T.C. Memo. 1999-199
UNITED STATES TAX COURT
DON LAVERNE CLARKE, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 151-97. Filed June 18, 1999.
Don Laverne Clarke, pro se.
Anthony Hoefer, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
ARMEN, Special Trial Judge: This case was heard pursuant to
the provisions of section 7443A(b)(3) and Rules 180, 181, and
182.1
1
Unless otherwise indicated, all section references are to
(continued...)
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Respondent determined a deficiency in petitioner's Federal
income tax for the year 1993 in the amount of $1,005.
After concessions by petitioner,2 the issue for decision is
whether petitioner is entitled to an IRA deduction in excess of
the amount determined by respondent. We hold that he is not.
FINDINGS OF FACT
Some of the facts have been stipulated, and they are so
found. Petitioner resided in Omaha, Nebraska, at the time that
his petition was filed with the Court.
For the year in issue, petitioner and his wife filed a joint
Federal income tax return reporting wage income, which was earned
by petitioner's wife, in the amount of $4,235, interest income in
the amount of $34, dividend income in the amount of $4,640,
capital gain in the amount of $353, taxable IRA distributions in
the amount of $2,900, and taxable pensions and annuities in the
amount of $10,645. On a Schedule C, petitioner reported gross
income (in the form of commissions) in the amount of $271 and
(...continued)
the Internal Revenue Code in effect for the taxable year in
issue, and all Rule references are to the Tax Court Rules of
Practice and Procedure.
2
Petitioner conceded the following adjustments: (1)
Interest income in the amount of $24, (2) dividend income in the
amount of $2, and (3) capital gain in the amount of $4,950.
Petitioner remitted $750 to respondent toward the deficiency
arising out of the aforementioned adjustments.
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claimed a net loss in the amount of $1,378. Petitioner and his
wife each claimed an IRA deduction in the amount of $2,000.
In the notice of deficiency respondent allowed the IRA
deduction claimed by petitioner's wife but determined that
petitioner's IRA deduction for 1993 was allowable only to the
extent of $271.
OPINION
In general, a taxpayer is entitled to deduct the amount
contributed to an IRA. See sec. 219(a); sec. 1.219-1(a), Income
Tax Regs.3 The amount allowable as a deduction to the taxpayer
in any taxable year may not, however, exceed the lesser of $2,000
or an amount equal to the "compensation" includable in the
taxpayer's gross income for such taxable year. See sec.
219(b)(1).
The term "compensation" is defined in section 219(f)(1). As
pertinent here, section 219(f)(1) provides that the term
"'compensation' includes earned income (as defined in section
401(c)(2))." Section 401(c)(2) provides in pertinent part that
"the term 'earned income' means the net earnings from self-
employment (as defined in section 1402(a))." Finally, section
3
Petitioner questioned whether sec. 1.219-1, Income Tax
Regs., was in effect in 1993, the year in issue. Sec. 1.219-1,
Income Tax Regs., was promulgated by T.D. 7714, 1980-2 C.B. 83,
effective for taxable years beginning after Dec. 31, 1978. Sec.
1.219-1, Income Tax Regs., was therefore in effect in 1993.
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1402(a) provides that the term "net earning from self-employment"
means the gross income derived by an individual from any trade or
business carried on by such individual less any allowable
deductions.
Section 1.219-1(c)(1), Income Tax Regs., defines
compensation as wages, salaries, professional fees, or other
amounts derived from personal services actually rendered but does
not include amounts, such as interest and dividends, derived from
or received as earnings or profits from property. See Miller v.
Commissioner, 77 T.C. 97 (1981).
Petitioner contends that he received $7,893 of
"compensation" during 1993 consisting of an IRA distribution in
the amount of $2,900, dividend income in the amount of $4,640,
and capital gain in the amount of $353. In this regard, he
contends that Congress did not intend to exclude dividend income,
capital gain, and IRA distributions from the definition of
"compensation" for purposes of section 219(a). Petitioner
asserts that by using the term "includes" in the definition of
"compensation" under section 219(f), Congress did not mean to
exclude other unlisted sources of income, such as dividends or
capital gain. He makes a similar contention with respect to the
use of the term "means" in section 401(c)(2).
Petitioner's contentions were considered in Miller v.
Commissioner, supra. In that case, the taxpayer claimed
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entitlement to an IRA deduction on the ground that income from
his investment activity constituted "compensation" within the
meaning of section 219. This Court held that capital gain,
dividends, and interest income did not constitute "compensation"
within the meaning of section 219. On the issue of statutory
interpretation of the term "compensation", we stated:
Finally, petitioner contends that when Congress
used the word "includes" in sections 219(c)(1) and
401(c)(2)(C), it intended a broad interpretation of the
statutes rather than a restrictive one. Apparently he
is contending either that earned income is but one
example of the many types of compensation covered by
section 219(c)(1) or that the profits from his
investments constitute "compensation" within the
meaning of section 219 exclusive of section 219(c)(1).
However, section 219(c)(1) was designed to include in
the term "compensation" income earned by the
self-employed individual, which, except for that
provision, would be excluded from the definition of
"compensation" under section 219. See H. Rept. 93-779,
1974-3 C.B. 244, 369. Thus, if the requirements of
section 219(c)(1), which are in actuality the
requirements of section 401(c)(2), are not satisfied,
self-employment income will not be included in the term
compensation. Similarly, section 401(c)(2)(C) was
designed to include in the term "earned income"
earnings generated by property created by the taxpayer,
e.g., the author or the inventor, which otherwise,
depending upon the technical form of the transaction
through which the income is earned, might have been
excluded from that term. See S. Rept. 1707, 89th
Cong., 2d Sess. (1966), 1966-2 C.B. 1059, 1103. [Fn.
refs. omitted.]
Miller v. Commissioner, supra at 103-104.
Petitioner contends that Miller v. Commissioner, supra, is
not applicable because the year in issue in that case, 1977, was
different from the year in issue in his case. However, the
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statutory definition of "compensation" has not changed in any
pertinent manner since 1977. Because Miller v. Commissioner,
supra, interprets substantially identical statutory language, it
lends precedential support to preclude entitlement to an IRA
deduction based on investment income. Petitioner's compensation
for the year in issue therefore does not include his capital gain
and dividend income.
Similarly, the IRA distribution received by petitioner is
not includable in his compensation. IRA distributions are not
compensation as they do not constitute wages, salaries,
professional fees, or other amounts derived from personal
services actually rendered. Cf. Miller v. Commissioner, supra;
sec. 1.219-1(c)(1), Income Tax Regs. Rather, they include
amounts derived from earnings from property. Cf. sec. 1.219-
1(c)(1), Income Tax Regs. In essence, IRA distributions are
nothing more than the distribution of principal plus dividends,
capital gain, or other investment income earned on a tax deferred
basis. See secs. 408(a), 72(a).
Further, by statute, the term "compensation" does not
include any amount received as "a pension or annuity" or as
"deferred compensation". See sec. 219(f)(1). An IRA provides
opportunity for private pension coverage in the form of a trust
created for the exclusive benefit of an individual or his
beneficiaries. See sec. 408(a). To ensure that IRA proceeds are
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used for retirement purposes, a 10 percent penalty is generally
imposed on IRA distributions made before the taxpayer reaches age
59-1/2. See sec. 72(t). In that regard, an IRA distribution
fits within the category of "a pension or annuity" or "deferred
compensation".4 Petitioner's compensation for the year in issue
therefore does not include the IRA distribution.
In light of the foregoing, petitioner is not entitled to an
IRA deduction in an amount exceeding $271.5
We now turn to some of petitioner's various other concerns.
Petitioner has asked us to consider whether respondent
properly determined the amount of interest imposed under section
6601. We are unable to address this issue. This Court is a
court of limited jurisdiction, and we may exercise jurisdiction
only to the extent expressly authorized by statute. See Judge v.
Commissioner, 88 T.C. 1175, 1180-1181 (1987); Naftel v.
Commissioner, 85 T.C. 527, 529 (1985). This Court's jurisdiction
4
Based on the record, it is not clear whether the IRA
distribution petitioner received was an annuity. To constitute
an annuity, payments must be received in the form of periodic
installments at regular intervals. See sec. 1.72-2(b)(2), Income
Tax Regs. Regardless, even if the IRA distribution did not
constitute an annuity, it would be considered a pension or
deferred compensation benefit.
5
We observe that respondent determined that petitioner was
entitled to an IRA deduction to the extent of his Schedule C
gross income as opposed to his Schedule C "net earnings". See
secs. 219(a), 401(c)(2), 1402(a). We therefore simply sustain
respondent's determination as respondent did not assert an
increased deficiency in this regard. See sec. 6214(a).
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to redetermine a deficiency in tax generally does not extend to
statutory interest imposed under section 6601. See Bax v.
Commissioner, 13 F.3d 54, 56-57 (2d Cir. 1993), affg. an Order of
this Court; LTV Corp. v. Commissioner, 64 T.C. 589, 597 (1975);
see also Asciutto v. Commissioner, T.C. Memo. 1992-564, affd. 26
F.3d 108 (9th Cir. 1994). Indeed, section 6601(e)(1) provides
that interest prescribed by section 6601 is treated as a tax
"except [for purposes of] subchapter B of chapter 63, relating to
deficiency procedures". Because the effect of the parenthetical
language of section 6601(e)(1) is to exclude interest from the
definition of a "tax" for purposes of section 6211(a), it follows
that such interest is not a deficiency. See White v.
Commissioner, 95 T.C. 209, 213 (1990). We are therefore
precluded in the context of a deficiency action from deciding
whether respondent properly determined the amount of interest
imposed under section 6601. But see sec. 7481(c) and Rule 261
regarding supplemental proceedings to redetermine interest on
deficiencies on taxes; cf. sec. 6404(i) and Rules 280-284
regarding actions for review of failure to abate interest.
Petitioner also contends that respondent erred in failing to
reduce the "deficiency" by the $750 remitted by petitioner. We
disagree.
The term "deficiency" is a technical term which is defined
by the Internal Revenue Code. See section 6211(a). As relevant
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herein, a deficiency is the amount of income tax imposed by the
Internal Revenue Code that exceeds the amount shown as the tax by
the taxpayer on his return (if a return was filed). Thus,
payments made by a taxpayer, such as the $750 payment, do not
serve to reduce the "deficiency" within the meaning of section
6211(a). Cf. sec. 6211(b)(1). Parenthetically, we take note of
the fact that respondent has acknowledged petitioner's $750
payment, and that such amount will serve to reduce pro tanto the
amount of petitioner's ultimate out-of-pocket liability.
Finally, petitioner has raised other arguments that we have
considered in reaching our decision. To the extent that we have
not discussed these arguments, we find them to be without merit.
To reflect our disposition of the disputed issue, as well as
petitioner's concessions,
Decision will be entered
for respondent.