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gross pension payment of $26,313 annually.
The formula used by the MTRS to determine the taxable
portion of petitioner’s pension based on his after-tax
contributions (the formula) is in accordance with the rules
prescribed by the regulations promulgated under the Internal
Revenue Code. See sec. 1.72-4, Income Tax Regs. According to
the formula, the portion of petitioner’s pension income that is
subject to tax in 1996, based on the nominal value of his after-
tax contributions and the age of petitioner at his retirement in
1988, is $24,843.
Petitioner reported $22,979 as the amount of his pension
that was subject to tax in 1996. To arrive at this figure,
petitioner first adjusted the basis in his retirement annuity by
an inflation factor to take account of inflation between the date
of his contributions to the retirement plan and the annuity
starting date. According to his calculation, petitioner’s basis
as of his retirement in 1988 was $57,972 instead of the nominal
basis of $36,734. Petitioner then adjusted the basis in his
annuity as of the date of his retirement to account for expected
inflation over his actuarial life.
Discussion
Petitioner’s total pension income in 1996 was $26,313.
Pursuant to the applicable regulation, which allows for recovery
of petitioner’s basis in the pension, the taxable portion of
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