T.C. Memo. 1997-15
UNITED STATES TAX COURT
MARK J. VORWALD, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 26410-95. Filed January 8, 1997.
Mark J. Vorwald, pro se.
Fred E. Green, Jr., for respondent.
MEMORANDUM OPINION
CARLUZZO, Special Trial Judge: This case was heard pursuant
to the provisions of section 7443A(b)(3) and Rules 180, 181, and
182. Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the year at issue. All
Rule references are to the Tax Court Rules of Practice and
Procedure.
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Respondent determined a deficiency in petitioner's 1992
Federal income tax in the amount of $2,119.30, and an addition to
tax pursuant to section 6651(a) in the amount of $529.83.
The issues for decision are: (1) Whether petitioner must
include in income as a distribution from his individual
retirement account the amount transferred therefrom to his former
spouse in a garnishment proceeding; and, if so, (2) whether the
distribution is subject to the additional tax imposed by section
72(t). During the trial respondent's counsel conceded the
addition to tax and advised the Court that the deficiency
determined in the notice was overstated inasmuch as it failed to
take into account the allowance of the standard deduction.
Background
Some of the facts have been stipulated, and they are so
found. Petitioner filed his 1992 Federal income tax return on
June 15, 1995. He was single as of the close of 1992 and resided
in Buellton, California, at the time that the petition was filed.
In 1986, petitioner opened an individual retirement account
(IRA) at the Deer Valley Federal Credit Union in Phoenix, Arizona
(Deer Valley). The history of petitioner's contributions to the
IRA is unknown. As of March 18, 1992, there was at least
$8,483.25 in the account.
On or about September 4, 1991, a judgment in the amount of
$10,670.24 was entered against petitioner in favor of his former
spouse, Kathleen J. Vorwald, for arrearages in child support
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payments. In a subsequent garnishment proceeding, on or about
March 18, 1992, Kathleen J. Vorwald was awarded a judgment in the
amount of $8,483.25 against Deer Valley. Pursuant to this
judgment, Deer Valley was ordered to transfer $8,483.25 from the
IRA to Kathleen J. Vorwald, which transfer apparently took place
during 1992.
Petitioner did not become aware that his former spouse
garnished his IRA until he was so notified by respondent during
the course of the examination that eventually led to this
proceeding.
In the notice of deficiency, respondent determined that the
amount paid to Kathleen J. Vorwald by Deer Valley from the IRA
pursuant to the garnishment proceeding constitutes a distribution
to petitioner that is includable in his 1992 income. Respondent
further determined that the distribution is subject to the
additional tax imposed by section 72(t).
Discussion
We first consider whether under the circumstances present in
this case, the transfer of the funds from the IRA to petitioner's
former spouse is tantamount to a distribution from the IRA to
petitioner. For the following reasons, we find that it is.
Because the transfer of funds from the IRA to petitioner's
former spouse at least partially discharged a legal obligation he
owed to her, the transfer to her is the equivalent of receipt by
him. Old Colony Trust Co. v. Commissioner, 279 U.S. 716, 729
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(1929); see Poczatek v. Commissioner, 71 T.C. 371, 378 (1978).
We note that had petitioner voluntarily assigned his interest in
the IRA to his former spouse in connection with the debt that he
owed to her, the assignment would be deemed a distribution. Sec.
1.408-4(a)(2), Income Tax Regs. Furthermore, a taxpayer cannot
avoid the Federal income tax consequences resulting from a
particular transaction by transferring the proceeds of the
transaction to a creditor in satisfaction of a debt. As noted by
the Supreme Court in Helvering v. Horst, 311 U.S. 112, 116
(1940):
If the taxpayer procures payment directly to his
creditors of the items of interest or earnings due him,
* * * [citations omitted] he does not escape taxation
because he did not actually receive the money.
We understand that unlike the transfer involved in
Helvering v. Horst, supra, or contemplated by the above
regulation, the transfer in this case was hardly "voluntary";
however, we attach no significance to such a distinction. We
consider the transfer to petitioner's spouse to constitute a
distribution to petitioner.
Distributions from an IRA are includable in income in
accordance with section 72. Sec. 408(d). The distribution was
not received by petitioner as an annuity; consequently, the
provisions of section 72(e) are applicable. Consistent with the
presumption of correctness applicable to respondent's
determination, Welch v. Helvering, 290 U.S. 111, 115 (1933), and
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because there is no evidence in the record that petitioner made
nondeductible contributions to the IRA, we must assume that his
tax basis in the IRA was zero. Sec. 1.408-4(a)(2), Income Tax
Regs. It follows that he can be given no credit for any
investment in the IRA, within the meaning of section 72(e)(6) and
72(e)(3)(A)(ii). We also note that petitioner makes no argument,
and nothing in the record suggests, that the provisions of
section 408(d)(6) and section 1.408-4(g), Income Tax Regs.,
relating to transfers between spouses or former spouses, have
application in this case. Consequently, the entire amount of the
distribution is allocated to, and must be included in,
petitioner's income. Sec. 72(e)(3)(A); sec. 1.408-4(a)(1),
Income Tax Regs. Accordingly, respondent's adjustment increasing
petitioner's income by the IRA distribution is sustained.
The IRA is a qualified retirement plan within the meaning of
section 72(t). Sec. 4974(c)(4). Section 72(t)(1) imposes an
additional tax equal to 10 percent of the portion of any
distribution from a qualified retirement plan that is includable
in the taxpayer's gross income. Several exceptions to the
imposition of the additional tax are enumerated in section
72(t)(2). Petitioner has presented neither evidence nor argument
in support of the application of any of the exceptions, and we
are satisfied that none apply. Accordingly, the additional tax
imposed by section 72(t) is applicable to the distribution, and
respondent's determination in this regard is sustained.
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To reflect the foregoing, including the allowance of the
standard deduction not previously taken into consideration, and
respondent's concession,
Decision will be
entered under Rule 155.