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Судебные дела / Зарубежная практика  / A.E. SITES, Plaintiff, v. UNITED STATES OF AMERICA, Defendant., United States District Court, D. Maryland., 896 F.Supp. 500, Civ. A. No. MJG-94-820., April 20, 1995

A.E. SITES, Plaintiff, v. UNITED STATES OF AMERICA, Defendant., United States District Court, D. Maryland., 896 F.Supp. 500, Civ. A. No. MJG-94-820., April 20, 1995


A.E. SITES, Plaintiff, v. UNITED STATES OF AMERICA, Defendant.

United States District Court, D. Maryland.

896 F.Supp. 500

Civ. A. No. MJG-94-820.

April 20, 1995.

Edward L. Blanton, Jr., Baltimore, MD, for plaintiff.

Michael J. Salem, Trial Attorney, Tax Div., U.S. Depart. of Justice, Washington, DC, Lynne Battaglia, U.S. Attorney, Baltimore, MD, for defendant.


GARBIS, District Judge.

The Court has before it Motions for Summary Judgment filed by Plaintiff A.E. Sites 1 and Defendant United States. 2 Having considered the legal memoranda submitted by the parties, the Court finds a hearing unnecessary to resolve the Motions.


1 Hereinafter referred to as "Taxpayer."

2 Hereinafter referred to as "the Government."



Taxpayer was employed by the State of Maryland from March 29, 1961 to July 1, 1989. On May 1, 1961, Taxpayer became a member of the Maryland Employees' Retirement System (the "Retirement System"), a plan designed to provide benefits to all State employees upon their retirement. In response to actuarial projections suggesting that the Retirement System was dangerously underfunded, the State of Maryland created a new plan in 1979 called the Maryland Employees' Pension System (the "Pension System"). Existing members of the Retirement System were given four options: (1) transfer to the new Pension System; (2) participate in a bifurcated plan and receive a two-part benefit consisting of a portion based on the old Retirement System formula and a portion based on the new Pension System formula; (3) freeze their rate of contribution to the Retirement System and receive benefits based on the old formula, but with a five percent cost of living adjustment cap; or (4) pay an additional two percent of salary and retain unlimited cost of living adjustments on benefits received after retirement. Md. State Teachers ' Ass'n v. Hughes , 594 F.Supp. 1353, 1357√58 (D.Md.1984) (providing history of creation of Maryland Employees' Pension System).

Taxpayer chose to remain in the Retirement System until 1984, at which time he elected to become a member of the bifurcated system. On June 28, 1989, in contemplation of his imminent retirement, Taxpayer elected to transfer completely to the Pension System, receive a refund of his individual contributions and accumulated interest, and accept a reduced monthly payment from the Pension System in lieu of the larger monthly payment he would have received had he remained a partial member of the Retirement System. Taxpayer's retirement became effective July 1, 1989. Taxpayer was 61 years old when he retired. On July 14, 1989, the Retirement System refunded to Taxpayer his contributions to the Retirement System ($18,493.09), plus the interest accumulated on these contributions ($134,816.15) (the "Transfer Refund").


Summary judgment is appropriate in those cases in which there is no genuine dispute as to a material fact, and the movant is entitled to judgment as a matter of law. In the case at Bar, the parties have no dispute as to the material facts. The issues presented are purely legal and appropriate for summary judgment.


Although a distribution from a qualified plan is generally fully taxed in the year of receipt, a favorable 10-year forward averaging method of tax computation may be utilized if the distribution qualifies as a "lump sum distribution" within the meaning of section 402(e)(4)(A). 26 U.S.C. ╖╖ 402(a)(1), 72, 402(e)(1) 3 . Under ╖ 402(e)(4)(A), the term "lump sum distribution" means:


3 The Tax Reform Act of 1986 replaced the 10-year forward averaging method with a 5-year forward averaging method for lump sum amounts distributed after Dec. 31, 1986. Tax Reform Act of 1986, Pub.L. 99-514, ╖ 1122(a)(2), (h)(1), 100 Stat. 2085, 2466, 2470. However, sections 1122(h)(5) and 1124 provided a special transitional rule that allows taxpayers who have attained age 50 before January 1, 1986, to use 10-year averaging. On January 1, 1986, Plaintiff had attained age 50. Therefore, Plaintiff would eligible to use 10-year averaging, provided that the Transfer Refund qualified as a " lump sum distribution " under 402 ( e )( 4 )( A ).


the distribution or payment within one taxable year of the recipient of the balance to the credit of any employee which become payable to the recipient≈

(i) on account of the employee's death,

(ii) after the employee attains age 59╫

(iii) on account of the employee's separation from the service, or

(iv) after the employee has become disabled

from a trust which forms part of a plan described in section 401(a) and which is exempt from tax under section 501(a).

The Maryland Employees' Retirement System is a qualified plan as described by section 401(a) and is exempt from tax under section 501(a). Moreover, because ╖ 402(e)(4)(A) is phrased in the disjunctive, Taxpayer need meet only one of the four listed criteria to qualify as a lump sum distributee. It is undisputed that Taxpayer had "attained the age of 59╫" (╖ 402(e)(4)(A)(ii)) when he received the Transfer Refund. Therefore, the parties' debate as to whether Taxpayer also received the Transfer Refund "on account of [his] separation from service" (╖ 402(e)(4)(A)(iii)) is immaterial. The only issue in determining whether the distribution constituted a "lump sum distribution" under section 402(e)(4)(A) is whether the refund Taxpayer received was the "balance to the credit" of his account.

Pursuant to legislation enacted with the creation of the Pension System in 1979, a participant who elected to transfer to the Pension System would receive a distribution consisting of at least a part of the participant's accumulated contributions and earnings thereon (a "transfer refund"). Md.Code Ann., art. 73B, ╖╖ 11B(5), 14(1)(g) (1988). The balance of any accumulated contributions not distributed as part of a transfer refund would be transferred to the Pension System. Furthermore, when a participant transferred from the Retirement System to the Pension System, the participant's years of creditable service would also be transferred to the Pension System. Md.Code Ann., art. 73B, ╖ 115(4) (1988).

The Government contends that the Transfer Refund did not constitute a lump sum distribution because Taxpayer did not receive the "balance to the credit" of his account when he transferred from the Retirement System to the Pension System. Specifically, the Government points to the fact that Taxpayer's months of creditable service under the Retirement System were transferred to the Pension System and served to determine the monthly annuity benefit Taxpayer received under the Pension System. 4


4 Upon Plaintiff's transfer to the Pension System, 327 months of membership service credit, forty-eight months of military service credit, and sixteen months of sick service credit were transferred to his account in the Pension System.


Taxpayer contends that he received the entire account balance from the Retirement System when he received the transfer refund. Taxpayer argues that since the service credits had already been transferred to the Pension System (effective, retroactively, on June 1, 1989), he received the entire "balance" (or "amount remaining") when he received his contributions and the accumulated interest on July 14, 1989.

Pivotal to this dispute is whether the Retirement System and Pension System are to be aggregated for purposes of determining "the balance to the credit" of Taxpayer's account.

Section 402(e)(4)(C) provides in relevant part:

(C) Aggregation of Certain Trusts and Plans.≈ For purposes of determining the balance to the credit of an employee under subparagraph ( A ) ≈

(i) all trusts which are part of a plan shall be treated as a single trust, all pension plans maintained by the employer shall be treated as a single plan .

(emphasis added). The State of Maryland (Taxpayer's employer) maintained both the Retirement System and the Pension System. Thus, under ╖ 402(e)(4)(C), the Retirement System and the Pension System must be treated as a single plan. 5


5 Plaintiff argues that the plans should not be aggregated because: (1) the Retirement System is a contributory retirement plan, funded primarily by the employee, whereas the Pension System, by and large, is not a contributory plan and is funded almost entirely by the State (i.e., the plans are not "comparable"); because the plans are not comparable, they should not be aggregated; and (2) a Senate Committee Report accompanying the Technical and Miscellaneous Revenue Act of 1988 states that with respect to partial distribution rollover , the "balance to the credit" is determined "immediately before such distribution and without aggregating plans of the same type ." (Emphasis added).

To begin with, section 402(e)(4)(C) does not require that plans be "comparable" in order to be aggregated. Next, the Senate Committee Report noted by Plaintiff referenced a different tax event (i.e., a partial distribution rollover, not a lump sum distribution). Finally, the statutory language of section 402(e)(4)(C) clearly states that "all plans maintained by the employer shall be treated as a single plan." For these reasons, the Court is not persuaded that the express aggregation provision of 402(e)(4)(C) does not apply.


A recent Tax Court Memorandum Decision 6 , Hoppe v. Commissioner , 68 T.C.M. 1517, 1994 WL 711952 (1994), involved almost identical facts. In Hoppe , a former State of Maryland employee received a transfer refund upon his election to withdraw from the Retirement System and accept a lesser annuity under the Pension System. The Judge in Hoppe decided that, under ╖ 402(e)(4)(C), the Retirement System and Pension System were to be aggregated for purposes of determining the "balance to the credit" of the employee's account. Consequently, because Taxpayer's service credits had been transferred to and remained in the Pension System and were utilized to determine the amount of his annuity from the Pension System, the transfer refund did not constitute the "balance to the credit" of the Taxpayer's account. Id .


6 A Tax Court Memorandum Decision is not published in the official Tax Court Reports and does not have the status of an officially published decision.


The Judge in Hoppe also made an analogy between the situation there and cases in which certain federal employees covered by the Civil Service Retirement System had elected to receive an "alternative form of annuity" in which they received an initial (and substantial) single payment and a reduced annuity paid periodically thereafter. In those cases, the Tax Court had distinguished between the employees who chose the "alternative annuity" and those who forfeited their right to a monthly annuity in exchange for a higher initial single payment. The judge in Hoppe likened the Taxpayer there, who, by electing to transfer to the Pension System, had chosen to receive an initial single payment (the "transfer refund") to be followed by a reduced monthly annuity, to a federal employee who had chosen the "alternative annuity." The judge accordingly held that these employees' elections had effectively allowed them to receive the "balance to the credit" in two parts , an initial single payment to be followed by a reduced monthly annuity based on their years of creditable service and salary. Therefore, because they had not received the entire "balance to the credit" of their account upon the initial payment, this payment did not qualify as a "lump sum distribution" under 402(e)(1). See Green v. Commissioner , 68 T.C.M. 167, 1994 WL 386184 (1994); Kirkland v. Commissioner , 67 T.C.M. 2976, 1994 WL 193859 (1994) ("[P]etitioner did not receive the entire balance to his credit in the retirement plan . . . as required in section 402(e)(4)(A). Instead petitioner chose the alternative annuity and in doing so elected to take a portion of the balance to his credit as an annuity, which is payable over many years. Thus, the payment is not a "lump sum distribution" within the meaning of section 402(e)(4)(A), and petitioner is therefore not entitled to use the [forward income-averaging method]"); Twombly v. Commissioner , 62 T.C.M. 597, 1991 WL 159925 (1991) (same).

The Court believes that the statutory analysis and reasoning of Hoppe is sound. Because the Retirement System and Pension System were both maintained by Taxpayer's employer, the State of Maryland, they are to be aggregated for purposes of determining the "balance to the credit" of an employee under section 402(e)(4)(A). Whereas Taxpayer received a refund of his contributions and the accumulated interest, his service credits were transferred to and remained within the Pension System. Taxpayer here had the option of "cashing out" of the Retirement System altogether and receiving a single cash payment reflecting his contributions, interest, and accumulated leave credits , while waiving any further pension rights. U.S. Mot. for Summ. J. at 17. By choosing to transfer to the Pension System, he opted instead to receive a refund of his contributions and accumulated interest along with reduced annuity payments in the future . Thus, in effect, Taxpayer elected to receive the "balance to the credit" of his account in two-parts: the refund payment and the future annuity payments. Consequently, he did not receive the "balance to the credit" of his account on July 14, 1989.


For the foregoing reasons:

1. Defendant's Motion for Summary Judgment is GRANTED.

2. Plaintiff's Motion for Summary Judgment is DENIED.

3. Judgment shall be entered for Defendant by separate Order.



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