James Curtis Barrett - Page 13

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          annuity to be included in gross income.  Section 72(b)(1)                   
          excludes from gross income “that part of any amount received as             
          an annuity * * * 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).”  As mentioned above, petitioner’s investment in the                 
          contract was $71,244.41.5  His annuity starting date was February           
          1, 1996, the date on which he received his first payment from the           
          plan.  See sec. 72(c)(4).                                                   
               Under section 72(c)(3), employers can determine the expected           
          return under the contract by reference to actuarial tables.                 
          Alternatively, they can use a simplified “safe-harbor” method,              
          under which “Investment/Number of Monthly Payments = Tax free               
          portion of monthly annuity”.  See Notice 88-118, 1988-2 C.B. 450,           
          451.6  For distributees aged 56 to 60 on the annuity starting               
          date, the total number of monthly payments is 260.  Id.                     
               Ms. Wong testified that the city and county followed                   
          precisely the method set forth in Notice 88-118, supra to                   

               5  Petitioner testified that he contributed $137,293.29 to             
          the plan.  The plan’s records show, however, that petitioner                
          contributed only $71,244.41.  The remaining $66,048.88 of his               
          retirement account balance represented accumulated interest,                
          which is not part of his investment in the contract.  See sec.              
          72(c)(1); Newman v. Commissioner, 68 T.C. 433 (1977).                       
               6  Notice 88-118, 1988-2 C.B. 450, was replaced by Notice              
          98-2, 1998-1 C.B. 266, which applies to annuities with an annuity           
          starting date after Nov. 18, 1996.  Because petitioner’s annuity            
          starting date was Feb. 1, 1996, Notice 88-118, supra controls.              

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