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TL Case Summ

THE QUESTION

Can an IRA deduction that is disallowed due to active participant status in an employer plan be carried forward and deducted in a future year?

THE DISPUTE

Taxpayer Says: The 2008 IRA contribution was an “excess contribution” and should be allowable as a deduction in 2010.

Internal Revenue Service Says: The 2008 deduction was disallowed due to the taxpayer’s active participant status in his employer’s retirement plan. The contribution does not qualify as an excess contribution, and cannot be carried forward to 2010.

THE LAW

From Internal Revenue Code Section 219(a): Subject to various limitations, a deduction is allowed for contributions to an IRA for the taxable year.

From Internal Revenue Code Section 219(b)(1): The amount allowable as a deduction may not exceed the lesser of “the deductible amount” or the amount of compensation includible in the individual’s gross income for that year.

From Internal Revenue Code Section 219(f)(3): Provides that a contribution shall be deemed to have been made “on the last day of the preceding taxable year if the contribution is made on account of such taxable year and is made not later than the time prescribed by law for filing the return for such taxable year (not including extensions thereof).”

From Internal Revenue Code Section 219(g): If an individual is an active participant in a qualified plan, section 219(g) phases out the deduction allowed by section 219(a) according to certain income thresholds.

From Internal Revenue Code Section 4973(a): Imposes a 6% excise tax on “excess contributions” to an IRA.

From Internal Revenue Code Section 4973(b): Defines “excess contributions” to mean the excess of the amount contributed for a taxable year over contributions in excess of “the amount allowable as a deduction under section 219[(a)] for such contributions.” For purposes of calculating excess contributions, “the amount allowable as a deduction under section 219 shall be computed without regard to section 219(g).”

From proposed income tax regulation 1.219-1(d)(2): Proposed regulations issued 34 years ago, still in proposed form, specify a procedure for designating IRA contributions. (Contribution “shall be treated as made on account of [a] taxable year if it is irrevocably specified in writing to the trustee, insurance company, or custodian that the amounts contributed are for such taxable year”).

THE CAUSE OF THE DISPUTE

When you make excess contributions to your individual retirement account (IRA), you can apply the excess contribution in one year to a later year under certain conditions. For example, the contributions for that later year must be less than the maximum allowed for that year.

Excess contributions are those in excess of the amount you’re allowed to contribute under the tax code. That amount is the lesser of what’s allowed by statute—for example you can contribute and deduct $5,500 to a traditional IRA for 2015 plus an additional $1,000 when you’re over age 50 and under age 70-1/2—or your taxable compensation for the year.

In T.C. Memo. 2015-208 (Dunn), the taxpayer, an attorney, made the maximum allowable contribution to his IRA in two payments during January and March of 2008. He designated both payments as 2008 contributions and deducted the full amount on his 2008 tax return.

The IRS examined the 2008 tax return and disallowed the entire IRA deduction because the taxpayer was an active participant in his employer’s retirement plan and his income was above the threshold for a deduction. The taxpayer did not dispute that the 2008 deduction was properly disallowed.

In 2009, the taxpayer, now self-employed, made the maximum allowable contribution to his IRA in two payments, one in June of 2009 and one in January 2010. He designated both payments as 2009 contributions, and deducted the full amount on his 2009 tax return.

The IRS allowed the deduction in 2009 because the taxpayer was no longer an active participant in an employer’s plan.

In late January 2010, while still self-employed, the taxpayer made an $800 contribution to his IRA that he designated as a 2010 contribution. He claimed a $6,000 deduction on his 2010 federal income tax return, saying the disallowed 2008 contribution was an “excess contribution” that could be carried forward and deducted in future years.

The IRS reduced the deduction for the IRA contribution to $800, the amount the taxpayer had contributed in 2010 and designated for 2010. The IRS said there was no “excess contribution” because the taxpayer’s allowable contribution (and “allowable” deduction as computed under section 4973) for 2008 was $6,000, and he contributed $6,000 to his account.

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Sorry, wrong answer :(
Right answer!
For the IRS.

The taxpayer contends that the 2008 contribution was an “excess contribution” described in section 4973(b), which supposedly became deductible in 2010 under section 219(f)(6).

Section 4973(a) imposes a 6% excise tax on “excess contributions” to an IRA; as relevant here, section 4973(b)(1) defines “excess contributions” to mean contributions in excess of “the amount allowable as a deduction under section 219[(a)] for such contributions.”

For purposes of calculating excess contributions, “the amount allowable as a deduction under section 219 shall be computed without regard to section 219(g).” Sec. 4973(b) (last sentence).

The IRS determined that the taxpayer’s allowable IRA contribution deduction for 2008 was zero after application of section 219(g), since the taxpayer was an “active participant” during 2008 in a qualified retirement plan.

But section 4973(b) provides that, for purposes of determining the existence of an excess contribution, “the amount allowable as a deduction under section 219 shall be computed without regard to section 219(g).”

Without regard to section 219(g), the amount allowable to petitioners as a deduction under section 219 was $6,000, which equals the amount petitioner contributed to the taxpayer’s IRA for 2008.

His “excess contribution” for 2008 was thus zero, and he accordingly had no excess contribution that could be allowed as a deduction for a future year under section 219(f)(6).

The taxpayer is asking that a deduction for an IRA contribution made for 2008, which the IRS properly disallowed for 2008, should be allowed instead for 2010. There is no legal basis for this claim. A taxpayer is free to organize his affairs as he chooses, but once having done so, he must accept the tax consequences of his choice, whether contemplated or not.

In sum, the taxpayer is entitled for 2010 to an IRA contribution deduction of $800, the amount he contributed to his IRA during 2010 and designated as a contribution for 2010. We sustain the IRS’s disallowance of the balance of the $6,000 deduction claimed.

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