Court Opinion

ID: 4483468
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:16:07.518188+00
Date Added: 2024-06-11T09:58:48.381155
License: Public Domain

Dawson, J., dissenting in part: While I am in accord with the conclusion reached in the majority opinion on the first issue, I strongly disagree with the imposition of the 6-percent excise tax under section 4973 of the Code. Not only is it unduly harsh and particularly abhorrent to impose the penalty under these circumstances,1 but it is also unnecessary to treat the petitioner’s $1,500 payment as an “excess contribution” to which section 4973 is applicable. In attempting to establish an individual retirement account (IRA), this petitioner acted innocently and in good faith. It seems to me that we can legally free him from the excise tax penalty by stepping out of the shadow of strict construction into the sunlight of reasonable statutory interpretation. Respondent has imposed an excise tax on the whole amount as “excess contributions” under section 4973. He relied on section 4973(b)(1) which defines “excess contributions” as the excess of the amount contributed for the year (here $1,500) over the amount allowable as a deduction under section 219 (here zero). Respondent and the majority of the Court assume that there was a valid, subsisting IRA to which “excess contributions” could be made. But the facts show that petitioner was not eligible to open an IRA, and the entire $1,500 which he tried to contribute to an IRA will be added back to his 1975 taxable income and taxed. Under the particular facts of this case, I would conclude that no IRA was ever created. Petitioner simply does not come within the statutory scheme which was designed to limit strictly the amount that can be contributed to an IRA each year and to police against and penalize any contributions exceeding that limit. Section 4973(a) imposes a 6-percent, cumulative, nondeductible excise tax on any excess contributions to an IRA. At the same time, that section provides that the total amount of the tax “shall not exceed 6 percent of the value of the account.” Contributions to an IRA are required to be made in cash. Sec. 408(a)(1). The first year an IRA could be set up was 1975. And the only contribution petitioner has ever made was the $1,500 cash paid in 1975, which has been disallowed. It would seem that for petitioner “the value of the account” would be zero; and there is nothing in the other statutory provisions which compels a different result. The $1,500 ceiling on annual contributions to an IRA is the keystone of the IRA program, which is designed to encourage broad participation by persons of modest incomes. (Conf. Rept. 93-1280, pp. 335-336, 1974-3 C.B. 496-497.) In addition to the $1,500 limitation spelled out in section 219(b)(1), the definition of an IRA in section 408(a)(1) also provides that: Except in the case of a rollover contribution * * * no contribution will be accepted unless it is in cash, and contributions will not be accepted for the taxable year in excess of $1,500 on behalf of any individual. To enforce that dollar limitation and to force a taxpayer to eliminate any excess contributions from his IRA, there are numerous penalties and adverse tax consequences. Assuming that a taxpayer has run afoul of the dollar limitation and has made “excess contributions,” there are what have been called the “quadruple adverse tax consequences.” J. Hall, T. Dobson, and E. Lipsig, “Individual Retirement Arrangements,” 315 Tax Management A-19, A-20. First, the deduction for any excess contribution is disallowed, and the amount of the excess is returned to taxable income and taxed. Sec. 219(b)(1). Petitioner’s deduction, however, was not disallowed under section 219(b)(1) for exceeding the maximum contribution, but was disallowed under section 219(b)(2) because he was covered by another tax-free plan. The second consequence of excess contributions is the 6-percent cumulative, nondeductible excise tax. That tax applies each year until the excess contributions are eliminated from the taxpayer’s IRA. Sec. 4973. That penalty tax, of course, is the tax consequence facing petitioner at the moment. The excise tax is designed to force a taxpayer to eliminate the excess contributions from his IRA. Elimination of excess contributions can be accomplished by either distribution or underutilization of allowable contributions in a subsequent year. Sec. 4973(b)(2); Conf. Rept. 93-1280, supra at .340-341. Petitioner, being covered by his employer’s qualified pension plan, is not eligible for an IRA at all. Therefore, no contribution in any amount is allowable to him, and the underutilization route would be totally foreclosed to him. Only the distribution route would possibly be available to petitioner, and that too would carry adverse tax results. The third of the quadruple adverse tax consequences is a tax on early distributions. In other words, if excess contributions are eliminated from an IRA by distribution before the taxpayer reaches 59y2 years of age or becomes disabled, there is an additional 10 percent tax on the early distribution from his IRA. Sec. 408(f). Lastly, when the excess contribution is eliminated by means of this penalized early distribution, there is a fourth adverse tax consequence. The amount of the distribution is added to gross income and again taxed, because the taxpayer’s basis in his IRA is zero. Sec. 408(d)(1). The basis in an IRA is zero because it is generally contemplated that contributions to an IRA are made with tax-free dollars and that the contributions and any earnings thereon will not be taxed until distributed to the taxpayer after his retirement. That is not the case with petitioner whose “contribution” will have been made with tax-paid dollars. I recognize, of course, that that is also true for a taxpayer who has made excess contributions to his IRA, and who has properly become subject to the full force of the “quadruple adverse tax consequences” previously mentioned. These cumulative taxes and penalties apply to IRA’s and excess contributions thereto. But the whole statutory scheme assumes that there is an IRA in the first place, and that a taxpayer has made excess contributions to it. I believe the statutory scheme should not be stretched beyond its clear intendment. I cannot believe that Congress would expect us to do otherwise. This petitioner innocently tried to open an IRA for which he was not qualified, and I think no valid IRA was created. The present case is unlike that of an employee who properly creates an IRA in the first instance and where later events affect either the employee’s eligibility or the qualification of the IRA itself.2 For example, if an employee properly creates an IRA and later that year goes to work for a company that has a qualified pension plan, the employee’s contribution to his IRA is not deductible and becomes excess contributions. However, there is a statutory grace period during which he can withdraw his contributions without any penalty or adverse tax consequences. Sections 408(d)(4) and 4973(b)(2). Even the 6-percent excise tax is not imposed if the excess contribution is timely withdrawn.3 This statutory grace period does not apply to a taxpayer, such as petitioner, who believes he is eligible to open an IRA and later finds himself litigating his eligibility. Petitioner contends that it is unfair for him to have to pay a 6-percent excise tax in order to obtain a Tax Court ruling on his eligibility for an IRA. He complains that the Tax Court’s declaratory judgment jurisdiction applies only to employers, who can obtain a determination of the qualification of their pension plan (sec. 7476), but that there is no comparable avenue of relief open to an employee who wishes to get a ruling on the qualification of his IRA. He points to the statutory notice of deficiency which states that “No intentional disregard or negligence is implied by the assertion of this excise tax.” Obviously this is not a case in which a taxpayer has either deliberately or negligently sought to create an IRA, when he knew or should have known that he was not eligible for one. Petitioner’s eligibility was the subject of this particular lawsuit, and the Court has found that he was never eligible to establish an individual retirement account. I must comment briefly on the majority’s statement that the IRA provisions are “relatively straightforward.” Maybe the literal import of the provisions are clear to a lawyer, a certified public accountant, or a tax specialist. But to an ordinary, low or middle income taxpayer who is not covered by a qualified pension plan — the very type of person for whom a benevolent Congress created the tax benefit — the provisions are complex and the labyrinth of sanctions and penalties is beset with invisible boomerangs. How can a statute that contains complicated definitions of excess contributions, premature distributions, rollover transfers, and prohibited transactions be characterized as “relatively straightforward”? Unfortunately, the statute can become a horrible trap for an unwary and unsophisticated taxpayer. I think it is enough to deny this petitioner the deduction he claimed under section 219 by treating the attempted creation of the IRA as a nullityiiecause he was covered at that time by the Otis qualified pension plan. The respondent will recover the deficiency plus interest. The consequences to the petitioner that will flow from holding him liable for the excise tax under section 4973 are horrendous. The excess is subject to a cumulative 6-percent excise tax that is not deductible. If he should withdraw the $1,500, it will be included in his taxable income in the year of withdrawal. Unless he is disabled, any withdrawal or distribution from the IRA is subject to a 10-percent penalty tax if he has not reached age 59y2. If for any reason he fails to file an annual IRA return on Form 5329 when it is due, he can be held liable for a penalty of $10 per day (up to a maximum penalty of $5,000) until the return is filed. Petitioner was at all times disqualified from making a ‘contribution” to an IRA. Since section 4973(b) defines “excess contributions” as the excess of the amount contributed over “the amount allowable as a deduction under section 219” and since nothing is allowable as a deduction, I would hold that the $1,500 payment did not constitute an “excess contribution” to an individual retirement account. Therefore, I think the majority has erred in reaching a contrary conclusion on this issue. Featherston, Drennen, Wiles, and Wilbur, JJ., agree with this dissenting opinion.  Such a shocking result tempts me to embrace Snoopy’s credo: “Curse on all laws but those which love has made.” “Peanuts” by Charles M. Schulz (Dec. 2,1977).   An IRA that is validly created may later become disqualified because of prohibited transactions. Sec. 408(e)(2)(A).   This is in part by statute and in part by administrative practice of the Internal Revenue Service. See J. Hall, T. Dobson, and E. Lipsig, “Individual Retirement Arrangements,” 315 Tax Management A-20, A-21, and changes and additions thereto for p. A-20.