In Uncategorized on 06/26/2017 at 17:33

There is any number of sad tales to be found on the Tax Court’s website. Here’s one, where a husband, seeking an amicable, decent parting of the ways from his loved-once, and unwilling or unable to bear the price of a practitioner with Section 72(t) hyper-awareness, gets hit with the 10% “additional tax” on an IRA distribution.

Jeremy Ray Summers, 2017 T. C. Memo. 125, filed 6/26/17, has three (count ‘em, three) IRS lawyers confronting him over $1700. And while Judge Lauber is all kinds of sympathetic, Jeremy still takes the hit.

Jeremy and the about to be former Mrs Jeremy part ways, agreeing on child support, visitation, property, and trying to do the right thing. The about to be former Mrs Jeremy needs cash, so Jeremy liquidates his IRA (all $17K worth), gets a check from the trustee, deposits same in his checking account and writes a check for half to the about to be former Mrs Jeremy.

I say “about to be former” because Jeremy and the about to be former Mrs Jeremy don’t bother to put their agreement into divorce court and get it so-ordered until after Jeremy gives the about to be former Mrs Jeremy her half. And, of course, having divvied up the IRA, Jeremy puts in the so-ordered agreement that there aren’t any IRAs. Jeremy claims the QDRO exception to the 10% hit. Qualified Domestic Relations Order, except this one isn’t.

I’m sure my readers are face-palming Jeremy’s generosity. So is Judge Lauber.

“The exception on which Jeremy relies appears in section 72(t)(2)(C).  It applies to a distribution that is made ’to an alternate payee pursuant to a qualified domestic relations order (within the meaning of section 414(p)(1)).’  Section 414(p)(8) defines an ‘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.’  Section 414(p)(1)(B) defines a ‘domestic relations order’ as a ‘judgment, decree, or order relating to ‘the provision of child support, alimony payments, or marital property rights’ that ‘is made pursuant to a State domestic relations law.’

“[About to be former Mrs Jeremy] indirectly received half the value of Jeremy’s IRA account, and respondent readily agrees that the transaction could likely have been organized so as to entitle Jeremy to a section 72(t)(2)(C) exception for her 50% share. (Jeremy concedes that he erred in claiming this exception for his own 50% share.)  As it is, respondent contends persuasively that Jeremy does not qualify for this exception for two reasons.” 2017 T. C. Memo. 125, at pp. 5-6.

I’m sure my readers know the two reasons. One, Jeremy got the distribution, not about to be former Mrs Jeremy. It doesn’t matter that she wound up with the cash, she has to get it to begin with. Second, the payout wasn’t pursuant to a QDRO; the DRO said there wasn’t an IRA. That was true, because when the agreement was so-ordered and became a DRO, there was no IRA to distribute “pursuant to” that DRO.

Now Section 72(t)(2)(c) requires strict compliance, because the QDRO has to drive the whole deal; there’s no “substantial compliance” out.

So although Judge Lauber has “considerable sympathy” for Jeremy, a decent guy in a tough situation, “…we are not at liberty to add equitable exceptions to the statutory scheme that Congress enacted, and we thus have no alternative but to sustain the 10% additional tax that respondent has determined.” 2017 T. C. Memo. 125, at p. 8.

I will forbear to comment on some of the “statutory schemes that Congress has enacted,” lest this blog become unfit for family reading round the dinner table.

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