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petitioner elected to withdraw the entire amount held by PEBSCO
on his behalf. Accordingly, the plan administrator paid
petitioner $9,525 during 2000. Petitioners did not include any
portion of that distribution as income on their 2000 tax return.
In the notice of deficiency, respondent determined that the
entire $9,525 constituted taxable gross income.
Employees of State and local governments, as well as
employees of certain tax-exempt organizations, may defer a
portion of their salaries to retirement years under what is
referred to as a section 457 plan. Under such plans, a
participating employee does not currently pay income tax on that
portion of his salary contributed to the plan, nor are the
earnings of the plan taxable. Upon retirement, however, the
distributions constitute gross income to the participant. The
parties agree with this basic premise.3
Petitioners’ position, however, is that, for the years 1988
through 1996, they prepared their own income tax returns, and, on
each of those returns, they included as income the gross amount
of petitioner’s wages without a reduction for the contributions
made to the section 457 plan. Following the year 1996,
petitioners engaged the services of a professional tax return
3In certain situations, the burden of proof is on respondent
under sec. 7491(a). This case is decided without regard to the
burden because, as reflected in the ensuing discussion, the facts
are not in dispute, and the issue is essentially legal in nature.
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Last modified: May 25, 2011