1 Unless otherwise indicated, all subsequent section

references are to the Internal Revenue Code in effect for the

year in issue.

T.C. Summary Opinion 2008-148 

UNITED STATES TAX COURT

TED T. AND SOPHIE M. STARNES, Petitioners v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 13869-07S. Filed November 24, 2008.

Ted T. and Sophie M. Starnes, pro sese.

Vicki L. Miller, for respondent.

VASQUEZ, Judge: This case was heard pursuant to the

provisions of section 7463 of the Internal Revenue Code in effect

when the petition was filed.1 Pursuant to section 7463(b), the

decision to be entered is not reviewable by any other court, and 
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this opinion shall not be treated as precedent for any other

case.

Respondent determined a deficiency of $2,595 in petitioners’

2005 Federal income tax. The issue for decision is whether

petitioners’ individual retirement account (IRA) contributions

for 2005 are deductible pursuant to section 219(g).

Background

Some of the facts have been stipulated and are so found. 

The stipulation of facts and the attached exhibits are

incorporated herein by this reference. At the time the petition

was filed, Ted T. Starnes (petitioner) and Sophie M. Starnes

(Mrs. Starnes) resided in New Mexico. 

Petitioners contributed $4,500 each to an IRA at Del Norte

Credit Union in 2005. Petitioners claimed a total IRA deduction

of $9,000 on their 2005 tax return. Of this amount, petitioners

claimed $4,500 as a deduction based on an IRA contribution made

on behalf of petitioner and petitioners claimed $4,500 as a

deduction based on an IRA contribution made on behalf of Mrs.

Starnes. 

Respondent disallowed petitioners’ $9,000 IRA contribution

deduction. Respondent disallowed $4,500 claimed as a deduction

for an IRA contribution made on behalf of petitioner because he

was an “active participant” in a qualified retirement plan during

2005. Respondent disallowed $4,500 claimed as a deduction for an
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2 Notably, the provision of this statute requiring

mandatory contributions expired on Dec. 31, 2006. N.M. Stat.

Ann. sec. 10-11-8(C)(2). 

IRA contribution made on behalf of Mrs. Starnes because her

spouse, petitioner, was an active participant in a qualified

retirement plan during 2005 and petitioners’ modified adjusted

gross income exceeded $160,000.

Petitioner retired from the New Mexico State Aging and 

Long-Term Services Department (NMSALTSD) on December 31, 1999. 

During 2005 petitioner received a pension from the State of New

Mexico’s employee retirement plan. This plan is administered by

the Public Employees’ Retirement Association of New Mexico

(PERA). After an unknown period of retirement, petitioner became

reemployed with the NMSALTSD and was a full-time employee of the

NMSALTSD in 2005. 

Petitioner’s reemployment was governed by N.M. Stat. Ann.

sec. 10-11-8(C) (LexisNexis Supp. 2007) because NMSALTSD was

considered an affiliated public employer. The statute required

PERA retirees reemployed with an affiliated public employer to

make contributions to PERA once the reemployed retiree was paid

or earned over $25,000 annually.2 The reemployed retiree could

continue to receive retirement benefits from PERA in addition to

wages paid or earned while working for NMSALTSD, but was not able

to receive retirement service credit for the mandatory

contributions to PERA. As an alternative, the statute provided
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that a PERA reemployed retiree could elect to receive retirement

service credit for the mandatory contributions to PERA in

addition to wages paid or earned, but would be forced to elect to

suspend distribution of retirement benefits from PERA; i.e.,

pension payments. There was no option for a reemployed retiree

to elect out of participating in the PERA plan.

During 2005 petitioner earned over $25,000 and was required

to make contributions to PERA in the amount of $5,283.95. 

Petitioner did not elect to suspend receiving his pension

payments from PERA. 

 Petitioner did not receive any service credits in exchange

for his $5,283.95 mandatory contribution, which was

nonrefundable. The Form W-2, Wage and Tax Statement, issued to

petitioner by NMSALTSD for 2005 reflects $61,862.12 in wages and

$5,283.95 in retirement contributions. The pension plan box is

marked with an “X” indicating that petitioner was a participant

in the plan. 

Petitioner received $36,573.84 in pension payments from PERA

during 2005. 

In 2005 petitioners filed a joint Federal income tax return,

and their modified adjusted gross income (modified AGI) was 
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3 As relevant herein, modified adjusted gross income means

adjusted gross income computed without regard to any deduction

for an IRA contribution. See sec. 219(g)(3)(A).

$177,982.3 At the close of the 2005 tax year, both petitioners

were over the age of 50. 

Discussion

Generally, a taxpayer is entitled to deduct amounts

contributed to an IRA. See sec. 219(a); sec. 1.219-1(a), Income

Tax Regs. The deduction may not exceed the lesser of: (1) The

deductible amount, or (2) an amount equal to the compensation

includable in the taxpayer’s gross income for such year. Sec.

219(b)(1). For 2005 the deductible amount was $4,000, increased

by $500 if the taxpayer was age 50 or older before the close of

the taxable year. Sec. 219(b)(5)(A) and (B). Both petitioners

were over the age of 50; accordingly, the deductible amount is

$4,500.

The deductible amount of IRA contributions is further

limited where the taxpayer or spouse of the taxpayer is an

“active participant” in certain retirement plans. Sec.

219(g)(1). Section 219(g)(5)(A) lists six types of plans in

which the active participant limitation will apply. Section

219(g)(5)(A)(iii) provides that, an active participant includes

an individual who is an active participant in “a plan established

for its employees by the United States, by a State or political 
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4 The applicable dollar amount in 2005 for an active

participant was $70,000. See sec. 219(g)(3)(B)(i).

5 Petitioners’ modified AGI in 2005 was $177,982. The

modified AGI of $177,982 minus $70,000 equals $107,982. The

ratio of 107,982:10,000 equals 10.7982. Accordingly, the $4,500

allowable deduction is to be reduced by $4,500 multiplied by

10.7982, which yields an allowable deduction of zero.

6 The applicable dollar amount for 2005 for the spouse of

an active participant was $150,000. See sec. 219(g)(7)(A).

subdivision thereof, or by an agency or instrumentality of any of

the foregoing”. 

For a taxpayer who files a joint return, the deduction is

reduced using a ratio determined by dividing the excess of the

taxpayer’s modified AGI over $70,0004 by $10,000. See sec.

219(g)(2). This provision results in a total disallowance of the

IRA deduction where the total modified AGI exceeds $80,000. 

Because petitioners reported a modified AGI of $177,982 on their

2005 income tax return, petitioner is not entitled to any IRA

deduction if he was an active participant in a plan defined in

section 219(g)(5)(A) during 2005.5

For a taxpayer who is not an active participant but is the

spouse of an active participant and files a joint return, the

deduction is reduced using a similar ratio. The ratio is

determined by dividing the excess of the taxpayer’s modified AGI

over $150,0006 by $10,000. This provision results in a total

disallowance of the IRA deduction where the total modified AGI

exceeds $160,000. Because petitioners reported a modified AGI of
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7 Petitioners’ modified AGI in 2005 was $177,982. The

modified AGI of $177,982 minus $150,000 equals $27,982. The

ratio of 27,982:10,000 equals 2.7982. Accordingly, the $4,500

allowable deduction is to be reduced by $4,500 multiplied by

2.7982, which yields an allowable deduction of zero.

$177,982 on their 2005 income tax return, Mrs. Starnes similarly

is not entitled to an IRA deduction if petitioner was an active

participant in a plan defined in section 219(g)(5)(A) during

2005.7

Petitioners argue that petitioner was not an active

participant in the PERA plan because he did not earn any service

credit for his monetary contributions and such contributions were

nonrefundable. Alternatively, petitioners argue that their IRA

deduction should be allowed because it was allowed on their 2004

tax return. Respondent argues that petitioner was an active

participant because he made contributions to the plan in 2005,

and he was eligible to receive benefits and participate in the

plan. Respondent further argues that petitioner was an active

participant in the PERA plan because the Form W-2 issued to him

by the State of New Mexico reflected that he was an active

participant. Respondent argues that petitioner’s lack of benefit

from his contributions does not preclude him from attaining

active participant status. We agree with respondent and conclude

that petitioner was an active participant in the PERA plan during

2005. 
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Active Participant

The plan provided by PERA is a plan described in section

219(g)(5)(A)(iii) and the active participant limitations may

apply to petitioner. The plan provided by PERA is a plan

established by the State of New Mexico for its employees. 

Accordingly, petitioner is an employee of the State of New

Mexico, and the active participant limitations apply to this

plan. Having determined that the active participant limitations

apply to this plan, we must now determine whether petitioner was

an active participant in the PERA plan.

The fact that petitioner did not receive service credits in

exchange for his mandatory contributions does not prevent

petitioner from being an active participant in the PERA plan. In

a prior case, we concluded that even where a taxpayer forfeited

his accrued interest in a plan, the taxpayer was still an active

participant in such plan. See Eanes v. Commissioner, 85 T.C. 168

(1985). We also found a taxpayer to be an active participant

where the taxpayer was accruing service credits from mandatory

contributions at such a slow rate that the taxpayer would be

required to work 120 years to receive a retirement benefit. See

Wade v. Commissioner, T.C. Memo. 2001-114. Ultimately, in both

Eanes and Wade, the taxpayers did not receive a retirement

benefit in exchange for their contributions. Similarly,

petitioner did not receive a retirement benefit in exchange for
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his contributions to the PERA plan. This does not mean that

petitioner was not an active participant in the PERA plan in

2005.

At the heart of the IRA contribution limitation is

Congress’s concern with taxpayers’ being able to receive

duplicate tax benefits from participation in an employersponsored plan and from participation in an IRA. See H. Rept.

93-807, at 129 (1974), 1974-3 C.B. (Supp.) 236, 364. Petitioner

can elect to suspend receiving a payout of retirement benefits

from the PERA plan at any time and start accruing service credits

in the PERA plan. Petitioner was, and is, free to elect to start

accruing service credits instead of receiving his pension at any

time.

The contributions petitioner made to the PERA plan during

2005 caused petitioner to be an active participant in the PERA

plan according to section 1.219-2(e), Income Tax Regs. Section

1.219-2(f), Income Tax Regs., excludes from the definition of

active participant only those individuals who have elected out of

participating pursuant to the plan. Petitioner could not, and

did not, elect out of participating in the PERA plan. Rather,

petitioner made a mandatory contribution, and this is sufficient

to characterize petitioner as an active participant pursuant to

the regulations. See sec. 1.219-2(e), Income Tax Regs. 
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Because petitioner is an active participant and petitioners’

adjusted gross income exceeded $160,000, we conclude that

petitioners cannot deduct their 2005 IRA contributions.

Allowance on 2004 Return

Petitioners argue that they should be allowed to deduct

their 2005 IRA contributions on the basis that respondent allowed

them for the 2004 tax year. Respondent’s allowance of

petitioners’ IRA contribution deduction for the prior year has no

bearing on whether petitioners are entitled to a similar

deduction for 2005. Even though the Commissioner may have

overlooked or accepted the tax treatment of certain items in

previous years, the Commissioner is not precluded from correcting

that error in subsequent years with respect to the same taxpayer. 

Garrison v. Commissioner, T.C. Memo. 1994-200, affd. without

published opinion 67 F.3d 299 (6th Cir. 1995).

In reaching all of our holdings herein, we have considered

all arguments made by the parties, and to the extent not

mentioned above, we conclude they are irrelevant or without

merit.

To reflect the foregoing,

Decision will be entered

for respondent.