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SIANO v. UNITED STATES

September 12, 1996

RUSSELL L. SIANO, LORRAINE I. SIANO, PETER V. MARCOLINE, JR., and SUSAN N. MARCOLINE, Plaintiffs,
v.
UNITED STATES OF AMERICA, Defendant.



The opinion of the court was delivered by: BLOCH

 BLOCH, District J.

 Presently before this Court are cross-motions for summary judgment filed by plaintiffs and defendant pursuant to Fed. R. Civ. P. 56. For the reasons set forth in this opinion, this Court will grant defendant's motion and deny plaintiffs' motion.

 I. Factual background

 This is an action for the recovery of taxes assessed against plaintiffs under the Internal Revenue Code. The uncontroverted facts are as follows. *fn1"

 Plaintiffs are two married couples; Lorraine and Russell Siano, and Susan and Peter Marcoline. Prior to the institution of this action, plaintiffs Russell Siano and Peter Marcoline (plaintiffs) had been federal employees, Mr. Siano having been employed with the Inspection Service of the United States Postal Office and Mr. Marcoline with the United States Attorney's Office. Because they were "federal employees hired prior to January 1, 1984, [plaintiffs] were eligible to participate in the Civil Service Retirement System by contributing part of their salary to the Civil Service Retirement and Disability Fund." George v. United States, 30 Fed. Cl. 371, 373 (1994), aff'd., 90 F.3d 473 (Fed. Cir. 1996) See also 5 U.S.C. § 8348.

 The Civil Service Retirement Act (CSRA), 5 U.S.C. § 8331, et seq., allows for an "immediate" retirement at age 50 for a special class of federal employees involved in "law enforcement," entitling such retirees to an annuity. See 5 U.S.C. § 8336(c) (1). Plaintiffs retired on November 30, 1990, both at age 50, pursuant to the "law enforcement" exception of the CSRA. *fn2"

  Upon retirement, under the Federal Employees Retirement System, 5 U.S.C. § 8401, et seq. (FERS), *fn3" plaintiffs were entitled to choose one of three forms of annuities: (1) a basic annuity under 5 U.S.C. § 8339; (2) a basic annuity plus a survivor annuity under 5 U.S.C. § 8341(b) (1); or (3) an "alternative form of annuity" under 5 U.S.C. § 8343a(b). See George, 30 Fed. Cl. at 373. The "alternative form of annuity" has two components: first, the retiree receives a lump sum credit; *fn4" and, second, the retiree receives a monthly annuity, the monthly annuity thereby being reduced to reflect the payment of the lump sum credit. *fn5" George, 30 Fed. Cl. at 374; see also 5 U.S.C. § 8343a (b). Plaintiffs both selected the "alternative form of annuity" (alternative annuity) under 5 U.S.C. § 8343a (b). *fn6" Accordingly, both received the lump sum portions of their alternative annuities in two installments; the first in 1991 and the second in 1992. In addition, both began receiving reduced monthly annuities shortly after retirement.

 Section 72 (t) of the Internal Revenue Code imposes a ten percent additional tax on early distributions from qualified retirement plans. Pursuant to 26 U.S.C. § 72 (t) (1), the Sianos paid a ten percent additional tax on the lump sum portion of Mr. Siano's alternative annuity, with respect to tax years 1991 and 1992. Likewise, the Marcolines paid a ten percent additional tax on the second installment of the lump sum portion of Mr. Marcoline's alternative annuity, with respect to tax year 1992. *fn7"

 Thereafter, in January, 1995, the Sianos filed claims with the IRS Service Center for refunds of the ten percent additional tax paid upon the lump sum portion of Mr. Siano's alternative annuity. The District Director of the IRS subsequently disallowed the Sianos' requested refunds in October, 1995. Similarly, in April, 1993, the Marcolines filed a claim for a refund of the ten percent additional tax paid upon the second installment of the lump sum portion of Mr. Marcoline's alternative annuity. *fn8" Subsequently, in October, 1993, the IRS disallowed the Marcolines' claim for a refund. The disallowance was thereafter appealed to the Appeals Office of the IRS, and the appeal was denied in March, 1995.

 As a result of these events, plaintiffs filed the instant action, claiming that the ten percent additional tax imposed on the lump sum portions of plaintiffs' alternative annuities was erroneously and illegally assessed and collected by the IRS. Plaintiffs have raised claims against defendant for recovery or the amounts paid pursuant to the ten percent additional tax, plus interest and attorney's fees.

 The parties have filed cross-motions for summary judgment, which are presently before this Court. In their motion for summary judgment, plaintiffs raise two arguments in support of their claims: (1) the lump sum portions of plaintiffs' alternative annuities were exempted distributions pursuant to 26 U.S.C. § 72 (t) (2) (A) (iv); and (2) the imposition of the ten percent additional tax on plaintiffs' lump sum distributions is in direct conflict with the statutory scheme of the CSRA. Plaintiffs have also requested litigation costs and reasonable attorney's fees.

 Defendant, on the other hand, contends that: (1) plaintiffs' lump sum distributions were "early distributions" from a qualified retirement plan and, thus, were properly subject to the ten percent additional tax under 26 U.S.C. § 72 (t) (1); and (2) the imposition of the ten percent additional tax on plaintiffs' lump sum distributions is not at odds with the statutory scheme of the CSRA. Defendant further contends that plaintiffs have improperly and prematurely requested attorney's fees.

 In their motions for summary judgment, the parties essentially take opposite positions on the same underlying issues. For this reason, the Court will address the parties' motions together, discussing each of the plaintiffs' claims in turn. For the reasons stated below, this Court will grant defendant's motion for summary judgment and deny plaintiffs' motion.

 II. Summary judgment standard

 Summary judgment may be granted if "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine I 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). "Rule 56 mandates the entry of summary judgment, after adequate time for discovery and upon motion, against the party who fails to make a showing sufficient to establish the existence of an element essential to that party's case, and on which that party will bear the burden of proof at trial." Celotex Corp. v. Catrett, 477 U.S. 317, 322, 91 L. Ed. 2d 265, 106 S. Ct. 2548 (1986).

 In considering a motion for summary judgment, this Court must examine the facts in a light most favorable to the party opposing the motion. International Raw Materials Ltd. v. Stauffer Chemical Co., 898 F.2d 946, 949 (3d Cir. 1990). The burden is on the moving party to demonstrate that the evidence creates no genuine issue of material fact. Chipollini v. Spencer Gifts, Inc., 814 F.2d 893, 896 (3d Cir.) (en banc), cert. dismissed, 483 U.S. 1052 (1987). Where the non-moving party will bear the burden of proof at trial, the party moving for summary judgment may meet its burden by showing that "the evidentiary materials of record, if reduced to admissible evidence, would be insufficient to carry the non-movant's burden of proof at trial." Id.; Celotex, 477 U.S. at 322.

 III. Discussion

 A. Plaintiffs' claim that the lump sum distributions were exempt from the ten percent additional tax

 Section 72 of the Internal Revenue Code provides the rules for determining the tax treatment of amounts received under an annuity. See 26 U.S.C. § 72. Section 72 (t), in particular, imposes a ten percent additional tax on early distributions from qualified retirement plans. *fn9" Specifically, § 72 (t) (1) provides as follows:

 
If any taxpayer receives any amount from a qualified retirement plan. . .the taxpayer's tax under this chapter for the taxable year In which such amount is received shall be increased by an amount equal to ten percent of the portion of such amount which is includible in gross income.

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