Foulkes v. C. I. R.

• Decision Date: 02 June 1980
• Docket Number: No. 79-1945,79-1945
• Citation: 638 F.2d 1105
• Parties: 81-1 USTC P 9149, 2 Employee Benefits Ca 1044 John F. FOULKES and Joyce A. Foulkes, Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee. . Heard
• Court: U.S. Court of Appeals — Seventh Circuit

Page 1105

638 F.2d 1105

81-1 USTC P 9149, 2 Employee Benefits Ca 1044

John F. FOULKES and Joyce A. Foulkes, Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.

No. 79-1945.

United States Court of Appeals Seventh Circuit.

Heard June 2, 1980.

Decided Jan. 21, 1981.

John Foulkes, pro se.

Jay W. Miller, Tax Div., Dept. of Justice, Washington, D. C., for respondent-appellee.

Before FAIRCHILD, Chief Judge, and SWYGERT and CUDAHY, Circuit Judges.

FAIRCHILD, Chief Judge.

This tax case requires us to consider whether a deduction for a contribution to an individual retirement account (IRA) may be taken in a year in the beginning of which taxpayer is covered by a qualified pension plan, but during which it becomes certain that taxpayer can acquire no tax benefit from such coverage.

I.

From November 1970 to May 1975 John F. Foulkes was employed by S&C Electric Company of Chicago (S&C). S&C maintained a qualified, noncontributory pension plan and Foulkes was covered by the plan. ¹ Pursuant to the terms of the plan, Foulkes forfeited his right to benefits when he terminated his employment in May 1975. ²

After his termination from S&C Foulkes obtained employment with Balluff & Balluff, Architects and Engineers of Elmhurst, Illinois. Balluff & Balluff had no pension plan for its employees. In December of 1975 Foulkes opened an IRA with Elmhurst Federal Savings and deposited $1,500 into the account. Pursuant to 26 U.S.C. § 219(a)(1) Foulkes claimed a $1,500 deduction on his 1975 federal income tax form. ³ The Internal Revenue Service disallowed the deduction, contending that since Foulkes had been an "active participant" in a qualified plan for the year 1975, section 219(b)(2)(A)(i) precluded him from taking the $1,500 deduction. The Tax Court held for the Commissioner and Foulkes seeks review of that determination. ⁴

II.

A fair understanding of the issue presented for review requires some discussion of the pertinent statutory provisions. Various provisions of the Internal Revenue Code give tax advantages to employees who are members of qualified pension plans. ⁵ Likewise, participating employers receive special tax treatment when contributing to qualified plans. ⁶ These provisions were enacted by Congress to encourage the growth of pension plans in recognition of the public interest in ensuring that an employee's economic welfare was provided for at the time of retirement.

These provisions, however, created inequities in that employees who were not covered by qualified plans received no corresponding tax break and thus no tax incentive to save for their retirement. H.R.Rep.No.93-807, 93d Cong., 2d Sess. 2, reprinted in (1974) U.S.Code Cong. & Ad.News, pp. 4639, 4670. Congress, cognizant of these inequities, passed several provisions which sought to create tax incentives for the individual, not a member of a qualified plan, who wished to create his or her own retirement fund. ⁷ Section 219(a)(1) provided for a deduction for contributions to an IRA of 15% of compensation includible in gross income but not to exceed $1,500. ⁸

In allowing this deduction under § 219(a)(1), Congress also added a limitation that is, § 219(b)(2)(A)(i) provides that an individual who was an active participant in a qualified pension plan for any part of such year could not claim a deduction for a contribution to an IRA made in that year. ⁹ Congress, by passage of this limitation, sought to preclude the potential for an individual to obtain the tax benefit provided by being a participant in a qualified pension plan as well as the tax benefit allowed to those making contributions to an IRA.

It should be emphasized that the limitation in § 219(b)(2)(A)(i) was to prevent not merely the actual double tax benefit but the potential for this double tax benefit. This is made clear by the fact that § 219(b)(2)(A)(i) applies even if an individual's rights under the qualified plan are subject to forfeiture. ¹⁰

III.

The Commissioner places reliance on several cases in his contention that Foulkes cannot avail himself of the IRA deduction. The Commissioner also argues that the clear wording of the statute as well as the regulations promulgated thereunder ¹¹ also mandate affirmance of the Tax Court. We proceed to discuss these contentions.

The Commissioner places primary reliance on Cooper v. Commissioner, 38 T.C.M. 1023 (1979). In Cooper the employee began the year as a member of a qualified plan. In September of that year the plan terminated as to him. In the same tax year the taxpayer opened an IRA account and claimed a $1,500 deduction. The Tax Court held that the deduction be disallowed, reasoning that although the plan terminated in September of 1975, the taxpayer had been an active participant in the plan for part of the year and thus covered by the limitation of § 219(b)(2)(A)(i).

The Tax Court in this case utilized reasoning identical to Cooper and disallowed the deduction. The Commissioner urges us to follow Cooper and hold that Foulkes was an "active participant" for the year 1975.

We observe that the facts of Cooper are indistinguishable from the present case. However, we decline to adopt its reasoning ¹² and instead look to our decision in Johnson v. C. I. R., 620 F.2d 153 (7th Cir. 1980) for guidance. ¹³ In Johnson we had an opportunity to discuss section 219 and the congressional purpose behind the provision. The taxpayer in Johnson worked for three separate employers in the tax year. Only the last employer had a qualified pension plan. Earlier in the year Johnson had made a contribution to an IRA. The Tax Court disallowed the deduction and we affirmed. We relied upon the language of the statute and the legislative history. In discussing the legislative history we observed:

Further buttressing the Commissioner's reading of § 219(b)(2) is the purpose behind the statute. Congress enacted § 219(b)(2) to prevent situations in which taxpayers would obtain double tax benefits by setting aside in an IRA the maximum portion of their income allowed and deferring tax on that income, while for the same year deferring tax on employer contributions to a qualified pension plan. See H.Rep.No.93-807, supra, (1974) U.S.Code Cong. & Admin.News at 4793-94; Orzechowski v. C. I. R., 592 F.2d 677, 678 (2d Cir. 1979). That is precisely the situation in which Johnson found himself. Thus the Tax Court was correct in holding that Johnson was not entitled to the claimed deduction and that the contribution to the IRA was an excess contribution subject to the 6% excise tax under I.R.C. § 4973.

620 F.2d at 155. ¹⁴ Thus, in Johnson we acknowledged the significance of the congressional purpose in defining the phrase "active participant."

The Commissioner urges us to follow the "clear and unambiguous" language of § 219(b)(2)(A)(i). As a corollary to this argument, the Commissioner states that where the language of a statute is precise, reliance on legislative materials is inappropriate. ¹⁵ Appellee's Brief at 8 n. 7. We reject these contentions for the reasons stated below.

First, the phrase "active participant" is anything but self-defining or clear and precise. Second, the rule that extrinsic aids are unnecessary when statutory language is plain is not an absolute rule.

It is said that when the meaning of language is plain we are not to resort to evidence in order to raise doubts. That is rather an axiom of experience than a rule of law, and does not preclude consideration of persuasive evidence if it exists.

Boston Sand & Gravel Co. v. United States, 278 U.S. 41, 48, 49 S.Ct. 52, 53, 73 L.Ed. 170 (1928) (Holmes, J.).

In the present case the various legislative reports indicate that the congressional purpose in enacting the limitation in § 219(b)(2)(A)(i) was to avoid a potential double tax benefit. Foulkes, in making his contribution to an IRA and taking the corresponding deduction never had the potential for a double tax benefit in the year 1975. ¹⁶

It may be contended that as a member of the plan from January 1975 to May 1975 Foulkes was reaping the tax benefits of being a plan participant. However, this argument ignores that Foulkes paid his income tax on a calendar year basis and that the potential for a double tax benefit must be assessed as of the close of the tax year that is, December 31, 1975. On December 31, 1975 Foulkes' tax benefit as a member of a qualified plan would have been the right to defer income (and the tax thereon) from the plan. His forfeiture of the rights under the plan in that year meant that by December 31, 1975 it had been determined that he received no tax benefit as a member of the plan and that he retained no potential for such a benefit.

Thus, inclusion of Foulkes within the limitation of § 219(b)(2)(A)(i) would not further the congressional purpose behind that provision. In fact, the IRS concedes that there is an "absence of any potential for a double tax benefit in the instant case...." Supp. Brief for the Appellee at 17. We concede that the language of the statute arguably does include Foulkes. Yet this does not end the statutory analysis. Instead, the particular case must be viewed in light of the congressional purpose sought to be achieved.

It is a familiar rule, that a thing may be within the letter of the statute and yet not within the statute, because not within its spirit, nor within the intention of its makers.... This is not the substitution of the will of the judge for that of the legislator, for frequently words of general meaning are used in a statute, words broad enough to include an act in question, and yet a consideration of the whole legislation, or of the circumstances surrounding its enactment, or of the absurd results which follow from giving such broad meaning to the words, makes it unreasonable to believe that the legislator intended to include the particular act.

Church of the Holy Trinity v. United States, 143 U.S. 457, 459, 12 S.Ct. 511, 512, 36 L.Ed. 226 (18...