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

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Opposition Brief
- **Published:** January 1, 1992

## Text

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No. 91-1241 : 1932

OFFICE OF lr wee A

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Jn the Supreme Court of the United States

OCTOBER TERM, 1991

JOHN E. SHIMOTA AND NAN B. SHIMOTA, PETITIONERS
v.

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

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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,

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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.):
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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
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Statutes and regulations—Continued: Page
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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)

2
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.

3

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

4

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

id
~»

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.

6

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.”

7

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.”).

8

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

ee

9

‘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.

10

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.”

eo

11

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

12

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

13

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

14

observed (Pet. App. 27a), Ҥ 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,

15

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

16

(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.

17

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.

18

CONCLUSION
The petition for a writ of certiorari should be

denied.
Respectfully submitted.

KENNETH W. STARR
Solicitor General
JAMES A. BRUTON
Acting Assistant Attorney General
RICHARD FARBER
BRUCE R. ELLISEN
Attorneys

MARCH 1992

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386011_0128%3A2. Public record. Not legal advice.