Appeals from the United States Tax Court. (Tax Ct. Nos. 93-3499, 96-8028)
Before HAMILTON and LUTTIG, Circuit Judges, and GARBIS, United States District Judge for the District of Maryland, sitting by designation.
Affirmed by published opinion. Judge Garbis wrote the opinion, in which Judge Hamilton and Judge Luttig joined.
Appellants Allan R. and Joan K. Powell and Appellants Richard J. and Adele S. Montgomery appeal from decisions of the United States Tax Court holding them liable for assessed taxes on excess distributions from their respective retirement plans.
Succinctly put, the Internal Revenue Code permits employers to place part of the compensation paid to an employee into a qualified, tax-sheltered retirement account. The employer obtains a deduction for the contribution at the time it is made. However, the employee does not treat the amount of compensation placed into the plan as current income, and does not report the income earned in the plan prior to distribution. Only at the time the employee receives a distribution from the plan does he/she recognize income with regard to the distribution.
There are various restrictions upon the timing and amounts of distributions from a qualified pension plan. "Early" distributions *fn1 are subject to additional tax burdens, as are distributions in excess of permissible amounts.
The instant cases arise because the taxpayers chose to switch from one retirement plan to another and, in connection with their switches, received distributions of the funds in their accounts. These distributions were subject to income tax and resulted in Internal Revenue Service ("IRS") determinations of liability for the additional tax burdens at issue in these cases.
A "retirement distribution" is an amount distributed under an individual retirement plan or under a qualified employer plan. See Section(s) 4980A(e)(1). *fn2 A qualified employer plan is a "plan described in section 401(a) which includes a trust exempt from tax under section 501(a)," Section(s) 4980A(e)(2)(A), that the Commissioner has at any time determined to be a qualified pension plan pursuant to section 401. See Section(s) 4980A(e)(2).
Section 4980A imposes a fifteen percent excise tax on "excess distributions" from qualified retirement plans. An"excess distribution" is the amount of a retirement distribution which exceeds an exempt threshold. See Section(s) 4980A(c)(1). The exemption is normally $150,000. See Section(s) 4980A(c)(1)(A). However, if a distribution qualifies as a "lump sum distribution," the exempt threshold is increased five fold, to $750,000. See Section(s) 4980(c)(4).
Section 72(t) imposes a ten percent tax on the gross income included in "early" distributions from qualified retirement plans. *fn3 A distribution is "early" if made before the employee ...