In Uncategorized on 11/07/2018 at 16:19

This isn’t a promotion for a twelve-step program, although these are of great value. Rather, Judge Gustafson issues an off-the-bench designated hitter that sends off IRS and Paul C. Nordberg & Debra L. Nordberg, Docket No. 1426-17, filed 11/7/18, to figure out how much of Paul’s CSRS (Civil Service Retirement System, the Fed pension plan) payments are tax-exempt.

Paul’s argument that his pension is like an IRA (Roth or trad) craters when no separate account was set up for Paul per Section 408(q), because Paul didn’t make voluntary contributions, and CSRS doesn’t make separate accounts. And while Paul could have rolled his CSRS into a Roth IRA, he didn’t. If he had, he’d have had to pay tax on any earnings beyond his base contributions.

And he would have had other troubles that Judge Gustafson hadn’t to deal with. See my blogpost “The (Naked) Civil Servant,” 9/23/14; and note Judge Gustafson agreed with Judge Buch’s dissent and would have permitted the rollover then.

Paul also claims the Federal payout is far worse than the private sector would have paid him, but that’s tough. Congress made the plan, and Judge Gustafson can’t change it.

“Mr. Nordberg urges that it is unfair for the Government to give him a pension that (he reckons) is so far below what a fair return on his money would have yielded and, at the same time, to add insult to injury by taxing him on that disappointing return on his money. However, we do not have authority to depart from the laws Congress has enacted and to instead devise rules of taxation based on felt fairness.” Order, transcript at p. 9.

I note Paul’s Federal employment was on the staff of a member of Congress.

Paul claims the whole payment is exempt, but that loses. The Feds gave him 1099-Rs showing only $1550 was exempt out of $22,044 in one year at issue, and the same $1550 out of $21,720 for the other, despite the disparity in the amounts distributed.

Paul says, based on his after-tax contributions, he’d have to live to age 95 to get all his own money back tax-free.

Ever obliging, here’s Judge Gustafson: “We hope he will do so, but we share his feeling that this would be excessively optimistic from an actuarial point of view. OPM [Office of Personnel Management] began paying Mr. Nordberg’s pension in 2008, and we note that the Social Security Administration’s “Period Life Table, 2007” (2008 is not available) projects, for a male age 65, a life expectancy of about 17 years, not 30 years. See (We do not rely on this information to find a life expectancy.)

“Neither party has proposed a specific, alternative non-taxable amount, but our reading of section 72 suggests as follows: It appears that under section 72(d)(1)(B), Mr. Nordberg’s contributions (which totaled $46,476) were to be recovered over 260 months–i.e., at $179 per month, or $2,148 per year. That is, it appears that the non-taxable portion may have been not $1,550, as OPM evidently figured, but rather $2,148. If, as it seems, the non-taxable amount is not $1,550, then the deficiency will have to be recomputed. If that calculation of an alternative non-taxable amount of $2,148 is not correct, then the parties can propose the correct calculation….” Order, Transcript, at pp 10-11.

And they can have a Rule 155 beancount to do so at no extra charge.

Although this is an off-the-bencher, and therefore can’t be cited as precedent, I suggest practitioners can use the reasoning even in cases beyond those involving Federal pensions.

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