In Uncategorized on 09/19/2019 at 16:26

The Boyg’s advice to Peer Gynt doesn’t serve William Elias Rosenberg, 2019 T. C. Memo. 124, filed 9/19/19, well, as Judge Pugh nails Wm E with a deficiency plus the 10% early withdrawal whatever-it-is.

Wm E is short of the 59-1/2 year safe harbor.

“…a Judgment and Property Order Attachment to Judgment (Property Order) was entered that dissolved petitioner’s marriage to his former spouse. It provided that his former spouse must pay him the sum of $10,000 to be ‘[p]aid from the proceeds of * * * [his former spouse’s] retirement account as reimbursement to petitioner for his payment to * * * [her] of liquidated retirement proceeds during marriage.’” 2019 T. C. Memo. 124, at p. 2.

The next year “…petitioner’s former spouse transferred retirement funds to him. Instead of withdrawing the funds from her retirement account at Merrill Lynch and making a cash payment to him, she arranged for those funds to be transferred from her retirement account to an IRA that petitioner opened at Merrill Lynch. Within seven days of this transfer he withdrew the funds and closed the account.” Order, at p. 2.

Wm E never reported the $10K (actually it was $9875, because Merrill hit Wm E with a $125 withdrawal fee).

Now all my learned readers know about QDROs (pronounced “quaddros” by the cognoscenti), and how these dodge the cliché via Section 72(t)(2)(C).

But Judge Pugh isn’t creative.

“Petitioner does not argue that the Merrill Lynch withdrawal is not income or that any statutory exception in section 72(t)(2) applies; he argues rather that the Court should (1) disregard entirely the Merrill Lynch account and the intermediate steps of the transfers from his former spouse’s retirement account to his IRA and his immediate withdrawal from that account and (2) treat the transaction instead in substance as a payment of cash from his former spouse to him as prescribed by the Property Order. He reasons that his former spouse interposed the intermediate steps over his objection, and he did not think the temporary account would convert his property settlement into a retirement distribution includable in his gross income or subject to the 10% additional tax under section 72(t)(1). Petitioner credibly testified regarding the intent of the Property Order, but his understanding that his former spouse would withdraw the funds from her retirement account and transfer them directly to him cannot overcome the fact that the funds were transferred from her retirement account to his and he then withdrew them. We will not use common law doctrines to fashion an equitable exception to the statutory scheme in section 72.” 2019 T. C. Memo. 124, at p. 5. (Citation omitted).

Tax Court does not craft equitable exceptions to what Congress decided. Wm E might have been better advised to try a pay-and-file-for-a-refund gambit. Maybe USDC might have been able to do some crafting.


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