1.72-2(a)(3)(iii)

(“Section 72 shall be applied to distributions received under the

Civil Service Retirement Act.”).

These rules generally provide that amounts received

under such a contract (and, by virtue of Section

402(a)(1), amounts distributed by a qualified employ-

ees’ trust) are includible in the gross income of the

recipient, except to the extent that they are consid-

ered to represent a return of premiums or other

consideration paid. Treas. Reg. § 1.72-1(a). A payment

that is “received as an annuity” is taxed under

Section 72(a) and (b), which generally provides that

each annuity payment will be treated as both the

receipt of income and the return of an aliquot portion

of the premiums or other consideration paid for the

annuity contract. Thus, pursuant to Section 72(a) and

(b), “[t]he entire annuity payment is included in gross

income and then the proportion of each annuity pay-

ment which the annuitant’s investment in the annuity

contract bears to his total expected return therefrom

is excluded from income.” Garvey, Inc. v. United

States, 1 Cl. Ct. 108, 120 (1983), aff’d, 726 F.2d 1569

(Fed. Cir.), cert. denied, 469 U.S. 823 (1984).

Section 72 also contemplates the receipt of amounts

that are “received under an annuity * * * contract”

but are “not received as an annuity” (I.R.C. §

72(e)(1)(A)), and Section 72(e) provides rules govern-

ing the taxation of such amounts. The regulations ex-

plain the difference between an amount “received as

an annuity” and an amount “not received as an annu-

ity.” Treasury Regulations § 1.72-1(b) states that

“amounts received as an annuity’ are 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.” The regulation further

provides that “[a]lny other amounts to which the

provisions of section 72 apply are considered to be

‘amounts not received as an annuity.’” See also

Treas. Reg. §§ 1.72-2(b)(2), 1.72-11(a)(1). The rules of

Section 72(e) thus apply to any non-annuity payment

that is received under an annuity contract, such as

dividends, payments in the nature of dividends, and

payments that represent a return of premiums paid or

other consideration. See Price v. United States, 459

F. Supp. 362, 364-365 (D. Md. 1978) (return of excess

contributions to state retirement fund taxable under

Section 72(e)). Since Section 72 applies to any amount

distributed by an employees’ trust, Section 72(e) ap-

plies to any distribution by an employees’ trust that

is not an annuity payment.

As the Claims Court observed (Pet. App. 24a), since

the lump-sum payment was a one-time payment, it did

not constitute “amounts which are payable at regular

intervals over a period of more than one full year”

(Treas. Reg. § 1.72-1(b)). Since Section 72 applies to

the payment (by reason of Section 402(a)(1)), Section

72(e) applies to determine the tax treatment of the

payment, as the Claims Court correctly held (Pet.

App. 24a-28a).

Section 72(e)(2)(A) provides that an amount to

which Section 72(e) applies that is “received on or

after the annuity starting date, shall be included in

gross income.” The “annuity starting date” is “the

first day of the first period for which an amount is

received as an annuity under the contract.” I.R.C. §

72(c)(4). Petitioner received his first annuity payment

from the Fund on April 1, 1987, and received his lump-

sum payment on August 3, 1987 (Pet. App. 7a). Since

the lump-sum payment was received after the annuity

starting date, it is included in gross income pursuant

to Section 72(e)(2)(A), as the Claims Court (Pet. App.

23a-24a) and the court of appeals (id. at 2a) correctly

held. Accord, Guilzon v. Commissioner, 97 T.C. 237

(1991).

2. In an effort to avoid the clear rule of Section

72(e)(2)(A), petitioner argues that application of

Sections 72(d) and 414(k) of the Code indicate that his

lump-sum payment and his annuity payments were

received under “separate contracts” (Pet. 9-17).

Petitioner did not raise this argument in the Claims

Court and did not raise it in his opening brief in the

court of appeals. Indeed, he cited neither Section 72(d)

nor Section 414(k) in that brief. He raised the argu-

ment for the first time in his appellate reply brief.

Arguments not presented in the trial court generally

should not be considered for the first time on appeal.

Singleton v. Wulff, 428 U.S. 106, 120 (1976). Moreover,

arguments can not be raised for the first time in a

reply brief. Miller v. Fairchild Indus. Inc., 797 F.2d

727, 738 (9th Cir. 1986); see Kaufman Co. v. Lantech,

Inc., 807 F.2d 970, 973 n.* (Fed. Cir. 1986). The court of

appeals did not address the argument, and this Court

should therefore decline to consider it. In any event,

petitioner’s argument lacks merit.

Section 1122(c)(3)(A) of the Tax Reform Act of 1986,

Pub. L. No. 99-514, 100 Stat. 2468, added Section

72(e)(9) to the Code, which provided: “Any employee

contributions (and any income allocable thereto) un-

der a defined contribution plan shall be treated as a

separate contract for purposes of [Section 72(e)|.” 26

U.S.C. 72(e)(9) (Supp. IV 1986). Congress contem-

plated that, under this provision, “if an employee

withdraws employee contributions from such a plan

or account, then for tax purposes, the distribution

will be considered to be part nontaxable, i.e., a return

of employee contributions, and part taxable, i.e., a

distribution of earnings on those contributions.”

2 H.R. Conf. Rep. No. 841, 99th Cong., 2d Sess. II-462

(1986). In 1988, Congress made a technical correction

to the 1986 Act by repealing Section 72(e)(9) and

adding Section 72(d), which provides: “For purposes of

[Section 72], employee contributions (and any income

allocable thereto) under a defined contribution plan

may be treated as a separate contract.” Technical and

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

647, § 1011A(b)(2), 102 Stat. 3472. See S. Rep. No. 445,

100th Cong., 2d Sess. 172-173 (1988).

The “separate contract” treatment of new Section

72(d) applies only to employee contributions “under a

defined contribution plan.” A “defined contribution

plan” is “a plan which provides for an individual ac-

count for each participant and for benefits based

solely on the amount contributed to the participant’s

account, and any income, expenses, gains and losses,

and any forfeitures of accounts of other participants

which may be allocated to such participant’s account.”

I.R.C. § 414(i). A “defined benefit plan” is “any plan

which is not a defined contribution plan.” I.R.C. §

414(j). Since the CSRS retirement program provides

for benefits based on average pay and years of service

(see 5 U.S.C. 8339), it is not a defined contribution

plan, but, rather, is a defined benefit plan. Section

414(k) of the Code provides in part that, for purposes

of Section 72(d), a defined benefit plan that has a

component similar to a defined contribution plan will

be treated as consisting of two 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 * * * for purposes of

section|] 72(d) * * * be treated as consisting of a

defined contribution plan to the extent benefits

are based on the separate account of a participant

and as a defined benefit plan with respect to the

remaining portion of benefits under the plan.

Petitioner’s assertion that Section 414(k) makes the

rule of Section 72(d) applicable to distributions from

the Fund (Pet. 10-13) is wrong for two reasons.

First, the Fund, contrary to petitioner’s implica-

tion (Pet. 13), does not contain a “separate account”

for each individual federal employee. Federal agencies

merely are required to maintain “individual retire-

ment records” reflecting the amount that each em-

ployee has contributed to the Fund. 5 U.S.C. 8334(f).

Moreover, the “separate account of a participant”

referred to in Section 414(k) is “a separate account to

which actual earnings and losses are allocated.”

Notice 87-13, 1987-1 C.B. 432, 438 (Q & A 14). *

Amounts distributed to employees by the Fund are in

no way based upon any earnings and losses of the

Fund, much less upon earnings and losses of any

“separate account” of the employee. Accordingly, the

lump-sum payment under 5 U.S.C. 8343a is not “a

benefit * * * which is based partly on the balance of

the separate account of a participant” within the

meaning of Section 414(k).

Second, even if the lump-sum payment were viewed

as a benefit based partly on the balance of the separate

account of a participant, it would not be “a benefit de-

rived from employer contributions” (I1.R.C. § 414(k)

(emphasis added)). If the lump-sum payment rep-

® For purposes of Section 414(k), the plan provisions re-

garding a participant’s separate account must satisfy the

requirements of a defined contribution plan under Section

414(i). Rev. Rul. 79-259, 1979-2 C.B. 197, 19%. A separate

account to which earnings and losses are allocated is the essence

of a defined contribution plan.

a ee

resents the balance of a separate account of a

participant, then, since the lump-sum payment is an

amount equal to the employee’s contributions to the

Fund, the lump-sum payment would be a benefit

derived from employee contributions. In short,

Section 414(k) does not apply here, and the separate

contract treatment of Section 72(d) is therefore

inapplicable.

4. Petitioner observes that the IRS has ruled that

receipt of the lump-sum credit under 5 U.S.C. 8342 is

taxable only to the extent that the amount received

exceeds the employee’s contributions (Rev. Rul. 70-

150, 1970-1 C.B. 106) and suggests that a lump-sum

payment received under 5 U.S.C. 8343a should be

treated in the same manner (Pet. 6-9). The Claims

Court correctly recognized that there is a difference

hetween the lump-sum credit under 5 U.S.C. 8342 and

the lump-sum payment under 5 U.S.C. 8343a that re-

sults in different tax treatment under Section 72 of

the Internal Revenue Code (Pet. App. 26a-27a).

Section 72(e)(5) provides that certain types of

payments “not received as an annuity” are not subject

to the rules of Section 72(e)(2); instead, “the amount

shall be included in gross income, but only to the

extent it exceeds the investment in the contract.”

One of those specified payments is “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.” 26 U.S.C.

72(e)(5)()G); see also Treas. Reg. § 1.72-11(c). The

receipt of the lump-sum credit under Section 8342

terminates the right of the employee to receive a

CSRS annuity. The lurap-sum credit is thus received

“in full discharge” of the employee’s annuity rights.

Under these circumstances, as the Claims Court

observed (Pet. App. 27a), “§ 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 contribution).” See 5

U.S.C. 8331(8)(C) (circumstances in which lump-sum

credit includes interest); 5 C.F.R. 831.105(b) (same).

The receipt of a lump-sum payment under Section

8343a, however, does not result in a full discharge of

the employee’s annuity rights, because the retiree is

still entitled to receive a reduced annuity. Therefore,

the Claims Court correctly concluded that Section

72(e)(5) does not apply here and that “the taxability of

this lump-sum payment is governed by § 72(e)(2)”

(Pet. App. 27a).

4. Petitioner contends that the legislative history

of 5 U.S.C. 8848a shows that Congress intended that

the Section 8343a lump-sum payment would be a tax-

free distribution (Pet. 13-17). Petitioner points to

nothing in the legislative history of the Federal

Employees’ Retirement System Act of 1986, Pub. L.

No. 99-335, 100 Stat. 514 (the FERS Act), to support

his contention. Section 8343a was enacted by Section

204(a) of the FERS Act, 100 Stat. 591-592. That

provision was contained in neither the House nor the

Senate version of the bill that became the FERS Act,

but rather was added in conference. The Conference

Report makes only passing references to the provi-

sion and offers no explanation of its purpose. H.R.

Conf. Rep. No. 606, 99th Cong., 2d Sess. 149, 154

(1986).

Petitioner relies instead on the legislative history

of other legislation enacted four years after the

FERS Act, the Omnibus Budget Reconciliation Act

of 1990, Pub. L. No. 101-508, 104 Stat. 1388. Section

7001(a) of that Act, 104 Stat. 1388-327 to 1388-328,

amended Section 8343a to suspend the alternative

form of annuity election for employees retiring after

November 30, 1990, and before October 1, 1995. See

H.R. Conf. Rep. No. 964, 101st Cong., 2d Sess. 975-976

(1990). One section of the House Budget Committee

report on the Act presents the House Post Office and

Civil Service Committee’s views on the portions of

the bill within its jurisdiction. H.R. Rep. No. 881,

101st Cong., 2d Sess. 169-195 (1990). It is this report

on which petitioner relies (Pet. 15-16).

Since application of the Internal Revenue Code pro-

visions governing the taxation of distributions from

employees’ trusts plainly indicates that a Section

8343a lump-sum payment is taxable under Section

72(e) of the Code, there is no need to turn to

legislative history to determine whether Congress

intended that such payments would be taxed. Courts

are required to “assume ‘that the legislative purpose

is expressed by the ordinary meaning of the words

used.“ American Tobacco Co. v. Patterson, 456 U.S.

63, 68 (1982), quoting Richards v. United States, 369

U.S. 1, 9 (1962). The Conference Report on the FERS

Act says nothing about the tax treatment of a lump-

sum payment. According to petitioner, the 1990 House

Report indicates that a lump-sum payment is tax-free.

But a statement in a committee report “as to what the

Committee believes an earlier statute meant” pro-

vides “an extremely hazardous basis for inferring the

meaning of a congressional enactment.” Consumer

Product Safety Comm’n v.GTE Svlvania, Inc., 447

U.S. 102, 118 n.13 (1980); see Weinberger v. Rossi, 456

U.S. 25, 35 (1982). Moreover, even apart from its

status as post-enactment history, the report cited by

petitioner hardly evidences a clearly expressed

legislative intent that lump-sum payments are tax-

free. The discussion of Section 8348a in the report

(H.R. Rep. No. 881, supra, at 170) is, at most, am-

biguous with respect to whether the committee that

prepared that report believed that a Section 8343a

lump-sum payment would be tax-free. It is well settled

that “exemptions from taxation are not to be implied;

they must be unambiguously proved.” United States

v. Wells Fargo Bank, 485 U.S. 351, 354 (1988). There

is no statutory provision granting an exemption for

petitioner’s lump-sum payment, and the absence of

such a provision hardly can be overcome by reliance

on ambiguous language in a committee report written

four years after the enactment of Section 8343a.

Petitioner also contends that the legislative his-

tory of the Tax Reform Act of 1986 indicates that

Congress contemplated that the “separate contract”

treatment of Section 72(d) would apply to the Section

8343a lump-sum payment (Pet. 16-17). Petitioner re-

lies on statements made by Representative

Rostenkowski, Chairman of the House Ways and

Means Committee, in response to questions raised by

Representative Ford, Chairman of the House Post

Office and Civil Service Committee, with regard to

the tax treatment of certain types of distributions

from the Fund. 132 Cong. Rec. 26,207-26,208 (1986).

tepresentative Rostenkowski stated, among other

things, that (zbid.):

if an existing employee makes an election to be

covered under the new Federal employee retire-

ment system or under the integrated offset sys-

tem and the employee receives a refund of excess

contributions paid onto [sic] the old civil service

retirement system, the refunded contributions

are also treated as part of a separate contract and,

therefore, are treated as a nontaxable return of

employee contributions.

Petitioner admits that Representative Rosten-

kowski’s “comments did not relate to the lump-sum

credit [under 5 U.S.C. 8343a]” (Pet. 17 n.23). Such

comments with respect to a refund of “excess”

contributions to an “existing” employee who elects to

be covered under FERS hardly show that Congress

intended that the lump-sum payment an employee can

elect to receive upon retirement are to be treated as

part of a separate contract.

5. Petitioner correctly observes (Pet. 4) that the

question of the proper income tax treatment of a

lump-sum payment received under 5 U.S.C. 8343a

affects many federal retirees who have received such

payments. 7 The only courts that have considered the

question (the courts below and the Tax Court in

Guilzon) have held that the payments are taxable

under Section 72(e) of the Internal Revenue Code.

There is thus no conflict among the courts of appeals

nor other reason warranting further review.

7 As noted at page 14-15, supra, Section 7001(a) of the

Omnibus Budget Reconciliation Act of 1990 amended Section

8343a to suspend the alternative form of annuity election for

employees retiring after November 30, 1990, and before

October 1, 1995. Federal employees retiring during that period

cannot elect to receive the lump-sum payment under Section

8343a.

CONCLUSION

The petition for a writ of certiorari should be

denied.

Respectfully submitted.

KENNETH W. STARR