Merriam-Webster Dictionary Definition Not Sufficient to Support IRA Deduction

Colombell v. Commissioner is another recent Tax Court case. It is yet another case where IRS created “tax law” is not support by federal tax policies. In other words, it is a case where the IRS makes anti-taxpayer rules with the aim of frustrating Congressional intent.

Colombell was employed as a part-time nurse. Her employer maintained a defined benefit plan for employees who worked over a certain number of hours per year. Because Colombell did not work enough hours per year, she was not entitled to participate in the defined benefit plan. Consequently, Colombell opted to contribute to an IRA retirement account. Colombell claimed the Section 219 tax deduction for her IRA contribution on her timely filed tax return, but the IRS denied Colombell’s deduction.

Generally taxpayers are entitled to the Section 219 deduction unless they (or their spouse) were an “active participant” in certain retirement accounts, such as the account that Colombell’s employer provided to its full time employees.

Colombell, relying on a definition in the Merriam-Webster Dictionary, argued that she was not an “active participant” in her employer’s retirement plan. The IRS relied on the IRS-written Treasury Regulations in support of the argument that Colombell was an “active participant” in her employer’s retirement plan because she was not excluded from it.

The Tax Court found that Colombell’s job was structured in a way that she could not have worked enough hours to qualify to participate in the employer’s retirement plan, she had a zero balance in the plan, and she obtained no tax benefit from her employer’s plan. However, the Tax Court — pursuant to the IRS-created law — ruled that Colombell was not entitled to the IRA tax deduction becuase she was in fact an “active participant” in her employer provided retirement plan.

The policy underlying the IRA tax deduction is to encourage taxpayers who are not saving for retirement to save for retirement, with the hope that these savings will reduce the taxpayer’s future dependence on government welfare during the taxpayer’s retirement years. That was exactly what had happened in Colombell’s case. Yet, the IRS opted to enforce an erroneous interpretation of this tax deduction provision despite the very policy underlying the tax provision….

Thus, the Merriam-Webster definition was not sufficient to support the IRA deduction, only because the IRS used its own frivolous definition.

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