The opinion
T.C. Memo. 1997-20
UNITED STATES TAX COURT
JERRY L. BURTON, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 6115-95. Filed January 13, 1997.
P received a lump-sum distribution from two
accounts under a qualified pension plan in 1991.
Pursuant to a divorce decree entered shortly
thereafter, part of the distribution was used to pay
off the mortgage on P's former residence and to pay his
ex-wife $30,000. P reported the distribution as income
on his 1991 Federal income tax return, but included the
amount used to satisfy his mortgage obligation and the
amount paid to his ex-wife as part of an alimony
deduction. R disallowed the alimony deduction and
determined that P is taxable on the entire
distribution. P contends that he is not liable for tax
on the portion of the distribution paid to his former
wife and the portion used to satisfy the mortgage
because the payments were made pursuant to a qualified
domestic relations order (QDRO), as defined by sec.
414(p), I.R.C. Held: The divorce decree rendered
after the lump-sum distribution to P does not meet the
requirements of sec. 414(p), I.R.C., and is thus not a
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QDRO. Therefore, P is liable for tax on the entire
lump-sum distribution. Held, further, P is liable for
additional tax on the entire lump-sum as a result of
the early distribution from a qualified retirement plan
pursuant to sec. 72(t), I.R.C.
John L. Onesto, for petitioner.
Donald K. Rogers and Matthew J. Fritz, for respondent.
MEMORANDUM OPINION
NIMS, Judge:* Respondent determined a deficiency in the
1991 Federal income tax of petitioner Jerry L. Burton in the
amount of $53,916, stemming from funds received by petitioner in
connection with the closing of his retirement benefits accounts.
A petition was filed on April 24, 1995. An Answer was filed on
June 13, 1995. Respondent thereafter filed an Amendment to
Answer, claiming an increased deficiency of $17,676 based upon
section 72(t).
Unless otherwise indicated, all section references are to
sections of the Internal Revenue Code in effect for the year in
issue, and all Rule references are to the Tax Court Rules of
Practice and Procedure.
The sole issue for decision is whether the portion of
petitioner's retirement account distribution used to pay off the
mortgage on petitioner's former residence and to pay his ex-wife
*This case was reassigned to Judge Arthur L. Nims, III, by
Order of the Chief Judge.
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$30,000 pursuant to their divorce decree constituted taxable
income to petitioner in the amount of $156,099.46 for 1991.
This case was submitted to the Court on a full stipulation
of facts, which are so found. The stipulation of facts and the
attached exhibits are incorporated herein by this reference. At
the time the petition was filed, petitioner resided in Jackson,
Ohio.
Background
Petitioner's employment with Fluor Daniel, Inc. (Fluor
Daniel) was terminated on March 8, 1991. Petitioner subsequently
divorced Linda Gayle Burton (Mrs. Burton) on June 11, 1991; an
"Agreed Decree of Divorce" (Decree) was entered with the District
Court of Denton County, Texas. The Decree divested petitioner of
his entire interest in his former residence located at 2707
Daybreak Drive, Dallas, Texas (2707 Daybreak Drive), and
transferred that interest to Mrs. Burton. The Decree also
required petitioner to withdraw his entire retirement account
balances at Fluor Daniel, use the proceeds to pay off the
mortgage on 2707 Daybreak Drive (for which petitioner was
personally liable), and pay Mrs. Burton the remaining balance in
an amount not to exceed $30,000. The Decree states that
petitioner "shall be responsible for all taxes due on the lump
sum retirement withdrawal, and releases * * * [Linda] from any
and all liability concerning the taxes on the retirement
withdrawal."
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The Fluor Daniel retirement plan is and was, at the time of
petitioner's participation, subject to the requirements of the
Employee Retirement Income Security Act of 1974 (ERISA), Pub. L.
93-406, 88 Stat. 829, as amended. Petitioner had two separate
retirement accounts at Fluor Daniel, the "Retirement Plan" and
the "Savings Investment Plan." Sometime in March of 1991,
petitioner asked the plan administrator at Fluor Daniel to
distribute to him the entire balance of each retirement account.
By letters dated May 7 and May 13, 1991, the plan administrator
acknowledged petitioner's request and reported to him the amounts
to be distributed based on a valuation date of March 31, 1991.
As of that date, the combined value of the Retirement Plan and
the Savings Investment Plan accounts (plan balance) was
$176,754.88. Petitioner received this sum sometime at the end of
May 1991 in the form of two checks dated May 24, 1991 and issued
by The Northern Trust Company. At the time petitioner received
the checks, he was under the age of 59-1/2 and did not attain
that age at any time during 1991. The record does not disclose
whether petitioner had attained age 55. See sec. 72(t)(2)(A)(v).
Petitioner paid off his mortgage debt on 2707 Daybreak Drive
by wire transfer of $126,099.46 from his account at BancOhio
National Bank (BancOhio) to his mortgage account at Bank One
Dallas on June 6, 1991. Furthermore, on or about July 31, 1991,
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petitioner sent Mrs. Burton a check drawn on petitioner's account
at BancOhio in the amount of $30,000 to fulfill his obligation
under the Decree.
On his 1991 Federal income tax return, petitioner reported
the plan balance as dividend income of $138,418.91 and capital
gain income of $38,335.97. Petitioner also claimed an alimony
deduction with respect to both the $30,000 that he paid directly
to Mrs. Burton and the $126,099.46 he paid to satisfy the
mortgage on 2707 Daybreak Drive. Petitioner included this amount
as part of the total alimony deduction of $175,394.07 claimed on
the return. The parties have stipulated that petitioner's
allowable alimony deduction for the taxable year 1991 was $5,425.
In the Amendment to Answer referred to above, the asserted
increased deficiency of $17,676 represents the imposition of
additional tax under section 72(t) on petitioner's premature
retirement benefits distribution of $176,754.88. Since
respondent asserts an increased deficiency, she has the burden of
proof on this issue. Rule 142(a). However, the parties
stipulated that $20,655.42 of that distribution is taxable income
to petitioner. The parties further stipulated that if the Court
holds that the total amount of the retirement accounts
distribution ($176,754.88) is taxable to petitioner, then
petitioner is liable for the additional tax under section 72(t).
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Discussion
We must decide whether the Decree is a qualified domestic
relations order (QDRO) within the meaning of section 414(p), thus
relieving petitioner of liability for tax pursuant to section
402(a)(9) on the $156,099.46 portion of the lump-sum distribution
used to satisfy his mortgage and pay his ex-wife, and the $17,676
additional tax under section 72(t). For the reasons which
follow, we hold that the Decree does not constitute a QDRO.
Ordinarily, any funds distributed from an exempt employees'
trust (under a tax qualified employees' plan) are taxable to the
plan participant or beneficiary who is entitled to receive the
distribution under the plan. Darby v. Commissioner, 97 T.C. 51,
58 (1991). However, section 402(a)(9) (now section 402(e)(1)(A))
states an exception to this general rule, providing that an
alternate payee (who is the spouse or former spouse of the plan
participant) shall be treated as the distributee of any
distribution or payment made to such payee under a QDRO.
Accordingly, the tax liability for the distribution from the
Fluor Daniel retirement accounts will be allocated either to
petitioner or to Mrs. Burton depending upon whether the Decree
meets the statutory definition of a QDRO.
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The Retirement Equity Act of 1984 (REA), Pub. L. 98-397,
sec. 204(b), 98 Stat. 1445, added section 414(p), which defines a
QDRO. Section 414(p) provides, in pertinent part, the following:
SEC. 414(p). Qualified Domestic Relations Order
Defined.--For purposes of this subsection and section
401(a)(13)--
(1) In General.--
(A) Qualified Domestic Relations Order.--The
term "qualified domestic relations order" means a
domestic relations order--
(i) which creates or recognizes the
existence of an alternate payee's right to,
or assigns to an alternate payee the right
to, receive all or a portion of the benefits
payable with respect to a participant under a
plan, and
(ii) with respect to which the
requirements of paragraphs (2) and (3) are
met.
(B) Domestic Relations Order.--The term
"domestic relations order" means any judgment,
decree, or order (including approval of a property
settlement agreement) which --
(i) relates to the provision of child
support, alimony payments, or marital
property rights to a spouse, former spouse,
child, or other dependent of a participant,
and
(ii) is made pursuant to a State
domestic relations law (including a community
property law).
(2) Order Must Clearly Specify Certain Facts.--A
domestic relations order meets the requirements of this
paragraph only if such order clearly specifies--
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(A) the name and the last known mailing
address (if any) of the participant and the name
and mailing address of each alternate payee
covered by the order,
(B) the amount or percentage of the
participant's benefits to be paid by the plan to
each such alternate payee, or the manner in which
such amount or percentage is to be determined,
(C) the number of payments or period to which
such order applies, and
(D) each plan to which such order applies.
(3) Order May Not Alter Amount, Form, Etc, Of
Benefits.--A domestic relations order meets the
requirements of this paragraph only if such order--
(A) does not require a plan to provide any
type or form of benefit, or any option, not
otherwise provided under the plan,
(B) does not require the plan to provide
increased benefits (determined on the basis of
actuarial value), and
(C) does not require the payment of benefits
to an alternate payee which are required to be
paid to another alternate payee under another
order previously determined to be a qualified
domestic relations order.
Thus, to qualify as a QDRO, a domestic relations order must
meet the following tests: First, it must be a domestic relations
order that creates, recognizes, or assigns, to an alternate
payee, rights under a qualified employee benefit trust otherwise
payable to a plan participant. Second, the QDRO must clearly
specify certain facts, namely, the names and last known mailing
addresses of the participant and the alternate payee; the amount
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or percentage of the benefits to be paid or the manner in which
such amount or percentage is to be determined; the number of
payments; and each plan to which the order applies. Third, the
QDRO may not alter the amount, form, etc., of the benefits.
Generally, benefits under qualified plans are subject to
prohibitions against assignment or alienation (so-called
"spendthrift provisions"). S. Rept. 98-575, at 19 (1984), 1984-2
C.B. 447, 456. Before the enactment of section 414(p), the IRS
had ruled that the spendthrift provisions are not violated when a
plan trustee complies with a court order requiring the
distribution of benefits of a participant in "pay status" to the
participant's spouse or children in order to meet the
participant's alimony or child support obligations, but the IRS
had taken no position with respect to this issue in cases in
which the participant's benefits are not in pay status. The
Senate report indicates that section 414(p) was enacted "to
provide rational rules for plan [administrators]". Id. Congress
believed it necessary to establish guidelines for determining
whether the exception to the spendthrift rules applies, to ensure
that only those domestic relations orders that are excepted from
the spendthrift provisions are not preempted by ERISA. Id.
The facts in this case do not comport with the requirements
of section 414(p)(1). Petitioner's employment with Fluor Daniel
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was terminated on March 8, 1991. During that same month
petitioner asked the Fluor Daniel plan administrator to
distribute to him--petitioner--the entire plan balance. In mid-
May of that year the plan administrator acknowledged petitioner's
request and reported to him the amounts to be distributed based
upon a March 31 valuation date. Petitioner received two checks,
both dated May 24, 1991, which terminated his interest in the
plan. It is not clear why the plan administrator agreed to this
termination of petitioner's entire interest in the plan; one
possibility is that the termination of petitioner's interest was
permissible as being related to his separation from service with
Fluor Daniel. In any event, since the plan proceeds were
distributed to petitioner and not to Mrs. Burton, and in advance
of the Decree (which was dated June 11, 1991), it cannot be
argued that the distribution was made by the plan administrator
to an alternate payee in response to the Decree.
Rodoni v. Commissioner, 105 T.C. 29 (1995), involved a
similar situation. The domestic relations order in dispute in
that case was not executed until after the taxpayer had received
a lump-sum distribution terminating his interest in a profit
sharing plan. We held that the domestic relations order in that
case could not create or recognize rights that no longer existed
at the time of the order. Id. at 35. The same is true in this
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case. See also to the same effect Karem v. Commissioner, 100
T.C. 521 (1993).
Nowhere is there any indication that the Decree was
presented to the plan administrator, even in draft form, prior to
the distribution of the plan proceeds to petitioner. We have
stated, in Rodoni v. Commissioner, supra at 36, that implicit in
the procedural rules relating to employee benefit plan provisions
(contained in sections 414(p)(6)(B) and 414(p)(7)(B)) is the
requirement that a domestic relations order be presented to the
plan administrator and adjudged "qualified" before any
distribution is made by the plan to the spouse or former spouse.
There is no evidence that this occurred in the case before us.
For the foregoing reasons, we hold that the Decree did not
effectively create or recognize Mrs. Burton's right as an
alternate payee, within the meaning of section 414(p), to receive
petitioner's qualified plan benefits. The directions in the
Decree to turn over the disputed part of the plan proceeds could
only have been effectively addressed to petitioner, who already
had the proceeds, and not to the plan administrator. As a
consequence of this holding, the total amount of the plan
distribution to petitioner is taxable to him in 1991.
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Having so held, we do not reach the question of whether the
Decree clearly specifies facts as required by section 414(p)(2),
or alters the amount, form, etc., of the benefits, as prohibited
by section 414(p)(3).
In Hawkins v. Commissioner, 86 F.3d 982 (10th Cir. 1996),
the Court of Appeals disagreed with our holding in Hawkins v.
Commissioner, 102 T.C. 61 (1994), that the domestic relations
order in that case did not create or recognize the existence of
an alternate payee's right, or assign to an alternate payee the
right, to receive employee plan benefits, and did not satisfy the
clearly specified facts requirement of section 414(p)(2).
However, in that case the disputed domestic relations order
preceded the plan distribution, which makes this case
distinguishable from Hawkins in a way that is fatal to
petitioner's position. The Court of Appeals in Hawkins v.
Commissioner, 86 F.3d at 990-991, itself recognized a similar
disabling distinction under the facts of Karem v. Commissioner,
100 T.C. 521, 523 (1993):
In Karem [v. Commissioner, 100 T.C. 521 (1993)], a consent
judgment was entered by a state divorce court in order to
partition the community property of Mr. and Mrs. Karem. 100
T.C. at 523. The consent judgment provided that Mrs. Karem
was to receive an interest in her ex-husband's pension plan,
but it stated the following condition:
"She shall receive that interest pursuant to a
qualified Domestic Relations Order to be prepared by
Robert Louis Karem. Until the Qualified Domestic
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Relations Order is completed, Robert Louis Karem shall
pay Barbara Wiechman Karem her interest in the pension
plan immediately when he receives it."
Id. After being assessed a deficiency in his gross income
based on a lump-sum plan distribution paid to Mrs. Karem,
Mr. Karem filed a petition in the Tax Court arguing that the
consent judgment was a QDRO. The court rejected this
argument, noting that "the consent judgment directs that a
QDRO be drafted * * *; the consent judgment itself is not a
QDRO." Id. at 525-526 * * *.
The Court of Appeals went on to observe that there was thus no
written order in existence at the time of the distribution that
would satisfy the requirements of section 414(p). Hawkins v.
Commissioner, supra at 991.
On brief petitioner argues that he received the plan
benefits as agent for Mrs. Burton. However, since the Decree did
not qualify as a QDRO, the possibility raised by this argument
becomes moot.
As noted above, the parties stipulated that if the Court
holds that the total amount of the retirement accounts
distribution is taxable to petitioner, then petitioner is also
liable for the additional tax under section 72(t). Consistent
with this stipulation, we so hold.
Decision will be entered
for respondent.