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
1
Unless otherwise indicated, all subsequent section
references are to the Internal Revenue Code in effect for the
year in issue.
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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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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
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).
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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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$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
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).
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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
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).
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$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.
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.
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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 employer-
sponsored 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.