Barney K. and Lindy W. Huang - Page 15

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          of $5,008.  Petitioners dispute this determination in part, as              
          explained below.                                                            
               In general, gross income includes all income from whatever             
          source derived, including income from pensions and annuities.               
          Sec. 61(a)(9), (11); sec. 72(a).  However, portions of certain              
          annuity payments, representing a ratable recovery of a taxpayer’s           
          investment therein, may be excludable from income.  Sec. 72(b),             
          (d).                                                                        
               Previously taxed contributions to a section 401(a) qualified           
          plan which are returned to the contributing taxpayer before the             
          annuity starting date are not included in income in the year they           
          are returned.  Secs. 72(e)(2)(B)(ii), 402(a).  Interest earned on           
          such contributions, however, is included in gross income unless             
          it is “rolled over” into another eligible retirement plan such as           
          an IRA.  Secs. 72(e)(2)(B)(i), 402(c)(1).                                   
               In 1996, petitioners received pension and annuity payments             
          from Aetna Life Insurance Company and from the Teachers’ and                
          State Employees’ Retirement System of North Carolina (TSERS),               
          which is a section 401(a) qualified plan.  The Forms 1099-R,                
          Distributions From Pensions, Annuities, Retirement or Profit-               
          Sharing Plans, IRAs, Insurance Contracts, etc., attached to                 
          petitioners’ return listed taxable distributions of $14,716 from            
          Aetna and $19,855 from TSERS.  However, petitioners included in             
          gross income only $32,397, or $2,174 less than the amounts                  






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