The opinion
T.C. Memo. 2003-294
UNITED STATES TAX COURT
RANDOLPH S. SIMPSON, I, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 2832-01. Filed October 21, 2003.
Randolph S. Simpson I, pro se.
Gordon P. Sanz, for respondent.
MEMORANDUM OPINION
COUVILLION, Special Trial Judge: Respondent determined a
deficiency of $4,453 in petitioner’s Federal income tax for the
year 1997. In an amendment to answer, respondent seeks to
increase the deficiency by $5,012, for a total deficiency of
$9,465.1
1
Unless otherwise indicated, section references are to
(continued...)
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After a concession by petitioner,2 the issues for decision
are: (1) Whether petitioner is liable for the 10-percent
additional tax on an early distribution from a qualified
retirement plan under section 72(t)(1) for the year at issue, and
(2) whether petitioner is entitled to deduct $17,900 paid to his
former spouse during 1997 as alimony. The second issue arises
out of respondent’s amendment to answer. The undisputed facts in
the record permit the Court to decide the issues without regard
to the burden of proof.
Some of the facts were stipulated, and those facts, with the
annexed exhibits, are so found and are incorporated herein by
reference. At the time the petition was filed, petitioner's
legal residence was Houston, Texas.
During the year at issue, petitioner was employed as a
shuttle bus driver for Avis Rent-A-Car (Avis). From 1987 to
1996, according to petitioner, Avis established and maintained a
qualified Employee Stock Ownership Plan (ESOP) in which
petitioner was a participant. In 1996, the employees of Avis
voted to sell their stock held in the ESOP to a private company.
1
(...continued)
the Internal Revenue Code in effect for the year at issue.
2
Petitioner conceded an unreported $469 distribution
from the Teachers Retirement System of Texas that was received
during 1997, as well as the 10-percent addition to tax under sec.
72(t) attributable to that distribution.
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As a result of the sale, petitioner received a lump-sum
distribution from U.S. Trust Co. of California in October 1997.
The amount of the distribution was $42,805.55, out of which 20
percent Federal income tax was withheld. Petitioner received a
check in the net amount of $34,244.44 and was thereafter issued
Form 1099-R, Distributions From Pensions, Annuities, Retirement
or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.
Petitioner was 47 years old at the time of the distribution.
At the time of the sale, petitioner was in the midst of a
divorce proceeding with his wife, Lucille R. Simpson (Ms.
Simpson). A Final Decree of Divorce (divorce decree) was decreed
on November 7, 1997, by the District Court of Harris County,
Texas. In the divorce decree, petitioner is also referred to as
“petitioner” and his former wife, Ms. Simpson, is referred to as
“respondent”. The parties in this case agree that Texas is a
community property State. The divorce decree provided: “The
Court * * * finds that the parties have agreed to the terms of
this Final Decree of Divorce and have stipulated that its terms
and provisions are contractual.”
Under the section of the divorce decree entitled “Division
of Community Estate”, petitioner was awarded as his sole and
separate property:
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Any and all sums, whether matured or unmatured, accrued or
unaccrued, vested or otherwise, together with all increases
thereof, the proceeds therefrom, and any other rights
related to any profit-sharing plan, retirement plan, pension
plan, employee stock option plan, employee savings plan,
accrued unpaid bonuses, or other benefit program existing by
reason of Petitioner’s past or present employment.
The divorce decree contained a similar provision in favor of Ms.
Simpson. The decree further awarded Ms. Simpson a money judgment
of $17,900 to effect “a just and right division of the community
estate.” The divorce decree further provided, however, that the
money judgment “is part of the division of the community estate
between the parties and does not constitute, nor shall it be
interpreted to be, any form of spousal support, alimony or child
support.” The payment of $17,900 by petitioner to his former
spouse in satisfaction of the money judgment was acknowledged in
the decree. To pay the money judgment to Ms. Simpson, petitioner
used part of the proceeds he had received from the ESOP
distribution.
On his 1997 Federal income tax return, petitioner claimed
head-of-household filing status, reported $23,818 wage income,
and claimed the standard deduction. On line 16a, Total pensions
and annuities, petitioner reported $42,806 and reported the
entire amount as taxable on line 16b, Taxable amount. On line
30a, Alimony paid, petitioner claimed an adjustment to income of
$17,900 for alimony paid. No other income or adjustments were
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reported, yielding an adjusted gross income of $48,724.
Petitioner entered "-0-" on line 50, Tax on qualified retirement
plans (including IRAs) and MSAs. He did not attach Form 5329,
Additional Taxes on Qualified Plans (Including IRAs) and Other
Tax-Favored Accounts, to his return.
In the notice of deficiency and accompanying explanations,
respondent determined that the 10-percent additional tax under
section 72(t) was due on the premature distribution from the
United States Trust Co. of America. In the amendment to answer,
respondent claims the $17,900 paid by petitioner to his former
wife is not deductible as alimony.
The first issue is whether petitioner is liable for the 10-
percent additional tax on the distribution from the qualified
retirement plan under section 72(t)(1). Section 72(t) provides
for a 10-percent additional tax on early distributions from
qualified retirement plans, as follows:
(1) Imposition of additional tax.-–If any taxpayer
receives any amount from a qualified retirement plan (as
defined in section 4974(c)), the taxpayer’s tax under this
chapter for the taxable year in which such amount is
received shall be increased by an amount equal to 10 percent
of the portion of such amount which is includible in gross
income.
The term “qualified retirement plan” includes any plan described
in section 401(a), which includes qualified stock bonus plans
such as the ESOP in which petitioner participated. Sec.
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4974(c)(1). Petitioner does not dispute that he received a
distribution from a qualified plan. However, he contends that
his former wife should bear the burden of the 10-percent addition
to tax with respect to the $17,900 payment he made to her under
the divorce decree.
The 10-percent addition to tax does not apply to certain
distributions, including those made “to an alternate payee
pursuant to a qualified domestic relations order (within the
meaning of section 414(p)(1)).” Sec. 72(t)(2)(C). A “domestic
relations order” is defined in pertinent part as any judgment
that relates to the provision of marital property rights to a
spouse, or former spouse, of a participant and is made pursuant
to a State domestic relations law. Sec. 414(p)(1)(B). A
qualified domestic relations order, or QDRO, is a specific type
of domestic relations order that in pertinent part (1) creates an
alternate payee’s right to receive all or part of the benefits
payable with respect to a participant under a plan, (2) clearly
specifies certain facts, and (3) does not alter the amount of the
benefits under the plan. Sec. 414(p)(1)(A), (2), and (3).
Section 414(p)(8) defines the term “alternate payee” as any
spouse, former spouse, child or other dependent of a participant
who is recognized by a domestic relations order as having a right
to receive all, or a portion of, the benefits payable under a
plan with respect to such participant.
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Although petitioner did not allege or contend that the
$17,900 was paid pursuant to a QDRO, petitioner in any event does
not qualify for the section 72(t)(2)(C) exception to the
additional tax. Although the divorce decree is a domestic
relations order, it is not a QDRO. Rather than recognizing an
alternate payee with respect to petitioner’s qualified plan, the
decree divested Ms. Simpson of any rights to such property and
deemed that property to be petitioner’s sole and separate
property. Sec. 414(p)(1)(A). Because no alternate payee was
named in the divorce decree, the decree was not a QDRO.
Moreover, the distribution of funds from petitioner’s
qualified plan was not made to an alternate payee as required by
section 72(t)(2)(C). By contrast, the funds were disbursed by
the plan administrator directly to petitioner. The Court rejects
petitioner’s argument that, because he used funds received in the
plan distribution to pay Ms. Simpson, she should be responsible
for a proportionate share of the additional tax. Petitioner’s
argument ignores the definitional elements of alternate payee in
section 414(p)(8), and he points to no legal authority to support
his position. As previously noted, Ms. Simpson was not an
alternate payee. Bougas v. Commissioner, T.C. Memo. 2003-194.
Petitioner does not fall within the section 72(t)(2)(C) exception
to the section 72(t) additional tax on an early distribution from
a qualified retirement plan, nor does he contend that he
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qualifies under any other exception. He alone is responsible for
the section 72(t) additional tax. Respondent is sustained on
this issue.
The second issue is whether petitioner is entitled to a
deduction for the $17,900 paid to his former spouse during 1997
as alimony. Amounts received as alimony or separate maintenance
are includable in the recipient’s gross income under sections
61(a)(8) and 71(a) and are deductible by the payor under section
215(a) in the year paid. On the other hand, payments
representing a property settlement are neither deductible to the
payor nor includable in income by the recipient. Sec. 1041. For
tax purposes, the term “alimony or separate maintenance payment”
is defined in section 71(b)(1) as any payment in cash meeting the
following four criteria:
(A) such payment is received by (or on behalf of) a spouse
under a divorce or separation instrument,
(B) the divorce or separation instrument does not designate
such payment as a payment which is not includible in gross
income under this section and not allowable as a deduction
under section 215,
(C) in the case of an individual legally separated from his
spouse under a decree of divorce or separate maintenance,
the payee spouse and the payor spouse are not members of the
same household at the time such payment is made, and
(D) there is no liability to make any such payment for any
period after the death of the payee spouse and there is no
liability to make any payment (in cash or property) as a
substitute for such payments after the death of the payee
spouse.
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Section 71 was amended by the Deficit Reduction Act of 1984, Pub.
L. 98-369, sec. 422(a), 98 Stat. 494, 795, to establish an
objective standard to distinguish between a payment received in
the division of property (which is not includable in gross
income) and a payment received as spousal support (which is
includable in gross income). Hoover v. Commissioner, 102 F.3d
842, 845 (6th Cir. 1996), affg. T.C. Memo. 1995-183; H. Rept. 98-
432 (Part II), at 1495 (1984) (“The committee bill attempts to
define alimony in a way that would conform to general notions of
what type of payments constitute alimony as distinguished from
property settlements and to prevent the deduction of large, one-
time lump-sum property settlements”.).
In this case, the $17,900 payment petitioner made to Ms.
Simpson in 1997 was a property settlement and not deductible
alimony. Although the transfer was made under a divorce or
separation instrument, the payment was designated in the divorce
decree as part of the division of the community estate between
the parties. The divorce decree specifically stated that the
payment “does not constitute, nor shall it be interpreted to be,
any form of spousal support, alimony, or child support.” In
ascertaining the applicability of subparagraph (B) of section
71(b)(1), “the divorce or separation instrument need not mimic
the statutory language of the subparagraph (e.g., the instrument
need not specifically refer to sections 71 and 215).” Estate of
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Goldman v. Commissioner, 112 T.C. 317, 323 (1999), affd. sub nom.
Schutter v. Commissioner, 242 F.3d 390 (10th Cir. 2000). Rather,
the divorce or separation instrument contains a nonalimony
designation if the substance of such a designation is reflected
in the instrument. Id. The Court finds that petitioner’s
divorce decree contains a nonalimony designation within the
meaning of section 71(b)(1)(B). Thus, petitioner’s payment of
$17,900 to Ms. Simpson was not alimony but rather a property
settlement between the spouses. Respondent is sustained on this
issue.
Decision will be entered
for respondent.