108 T.C. No. 5
UNITED STATES TAX COURT
GEORGE AND ELAM CAMPBELL, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 12931-95. Filed February 18, 1997.
P was a State employee. In October 1989, P elected to transfer from the State Retirement System to the State Pension System effective November 1989. As a consequence, P received a Transfer Refund in 1989 consisting principally of previously taxed contributions and taxable earnings. Shortly thereafter, P deposited approximately one-half of the taxable portion into an IRA with Loyola. P included the entire taxable portion of the Transfer Refund in income on an amended tax return for 1989. See Dorsey v. Commissioner, T.C. Memo. 1995-97. In April 1991, P closed his Loyola IRA. On a 1991 tax return, P included in income a portion of the earnings generated by the IRA but not the balance. P contends that sec. 72(e)(6) provides P with a basis in his IRA equal to the amount rolled over from his Transfer Refund into the IRA. R contends that such an application of sec. 72(e)(6) is contrary to legislative intent. Held, Sec. 72(e)(6) provides P with a basis in his entire Loyola IRA contribution, the genesis of which - 2 -
was P's taxed retirement savings; thus, the distribution of such contribution in 1991 is not includable in P's income. Secs. 72(e)(6), 408(d)(1), I.R.C. 1986.
Thomas F. DeCaro, Jr., for petitioners.
Alan R. Peregoy, for respondent.
OPINION
DAWSON, Judge: This case was assigned to Special Trial
Judge Robert N. Armen, Jr., pursuant to the provisions of section
7443A(b)(4) of the Internal Revenue Code of 1986, as amended, and
Rules 180, 181, and 183.1 The Court agrees with and adopts the
Opinion of the Special Trial Judge, which is set forth below.
OPINION OF THE SPECIAL TRIAL JUDGE
ARMEN, Special Trial Judge: For the taxable year 1991,
respondent determined a deficiency in petitioners' Federal income
tax, as well as a deficiency in Federal excise tax under section
4980A,2 in the total amount of $58,464.
1 Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for 1991, the taxable year in issue. All Rule references are to the Tax Court Rules of Practice and Procedure. 2 Sec. 4980A imposes a 15-percent excise tax on excess distributions from qualified retirement plans. This tax is included within ch. 43 of the I.R.C. and is subject to the deficiency procedures set forth in subch. B of ch. 63 of the I.R.C. See sec. 6211(a). - 3 -
After concessions by the parties,3 the only issue for
decision is whether the distribution received by petitioner
George Campbell in 1991 from his individual retirement account
with Loyola Federal Savings and Loan is taxable under sections
408(d)(1) and 72.
This case was submitted fully stipulated under Rule 122, and
the facts stipulated are so found. Petitioners resided in Prince
Frederick, Maryland, at the time that their petition was filed
with the Court.
Background
George Campbell (petitioner) was employed by the Maryland
State Highway Administration (the Highway Administration) in 1989
and 1991, and remained so employed at least through the time that
this case was submitted for decision. As an employee of the
Highway Administration, petitioner was a member of the Maryland
State Employees' Retirement System (the Retirement System) until
he transferred to the Maryland State Employees' Pension System
(the Pension System), effective November 1, 1989.
3 Petitioners concede that $7,762.11 and $9,612.14 of the distributions from petitioner George Campbell's Loyola IRA and Delaware Charter IRA, respectively, represent earnings and are includable in petitioners' gross income for 1991. Respondent concedes that the amount of unreported income from the IRA distributions is $91,513 (i.e., $172,719 less $81,206), rather than the greater amount determined in the notice of deficiency. Respondent also concedes that petitioners are not liable for the excise tax under sec. 4980A. See infra p. 9, for further discussion regarding the parties' concessions. - 4 -
The Retirement System and the Pension System
The Retirement System is a qualified defined benefit plan
under section 401(a) and requires mandatory nondeductible
employee contributions. The Pension System is also a qualified
defined benefit plan under section 401(a), but generally does not
require mandatory nondeductible employee contributions. The
State of Maryland contributes to both the Retirement System and
the Pension System on behalf of the members of those systems.
The trusts maintained as part of the Retirement System and the
Pension System are both exempt from taxation under section
501(a).4
The Transfer Refund
On October 4, 1989, petitioner elected to transfer from the
Retirement System to the Pension System, effective November 1,
1989. As a result of his election to transfer, petitioner
received a distribution (the Transfer Refund) from the Retirement
System in the amount of $174,802.14, which petitioner received in
the form of a check dated November 30, 1989.
Petitioner's Transfer Refund consisted of $11,695.84 in
previously taxed contributions made by petitioner during his
employment tenure with the Highway Administration, $693.52 in
4 For a further discussion of the Retirement System and the Pension System, see Adler v. Commissioner, 86 F.3d 378 (4th Cir. 1996), vacating and remanding T.C. Memo. 1995-148; Maryland State Teachers Association, Inc. v. Hughes, 594 F. Supp. 1353, 1357-1358 (D. Md. 1984). - 5 -
taxable employer "pick-up contributions",5 and $162,412.78 of
taxable earnings in the form of interest. The earnings and
"pick-up contributions", which total $163,106.30, constitute the
taxable portion of the Transfer Refund.
If petitioner had not transferred to the Pension System but
rather had remained a member of the Retirement System, he would
have been entitled to retire at an appropriate age and receive a
normal service retirement benefit, including a regular monthly
annuity. He would not, however, have been entitled to receive a
Transfer Refund because a Transfer Refund is only payable to
those who elect to transfer from the Retirement System to the
Pension System.
As a result of transferring from the Retirement System to
the Pension System, petitioner became, and presently is, a member
of the Pension System. As a member of the Pension System,
petitioner will be entitled to receive a retirement benefit based
upon his salary and his creditable years of service, specifically
including those years of creditable service recognized under the
Retirement System. However, because petitioner received the
Transfer Refund on account of transferring from the Retirement
System to the Pension System, petitioner's monthly annuity will
be less than the monthly annuity that he would have received if
5 See sec. 414(h)(2). - 6 -
he had not transferred to the Pension System but had ultimately
retired under the Retirement System.6
Rollover of Petitioner's Transfer Refund
Within 60 days of receiving the Transfer Refund, petitioner
deposited the taxable portion thereof into two individual
retirement accounts (IRA's), as follows:
On December 26, 1989, petitioner deposited $82,900 of the
Transfer Refund into an IRA with Loyola Federal Savings and Loan
(the Loyola IRA).
On January 2, 1990, petitioner deposited $81,206.39 of the
Transfer Refund into an IRA with Delaware Charter Guarantee and
Trust Co. (the Delaware Charter IRA).7
Distribution of the Loyola IRA
On or about April 11, 1991, Loyola Federal Savings and Loan
distributed, and petitioner received, the account balance of
6 It should be recalled that petitioner remained employed by the State of Maryland at the time that this case was submitted to the Court. 7 Petitioner deposited a total amount of $164,106.39 into his two IRA's. However, the taxable portion of petitioner's Transfer Refund was only $163,106.30. This discrepancy is not explained in the record. - 7 -
petitioner's IRA; i.e., $90,662.11, which consisted of
petitioner's initial deposit and earnings as follows:
IRA deposit: $ 82,900.00 Earnings: 7,762.11 Total distribution: 90,662.11
Distribution of the Delaware Charter IRA
In a letter to Delaware Charter Guarantee and Trust Co.,
dated April 8, 1991, petitioner requested that his IRA be
converted into a non-IRA account prior to April 15, 1991. In
such letter, petitioner stated: "To avoid further IRS penalties I
must have the IRA account closed by April 15, 1991."
Petitioner's IRA was converted into a non-IRA account on June 11,
1991.
The balance of petitioner's Delaware Charter IRA, upon
conversion into a non-IRA account, was $90,818.53, which
consisted of petitioner's initial deposit and earnings as
follows:
IRA deposit: $ 81,206.39 Earnings: 9,612.14 Account balance on conversion: 90,818.53
Petitioners' 1989 Return
On their Federal income tax return for 1989, petitioners did
not include in gross income any of the taxable portion of the
Transfer Refund; i.e., $163,106.30. In 1991, petitioners amended
their 1989 income tax return to include the taxable portion of
the Transfer Refund in gross income. See Dorsey v. Commissioner, - 8 -
T.C. Memo. 1995-97 (a taxpayer who was employed for 1 year after
transferring from the Retirement System to the Pension System was
required to include the Transfer Refund in income in the year of
receipt); cf. Adler v. Commissioner, 86 F.3d 378 (4th Cir. 1996),
vacating and remanding T.C. Memo. 1995-148 (where a member of the
Retirement System retired shortly after receiving his Transfer
Refund, such member received the Transfer Refund "on account of"
retirement and was not required to include such amount in income
in the year of receipt).
Petitioners' 1991 Return
On their Federal income tax return for 1991, petitioners
disclosed the receipt of distributions from petitioner's IRA's in
the total amount of $181,481. Of this amount, petitioners
reported $8,762 as the taxable amount.
The Notice of Deficiency
In the notice of deficiency, respondent determined that the
difference between the amount distributed from petitioner's IRA's
(i.e., $90,662.11 + $90,818.53 = $181,480.64) and the amount
reported as taxable ($8,762); i.e., $172,719, was includable in
petitioners' gross income for 1991. As a corollary, respondent
also determined that petitioners were liable for the 15-percent
excise tax imposed by section 4980A. - 9 -
The Parties' Concessions
The distribution from petitioner's Delaware Charter IRA is
deemed to have occurred before the due date of petitioners'
income tax return for the year in which the contribution to that
IRA was made. For that reason, respondent concedes on brief that
petitioner's Delaware Charter IRA distribution qualifies for
relief pursuant to section 408(d)(4), and that only the portion
of such distribution representing earnings; i.e., $9,612.14, is
includable in petitioners' gross income.8 As a result of this
concession, the threshold amount that must be exceeded before the
excise tax under section 4980A may be imposed is no longer
satisfied; thus, respondent also concedes that petitioners are
not liable for such excise tax.9
Petitioners concede that the earnings on petitioner's
contributions to petitioner's Delaware Charter IRA and Loyola IRA
are includable in petitioners' gross income.
In view of the foregoing concessions, the only issue
remaining for decision is whether $82,900 of the distribution
received by petitioner from his Loyola IRA (i.e., $90,662.11 less
8 For a detailed analysis of sec. 408(d)(4), see Childs v. Commissioner, T.C. Memo. 1996-267; Thompson v. Commissioner, T.C. Memo. 1996-266. 9 Insofar as petitioner Elam Campbell might otherwise be concerned, see sec. 4980A(b); Johnson v. Commissioner, 74 T.C. 1057, 1062 (1980), affd. 661 F.2d 53 (5th Cir. 1981). - 10 -
$7,762.11 that petitioners concede is taxable earnings) is
taxable under sections 408(d)(1) and 72.
Discussion
1. General Legal Background
Generally, a taxpayer is entitled to deduct the amount
contributed to an IRA. Sec. 219(a); sec. 1.219-1(a), Income Tax
Regs. The deduction in any taxable year, however, may not exceed
the lesser of $2,000 or an amount equal to the compensation
includable in the taxpayer's gross income for such taxable year.
In addition, the amount of the deduction is limited where the
taxpayer was, for any part of the taxable year, an "active
participant" in a retirement plan qualified under section 401(a)
or a plan established for its employees by the United States, by
a State or political subdivision thereof, or by any agency or
instrumentality of any of the foregoing. Sec. 219(g)(1),
(5)(A)(i), (iii). In the case of an active participant who files
a return as a single individual, the deduction is reduced using a
ratio determined by dividing the excess of the taxpayer's
modified adjusted gross income (modified AGI) over $25,000, by
$10,000.10 Sec. 219(g)(2) and (3). In the case of an active
participant who files a joint return, the deduction is reduced
10 As relevant herein, modified adjusted gross income means adjusted gross income computed without regard to any deduction for an IRA. Sec. 219(g)(3)(A). - 11 -
using a ratio determined by dividing the excess of the taxpayer's
modified AGI over $40,000 by $10,000. Id.
Notwithstanding the foregoing limitation, section 408(o)
permits individuals to make designated nondeductible IRA
contributions to the extent that deductible contributions are not
allowable because of the active participant reduction rule set
forth in section 219(g). Sec. 408(o)(1) and (2). Specifically,
an individual may make nondeductible contributions to the extent
of the excess of (1) the amount allowable as a deduction under
section 219 determined without regard to the reduction for active
participants over (2) the amount allowable as a deduction under
section 219 determined with regard to such reduction. Sec.
408(o)(2).
As relevant herein, a contribution to an IRA that exceeds
the amount allowable as a deduction under section 219(a),
computed without regard to the active participant reduction rule
under section 219(g), is considered an excess contribution. Sec.
4973(b).11
In the present case, petitioner made an excess contribution
to his Loyola IRA in the amount of $80,900 for 1989 (i.e.,
11 As relevant herein, an excess contribution may also be viewed as the amount of an IRA contribution that exceeds the sum of (1) the deductible limit under sec. 219(a), computed with regard to sec. 219(g), and (2) the nondeductible limit under sec. 408(o). S. Rept. 99-313, 545 (1986), 1986-3 C.B. (Vol. 3) 1, 545. - 12 -
$82,900 less $2,000). The genesis of such contribution was in
petitioner's retirement savings which petitioners reported as
income on their amended Form 1040 for 1989. This contribution
was distributed to petitioner by his IRA on April 11, 1991.
As a general rule, any amount "paid or distributed out of"
an IRA is includable in gross income by the taxpayer in the
manner provided under section 72. Sec. 408(d)(1). Section 72(e)
is applicable, inter alia, to amounts received under an annuity
contract but not received as an annuity. The distribution
received by petitioner on April 11, 1991, falls into this
category.
Amounts received before the annuity starting date are
includable in income to the extent allocable to income on the
contract and are not includable in income to the extent allocable
to the investment in the contract.12 Sec. 72(e)(2)(B). Thus,
section 72(e)(2)(B) effectively gives a taxpayer a basis in the
taxpayer's IRA to the extent of his or her investment in the
contract. The investment in the contract is defined in section
72(e)(6) as the aggregate amount of consideration paid for the
contract reduced by the amount received that was previously
12 Under sec. 72(c)(4), "annuity starting date" is defined as the first day of the first period for which an amount is received as an annuity under the contract. Petitioner received a single payment in the amount of $90,662.11 from his Loyola IRA prior to drawing annuity payments from his retirement account. Thus, the distribution was received by petitioner before the annuity starting date and, accordingly, sec. 72(e)(2)(B) applies. - 13 -
excludable from gross income. The amount of a distribution
allocable to the investment in the contract, and thus distributed
tax-free, is the portion of the amount received that bears the
same ratio to the amount received as the investment in the
contract bears to the account balance. Sec. 72(e)(8)(A) and (B).
In determining the taxability of petitioner's IRA
distribution from Loyola, it is necessary to determine the amount
of the distribution allocable to the "investment in the
contract". In dispute in this case is the meaning of the phrase
"aggregate amount of * * * consideration paid for the contract"
found in section 72(e)(6), and whether the phrase encompasses the
excess contribution made by petitioner in the amount of $80,900.
If petitioner's contribution is considered to be an amount paid
in consideration for an IRA and, thus, is an "investment in the
contract", then section 72 would provide a basis for petitioner's
excess contribution and, upon distribution, such amount would be
distributed tax-free. However, if petitioner's excess
contribution is not consideration paid for an IRA and, thus, is
not an "investment in the contract", then section 72 would not
provide a basis in petitioner's excess contribution and, upon
distribution, such amount would be taxed in full.
The parties agree that the plain meaning of the language in
section 72(e)(6), i.e., "amount of * * * consideration paid for
the contract", would include petitioner's excess contribution. - 14 -
Petitioners essentially urge us to adopt a plain language
interpretation of section 72(e)(6) that would give petitioner a
basis in his excess contribution. Respondent contends, however,
that a literal interpretation of section 72(e)(6) reaches a
result contrary to legislative intent. Specifically, respondent
contends that in amending section 408(d)(1), Congress intended to
provide a basis for nondeductible contributions as contemplated
by section 408(o), but did not intend to provide a basis for any
contributions in excess of the section 408(o) limits. Thus,
respondent urges us to look beyond the words of the statute to
interpret its meaning.
In construing section 72(e)(6), our task is to give effect
to the intent of Congress, and we must begin with the statutory
language, which is the most persuasive evidence of the statutory
purpose. United States v. American Trucking Associations, Inc.,
310 U.S. 534, 542-543 (1940). Ordinarily, the plain meaning of
the statutory language is conclusive. United States v. Ron Pair
Enterprises Inc., 489 U.S. 235, 242 (1989). Where a statute is
silent or ambiguous, we may look to legislative history in an
effort to ascertain congressional intent. Burlington N. R.R. v.
Oklahoma Tax Commn., 481 U.S. 454, 461 (1987); Griswold v United
States, 59 F.3d 1571, 1575-1576 (11th Cir. 1995). However, where
a statute appears to be clear on its face, we require unequivocal
evidence of legislative purpose before construing the statute so - 15 -
as to override the plain meaning of the words used therein.
Huntsberry v. Commissioner, 83 T.C. 742, 747-748 (1984); see
Pallottini v. Commissioner, 90 T.C. 498, 503 (1988), and cases
there cited.
2. Section 72(e)(6)
Thus, we turn to the words of section 72(e)(6) that define
investment in the contract, as relevant herein, as "the aggregate
amount of * * * consideration paid for the contract * * * minus
the aggregate amount received under the contract". In the
instant case, petitioner invested, or paid, $82,900 for his IRA
with Loyola. Interpreted literally, section 72(e)(6) would treat
such amount as the "investment in the contract" because the
contribution was the consideration paid by petitioner for the
contract.
3. Legislative History
We find nothing ambiguous in the statute, and, accordingly,
feel controlled by its clear language. However, respondent
contends that a literal interpretation of section 72(e)(6)
reaches a result contrary to legislative intent. Thus, we have
examined the legislative histories of the 1974 enactment of
section 408(d)(1), its subsequent amendment in 1986, and the 1986
enactment of section 408(o). As discussed below, we are not
satisfied that the legislative history relied upon by respondent
rises to the level of unequivocal evidence of legislative purpose - 16 -
sufficient to override the literal language of the controlling
statute.
In the Employee Retirement Income Security Act of 1974,
(ERISA) Pub. L. 93-406, 88 Stat. 829, Congress enacted section
408(a), which provided for the creation of individual retirement
accounts. In adopting the individual retirement provisions of
ERISA, the goal of Congress was to create a system whereby
employees not covered by qualified retirement plans would have
the opportunity to set aside at least some retirement savings on
a tax-sheltered basis. See H. Rept. 93-807 (1974), 1974-3 C.B.
(Supp.) 236, 361; S. Rept. 93-383 (1973), 1974-3 C.B. (Supp.) 80,
210. Under the statutory framework thus established, individuals
could obtain a limited deduction for amounts contributed to
individual retirement accounts while earnings on such amounts
would accrue tax free. See secs. 219, 408, 409; see also
Orzechowski v. Commissioner, 69 T.C. 750, 752-753 (1978), affd.
592 F.2d 677 (2d Cir. 1979); H. Rept. 93-807, supra, 1974-3 C.B.
(Supp.) at 361-362; S. Rept. 93-383, supra at 130, 1974-3 C.B.
(Supp.) at 209. Individuals who were active participants in
employer-sponsored plans were not permitted to make deductible
IRA contributions because they were already benefitting as
participants in tax-favored plans. See sec. 219(b)(2) as
originally enacted by ERISA sec. 2002, 88 Stat. 958. - 17 -
The individual retirement provisions of ERISA expressly
provided that a distribution from an IRA was fully taxable to the
distributee upon distribution. Specifically, section 408(d)(1),
as originally enacted by ERISA, provided:
any amount paid or distributed out of an [IRA] * * * shall be included in gross income by the payee or distributee * * * for the taxable year in which the payment or distribution is received. The basis of any person in such an account or annuity is zero. [Emphasis added.]
The committee report reveals that Congress intended for taxpayers
to have a zero basis in their IRA's because "neither the
contributions nor the earnings thereon will have been subject to
tax previously." H. Rept. 93-779 (1974), 1974-3 C.B. 244, 369;
see also H. Conf. Rept. 93-1280, at 339 (1974), 1974-3 C.B. 415,
500.
In adopting the IRA provisions of ERISA, Congress recognized
that, despite the dollar limitation on deductible contributions
to an IRA, a taxpayer might have an incentive to make
nondeductible contributions to an IRA because the tax on the
earnings would be deferred. See H. Rept. 93-779, supra at 136,
1974-3 C.B. at 371; H. Conf. Rept. 93-1280, supra at 340, 1974-3
C.B. at 501. Accordingly, Congress enacted sanctions to prevent
excess contributions and the misuse of IRA's. In particular,
Congress imposed a 6-percent excise tax on excess contributions
to an IRA in order to offset the benefit that would otherwise
result from the deferral of tax on the earnings in the IRA. See - 18 -
sec. 4973. Additionally, Congress continued to fully tax excess
contributions upon distribution, despite the fact that such
contributions were made with after-tax dollars. H. Conf. Rept.
93-1280, supra at 340, 1974-3 C.B. at 501; H. Rept. 93-807, supra
at 130-131, (1974), 1974-3 C.B. (Supp.) 365-366. Significantly,
the ERISA conference report states, in pertinent part, as
In general, where contributions in excess of the deductible limits are made to an individual retirement account, no deduction is allowed for the excess amount, and this amount will be subject to a 6 percent tax for the year in which it is made, and each year thereafter, until there is no excess. The distribution is not to be includible in income if the excess is distributed to the individual on or before the due date for filing the employee's tax return for the year in question (including extensions). If the distribution occurs after that date, however, the distribution is to constitute taxable income to the employee (because his basis in his account is always zero) and will also give rise to a 10-percent additional tax if the distribution occurs before the employee is 59 ½. [H. Conf. Rept. 93-1280, supra at 340, 1974-3 C.B. at 501; emphasis added.]
As this excerpt illustrates, in enacting section 408(d)(1),
Congress consciously and expressly declined to provide a taxpayer
with a basis in IRA contributions exceeding the deductible limit.
This created the possibility that a taxpayer could be fully taxed
on an IRA distribution funded with after-tax contributions.
In the Tax Reform Act (TRA) of 1986, Congress made two
significant changes to the IRA provisions. First, Congress
enacted section 408(o), which permits individuals to make
"designated nondeductible contributions" to the extent that - 19 -
deductible contributions are not allowable because of the "active
participant" rule.13 Although such contributions are not
deductible from gross income, they are not subject to the excise
tax on excess contributions under section 4973. Sec. 4973(b),
flush language; see sec. 408(o)(2). Moreover, the earnings on
such contributions are permitted to accumulate on a tax-deferred
basis and without incurring any excise tax under section 4973.
Sec. 408(o); see S. Rept. 99-313, at 543 (1986), 1986-3 C.B.
(Vol. 3) 543. Second, Congress amended section 408(d)(1) to
provide an individual with a basis in his or her IRA to the
extent of the individual's "investment in the contract".
The conference report to the TRA of 1986 discussed the new
approach to taxing IRA distributions as follows:
if an individual withdraws an amount from an IRA during a taxable year and the individual has previously made both deductible and nondeductible IRA contributions, then the amount [excludable from] income for the taxable year is the portion of the amount withdrawn which bears the same ratio to the amount withdrawn for the taxable year as the individual's aggregate nondeductible IRA contributions bear to the aggregate balance of all IRAs of the individual
13 In the Economic Recovery Tax Act of 1981, Pub. L. 97- 34, 95 Stat. 274, Congress eliminated the active participant restriction and extended IRA availability to all taxpayers. However, 5 years later, in the Tax Reform Act of 1986, Pub. L. 99-514, sec. 1101(a)(1) 100 Stat. 2085, 2411, Congress enacted sec. 219(g), which reinstated rules imposing restrictions on the availability of IRA deductions to active participants; i.e., individuals covered by an employer-provided retirement plan. Thus, Congress enacted section 408(o) in an effort to provide a tax incentive for discretionary retirement savings for individuals considered active participants in qualified retirement plans. - 20 -
* * *. [H. Conf. Rept. 99-841, at II-379 (1986), 1986-3 C.B. (Vol. 4) at 379; emphasis added.]
This excerpt illustrates that Congress intended to provide a
basis in "nondeductible contributions". However, nowhere in the
legislative history to the TRA of 1986 did Congress address the
tax treatment of excess contributions upon distribution.
Respondent asserts that petitioners' interpretation of
section 72(e)(6) significantly changes the law and creates a
basis in excess contributions where, historically, no basis had
been allowed. To the contrary, it was Congress that
significantly changed the law by creating basis where none had
previously existed. Thus, prior to the TRA of 1986, all IRA
distributions, even those the genesis of which was in after-tax
contributions, were fully taxed to the taxpayer in the year of
distribution because "the basis of any person in [an IRA was]
zero." Sec. 408(d)(1) as originally enacted by ERISA. However,
in the TRA of 1986 Congress amended section 408(d)(1) by striking
the language mandating that taxpayers have a zero basis in their
IRA and by substituting therefor an "investment in the contract"
approach in taxing IRA distributions. This amendment removes the
legislative underpinnings for double taxation upon which
respondent heavily relies in this case.
In 1974, when Congress decided to include in income the
distribution of excess contributions, it clearly and explicitly
required such inclusion in both the language of section 408(d)(1) - 21 -
and in the legislative history of such section. See sec.
408(d)(1), as originally enacted by ERISA; H. Conf. Rept. 93-
1280, supra at 340, 1974-3 C.B. at 501. However, in amending
section 408(d)(1) in 1986, Congress omitted any language
indicating, either explicitly or implicitly, that excess
contributions were to be taxed to the contributor upon
distribution from an IRA. Significantly, the legislative history
for the TRA of 1986 does not even address the distribution of
excess contributions from an IRA.
The statute currently provides for basis to the extent of a
taxpayer's "investment in the contract". Absent the requisite
expression of intent in sections 408(d)(1) and 72(e)(6), or in
the legislative histories of those sections, to tax excess
contributions sourced in previously taxed retirement savings, we
think that it would be erroneous to deny petitioner a basis in
his excess contribution notwithstanding that such contribution
would have been without basis prior to the TRA of 1986.
4. Policy
We are satisfied that there is nothing in the legislative
history establishing that Congress intended to include in income
an IRA distribution, the genesis of which was in retirement
savings previously included in income. In fact, to sanction
respondent's interpretation of section 72(e)(6) would not further
the goal that Congress sought to advance by enacting the - 22 -
legislation itself. In enacting and amending the IRA provisions
in 1974 and 1986, respectively, it is clear that Congress
intended to encourage retirement savings and the retention of
those savings for retirement use. If denied favorable tax
treatment in this situation, petitioners will face retirement
without a large portion of petitioner's retirement savings, thus
creating the very situation that Congress sought to avoid by
enacting the IRA provisions in the first place. See Adler v.
Commissioner, 86 F.3d 378, 381 (4th Cir. 1996), vacating and
remanding T.C. Memo. 1995-148.
Finally, petitioners contend that respondent's
interpretation of section 72(e)(6) should be resisted because
otherwise it would lead to petitioner's retirement distribution's
being taxed twice. We think petitioners' contention is
meritorious. Here we take note of the long-standing principle
that double taxation is to be avoided unless expressly intended
by Congress. E.g., Maass v. Higgins, 312 U.S. 443, 449 (1941);
United States v. Supplee-Biddle Hardware Co., 265 U.S. 189, 195-
196 (1924); Tennessee v. Whitworth, 117 U.S. 129, 137 (1886);
Verkouteren v. District of Columbia, 433 F.2d 461, 469 (D.C. Cir.
1970). Nothing in section 72(e)(6) suggests that petitioner's
retirement distribution should be taxed twice. As previously
discussed, such intent is also conspicuously absent in the
pertinent legislative history. - 23 -
5. Conclusion
In view of the foregoing, we conclude that section 72(e)(6),
when considered in conjunction with its legislative history and
all of the facts and circumstances peculiar to this case,
provides a basis in petitioner's excess contribution.
In order to give effect to our disposition of the disputed
issue, as well as the parties' concessions,
Decision will be entered
under Rule 155.