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The pension plan administered by the MTRS is a qualified
defined benefit pension plan as provided for in section 401(a).
The taxation of the distributee of such a plan is governed by
section 402(a). Section 402(a) provides that the amounts
distributed under a section 401(a) plan shall be taxable to the
distributee under section 72.
Section 72 provides in general that amounts received under
an annuity contract are includable in gross income except to the
extent that such amounts are considered to be a reduction or
return of consideration paid. Specifically, section 72(a)
provides that unless otherwise provided, gross income includes
any amount received as an annuity under an annuity contract.
Section 72(b), however, provides that a portion of the annuity
will be excluded from gross income. In particular, gross income
does not include that part of any amount received as an annuity
under an annuity contract which bears the same ratio to such
amount as the investment in the contract (as of the annuity
starting date) bears to the expected return under the contract
(as of such date). See sec. 72(b); sec. 1.72-4, Income Tax Regs.
This ratio is referred to as the “exclusion ratio.” Sec. 72(b);
sec. 1.72-4, Income Tax Regs. Section 72(c), as relevant here,
defines the investment in the contract to be the aggregate amount
2(...continued)
See, e.g., secs. 1(f), 151(d)(4); Bartley v. Commissioner, T.C.
Memo. 1998-322 n.10.
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Last modified: May 25, 2011