Tax Court in Brief | Couturier v. Commissioner | Taxation of Excess Contributions from IRA

The Tax Court in Brief – July 4th – July 8th, 2022

Freeman Law’s “The Tax Court in Brief” covers every substantive Tax Court opinion, providing a weekly brief of its decisions in clear, concise prose.

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Tax Litigation:  The Week of July 4th, 2022, through July 8th, 2022

• Barrington v. Commissioner, T.C. Memo. 2022-68 | July 6, 2022 | Buch, J.| Dkt. No. 1781-14
• Wolpert v. Commissioner, T.C. Memo. 2022-70 | July 7, 2022 | Jones, J.| Dkt. No. 3182-20, 4693-20

Couturier v. Commissioner, No. 19714-16, T.C. Memo 2022-69 | July 6, 2022 | Lauber | Dkt. 19714-16

Opinion

Short Summary:  This case involves a determination by the IRS that petitioner in 2004 made an excess contribution of $25,132,892 to his individual retirement account (“IRA”). Section 4973(a) imposes an excise tax “in an amount equal to 6 percent of the amount of the excess contributions” that a taxpayer makes to an IRA in any given year. This excise tax continues to apply to future tax years, until such time as the original excess contribution is distributed to the taxpayer and included in income. See § 4973(b)(2).  Petitioner contended that the IRS is precluded as a matter of law from asserting excise tax liability under section 4973 because it did not issue him a notice of deficiency challenging his income tax treatment of the transactions that generated the excess contributions. Finding no merit in this argument, the Tax Court denied the Motion.

Key Issues:

• Whether imposition of an excise tax is dependent on or affected in any way based on whether the taxpayer has an income tax liability, whether the taxpayer has filed (or the IRS has examined) an income tax return, or whether the IRS has issued the taxpayer a notice of deficiency in income tax.
• Whether the IRS’s failure to examine a return, or its failure to challenge a particular position that a taxpayer took on a return, constitutes a concession or admission that the taxpayer’s position was correct.

Facts and Primary Holdings: 

• In 1999 petitioner was employed as the president of Noll Manufacturing Co. (“Noll”). He remained president of Noll at least into 2004. Noll was a subsidiary of The Employee Ownership Holding Company, Inc. (TEOHC).
• TEOHC maintained an employee stock ownership plan (ESOP). As of 2004 petitioner owned 4,586 shares of stock in the ESOP. He also enjoyed benefits, beginning in 2001 or earlier, under three other compensatory plans maintained by TEOHC. Under the Compensation Continuation Agreement (CCA), a nonqualified deferred compensation plan, he was entitled upon retirement to monthly payments of $30,000 (as of 2004). He participated in an Incentive Stock Option (ISO) plan, in which he held at least 80,000 shares. And he participated in a Value Enhancement Incentive (VEI) plan, in which he held at least 500 shares (plus 200 “tax bonus units”). Petitioner’s ISO and VEI shares constituted “synthetic equity” in TEOHC within the meaning of section 409(p)(6)(C). He was therefore a “disqualified person” with respect to the ESOP under section 409(p)(4).
• After a corporate reorganization in 2004, TEOHC informed petitioner that it wished to buy out his interests. Following lengthy negotiations, TEOHC agreed to pay him $26 million in exchange for his ESOP stock and his relinquishment of the interests he held in the CCA plan, the ISO plan, and the VEI plan. The $26 million of consideration took the form of a $12 million cash payment to petitioner’s IRA and a $14 million promissory note payable to his IRA. In August 2005 TEOHC paid the promissory note in full.
• For the 2004 taxable year Petitioner alleged that TEOHC issued him a Form 1099–R reporting a “gross distribution” of $26 million. The IRS purportedly has no record of having received a Form 1099–R. The Form 1099–R allegedly reported that no portion of the distribution was taxable, with the box being checked for “distribution code G.” The Form 1099–R instructions for 2004 explain that distribution code G was for a distribution that was a “direct rollover to . . . an IRA.”
• On April 11, 2005, Petitioner timely filed his Form 1040 for 2004. On line 16(a) of that return he characterized the $26 million received from TEOHC as a nontaxable “rollover contribution” to his IRA. He left blank line 59, “Additional tax on IRAs, other qualified retirement plans, etc.” The instruction for line 59 indicated that, if a taxpayer made excess contributions to his IRA, then he must consult IRS publications to determine whether he was required to file Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts. Petitioner did not include a completed Form 5329 with his 2004 return or with any subsequent income tax return.
• The U.S. Department of Labor (“DOL”) initiated an investigation of Petitioner and other fiduciaries of the ESOP for alleged violation of their fiduciary duties under the Employee Retirement Income Security Act of 1974 (ERISA). In November 2008 DOL sued Petitioner and other defendants alleging that they had engaged in a prohibited transaction under ERISA. That litigation was resolved by settlement in March 2010.
• In connection with its investigation DOL made a referral to the IRS, in the form of a Report of Investigation (“ROI”), so that the IRS could consider whether to open any related tax examinations.
• In spring of 2009 the IRS opened an examination of the ESOP’s Form 5500, Annual Return/Report of Employee Benefit Plan, to investigate whether the ESOP and one or more of its disqualified persons had engaged in a “prohibited transaction” under section 4975.
• At the conclusion of that examination, the IRS determined that no prohibited transaction involving the ESOP had in fact occurred. In the course of examining the ESOP, however, the IRS determined that the value of Petitioner’s stock in the ESOP was worth considerably less than $26 million, which caused the IRS to conclude that he had made excess contributions to his IRA in 2004. The IRS never opened an examination of petitioner’s Form 1040 for 2004.
• On June 10, 2016, the IRS issued notices of deficiency determining that Petitioner was liable for excise taxes under section 4973 in the aggregate amount of $8,476,705 for 2004–2014. These deficiencies were based on the determination that petitioner’s 4,586 shares of stock in the ESOP were worth only $830,392 and that TEOHC had paid the balance of the $26 million in exchange for Petitioner’s relinquishment of his interests under the CCA plan, the ISO plan, and the VEI plan. Since none of those interests represented interests in a “qualified plan,” the IRS determined that only $830,392 constituted a valid “rollover contribution” within the meaning of section 4973(b)(1)(A). The IRS allowed growth on that amount as part of the eligible rollover, plus the $3,500 deduction normally allowed under section 219(b) for a 2004 IRA contribution, for a total allowable contribution of $867,108. The IRS determined that the balance of petitioner’s $26 million contribution to his IRA, or $25,132,892, constituted an “excess contribution” under section 4973(a)(1) and (b)(2), generating excise taxes for the 11 years in question.
• Petitioner timely petitioned the Tax Court. In 2017 he filed a Motion for Summary Judgment contending that the notices of deficiency were untimely because they were issued after expiration of the three-year period of limitations specified in section 6501(a), as well as the six-year period of limitations specified in section 6501(e)(3). The IRS filed a Cross-Motion for Partial Summary Judgment, urging that the excise taxes could be assessed “at any time” under section 6501(c)(3) because Petitioner had failed to report his excess contributions on Form 5329, which constitutes a tax “return” within the meaning of section 6011. See Paschall v. Commissioner, 137 T.C. 8, 16 (2011). In April 2019 the Tax Court denied both parties’ motions, concluding that the period of limitations issue was “intertwined with the merits,” i.e., with the question whether Petitioner had actually made “excess contributions” reportable on a Form 5329.
• On August 27, 2021, Petitioner filed a second Motion for Summary Judgment, currently before the Court. In this Motion he contends that the IRS “is legally precluded from asserting any deficiencies against [him] under section 4973 for any of the tax years at issue” because the IRS “did not assert any income tax deficiency against [him] for [2004], the tax year in which the relevant events occurred.” The IRS objected to the Motion and further briefing ensued.

Key Points of Law:

• Section 4973 is in subtitle D of the Code, captioned “Miscellaneous Excise Taxes.” It provides that, in the case of any IRA, “there is imposed for each taxable year a tax in an amount equal to 6 percent of the amount of the excess contributions to such individual’s account[].” § 4973(a).
• The term “excess contributions” is initially defined as the excess of (1) the amount contributed to an IRA for the taxable year (other than a “rollover contribution” described in section 408(d)(3)), over (2) the amount allowable as a deduction under section 219 for such contribution. § 4973(b)(1). This excise tax continues to apply to future tax years, until such time as the original excess contribution is distributed to the taxpayer and included in income. See 4973(b)(2).
• The Court concluded that Petitioner had pointed to no statute or regulation that is alleged to have such a preclusive effect, noting that there is nothing in section 4973, the Treasury regulations, or any other IRS authority that makes the assertion of an income tax deficiency a precondition for determining an excise tax deficiency for the same year. The Court therefore denied the motion.
• Section 4973 does not condition the imposition of an excise tax on whether the taxpayer has an income tax liability, whether the taxpayer has filed (or the IRS has examined) an income tax return, or whether the IRS has issued the taxpayer a notice of deficiency in income tax. Section 4973(a) provides, simply and unambiguously, that “there is imposed for each taxable year a tax in an amount equal to 6 percent of the amount of the excess contributions to such individual’s account[].”
• The Court noted that the IRS’s failure to examine a return, or its failure to challenge a particular position that a taxpayer took on a return, does not constitute a concession or admission that the taxpayer’s position was correct. See Coca-Cola Co. & Subs. v. Commissioner, 155 T.C. 145, 207 (2020); Union Equity Coop. Exch. v. Commissioner, 58 T.C. 397 (1972), aff’d, 481 F.2d 812 (10th Cir. 1973); Rose v. Commissioner, 55 T.C. 28, 32 (1970).

Insight:  Unfortunately for taxpayers, the assessment of income taxes is an entirely separate matter from the assessment of excise taxes.  Even though they may overlap, the failure to assess one does not prevent or prohibit the assessment of the other.