Orzechowski v. Comm'r of Internal Revenue

• Decision Date: 22 February 1978
• Docket Number: Docket No. 1973-77.
• Citation: 69 T.C. 750
• Parties: RICHARD W. and JANET ORZECHOWSKI, PETITIONERS v. COMMISSIONER of INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

69 T.C. 750

RICHARD W. and JANET ORZECHOWSKI, PETITIONERS

v.COMMISSIONER of INTERNAL REVENUE, RESPONDENT

Docket No. 1973-77.

United States Tax Court

Filed February 22, 1978.

In 1975, P, who was a full-time, salaried employee of O covered by O's qualified pension plan, contributed $1,500 to an individual retirement account. Held, such contribution was not deductible under sec. 219, I.R.C. 1954, because P was an active participant in O's qualified pension plan. Held, further, the entire contribution was an excess contribution within the meaning of sec. 4973, I.R.C. 1954, and was subject to the 6-percent excise tax imposed on excess contributions by such section. Richard W. Orzechowski, pro se.

William F. Halley, for the respondent.

SIMPSON, Judge:

The Commissioner determined a deficiency of $375 in the petitioners' Federal income tax for 1975 and imposed an excise tax of $90. The issues for decision are: (1) Whether a $1,500 contribution to an individual retirement account was deductible under section 219 of the Internal Revenue Code of 1954;¹ and (2) whether any portion of such contribution constituted an excess contribution subject to the 6-percent excise tax imposed by section 4973.

FINDINGS OF FACT²

Petitioners Richard W. Orzechowski and Janet Orzechowski, husband and wife, lived in the town of Newburgh, N. Y., at the time they filed their petition in this case. They filed a joint Federal income tax return for 1975. Mr. Orzechowski will sometimes be referred to as the petitioner.

In August 1968, the petitioner went to work for Otis Elevator Co. (Otis) as a forms analyst or systems man in the firm's Corporate Systems and Data Processing Department. In that job, he was in charge of forms control at the corporate level and designed forms for high-speed computers. He was not a computer programmer. He was not a member of a collective bargaining unit, nor was he a temporary, special, or hourly employee. Throughout the period of his employment with Otis, the petitioner was a regular, full-time, salaried employee.

Otis' Basic Retirement Plan for Salaried Employees (the plan) was adopted in 1947, and pursuant to a determination letter issued by the Internal Revenue Service, the plan was determined to be a qualified pension plan under Section 401 during 1975. The plan was noncontributory. All regular, full-time, salaried employees, such as the petitioner, were automatically enrolled in the plan on the first day of the month following their date of employment. However, under the plan, an employee's rights were forfeitable until he had completed 10 years of continuous service. The petitioner was automatically covered by the plan and an active participant therein from virtually the beginning of his employment with Otis.

From November 1974 through November 1975, the petitioner wrote numerous letters to Otis discussing a waiver of participation in the plan. The plan did not permit employees to waive participation. Otis considered, but decided against, adopting such a waiver provision. Otis had consulted actuaries who advised that such voluntary waiver of participation might cause the plan to run the risk of not meeting coverage requirements and to run the risk of losing its qualified status.

From his own letters imploring Otis to change the plan to permit a waiver, it is apparent that the petitioner was aware that the plan did not permit waivers, and that his request for a waiver provision had been rejected by Otis. The petitioner even tried to buy out of this noncontributory pension plan, but Otis declined the offer and returned his check. The petitioner had not waived and could not waive participation in the plan.

In November 1975, the petitioner was told informally that he would probably be laid off. Subsequently, on January 15, 1976, his employment with Otis was terminated after 71;2 years of continuous service but before he had completed the 10 years necessary to obtain a nonforfeitable interest in the plan. The plan does not give any employee the right to be retained in the service of the company and does not interfere with the company's right to discharge or otherwise deal with an employee. Otis had no policy or practice to deliberately terminate employees before their rights in the plan could vest. The business of the company had declined substantially, and many employees, in addition to the petitioner, were laid off. The petitioner's employment was terminated principally because he was a systems man and not a computer programmer.

In 1975, the petitioner paid $1,500 into an individual retirement account (IRA) and deducted such amount on his 1975 Federal income tax return. In his notice of deficiency, the Commissioner disallowed the deduction and imposed an excise tax of $90.

OPINION

The first issue for decision is whether the petitioner is entitled to deduct under section 219(a) any portion of his contribution to an IRA.

The Employee Retirement Income Security Act of 1974 (ERISA), Pub. L. 93-406, 88 Stat. 829, was enacted to make retirement plans more effective in providing retirement income for employees. H. Rept. 93-807 (1974), 1974-3 C.B. (Supp.) 236; S. Rept. 93-383 (1973), 1974-3 C.B. (Supp.) 80; see also Conf. Rept. 93-1280 (1974), 1974-3 C.B. 415.³ The law already provided substantial tax advantages for those employees who were covered by their employers' qualified retirement plans. Such employees were not taxable currently on funds contributed to such plans, and the earnings on the funds were also exempt from current taxation. In addition to making many other changes in the law, ERISA undertook to provide comparable tax benefits for those employees whose employers had not established plans for them. It authorizes such employees to create individual retirement accounts; contributions to such accounts are deductible, and the earnings on such accounts are not currently taxed. Conf. Rept. 93-1280 at 497; H. Rept. 93-807 at 361; S. Rept. 93-383 at 209.

The deductibility of contributions to an IRA is governed by section 219. Generally, section 219(a) allows a deduction from gross income for cash contributions to an IRA. Section 219(b)(1) limits the amount of such deduction to the lesser of $1,500 or 15 percent of the individual's compensation includable in his gross income for such taxable year, and section 219(b)(2) disallows any deduction under section 219(a) for the taxable year if, inter alia, the individual claiming the deduction was an active participant in a qualified pension plan under section 401(a) for any part of such taxable year.

During 1975, the petitioner's rights under the Otis plan were forfeitable and because his employment was terminated in 1976, his rights were in fact forfeited. Moreover, he suggests that those engaged in his type of work often serve relatively short periods with the same employer and fail to acquire vested rights under an employer pension plan. For these reasons, he argues that he should not be considered an active participant in the Otis plan for 1975. Yet, it is clear that Congress intended the term “active participant” to include employees such as the petitioner.

Section 219 does not define the term “active participant,” but the report of the Ways and Means Committee states:

An individual is to be considered an active participant in a plan if he is accruing benefits under the plan even if he only has forfeitable rights to those benefits. Otherwise, if an individual were able to, e.g., accrue benefits under a qualified plan and also make contributions to an individual retirement account, when he later becomes vested in the accrued benefits he would receive tax-supported retirement benefits for the same year both from the qualified plan and the retirement savings deduction. * * * (H. Rept. 93-807 at 364.)

Although toward the end of 1975 the petitioner learned that his employment with Otis would probably be terminated, and although his employment was in fact terminated in January 1976, he remained an employee of Otis throughout the year 1975. The Otis plan operated on a fiscal year ending May 31, and for the year ending May 31, 1975, the petitioner was clearly considered an employee for purposes of the plan. Thus, within the terms of the committee report, he was an active participant in a qualified plan at least for a part of 1975 and, therefore, was not entitled to deduct the contribution made in that year to the IRA.

The petitioner contends that he waived participation in the plan in November 1974. However, the record does not support such contention. In his numerous communications with officials of Otis, the petitioner made clear his wish to waive participation in the plan. Yet, he was advised that the plan did not permit him to waive participation in it, and there was no effective waiver on his part.

The petitioner also argues that the plan was not a qualified pension plan. From the fact that he personally was laid off before his rights in the plan vested, he infers that Otis regularly engaged in such practice. He concludes that because of such alleged practice, the plan was discriminatory and therefore not a qualified pension plan under section 401. It is unnecessary to reach the legal argument because the petitioner has not established the factual predicate. The record does not show that Otis had any such policy or practice. The evidence shows that the petitioner's employment was terminated for reasons wholly unrelated to the plan, namely, the decline in Otis' business and the nature of his particular job with Otis.

The second issue for decision is whether the petitioner's contribution to an IRA was an excess contribution subject to the 6-percent excise tax imposed on such contributions by section 4973. Unlike some of the more complicated aspects of ERISA, the provisions dealing with IRA's are relatively straightforward. In a very orderly fashion, the method of creating IRA's, the tax treatment of contributions to, earnings on, and...