DocketNumber: Docket No. 10395-80
Citation Numbers: 42 T.C.M. 1171, 1981 Tax Ct. Memo LEXIS 198, 1981 T.C. Memo. 537
Filed Date: 9/24/1981
Status: Non-Precedential
Modified Date: 11/20/2020
MEMORANDUM FINDINGS OF FACT AND OPINION
HALL,
FINDINGS OF FACT
Some of the facts have been stipulated and are found accordingly.
Arline Bovee resided in Kodiak, Alaska, when she filed her petition.
Petitioner taught school in the State of Alaska for three years prior to moving to the State of Washington in 1968. As a teacher, petitioner was required to contribute a statutorily prescribed*199 percentage of her salary to the retirement fund of the Alaska Teachers' Retirement System ("ATRS").
Upon her re-employment, petitioner again became a member of ATRS and, pursuant to Alaska State law, became indebted to the retirement fund in the amount of the refund she received in 1968, including the interest paid to her, plus the amount, if any, deducted for administrative expenses.
If, when petitioner becomes eligible for retirement, she still has an outstanding indebtedness to the retirement fund, the may choose either: (1) to have her retirement benefits withheld until the total amount withheld is equal to the outstanding indebtedness; or (2) to cancel the outstanding indebtedness by accepting an actuarially reduced annuity for life.
*201 In 1977 petitioner paid the retirement fund $ 2,098.63 which it applied to the interest portion of her outstanding indebtedness. Petitioner deducted this amount as interest on her 1977 income tax return. In his notice of deficiency, respondent disallowed the deduction on the basis that the expense did not arise from a true debtor-creditor relationship.
OPINION
Petitioner contends that she had a bona fide indebtedness to the retirement fund of the Alaska Teachers' Retirement System ("ATRS"), and that she is therefore entitled to deduct as interest the amounts paid to the retirement fund and designated as such. Respondent, on the other hand, maintains that petitioner did not have a bona fide indebtedness to the retirement fund, and any payment thereto cannot be deducted as interest regardless of its characterization by Alaska State law. We agree with respondent.
Section 163(a) 3 allows "as a deduction all interest paid or accrued within the taxable year on indebtedness." Interest is that which one contracts to pay for the use of borrowed money, or compensation for the use or forebearance of money.
*203 In
Petitioner's case is not significantly different. 4 Petitioner has a choice of obtaining full retirement benefits by immediately repaying her contributions upon rejoining ATRS, paying them at a later time, or having them withheld from her benefits upon retirement. Petitioner also has the option of never making the payments and accepting reduced retirement benefits reflecting her actual contributions. These options do not create a legal obligation on petitioner to make these payments. Rather, these options merely allow petitioner, if she so choose, to purchase incremental retirement benefits 5 at various times and at various prices. The price of these incremental benefits increases because the actuarial*204 cost of providing petitioner with these incremental benefits increases. Petitioner's "interest" payments are merely part of the price of the incremental benefits, and are therefore not deductible. 6
*205
1. Petitioner was entitled to withdraw her accumulated contributions plus interest credited to her individual contributions account less any amounts she owed to the retirement fund because of previous withdrawals.
1a. Despite inferences to the contrary in her memorandum brief, there is no evidence in the record indicating that petitioner had any credible service, other than her previous teaching experience in Alaska, at the time she rejoined ATRS. See
2.
3. All statutory references are to the Internal Revenue Code of 1954, as in effect during the year in issue.↩
4. Petitioner's case is also not significantly different from the situation in
5. This increment is the difference between full retirement benefits and the actuarially or statutorily reduced retirement benefits. ↩
6. We are not unmindful that had petitioner borrowed the money from a bank and paid her indebtedness to the retirement fund she would be entitled to deduct interest paid to the bank. Petitioner's obligation in this hypothetical circumstance, however, would be a legally enforceable obligation to the bank. She would not have an option to forego the payments. Moreover, in certain situations, a taxpayer may be able to borrow money from her employee annuity contract and deduct interest paid thereon.