Zedaker v. Commissioner

Zedaker taught in California, resigned in 1986, and withdrew and paid tax on her retirement funds. She returned to teaching in 1991 and redeposited $149,553.01 into her state retirement account. She retired in 2004 at age 60, and her annuity began. In 2008 her gross annuity distribution was $19,100, of which the state reported $13,311 as taxable, but she reported none of it. The IRS issued a deficiency under Internal Revenue Code section 72(d), which lets a taxpayer exclude only the portion of each annuity payment equal to her contribution divided by the number of anticipated payments. Zedaker argued that all payments should be tax-free until she fully recovered her contribution and taxable in full afterward; otherwise she would not recover her contribution until age 90. The IRS moved for summary judgment.

Whether a taxpayer may exclude from gross income only a proportional amount of each employer-plan annuity payment-equal to her contribution divided by the number of anticipated payments-rather than recovering her entire contribution tax-free before any payment is taxed.