Thank You For Submiting Feedback!
26 U.S.C.S. § 72(a) generally requires that any amount received as an annuity be included in gross income. Section 72(d) allows taxpayers to exclude the benefits that represent a return of their own investment in a qualified employer retirement plan under the simplified method for recovery of investment. The simplified method excludes from gross income the amount of any monthly annuity payment that does not exceed the amount obtained by dividing the taxpayer's contribution to the plan by the number of anticipated payments. § 72(d)(1)(B). If the age of the annuitant on the annuity starting date is more than 55 but not more than 60, the number of anticipated payments is 310. § 72(d)(1)(B)(iii).
During the taxpayer wife’s tenure as a teacher, she made contributions to, and accumulated interest in, the California State Teachers' Retirement System (CalSTRS). She subsequently retired from teaching, and on July 1, 2004, her CalSTRS retirement annuity became effective. The Commissioner contended that the taxpayer could exclude from gross income each month a portion of the annuity payment under the simplified method in § 72(d). In contrast, the taxpayers argued that under the simplified method, it would take 25 years for the taxpayer to recover her investment in the contract, at which time she would be 90 years old and beyond her life expectancy. They suggested that the court adopt a "first in, first out" formula under which all payments received under the annuity would be tax free until the taxpayer recovered her initial investment.
Did the Commissioner correctly determine that petitioners were required to report in gross income $13,311 of a $19,100 retirement annuity distribution for 2008?
The court noted that it was a court of limited jurisdiction and was not at liberty to make decisions based solely in equity. The court was constrained by the law to hold that the taxpayers were required to include in gross income the portion of the gross distribution as determined by the Commissioner under § 72(d).