Excise tax imposed on $25 million in excess IRA contributions

The Tax Court granted the IRS’s motion for partial summary judgment, upholding the Service’s imposition of over $8 million in excise tax on a taxpayer’s excess contributions to an individual retirement arrangement (IRA).

Facts: Clair R. Couturier Jr. Was a corporate executive who participated in his company’s employee stock ownership plan (ESOP), a qualified retirement plan. As of 2004, he owned 4,586 shares in the ESOP. Couturier also participated in several other nonqualified compensation plans.

During a corporate reorganization in 2004, Couturier accepted a $26 million buyout offer in exchange for relinquishing his interest in the nonqualified compensatory plans. The $26 million consisted of a $12 million payment directly to his IRA and a $14 million promissory note to his IRA, which was paid in full in 2005.

On his 2004 individual tax return, Couturier did not include any additional tax on his IRA on Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts. Under Sec. 4973(a), excise taxes are imposed “equal to 6% of the amount of the excess contributions,” which continue to apply in future years until the excess contribution is distributed to the taxpayer and included in income.

Upon an audit of Couturier’s return, the IRS concluded that, of the $26 million he received for his IRA, $25,132,892 was due to the surrendering of his rights under the non-ESOP deferred compensation plans. This type of transfer is not considered a tax-free rollover. The IRS decided that the $25,132,892 constituted an “excess contribution” to his IRA as defined in Sec. 4973 and imposed additional tax deficiencies of $8,476,705 for tax years 2004 through 2014.

Issues: Sec. 6751(b)(1) states: “No penalty under this title shall be assessed unless the initial determination of such assessment is personally approved (in writing) by the immediate supervisor of the individual making such determination.”

Couturier argued that the exaction imposed by Sec. 4973 on excess contributions to IRAs is actually a penalty within the meaning of Sec. 6751, not a tax. Therefore, he argued, the IRS was required to obtain but failed to secure the approval of the “immediate supervisor” of the IRS employee making the initial determination of the $8,476,705 deficiency. Thus, the deficiency should be voided in full. The IRS moved for summary judgment that Sec. 4973 imposes a tax, not a penalty, and that Sec. 6751 therefore did not apply.

Alternatively, Couturier argued that the court should apply a “functional analysis” to determine whether Congress meant Sec. 6751(b)(1) to apply to exactions that are “punitive or penal in nature” and thus function as penalties even if they are called something else.

Holding: The Tax Court granted summary judgment for the IRS. The court’s first consideration was looking at Sec. 4973, “considering the plain and ordinary meaning of the text Congress enacted” (quoting Klein, 149 T.C. 341 (2017)). The text of Sec. 4973 refers to the assessment as a tax” numerous times, including in the section’s caption, “Tax on excess contributions to certain tax-favored accounts and annuities.” Sec. 4973 never refers to the assessment as a “penalty.”

The court held that this fact alone would suffice to resolve the issue; however, it also discussed the placement of Sec. 4973 in Subtitle D, Chapter 43, of the Internal Revenue Code (IRC). This chapter contains numerous excise taxes on various activities and actions. The court also cited additional cases involving sections of Subtitle D, Chapter 43, all of which held that the chapter was about taxes and not penalties. The court further found that the fact that the exaction was not located in Chapter 68 of the IRC, which governs numerous penalties, was evidence that it was a tax and not a penalty.

The court declined to undertake Couturier’s suggested functional analysis of Sec. 6751(b)(1) as inappropriate and held that Couturier had not provided any logical framework for conducting it.

Thus, the Tax Court held that the Sec. 4973 exaction is a tax, not a penalty; therefore, the Sec. 6751(b)(1) IRS supervisory-approval requirement did not apply. The court granted the IRS’s motion for summary judgment on the issue.

■ Couturier, T.C. Memo. 2024-6

— David R. Silversmith, CPA, CFP, CFE, MBA, is a senior manager in Private Client Services with Eisner Advisory Group LLC, based in Melville, N.Y. To comment on this column, contact Paul Bonner, the JofA’s tax editor.