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Malbon v. United States

filed: December 28, 1994.

A. SIDNEY MALBON AND HELENE J. MALBON, PLAINTIFFS-APPELLANTS,
v.
UNITED STATES OF AMERICA, DEFENDANT-APPELLEE.



Appeal from the United States District Court for the Western District of Washington. D.C. No. CV-93-05072-CRD. Carolyn R. Dimmick, District Judge, Presiding.

Before: Eugene A. Wright, Robert R. Beezer and Ferdinand F. Fernandez, Circuit Judges. Opinion by Judge Beezer.

Author: Beezer

BEEZER, Circuit Judge:

Taxpayers, A. Sidney Malbon and Helene Malbon, appeal the district court's denial of a refund for the 1987 tax year. The taxpayers contend that they are entitled to a refund for individual income tax paid on Sidney Malbon's lump-sum credit payment received pursuant to the Civil Service Retirement System ("CSRS"). The taxpayers also contend that the "deemed deposit" received as part of the lump-sum payment was not taxable in 1987 because it was not actually received by the taxpayers. The district court granted summary judgment in favor of the United States of America. We have jurisdiction pursuant to 28 U.S.C. § 1291 and affirm.

I

The pertinent facts are undisputed. Sidney Malbon was an employee of the United States of America for more than 32 years. During that time period he participated in the CSRS and made mandatory contributions in the amount of $47,783.64. He retired on December 31, 1986. At the time of his retirement he was informed by the Office of Personnel Management ("OPM") that he could either receive his annuity or elect an alternative form of annuity pursuant to 5 U.S.C. § 8343a. The alternative form of annuity provided Malbon with a lump-sum payment of $48,135.64 and a reduced annuity.*fn1

Malbon elected the alternative form of annuity. In 1987, Malbon received $47,783.64 in a lump-sum payment and $22,143 as an annuity. He calculated the tax on the income in accordance with the instructions received from the Internal Revenue Service. In 1991, Malbon filed an amended tax return claiming a refund of $13,525.14 for the 1987 tax year based on his Conclusion that the lump-sum payment was a tax free refund of his after-tax contributions and that he had not actually received the deemed deposit. The Internal Revenue Service disallowed the refund claim and the district court entered summary judgment in favor of the United States of America. Malbon v. United States, 846 F. Supp. 900 (W.D. Wash. 1994).

II

We review de novo the district court's grant of summary judgment. Arnes v. United States, 981 F.2d 456, 458 (9th Cir. 1992).

III

Federal employees eligible to participate in the CSRS contribute a portion of their salary to the Civil Service Retirement and Disability Fund ("Fund"). The employing agency makes a mandatory deduction from the employee's salary. 5 U.S.C. § 8334(a)(1). The amount is withheld from after-tax income and is therefore taxable the year the salary deduction is made. Contributions by the employing agency and any accrued interest are taxable upon distribution to the eligible employee. 26 U.S.C. §§ 72, 402(a).

Employees who leave federal service after meeting the eligibility requirements for retirement are entitled to a basic annuity. 5 U.S.C. § 8339. The amount of the basic annuity is determined by years of service and salary at retirement. 5 U.S.C. § 8339. In 1986, Congress provided that federal employees who met the retirement eligibility requirements and retired after June 5, 1986 could elect the basic annuity or an alternative form of annuity. 5 U.S.C. §§ 8342(a), 8343a.*fn2 The alternative annuity provided the employee with a lump-sum payment at retirement equal to the employee's contributions and an annuity in a reduced sum. 5 U.S.C. § 8343a. The alternative form of annuity is ultimately designed to be "actuarially equivalent to the present value" of the basic annuity. 5 U.S.C. § 8343a(c).

Taxation of annuities is governed by 26 U.S.C. § 72.*fn3 An annuity payment consists of both taxable income and a nontaxable return of the employee's contribution. Section 72 provides that the entire annuity payment is included in gross income and then a proportional amount of the nontaxable contribution is excluded. The amount of the nontaxable component is determined by dividing the amount of the employee's contribution by the number of annuity payments projected in life-expectancy tables. 26 U.S.C. § 72; 26 C.F.R. §§ 1.72-1; 1.72-9. The employee's contribution is recovered without further payment of income tax over the projected life of the annuity contract. LaFargue v. Commissioner, 800 F.2d 936, 938 (9th Cir. 1986). Where the annuity payments cease before the employee's entire contribution is recovered, the amount of the unrecovered contribution is allowed as a deduction on the taxpayer's final income tax return. 26 U.S.C. § 72(b)(3).

The alternative form of annuity provides, however, that the employee may receive at retirement a lump-sum payment equal to the amount of the employee's contributions to the Fund. Section 72(e) governs any amount "received under an annuity, endowment, or life insurance contract, and . . . is not received as an annuity." 26 U.S.C. ยง 72(e)(1)(A). Section 72(e)(2)(A) provides that an amount subject to section 72(e) is included in gross income when "received on or after the ...


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