Board of Contract Appeals General Services Administration Washington, D.C. 20405 ________________________________ December 11 , 1998 ________________________________ GSBCA 14436-RELO In the Matter of LINDA R. DREES Linda R. Drees, Manhattan, KS, Claimant. Paul W. Henne, Acting Assistant Director - Administration, Fish and Wildlife Service, Washington, DC, appearing for Department of the Interior. WILLIAMS, Board Judge. In this case claimant is disputing how the Department of the Interior, Fish and Wildlife Service (the Service), calculated her relocation income tax (RIT) allowance for tax year 1996. Specifically, claimant contends that the Service should have included her husband's pre-retirement disability income as taxable wages when calculating her RIT allowance. The agency denied the claim on the grounds that for purposes of RIT allowance calculations, earned income includes only salary, wages, or other compensation on IRS Form W-2, or net earnings for self-employment shown on Schedule SE of IRS Form 1040. The agency is correct. The Federal Travel Regulation (FTR) authorizing the RIT allowance narrowly defines earned income and does not include pre-retirement disability income. Background Linda R. Drees, an employee with the Fish and Wildlife Service, was transferred from Colorado to Kansas effective February 1996. In connection with her permanent change of station, claimant received relocation expenses. Under federal statute, 5 U.S.C. 5724(b) (1994), agencies may reimburse transferred employees for the additional income tax liability incurred by them as a result of certain relocation expense reimbursements. The FTR implements this statutory directive by establishing a two-step procedure that agencies use to reimburse employees for taxes that result from moving expense reimbursement. The first step is to calculate and to pay a withholding tax allowance (WTA), and the second step is to calculate a RIT allowance. 41 CFR 302-11 (1996). The agency withholds federal taxes from the amount it reimburses the employee because the reimbursed amount is considered to be taxable compensation to the employee. 41 CFR 302-11.6(b), (c). The purpose of paying a WTA is to offset, in an approximate way, the amount of federal income taxes withheld from the reimbursed amount. 41 CFR 302-11.7(a). When an agency pays a WTA, the agency withholds federal taxes from the amount of the WTA because the payment of a WTA is also considered to be compensation to the employee. 41 CFR 302-11.7(f). The WTA is paid in the year that the employee is reimbursed for the moving expenses, which is referred to in the FTR as Year 1. 41 CFR 302-11.6(d)-(f), 11.7(d). The second step in this procedure is calculating a RIT allowance. The purpose of the RIT allowance is to ensure more specifically that the employee is compensated for tax liability resulting from receipt of relocation benefits. 41 CFR 302-11.5(f). The procedures for calculating the RIT allowance are contained in the FTR and were developed by the General Services Administration (GSA) in conjunction with the IRS. The FTR explains that the procedures are "not to be adjusted to accommodate an employee's unique circumstance" which may differ from the circumstances assumed by GSA and the IRS when they developed the procedures for calculating a RIT allowance. 41 CFR 302-11.8(b)(2). The procedures produce an estimate of an employee's added tax liability due to moving expense reimbursements, and are not designed to reimburse an employee for precisely the amount of the employee's added tax liability. 41 CFR 302-11.8. The FTR refers to the year in which the RIT allowance is paid (or collected) as Year 2. 41 CFR 302-11.5(f). The FTR contains a formula for calculating the RIT allowance by using an employee's combined (federal and state) marginal tax rates for Years 1 and 2, the amount of the taxable reimbursements made by the agency, and the WTA paid in Year 1. 41 CFR 302-11.8(h). The combined marginal tax rates depend upon the amount of earned income that will be reported on the employee's federal tax return in Year 1. For purposes of the RIT allowance, earned income includes only gross compensation reported as income to the IRS and the net earnings for self-employment shown on Schedule SE of IRS Form 1040. If the agency calculates a RIT allowance using the FTR formula and the result is a positive dollar amount, the agency will pay that amount to the employee. If the agency calculates a RIT allowance using the FTR formula and the result is a negative dollar amount, this means that the agency paid an excessive amount of WTA, and the employee has to repay that excess WTA to the agency. 41 CFR 302-11.7(d), 11.8(f).[foot #] 1 In the instant case, Ms. Drees received a notice of a RIT allowance overpayment for 1997. Claimant contends that the RIT allowance calculation resulting in this assessment was erroneous. Specifically, claimant contends that her husband's disability pension should have been included as earned income for 1996, which placed them in a higher tax bracket than the one predicated on the amounts calculated as earned income in accordance with the FTR's RIT allowance formula. Claimant argues: Per the tax tables this computation placed me in the fifteenth percent tax bracket and overpayment ensued. The calculation did not include my husband's taxable disability pension . . . as earned income. According to claimant, counting her husband's income as earned income would yield a gross combined income sufficient to place claimant and her spouse in the 28% tax bracket, which would not result in an overpayment. The FTR addresses earned income in two separate provisions. FTR 302-11.5(h) defines earned income as follows: Earned income. For purposes of the RIT allowance, "earned income" shall include only the gross compensation (salary, wages, or other compensation such as reimbursement for moving expenses and the related WTA . . . and any RIT allowance . . . paid for moving expense reimbursement in a prior year) that is reported as income on IRS Form W-2 for the employee (employee and spouse, if filing jointly), and if applicable, the net earnings (or loss) for self-employment income shown on Schedule SE of the IRS Form 1040. Earned income may be from more than one source. (See 302-11.8(d).) 41 CFR 302-11.5(h). FTR 302-11.8(d) provides: Determination of income level and filing status. In order to determine the CMTR's [combined marginal tax rates] needed to calculate the RIT allowance, the employee must determine the appropriate amount of earned income (as prescribed herein) that was or will be reported on his/her Federal tax return for the tax year in which the covered taxable reimbursements were received (Year 1). Such amount will also include the spouse's earned income if a joint filing status is ----------- FOOTNOTE BEGINS --------- [foot #] 1 This summary of the FTR provisions governing the WTA and RIT allowance was taken in large part from the Board's decision in Robert J. Dusek, GSBCA 14325-RELO, 98-1 BCA 29,440, _______________ at 146,171-72. ----------- FOOTNOTE ENDS ----------- claimed. For purposes of this regulation, appropriate earned income shall include only the amount of gross compensation reported on IRS Form(s) W-2, and, if applicable, the net earnings (or loss) from self- employment income as shown on Schedule SE of IRS Form 1040. 41 CFR 302-11.8(d). On April 1, 1997, claimant and her spouse jointly filed a RIT allowance certification in which they certified that for the tax year 1996 they had filed a joint return as a married couple and that their total gross compensation was an amount which did not include her husband's disability retirement income. The disability retirement income was reported on Form 1099-R. However, on the Form 1040, filed with IRS for tax year 1996, claimant and her husband listed the disability income as "taxable pension/annuity amount" on line 16b and included this amount in their total taxable income on line 22 of Form 1040. In further support of her claim, claimant stated: "In 1996, the first year the disability retirement was received [claimant's spouse] listed [the amount of disability retirement income] identified as taxable income on 16B. The necessity of including this amount on line 7 arose as a result of the RIT [allowance] calculation issue. Linda Drees contacted the IRS . . . to determine whether an amended filing should occur to correct line 7. She was informed that such an amendment was unnecessary and inadvisable since the total amount was identified as taxable income and the total income on line 22 was correct." Discussion The FTR is clear that only earned income which is reported on Form W-2 or self-employment income shown on Schedule SE of Form 1040 should be included in determining the appropriate CMTR for purposes of calculating the RIT allowance. Thus, the issue in this case is whether claimant's husband's disability income should be considered wages as claimant asserts or unearned income as the agency treated it. As we held in Robert J. Dusek, GSBCA 14325-RELO, 98-1 BCA 29,440, at 146,171-72, "[T]he FTR is very clear that only earned income will be taken into account when determining the proper amount of a RIT allowance, and the FTR's procedures are not to be adjusted in order to accommodate an employee's unique circumstances." The applicable regulation, FTR 302-11.5(h), narrowly defines "earned income" as only the gross compensation (salary, wages, or other compensation, such as reimbursement for moving expenses and the related WTA) and net earnings for self- employment. Claimant's spouse's disability pension does not fit into any of these categories. As we explained in Dusek: For purposes of the RIT allowance, earned income includes only gross compensation reported as income on IRS Forms W-2 and the net earnings for self-employment shown on Schedule SE of IRS Form 1040. The FTR formula for calculating the RIT allowance does not allow agencies to take into account unearned income, such as interest and dividends, when determining an employee's combined marginal tax rate. 41 CFR 302-11.5(h); 302-11.8(d), (e). Dusek, 98-1 BCA at 146,172; see also William A. Lewis, GSBCA 14367-RELO, 98-1 BCA 29,532. Further, that same regulation defines earned income only as the compensation reported on IRS Form W-2 or Schedule SE of the IRS Form 1040. Claimant's spouse's disability pension income was not reported on either of these forms, but rather was reported on Form 1099-R. These limitations are reiterated in FTR 302-11.8(d). The FTR does not include this type of income as earned income in calculating the RIT allowance. Thus, claimant's spouse's disability pension is not earned income within the meaning of the FTR. Claimant's spouse had not yet reached normal retirement age at the time with which we are concerned here. We recognize that according to the IRS' publication 575, Pension and Annuity Income, retirement income must be reported as ordinary income and payments received are treated as wages for tax purposes until the recipient reaches a minimum retirement age. However, this does not alter our conclusion that claimant's spouse's disability income is not earned income under the dispositive regulation we are construing the FTR governing a RIT allowance. Decision The claim is denied. ________________________________ MARY ELLEN COSTER WILLIAMS Board Judge