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said amount and included such tax as part of their total income
tax liability on page 2 of their Form 1040.
In the notice of deficiency, respondent determined that
petitioners did not qualify for 5-year forward averaging.
Accordingly, respondent treated the Transfer Refund, in the
amount of $186,758.54, as subject to the regular income tax.
Respondent contends that the Transfer Refund does not qualify for
forward averaging because it does not constitute a "lump sum
distribution" within the meaning of section 402(e)(4)(A).
OPINION
As a general rule, a distribution from a qualified plan,
such as the Retirement System, is taxed to the recipient in the
year distributed under the rules relating to annuities. Sec.
402(a)(1); see sec. 72. However, section 402(e)(1) provides for
a preferential forward averaging method of computing the tax on
certain such distributions. The parties agree that petitioners
are entitled to this preferential method of computing the tax on
the Transfer Refund if the Transfer Refund constitutes a "lump
sum distribution" within the meaning of section 402(e)(1)(A).8
8 The Tax Reform Act of 1986 replaced the 10-year forward
averaging method with a 5-year forward averaging method for lump
sum amounts distributed after Dec. 31, 1986, in taxable years
ending after such date. Tax Reform Act of 1986, Pub. L. 99-514,
sec. 1122(a)(2), (h)(1), 100 Stat. 2085, 2466, 2470. However,
the Tax Reform Act of 1986, secs. 1122(h)(5) and 1124, provide
transitional rules under which lump sum distributions made after
Dec. 31, 1986, will nevertheless continue to qualify, under
certain limited circumstances, for the more generous 10-year
(continued...)
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