11 Employee Benefits Cas. (BNA) 1192 | Tax Ct. | 1989
MEMORANDUM OPINION
FAY,
Year | Deficiency |
1983 | $ 2,025 |
1984 | 2,118 |
1985 | 2,375 |
The issues for decision are whether pursuant to either
1989 Tax Ct. Memo LEXIS 313">*318 The parties submitted this case fully stipulated pursuant to Rule 122. The stipulation of facts and attached exhibits are found accordingly, and incorporated herein by this reference.
When the petition was filed in this case, petitioners Sharon W. Mettler and Steven Mettler, husband and wife, resided in Bakersfield, California. Sharon W. Mettler will hereinafter be referred to as petitioner.
During the years at issue, petitioner was employed as a municipal judge by the County of Kern, State of California. Judges who are eligible for retirement benefits (see
In 1985, the State of California passed legislation (
1989 Tax Ct. Memo LEXIS 313">*320 The parties have stipulated that the Retirement Fund is a "qualified State judicial plan" as defined by Act section 131(c)(3) of the Revenue Act of 1978, Pub. L. 95-600, 92 Stat. 2782, as added by section 252 of the Tax Equity and Fiscal Responsibility Act of 1982, Pub. L. 97-248, 96 Stat. 324 (TEFRA). 4 The parties have also stipulated that the Retirement Fund was a tax-qualified plan under
1989 Tax Ct. Memo LEXIS 313">*321 Petitioner made mandatory employee contributions to the Retirement Fund in the amounts of $ 4,604 in 1983, $ 5,044 in 1984, and $ 5,656 in 1985 and deducted these amounts from the gross income shown on petitioners' Federal income tax returns for these years.
Petitioners' first argument is that petitioner's mandatory employee contributions to the Retirement Fund are excludable from gross income under the provisions of
1989 Tax Ct. Memo LEXIS 313">*322
In general, a cash basis taxpayer must report gross income for the year in which it is received.
An exception1989 Tax Ct. Memo LEXIS 313">*323 to the current inclusion of income exists for participants in retirement plans which are tax-qualified under
Generally, if a plan requires contributions from a participant, then the participant may neither deduct nor exclude from income those contributions to the plan, whether or not the plan is tax-qualified under
In
As we view the effect of the arrangement mandated by the Judges Retirement Law, we conclude that there are economic benefits and there is implied consent sufficient to require inclusion in petitioner's gross income of the amount of petitioner's contributions to the Judges Retirement Fund. [
See
Pursuant to
Section 131(c) of the Revenue Act of 1978, 92 Stat. 2782 made the amendments contained in section 131(a) of the Revenue Act of 1978 (adding
The parties in this case do not agree on the effect of
The parties also stipulated that the Retirement Fund was tax-qualified under
Petitioners argue that the mandatory employee contributions to the Retirement Fund are excludable from gross income under
1989 Tax Ct. Memo LEXIS 313">*329
The Code does not define the term "pick-up" used in
However, some State and local government plans designate certain amounts as being employee1989 Tax Ct. Memo LEXIS 313">*331 contributions even though statutes authorize or require the relevant governmental units or agencies to "pick up" some or all of what would otherwise be the employee's contribution. In other words, the governmental unit pays all or part of the employee's contribution but does not withhold this amount from the employee's salary. In this situation the portion of the contribution which is "picked up" by the government is, in substance, an employer contribution for purposes of Federal tax law, notwithstanding the fact that for certain purposes of State law the contribution may be designated as an employee contribution. Accordingly, the bill provides in the case of a government pick-up plan, that the portion of the contribution which is paid by the government, with no withholding from the employee's salary, will be treated as an employer contribution under the tax law. [Emphasis added.]
The Conference statement of managers explained the conference agreement regarding this provision as follows (H. Rept. 93-1280 (Conf.), p. 279 (1974),
To clarify present law, the substitute [i.e., the Conference1989 Tax Ct. Memo LEXIS 313">*332 Committee's substitute for the House bill and the Senate amendment] provides that amounts contributed to a qualified plan in taxable years beginning after December 31, 1973, are to be treated as employee contributions if they are designated as employee contributions under the plan. This rule does not apply, however, to government "pick-up" plans, where the contribution is paid by the government, with no withholding from the employee's salary, and these amounts would be treated as employer contributions, no matter how designated under the plan.
Thus,
In the instant case, the question before the Court is whether1989 Tax Ct. Memo LEXIS 313">*333 the petitioner's mandatory employee contributions were "picked up" within the meaning of
The Congress did not explain, in the statute or in the Committee reports, what factual elements we are to look to in order to determine whether the "employing unit picks up the [employee's] contributions". However, in
The employee is stuck with the employer's designation, no matter what it is. Until 1981 Illinois by statute called the contributions to the Judges' Retirement System employees' contributions. This remitted Judge Howell to the presumptive rule that the whole salary is taxable. We could not accept his argument that the state "picked up" his contributions even before 1982 -- because he never saw the money1989 Tax Ct. Memo LEXIS 313">*334 either before or after the new law and never has had any choice about its destination -- without either reversing one of the most venerable principle of taxation (that he who earns the money pays the full tax) or disregarding the rule that permits the employer to designate a contribution as made by it or by the employee. Illinois made one choice for years before 1982, and now (using the right to "pick up" contributions) it has made another. Judge Howell is bound by both.
This exalts form over substance, no doubt. In tax, however, form and substance often coincide. The election between employers' and employees' contributions is nothing but form, and the new designation option in
In
Petitioner's mandatory employee contributions for the years at issue are not excludable from gross income under any of the theories advanced by petitioners. Consequently, we hold that respondent properly included petitioner's mandatory employee contributions in their gross income*336 for the years at issue. 8
To reflect the foregoing,
Footnotes
1. Except where otherwise indicated, all section references are to sections of the Internal Revenue Code of 1954, as amended and in effect for the years at issue. All Rule references are to the Tax Court Rules of Practice and Procedure. ↩
2. See California Judges Retirement Law, Chapter 11, Title 8,
California Government Code sections 75000↩ -75110 (West 1986).3.
Section 75103.3 of the California Government Code provided as follows:75103.3 Notwithstanding any other provision of law, the state and the county may pick up, for the sole purpose of deferring income taxes thereon, as authorized by
Section 414(h)(2) of the Internal Revenue Code (26 U.S.C.A. Sec. 414(h)(2) ) and Section 17501 of the Revenue and Taxation Code, all of the normal contributions required to be deducted underSection 75102 to 75103 , inclusive, and paid into the Judges' Retirement Fund. The payments shall be reported as employer-paid normal contributions and shall be credited to the judge's account. Nothing in this section shall be construed to limit the authority of the state or the county to periodically eliminate the pickup by the state of all of the normal contributions required to be paid by a judge, as authorized by this section.This section shall not affect the computation of a judge's retirement allowance.↩
4. Section 252 of TEFRA provides as follows:
SEC. 252. DEFERRED COMPENSATION PLANS FOR STATE JUDGES.
Subsection (3) of section 131 of the Revenue Act of 1978 is amended by adding at the end thereof the following new paragraph:
"(3) Deferred compensation plans for State judges. --
"(A) In general. -- The amendments made by this section shall not apply to any
qualified State judicial plan. "(B) Qualified state judicial plan. -- For purposes of subparagraph (A), the term 'qualified State judicial plan' means any retirement plan of a State for the exclusive benefit of judges or their beneficiaries if --
"(i) such plan has been continuously in existence since December 31, 1978,
"(ii) under such plan, all judges eligible to benefit under the plan --
"(I) are required to participate, and
"(II) required to contribute the same fixed percentage of their basic or regular rate of compensation as judge,
"(iii) under such plan, no judge has an option as to contributions or benefits the exercise of which would affect the amount of includible compensation,
"(iv) the retirement payments of a judge under the plan are a percentage of the compensation of judges of that State holding similar positions, and
"(v) the plan during any year does not pay benefits with respect to any participant which exceed the limitations of
section 415(b) of the Internal Revenue Code of 1954↩ ." [Emphasis added.]5.
Sec. 457 provides as follows:SEC. 457 . DEFERRED COMPENSATION PLANS WITH RESPECT TO SERVICE FOR STATE AND LOCAL GOVERNMENTS.(a) Year of Inclusion in Gross Income. -- In the case of a participant in an eligible State deferred compensation plan, any amount of compensation deferred under the plan, and any income attributable to the amounts so deferred, shall be includable in gross income only for the taxable year in which such compensation or other income is paid or otherwise made available to the participant or other beneficiary.
(b) Eligible State Deferred Compensation Plan Defined. -- For purposes of this section, the term "eligible State deferred compensation plan" means a plan established and maintained by a State --
(1) in which only individuals who perform service for the State may be participants,
(2) which provides that (except as provided in paragraph (3)) the maximum that may be deferred under the plan for the taxable year shall not exceed the lesser of --
(A) $ 7,500, or
(B) 33-1/3 percent of the participant's includable compensation,
(3) which may provide that, for 1 or more of the participant's last 3 taxable years ending before he attains normal retirement age under the plan, the ceiling set forth in paragraph (2) shall be the lesser of --
(A) $ 15,000, or
(B) the sum of --
(i) the plan ceiling established for purposes of paragraph (2) for the taxable year (determined without regard to this paragraph), plus
(ii) so much of the plan ceiling established for purposes of paragraph (2) for taxable years before the taxable year as has not theretofore been used under paragraph (2) or this paragraph,
(4) which provides that compensation will be deferred for any calendar month only if an agreement providing for such deferral has been entered into before the beginning of such month,
(5) which does not provide that amounts payable under the plan will be made available to participants or other beneficiaries earlier than when the participant is separated from service with the State or is faced with an unforeseeable emergency (determined in the manner prescribed by the Secretary by regulation), and
(6) which provides that --
(A) all amounts of compensation deferred under the plan,
(B) all property and rights purchased with such amounts, and
(C) all income attributable to such amounts, property, or rights, shall remain (until made available to the participant or other beneficiary) solely the property and rights of the State (without being restricted to the provision of benefits under the plan) subject only to the claims of the State's general creditors.
A plan which is administered in a manner which is inconsistent with the requirements of any of the preceding paragraphs shall be treated as not meeting the requirements of such paragraph as of the first plan year beginning more than 180 days after the date of notification by the Secretary of the inconsistency unless the State corrects the inconsistency before the first day of such plan year.
* * *
(d) Other Definitions and Special Rules. -- For purposes of this section --
(1) State. -- The term "State" means a State, a political subdivision of a State, and an agency or instrumentality of a State or political subdivision of a State.
* * *
(7) Community property laws. -- The amount of includable compensation shall be determined without regard to any community property laws.
* * *
(e) Tax Treatment of Participants Where Plan or Arrangement of State is not Eligible. --
(1) In general. -- In the case of a plan of a State providing for a deferral of compensation, if such plan is not an eligible State deferred compensation plan, then --
(A) the compensation shall be included in the gross income of the participant or beneficiary for the first taxable year in which there is no substantial risk of forfeiture of the rights to such compensation, and
(B) the tax treatment of any amount made available under the plan to a participant or beneficiary shall be determined under section 72 (relating to annuities, etc.).
(2) Exceptions. -- Paragraph (1) shall not apply to --
(A) a plan described in
section 401(a) which includes a trust exempt from tax undersection 501(a) ,(B) an annuity plan or contract described in section 403,
(C) a qualified bond purchase plan described in section 405(a),
(D) that portion of any plan which consists of a transfer of property described in section 83, and
(E) that portion of any plan which consists of a trust to which
section 402(b) applies.(3) Definitions -- for purposes of this subsection --
(A) Plan includes arrangements, etc. -- The term "plan" includes any agreement or arrangement.
(B) Substantial risk of forfeiture. -- The rights of a person to compensation are subject to a substantial risk of forfeiture if such person's rights to such compensation are conditioned upon the future performance of substantial services by any individual.
(The subsequent amendments of this provision by sec. 491(d)(33) of the Deficit Reduction Act of 1984 (Pub. L. 98-369, 98 Stat. 494, 851), by sec. 1107(a) of the Tax Reform Act of 1986 (Pub. L. 99-514, 100 Stat. 2085, 2426), and by secs. 1011(e), 6064, and 6071(c) of the Technical and Miscellaneous Revenue Act of 1988 (pub. L. 100-647, 102 Stat. 3460, 3700, 3705), do not affect the instant case.↩
6.
T.C. Memo. 1979-490↩ .7.
Section 414(h) provides for the year at issue as follows:(h) Tax Treatment of Certain Contributions. --
(1) In general. -- Effective with respect to taxable years beginning after December 31, 1973, for purposes of this title, any amount contributed --
(A) to an employees' trust described in
section 401(a) , or(B) under a plan described in section 403(a) or 405(a),
shall not be treated as having been made by the employer if it is designated as an employee contribution.
(2) Designation by units of government. -- For purposes of paragraph (1), in the case of any plan established by the government of any State or political subdivision thereof, or by any agency or instrumentality of any of the foregoing, where the contributions of employing units are designated as employee contributions but where any employing unit
picks up the contributions, the contributions sopicked up↩ shall be treated as employer contributions. [Emphasis added.]8. See
(June 15, 1985), where under substantially similar facts we reached the same conclusion.Yegan v. Commissioner, T.C. Memo 1989-291">T.C. Memo 1989-291↩