No carryforward of disallowed IRA deduction

Deposits were not ‘excess contributions’ within the meaning of Sec. 219(g), and shifting them to a subsequent year was not otherwise allowable, the Tax Court holds.
By Charles J. Reichert, CPA

The Tax Court denied a taxpayer's attempt to deduct in a later tax year the disallowed deduction for an IRA contribution from a previous tax year. According to the court, the amount was not an excess contribution; therefore, it could not be carried forward to a future year, and there also was no other legal basis to permit the carryforward.

Facts: Stephen Dunn, a tax attorney during the years at issue and at trial, was employed during 2008 at a law firm, where he was an active participant in the firm's retirement plan, but he was self-employed from late 2008 through 2010. In January and March 2009, Dunn contributed a total of $6,000, then the maximum contribution amount for a taxpayer age 50 or older, to his IRA, deducting that amount on his and his wife's 2008 joint federal income tax return. In June 2009 and January 2010, he contributed $5,000 and $1,000 to his IRA, respectively, designated them as contributions for 2009, and deducted the $6,000 on the couple's 2009 return. After the IRS disallowed the 2008 deduction due to Dunn's active participation in his former employer's plan, he contributed $800 to his IRA in January 2010, designated it for tax year 2010, and then deducted $6,000 on the couple's 2010 return. The taxpayer petitioned the Tax Court for relief after the IRS reduced the 2010 deduction to $800.

Issues: A taxpayer can contribute to an IRA (up to $6,000 in 2009 for taxpayers age 50 or older) and generally may deduct that amount on his or her tax return. However, under Sec. 219(g), if one or both of the spouses on a joint tax return are active participants in an employer retirement plan and their adjusted gross income (AGI) on the return reaches a certain level, the IRA deduction for any covered spouse is gradually reduced to zero as the couple's AGI increases.

If a taxpayer contributes more than the maximum allowable amount to an IRA for a given year, the excess contribution can be applied to a later tax year. (It may be subject to a 6% penalty tax.) Sec. 4973(b) defines an excess contribution as the taxpayer's contribution for the year minus the amount allowable as an IRA deduction without considering Sec. 219(g).

Dunn argued that his 2008 nondeductible contribution was an excess contribution eligible to be carried forward to 2009 and deducted on the 2009 return (when he was no longer an active participant in an employer retirement plan). Alternatively, he argued that the 2008 contribution should be deemed to have occurred in 2009, causing the 2009 contribution to be moved to 2010, and in turn moving the 2010 contribution to 2011.

Holding: The court rejected both arguments. It held that Dunn's 2008 excess contribution was zero because Dunn contributed $6,000 to his IRA for 2008, and his allowable 2008 deduction before any phaseout under Sec. 219(g) was also $6,000, leaving him with nothing to carry forward. The court also held that rolling each of the 2008, 2009, and 2010 contributions forward one year would violate the rules of cash-basis tax accounting, and no provision exists in the Code that permits an IRA deduction for a year that follows the year of the contribution.

In addition, the court could not find any Treasury regulation that permitted the redesignation of an IRA contribution to a different tax year. The court also held that the 20% accuracy-related penalty applied because there was not a "good-faith misunderstanding of the law," given Dunn's expertise in tax law.

  • Dunn, T.C. Memo. 2015-208

—By Charles J. Reichert, CPA, instructor of accounting, University of Minnesota—Duluth.




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