Guest v. Comm'r of Internal Revenue
| Decision Date | 03 August 1979 |
| Docket Number | 9115–77,Docket Nos. 6173–77,11498–77. |
| Citation | 72 T.C. 768,1 Employee Benefits Cas. 1603 |
| Parties | JOHN L. GUEST, ET AL.,1 PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Held: Sec. 219(b)(2), I.R.C. 1954, which disallows a deduction for a contribution to an individual retirement account (IRA) by an active participant in a qualified retirement plan, does not violate the due process clause of the Fifth Amendment to the Constitution. Accordingly, petitioners may not deduct the contributions made by the petitioner-employees to their IRAs. Held, further, the 6–percent excise tax under sec. 4973(a) on excess contributions to an IRA applies even if the deduction for contributions to the IRA is disallowed in its entirety under sec. 219(b)(2). Orzechowski v. Commissioner, 69 T.C. 750 (1978), affd. 592 F.2d 677 (2d Cir.1979), followed. Jerry R. Hatton, for the petitioners.
Mary Helen Weber, for the respondent.
Respondent determined deficiencies in petitioners' Federal income tax and in excise tax under section 4973(a) 2 for 1975, as follows:
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¦ ¦ ¦Deficiencies in— ¦
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¦Docket No. ¦Petitioners ¦Income tax ¦Excise tax ¦
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¦ ¦ ¦ ¦ ¦
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¦6173-77 ¦John L. Guest ¦$437.60 ¦0 ¦
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¦9115-77 ¦James Ventresca and Jordy L. Ventresca¦296.00 ¦$60 ¦
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¦ ¦Jerome Kobos ¦286.18 ¦60 ¦
+------------+--------------------------------------+------------+------------¦
¦ ¦Edward Andrew Prebihalo ¦290.20 ¦60 ¦
+------------+--------------------------------------+------------+------------¦
¦ ¦Lorraine A. Heitchue ¦379.96 ¦84 ¦
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¦ ¦Michael P. Grant and Mary Susan Grant ¦318.82 ¦60 ¦
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¦ ¦Paul A. Vlahutin and Rosalie S. ¦218.68 ¦60 ¦
¦ ¦Vlahutin ¦ ¦ ¦
+------------+--------------------------------------+------------+------------¦
¦11498-77 ¦Dennis L. Martens ¦290.02 ¦0 ¦
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The cases have been consolidated for trial, briefs, and opinion. The issues for decision are:
(1) The constitutionality of section 219(b)(2), which operates to disallow a deduction for a contribution to an individual retirement account by an active participant in a qualified retirement plan; and
(2) The taxability under section 4973(a) of such a contribution as an excess contribution.
Substantially all of the facts have been stipulated; the stipulations and the stipulated exhibits are incorporated herein by this reference.
When the petitions in these cases were filed, all the petitioners resided in Ohio.
Petitioners John L. Guest, James Ventresca, Jerome Kobos, Edward Andrew Prebihalo, Lorraine A. Heitchue, Michael P. Grant, Paul A. Vlahutin, and Dennis L. Martens (hereinafter sometimes collectively referred to as the petitioner-employees) were, during 1975, permanent employees of Industrial Nucleonics Corp. (hereinafter referred to as Nucleonics). During 1975, all of the petitioner-employees were active participants in the Employee Pension Plan of Nucleonics (hereinafter referred to as the Nucleonics Pension Plan).
The Nucleonics Pension Plan was, during 1975, a qualified retirement plan under section 401(a). Participation in the Nucleonics Pension Plan was mandatory for all permanent employees.
As of January 1, 1976, participants in the Nucleonics Pension Plan accrued benefits at the rate of $5 per month per year of credited service, these benefits being payable beginning at age 65 (or on an actuarially reduced basis in the case of early retirement).
During 1975, the petitioner-employees made deposits to individual retirement accounts (hereinafter referred to as IRAs) in their respective names at the State Savings Co. in Columbus, Ohio, in the amounts set forth in table I.
On their Federal individual income tax returns for 1975, the petitioner-employees deducted the amounts set forth in table I. Respondent disallowed these deductions under section 219(b)(2).
OPINIONRespondent maintains that because the petitioner-employees were active participants in a qualified retirement plan for 1975, they were ineligible to make deductible contributions to their IRAs for that year, under section 219(b)(2).3 Petitioners do not dispute the application of the statute, but they argue that this provision is unconstitutional because it violates the due process clause of the Fifth Amendment to the Constitution, in that—
(1) The classification created by section 219(b)(2) has no rational relationship to the purpose of the legislation; and
(2) The section establishes an impermissible “irrebuttable or conclusive presumption” that all participants in qualified retirement plans will receive tax-sheltered retirement income from their plans.
Respondent contends section 219(b)(2) is constitutional.
We agree with respondent.
Where it can fairly do so, a court should interpret statutory provisions so as to avoid serious doubts as to their constitutionality. E.g., Golden Rule Church Association v. Commissioner, 41 T.C. 719, 730 (1964), and cases cited therein. However, petitioners' attack on the statute is a frontal one—the parties' stipulations (in accord with our understanding of the facts) have left us no choice but to assess the constitutionality of section 219(b)(2) as in effect for 1975. We proceed now to that assessment.
A. Statutory framework.—Section 219(a) 4 permits an individual to deduct (subject to dollar limitations and other restrictions none of which are in issue in the instant cases) amounts paid in cash to an IRA. However, section 219(b)(2) 5 disallows the deduction for a year to any individual who, for any part of that year, is an active participant in a qualified plan under section 401(a), a section 403(a) annuity plan, a section 405(a) qualified bond purchase plan, or any government employee plan (whether or not tax-qualified). This disqualification applies also to any individual for a year if, for any part of that year, the individual's employer makes contributions for a section 403(b) annuity (a so-called tax-sheltered annuity) for that individual.
B. Legislative history.—Section 219 and the related sections establishing IRAs were enacted by section 2002 of the Employee Retirement Income Security Act of 1974 (), Pub.L. 93–406, 88 Stat. 958.
Examination of the legislative history makes it clear that the Congress was concerned about strengthening employee benefit arrangements, largely to be sure that benefits that appeared to be promised would indeed be forthcoming. However, recognizing that perhaps half the workforce was not covered by such arrangements, the Congress provided for IRAs.
For example, under the heading “Problem areas,” the report of the Committee on Ways and Means of the House of Representatives stated as follows:
Discrimination against individuals not covered by pension plans.—Individuals who are outside of qualified pension plans have no opportunity to set aside income for their own retirement under the favorable tax treatment accorded to individuals covered by such plans. These individuals must save for their retirement from income after tax and must pay tax currently on the income earned by their retirement savings.
The report went on (H.Rept. 93–807, supra at 126, 1974–3 C.B. (Supp.) at 361) to state the following:
Present Law
Generally, an employee is not allowed a deduction for amounts contributed from his own funds to a retirement plan. While an employer's qualified plan may allow employees to contribute their own funds to the plan, no deduction is allowed for these contributions (except to the extent that tax excludable contributions made in connection with salary reduction plans may be viewed as employee contributions). However, the income earned on employee contributions to an employer's qualified plan is not taxed until it is distributed.
General reasons for change
While in the case of many millions of employees, provision is made for their retirement out of tax-free dollars by their participation in qualified retirement plans, many other employees do not have the opportunity to participate in qualified plans. Often, plans are not available because an employer is not willing to incur the costs of contributing to a retirement plan since, in general, the employer contributes funds which are in addition to the compensation otherwise paid his employees. Employees who are not covered under a qualified plan are...
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