Retiree failed to prove that pension income should have been excluded from taxes or that taxes were paid

A retiree did not provide sufficient evidence that his pension distributions qualified for exclusion from federal income tax or that he had paid income tax when his employer contributed to the pension trust fund, according to the U.S. Court of Federal Claims. Therefore, the retiree was not awarded a refund of the amount he paid for the assessed taxes.

For approximately 25 years, a retiree was employed by a company as an inventory control checker and was a member of a union that administered a pension trust fund. The fund required the employer to make weekly contributions for the union employees, including the retiree. Only the employer was allowed to contribute to the fund. The schedule for employer contributions was set forth in a collective bargaining agreement between the employer and the union. After the retiree received his first monthly pension distribution, he filed Form W-4P, indicating that he did not want any federal income tax withheld from future pension payments. For the rest of the first year of pension distributions to the retiree, the fund reported the retiree’s federal tax withholding as $0.00 per month.

After the end of that year, the retiree received a Form 1099-R that reported distributions of $19,365.00, all of which was listed on the form as taxable income. When the retiree filed Form 1040A, he reported the $19,365.00 in pension payments, but he claimed $0.00 as taxable income. The IRS issued a Notice of Assessment to the retiree because the employer had reported that retiree’s pension payments were taxable income, contrary to the retiree’s reporting on his federal income tax return. After the IRS sent the retiree a Notice of Deficiency, the retiree appealed the notice, but later paid the assessed taxes, including interest.

About eleven months later, the IRS’s Appeals Team Manager rejected the retiree’s appeal, disallowing the retiree’s refund claim. The retiree filed a suit, seeking a refund the amount he paid for the assessed taxes, including interest, as an alleged overpayment of taxes. The Government filed a motion for summary judgment.

Since the pension trust fund was a qualified employer plan, all income received by the retiree from the pension trust fund, either as a pension or annuity, should be included in his gross income and subject to ordinary federal income tax, unless the income was previously taxed or otherwise was exempt. The amount that could be excluded should be calculated using the “exclusion ratio,” which is the amount that a taxpayer has invested in a pension or annuity. But in this case, the retiree invested nothing, the court said. Contributions came exclusively from the employer, as provided in plan documents. The court explained that the retiree’s election on Form W-4P to opt out of withholding federal taxes from his monthly payments only affected his monthly withholding. It did not affect the federal income tax due.

The court concluded that the retiree did not provide any evidence that could be construed by a reasonable fact-finder as supporting the position that he was exempt from federal income tax on his pension distributions. Therefore, the retiree did not establish that any genuine issue of fact existed as to whether he was subject to federal income tax on payments received from the pension trust fund.

As to whether taxes had already been paid on the pension payments, the court noted that the parties had agreed that the retiree never made a contribution to the pension trust fund. Instead, the employer made weekly pension contributions for the retiree, pursuant to the union agreement.

The court stated that an essential element of the retiree’s case was showing that he paid taxes on the employer’s pension contributions. However, despite the fact that the retiree was given numerous opportunities to produce documents that could justify his allegations that he paid income tax on the amounts his employer contributed to the pension trust fund, he did not offer evidence sufficient to establish the presence of a genuine issue of fact as to whether he made such a payment. Therefore, as a matter of law, the court granted the Government’s motion for summary judgment.

Source: Blue v. United States (Fed Cl).

For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer’s Benefits Reports.

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