MARYLAND STATE RETIREMENT 'TRANSFER REFUND' WAS NOT QUALIFIED.

                 IN THE UNITED STATES DISTRICT COURT

[1] This matter is before the Court on the defendant's Motion for Summary Judgment. The plaintiffs, Robert A. Wantz ["Wantz"] and Cassandra H. Wantz, seek a refund of certain monies paid to the United States as Federal taxes in the 1990 tax year. A hearing was held before this Court on December 7, 1998.

[2] On their 1990 Form 1040, the plaintiffs reported as income a "transfer refund" payment of $399,873.00 from the Maryland State Retirement Agency. The plaintiffs then filed a refund claim with the Internal Revenue Service ["IRS"], arguing that the transfer refund met all the qualifications for 10-year income averaging and that the transfer refund was not a retirement distribution and, thus, not subject to the section 4980A excise tax. On March 27, 1995, the IRS issued a notice of disallowance of the plaintiffs' claim for the refund. This suit was filed on March 12, 1997.

I.

[3] In 1927, the State of Maryland created the Teachers' Retirement System ["Retirement System"] fund to provide retirement benefits for teachers employed by the State. The Retirement System required a non-deductible five percent contribution from all participants. Wantz began teaching for the State of Maryland in September 1957 and enrolled in the Teachers' Retirement System. Due to lack of funding, the State did not allow any new enrollees in the Retirement System after December 31, 1979; but, created the Maryland Teachers' Pension System ["Pension System"] to provide retirement benefits for employees of the State hired on or after January 1, 1980. However, Wantz, along with many other teachers, remained in the Retirement System. Both Systems were qualified benefit plans within the meaning of 26 U.S.C. section 401(a).

[4] The State then encouraged retirement participants such as Wantz to transfer to the Pension System and upon transfer, participants would receive distributions of their paid-in nondeductible contributions to the System, plus earnings on such contributions. On May 7, 1990, Wantz applied to transfer his membership in the Retirement System of the State of Maryland to the Pension System of the State of Maryland. On the same date, Wantz applied for service retirement to be effective July 1, 1990. Wantz's transfer from the Retirement to the Pension System was effective June 1, 1990, one month prior to the effective date of his retirement. At that time, Wantz was younger than 59.5 years of age.

[5] In 1990, Wantz received from the Retirement System all of his paid-in contributions plus the interest in excess of that actually earned thereon. The plaintiffs included the entire taxable portion of this payout in gross income for 1990, and paid an excess distribution excise tax pursuant to 26 U.S.C. section 4980A. Plaintiffs seek a refund for this excise tax payment.

II.

[6] This case presents two issues. First, whether the plaintiffs were entitled to compute their tax through income averaging. Second, if the plaintiffs are not entitled to income averaging, whether the transfer refund paid to the plaintiffs was a retirement distribution or a permissible withdrawal.

[7] The United States moves for summary judgment on the grounds that the plaintiffs are not entitled to a refund of their 1990 Federal taxes because plaintiffs' transfer refund was not a lump sum distribution qualified for ten-year forward averaging and that the distribution Wantz received from the plan was an excess distribution from a retirement plan subject to the 15% excise tax.

III.

[8] Summary Judgment may be granted in a civil case where "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits. . . . show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed. R. Civ. P. 56(c). In considering a motion for summary judgment, the Court must consider the facts and draw any inference in the light most favorable to the nonmoving party. Tuck v. Henkel Corp., 973 F.2d 371, 374 (4th Cir. 1992), cert. denied, 507 U.S. 918 (1993). "[T]here is no issue for trial unless there is sufficient evidence favoring the nonmoving party for a jury to return a verdict for that party." Anderson v. Liberty Lobby, 477 U.S. 242, 249 (1986). If a motion for summary judgment is properly made and supported, the burden shifts to the opposing party to show that a genuine dispute exists. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586 n.11 (1986). Because there are no genuine disputes as to any material facts, this case is ripe for summary judgment.

IV.

[9] Normally, distributions from qualified retirement plans must be included in a taxpayer's gross income in the year of receipt. See Edwards v. Commissioner, 906 F.2d 114, 115 (4th Cir. 1990) (citing 26 U.S.C. section 402(a)(1)). However, certain qualified lump sum distributions are entitled to five or ten-year averaging treatment. The plaintiffs argue they are entitled to ten-year averaging. The Government argues that the plaintiffs are not qualified because it was not a lump sum distribution.

[10] The Government argues that the transfer refund is not qualified because it was not a distribution or payment within one taxable year of the receipt of the balance to the credit of an employee. See, 26 U.S.C. section 402(e)(4)(A). The Government contends the plaintiffs do not qualify because there was not a distribution "of the balance to the credit." Wantz did not receive any distribution from his accumulated service and military credits. Indeed, the balance to the credit was transferred to his Pension System account and not distributed to him. Furthermore, Wantz is receiving annuity payments from the Pension System. Because Wantz received only a portion of the balance to his credit, he did not receive a lump sum distribution within the meaning of 26 U.S.C. section 402(e)(4)(A), and is hence ineligible for income averaging.

[11] The plaintiffs have now conceded this issue based on the Powell decision. The Fourth Circuit held in Powell v. Commissioner, 129 F.3d 321 (4th Cir. 1997), cert. denied, 118 S. Ct. 1522 (1998), that taxpayers did not receive the balance to the credit in the Maryland Retirement System, and thus, they did not receive a lump sum distribution. Accordingly, this Court finds Wantz did not receive a lump sum distribution.

V.

[12] The Internal Revenue Code levies a 15% excise tax on "excess distributions" from retirement plans. 26 U.S.C. section 4980A(a). An excess distribution consists of all distributed amounts during the taxable year in excess of $150,000.00. 26 U.S.C. section 4980A(c)(1)(A); Powell, 129 F.3d at 323.

[13] The issue is whether the transfer refund was a disqualifying retirement distribution or a permissible withdrawal of excess, non-deductible employee contributions. Plaintiffs argue that because at all times relevant to the Complaint, the Retirement System was a qualified defined benefit plan within the meaning of 26 U.S.C. section 401(a), the transfer refund cannot be a retirement distribution as defined in 26 U.S.C. section 4980A. A plan is qualified where payment is made upon retirement, disability or death whereas a plan which allows payment at other times is disqualified. In Powell, the Fourth Circuit ruled that the Retirement System is a qualified plan. Powell, 129 F.3d at 325. The plaintiffs argue that a retirement distribution made from the Retirement System at any time other than retirement, death or disability would disqualify the plan, and because the plan has not been disqualified, the transfer refund cannot be a retirement distribution. The plaintiffs argue that the only other thing it could be is a permissible withdrawal of excess, non-deductible employee contributions. However, the Fourth Circuit explicitly rejected plaintiffs' theory in Powell, 129 F.3d at 325.

[14] The plaintiffs further argue that Congress intended to penalize only those withdrawals of tax deductible contributions. Here, plaintiffs argue that the contributions were not tax deductible so there would be no abuse of the system and that penalties and additions to the tax, which were designed to prevent abuse of tax benefits available from qualified employer plans, should not be extended to distributions or payment from plans, such as this, which are not tax-favored. However, the Court may not consider this argument because it was not raised in plaintiffs' administrative claim. See Bowles v. United States, 820 F.2d 647, 648-49 (4th Cir. 1987) (taxpayer barred from raising in refund suit grounds for recovery not previously set forth in claim for refund). Even if the argument could be considered, the Fourth Circuit has rejected the argument, ruling that the "fact that the New Pension System is a government plan, and thus not one as to which the employer has claimed an income tax deduction, does not change its status as a 'qualified employer plan' under the statutory provisions here at issue." Powell, 129 F.3d at 325.

[15] The Fourth Circuit in Powell has determined that the monies paid out to employees of the Retirement System pursuant to the transfer refund distribution scheme at issue here are retirement distributions. See id. at 325-26. Powell defined a retirement distribution as an amount distributed under an individual retirement plan or under a qualified employer plan, 129 F.3d at 323. Hence, the Fourth Circuit has interpreted the monies paid to plaintiffs by the Retirement System to be a retirement distribution subject to the fifteen percent excise tax imposed by 26 U.S.C. section 4980A. Because the Pension System was determined to be a qualified plan, the transfer refund was a distribution from a qualified employer plan and thus subject to the tax. Accordingly, the plaintiffs are subject to the excise tax and are not entitled to a refund.

[16] In summary, the Court finds the plaintiffs were appropriately taxed for the retirement distribution. Based on the foregoing analysis, the defendant's Motion for Summary Judgment will be granted.

                                   Joseph H. Young