Taxpayer Can't Escape Assessments on Excess IRA Contributions

(Parker Tax Publishing March 2024)

A divided Tax Court held that the Code Sec. 6501(l)(4) statute of limitations provision, as enacted in the 2023 Consolidated Appropriations Act, applies only with respect to tax returns filed on or after December 29, 2022, and because the taxpayer's returns were filed before that time, Code Sec. 6501(l)(4) did not apply to let him off the hook for taxes and penalties incurred in years 2004 through 2008 for excess contributions made to his individual retirement account. Additionally, the court concluded that (1) the taxpayer's argument for the retroactive application of Code Sec. 6501(l)(4) would have imposed on the government a six-year limitations period that did not exist when it issued a notice of deficiency to the taxpayer, and (2) the taxpayer failed to show "clear congressional intent" militating in favor of such retroactive application. Couturier, Jr. v. Comm'r, 162 T.C. No. 4 (2024).

Facts

Clair Couturier, Jr. was a corporate executive and, in conjunction with his employment, he participated in multiple deferred compensation arrangements. As of 2004, he owned 4,586 shares in an employee stock ownership plan (ESOP), which was a qualified retirement plan. He also held interests in several compensatory plans, none of which were qualified retirement plans, and owned an individual retirement account (IRA).

In 2004, as part of a corporate reorganization, Couturier accepted a $26 million buyout from his company. The $26 million took the form of a $12 million cash payment to his IRA and a $14 million promissory note payable to his IRA. The promissory note was paid in full in 2005. On April 11, 2005, Couturier timely filed his 2004 Form 1040. On that return he characterized the $26 million as a nontaxable rollover contribution to his IRA. He left blank line 59, "Additional tax on IRAs, other qualified retirement plans, etc." He timely filed Forms 1040 for 2005-2008, again leaving line 59 blank. He did not include a completed Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts, with any of these returns.

Upon auditing Couturier's returns, the IRS concluded that the bulk of the $26 million received by Couturier's IRA was attributable to his relinquishment of rights under the non-ESOP deferred compensation plans, which were not eligible for tax-free rollovers. According to the IRS, $25,132,892 of the $26 million constituted an excess contribution to Couturier's IRA under Code Sec. 4973(a)(1) and Code Sec. 4973(b)(2). As a result, on June 10, 2016, the IRS issued notices of deficiency assessing excise taxes on the excess contributions, as well as interest and penalties. Couturier filed a motion for summary judgment contending that the notices of deficiency were untimely because they were issued after the expiration of the three-year statute of limitations period specified in Code Sec. 6501(a) and/or the six-year statute of limitations period specified in Code Sec. 6501(e)(3). The IRS filed a cross-motion arguing that the excise taxes could be assessed "at any time" under Code Sec. 6501(c)(3) because Couturier had failed to report his excess contributions on Form 5329, which constitutes a tax "return" within the meaning of Code Sec. 6011. In April 2019, the Tax Court denied both parties' motions, concluding that the statute of limitations issue was "intertwined with the merits," i.e., with the question of whether Couturier had actually made "excess contributions" reportable on Form 5329.

In July 2023, Couturier filed a motion for partial summary judgment, requesting a ruling that the statute of limitations on assessment imposed by recently enacted Code Sec. 6501(l)(4) rendered the IRS's deficiency notices for tax years 2004-2008 untimely.

Code Sec. 4973 Excise Tax and the Statute of Limitations

Under Code Sec. 4973(a), a 6 percent excise tax is imposed on the amount of excess contributions a taxpayer makes to an IRA in any given year. Code Sec. 4973(b)(2) provides that this tax continues to apply for future years, until such time as the original excess contribution is distributed to the taxpayer and included in income.

Under the law as it existed before 2022, a taxpayer's failure to file Form 5329 generally caused the statute of limitations for assessing the Code Sec. 4973 excise tax to remain open indefinitely. Section 313 of the Consolidated Appropriations Act, 2023 (2023 CAA) (Pub. L. 117-328), amended Code Sec. 6501(l) by adding new Code Sec. 6501(l)(4), which provides that the filing of an individual's income tax return starts the running of the statute of limitations period on assessing the Code Sec. 4973 excise tax. Code Sec. 6501(l)(4)(C) provides that a six-year statute of limitations period applies where a taxpayer has filed a Form 1040, but not a Form 5329, for the tax year(s) in question.

However, a prior Tax Court decision held that the filing of a Form 1040 does not necessarily start the statute of limitations period in every case. In Paschall v. Comm'r, 137 T.C. 8 (2011), the Tax Court held a return will start the running of the limitations period for Code Sec. 4973 purposes only if the return includes sufficient information to enable the IRS to compute the taxpayer's excise tax liability. The taxpayer in Paschall had neglected to file Form 5329, and his Forms 1040 included no information about his excise tax liability, leaving all relevant lines blank. Accordingly, the Tax Court held that the filing of Forms 1040 did not start the statute of limitations running for purposes of the Code Sec. 4973 excise tax in the absence of accompanying Forms 5329.

Congress specified that the amendment to Code Sec. 6501(l) "shall take effect on the date of the enactment of this Act," i.e., December 29, 2022. Couturier argued that Code Sec. 6501(l)(4) applies retroactively, and that the notices of deficiency for 2004-2008 were untimely because they were issued more than six years after his 2004-2008 tax returns were filed.

The question presented by Couturier's motion, which the court noted was a question of first impression, was whether Congress manifested an intent that Code Sec. 6501(l)(4) apply retroactively, i.e., to all pending disputes between taxpayers and the IRS as of the date of enactment. According to Couturier, Congress intended that the new Code Sec. 6501(l)(4) would apply to all Code Sec 4973 disputes with the IRS that were pending as of the date of enactment.

Divided Court Rejects Couturier's Argument

The majority opinion of the Tax Court held that the 2022 amendment did not render untimely the notice of deficiency issued to Couturier for 2004-2008. According to the court, Code Sec. 6501(l)(4) applies only with respect to tax returns filed on or after December 29, 2022, and because Couturier's returns were filed before December 29, 2022, Code Sec. 6501(l)(4) did not apply. The court said it could find no evidence anywhere in the 2023 CAA or its legislative history that Congress intended Code Sec. 6501(l)(4) to apply to pending cases, to prior tax years, or to tax returns filed for prior tax years. The court thus concluded that Code Sec. 6501(l)(4) posed no obstacle to the assessment of Code Sec. 4973 excise taxes for Couturier's 2004-2008 tax years. In addressing Couturier's argument that Congress intended that new Code Sec. 6501(l)(4) apply to all Code Sec. 4973 disputes with the IRS that were pending as of the date of enactment, the court responded that Congress knows how to use this sort of wording in an effective-date provision when that is what it intends.

Alternate Theories and Dissents

In a concurring opinion joined by three other judges, Judge Toro concurred with the majority's result while disagreeing with its reasoning. His disagreement with the majority opinion was important, he said, because the approach adopted by the court was, in his view, both incorrect and overly broad and would produce the wrong outcome for taxpayers with facts different from Couturier's.

According to Judge Toro, the precise question before the court was: Does the Code bar the IRS from assessing the taxes imposed by Code Sec. 4973 for the years 2004 to 2008 when (1) the notice of deficiency upon which the case is based was issued on June 10, 2016, (2) in view of Tax Court precedent and the posture of this case, the court must assume that, at the time the notice was issued, Code Sec. 6501(c)(3) applied and permitted the IRS to make an assessment of those taxes "at any time," (3) under Code Sec. 6503(a)(1), the issuance of the notice "suspended" the running of the statute of limitations in Code Sec. 6501," and (4) the 2023 CAA made no change to Code Sec. 6503? Judge Toro determined that the answer to these questions was "no" based on a straightforward reading of Code Secs. 6213(a), 6215, 6501, and 6503(a)(1) and Section 313 of the 2023 CAA.

Judge Toro also questioned why Congress would enact the rule the majority opinion adopted in view of the context of the amendment to Code Sec. 6501. Section 313 of the 2023 CAA, the judge said, plainly overturned the holding in Paschall, which Congress viewed as taking taxpayers by surprise. Further, the judge took exception to the court's claim that there was no evidence anywhere in the 2023 CAA or its legislative history that Congress intended Code Sec. 6501(l)(4) to apply to pending cases, to prior tax years, or to tax returns filed for prior tax years. Judge Toro noted that the support the opinion cited for this lack of evidence was a House Report dated March 29, 2022, that describes an older, materially different version of Section 313 never passed by the Senate and that a later summary prepared by the Senate Finance Committee and discussing the final version of Section 313 casts serious doubt on the court's claim. A summary prepared by the Senate Finance Committee, the judge noted, reflected the significant changes that had been made to Section 313 since the version passed by the House.

In a dissenting opinion, Judge Foley rejected the majority view that Code Sec. 6501(l)(4) applies purely prospectively to tax returns filed on or after December 29, 2022. According to the judge, the court's opinion reached a result-oriented conclusion with a tenuous connection to the statutory language. Congressional scriveners, the judge said, do not need drafting assistance and while Congress implemented narrower effective dates for other provisions in the 2023 CAA, it notably did not do so for individuals like Couturier. Because Couturier filed only Forms 1040, the judge said, Code Sec. 6501(a) mandated that the IRS assess the Code Sec. 4973 liability, or send a notice of deficiency, before the expiration of the six-year statute of limitations period. Because the IRS failed to do so, Judge Foley concluded that Couturier's motion for partial summary judgment should be granted. Judge Marshall also signed onto this dissent.

For a discussion of the tax consequences of excess contributions to IRAs, see Parker Tax ¶134,522.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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