## Facts

- Barbara R. Zedaker was a California public school teacher covered by a state teachers’ retirement system.
- In 1986, she resigned, withdrew all funds in her retirement account, and paid the required taxes on that withdrawal.
- In 1991, after returning to teaching, she redeposited $149,553.01 into the retirement system to restore service credit and increase future annuity benefits.
- She retired in 2004 at age 60 and began receiving retirement annuity payments.
- In 2008, she received $19,100 in gross annuity distributions.
- The retirement system issued Form 1099-R reporting $19,100 gross and $13,311 as the taxable amount.
- Zedaker reported none of the $19,100 on her 2008 federal income tax return.
- The IRS issued a notice of deficiency for 2008, including an income tax deficiency and an accuracy-related penalty under I.R.C. § 6662(a).
- The Commissioner moved for summary judgment; Zedaker argued she should exclude 100% of each annuity payment until she recovered the full $149,553.01 redeposit.

## Issues

1. Whether I.R.C. § 72 permits a taxpayer to exclude the full amount of periodic annuity payments until all after-tax contributions are recovered, rather than applying the statutory pro rata exclusion ratio.
2. Whether Zedaker is liable for the accuracy-related penalty under I.R.C. § 6662(a) for failing to report the taxable portion of her annuity.
3. Whether summary judgment was proper because there was no genuine dispute of material fact and the Commissioner was entitled to judgment as a matter of law.

## Decision

- The court granted the Commissioner’s motion for summary judgment.
- The court held that I.R.C. § 72 requires pro rata recovery of the taxpayer’s investment in the contract over the expected term of the annuity; Zedaker could not exclude 100% of payments until her contributions were fully recovered.
- The court sustained inclusion of the taxable portion of the 2008 annuity payment as determined under § 72 and reflected on Form 1099-R.
- The court sustained the accuracy-related penalty under I.R.C. § 6662(a), finding negligence and no adequate showing of reasonable cause and good faith.

## Legal Principles

- Gross income includes pension and annuity payments unless a specific statutory exclusion applies. I.R.C. § 61(a), § 72(a).
- Under I.R.C. § 72(b) and applicable employee-annuity rules, the exclusion for “investment in the contract” is computed by a statutory formula allocating each periodic payment between (i) nontaxable return of basis and (ii) taxable income.
- A taxpayer may not replace § 72’s required allocation with a preferred “front-loaded” basis recovery method based on perceived fairness or personal life-expectancy concerns.
- Summary judgment is appropriate when material facts are undisputed and the dispute turns solely on statutory application. Tax Ct. R. 121.
- The Commissioner bears the burden of production on penalties, but the taxpayer bears the burden to establish reasonable cause and good faith to avoid § 6662(a). I.R.C. § 7491(c), § 6664(c).
- Disregarding an information return (such as Form 1099-R) and reporting none of an amount identified as partially taxable supports a finding of negligence for § 6662(a) purposes.

## Conclusion

The Tax Court held that I.R.C. § 72 mandated a pro rata exclusion ratio for Zedaker’s teacher retirement annuity, rejecting her attempt to exclude all payments until her redeposit was recovered, and it upheld an accuracy-related penalty because she failed to report any taxable portion shown on Form 1099-R without reasonable cause.


Zedaker v. Comm’r, T.C. Summ. Op. 2011-64 (2011)