Wu v. United States

Michael and Christine Wu each have an individual retirement account (IRA); each contributed $200,000 after selling their home in 2007. For that tax year their maximum allowable deduction for IRA contributions was $4,000, and “excess contributions” incur a tax of up to 6% annually until withdrawn. 26 U.S.C. 219(b)(1), (b)(5)(A), 4973(a), (b). The Wus realized their mistake in 2010, informed the IRS, and corrected the problem by withdrawing the excesses from their accounts. The Wus paid the taxes for 2007-2009, and although they conceded liability for the first two years, they each sought a refund for tax year 2009, arguing that they had avoided incurring taxes for that year by adjusting the IRA account balances before the April 2010 filing deadline for their 2009 tax return. The IRS rejected this contention. The Wus filed suit under 28 U.S.C. 1346(a)(1). The district court and Seventh Circuit agreed with the government. Under section 4973(b), the consequence of taking a qualifying distribution under section 408(d)(4) is that the amount of the withdrawal “shall be treated as an amount not contributed,” but the Wus were not asking that their 2007 contributions be treated as if they were never contributed; they asked that those contributions be eliminated from the calculation for 2009 alone. View "Wu v. United States" on Justia Law

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