Czepiel v. Commissioner

T.C. Memo. 1999-289

UNITED STATES TAX COURT

RICHARD DAVID CZEPIEL, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 2826-98. Filed August 30, 1999.

Richard David Czepiel, pro se.

Carmino J. Santaniello, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

CHIECHI, Judge: Respondent determined a deficiency in

petitioner's Federal income tax (tax) for 1995 in the amount of

$16,204.

The issues remaining for decision are:
 - 2 -

(1) Is petitioner required to include in his gross income

for 1995 the distributions that he made during that year from his

individual retirement accounts (IRA's)? We hold that he is.

(2) Is petitioner liable for the 10-percent additional tax

under section 72(t)(1) with respect to the distributions referred

to above?1 We hold that he is.

FINDINGS OF FACT

Some of the facts have been stipulated and are so found.

Petitioner Richard David Czepiel (Mr. Czepiel), who was born

on July 23, 1946, resided in Holyoke, Massachusetts, at the time

the petition was filed.

Mr. Czepiel married Kathleen Marie Quinlan (Ms. Czepiel) on

October 23, 1982. During their marriage, they had two children,

Sean and Ryan.

On January 11, 1995, the Probate and Family Trial Court for

the Commonwealth of Massachusetts (Family Court) entered a

judgment of divorce nisi (divorce judgment) which dissolved the

marriage of Mr. Czepiel and Ms. Czepiel. In the divorce judg-

ment, the Family Court, inter alia, ordered (1)(a) Ms. Czepiel to

convey to Mr. Czepiel all of her right, title, and interest in

1
Unless otherwise indicated, all section references are to
the Internal Revenue Code (Code) in effect for the year at issue.
All Rule references are to the Tax Court Rules of Practice and
Procedure.
 - 3 -

certain real property in which they and their two children had

been living prior to their divorce (marital residence) and

(b) Mr. Czepiel to assume and pay the existing mortgage loan on

that property; (2) Ms. Czepiel to retain her two IRA accounts;

(3)(a) Mr. Czepiel to retain a certain automobile and (b) Ms.

Czepiel to execute any documents necessary to have the title to

that automobile solely in Mr. Czepiel's name; and (4) Mr. Czepiel

to pay to Ms. Czepiel "the sum of twenty-nine thousand ($29,000.)

dollars as a further division of marital property".

In January 1995, the total equity in the marital residence

was approximately $25,000, which represented less than 25 percent

of its fair market value at that time. At that time, Mr. Czepiel

was several months behind in his mortgage loan payments on the

marital residence, which resulted in threats of foreclosure by

the mortgage loan holder, he had exceeded the credit limit on

each of his credit cards, and he was unable to borrow against the

marital residence. The only funds available to petitioner in

January 1995 consisted of approximately $33,000 on deposit in two

IRA's that he maintained at BayBank. The foregoing financial

situation with respect to Mr. Czepiel did not change over the

period January 1995 through July 1995.

On January 20, 1995, Mr. Czepiel filed a motion for clar-

ification of the divorce judgment and to amend that judgment with
 - 4 -

respect to child support. The Family Court denied that motion on

January 25, 1995.

On February 27, 1995, Ms. Czepiel filed with the Family

Court a complaint against Mr. Czepiel for contempt. In that

complaint, Ms. Czepiel alleged that Mr. Czepiel had not obeyed

the divorce judgment in that he had failed to pay her the sum of

$29,000 as a division of marital assets, as ordered by that

judgment. On March 21, 1995, after a hearing, the Family Court

issued a temporary order on contempt. In that order, the Family

Court found that Mr. Czepiel was guilty of contempt of court for

having willfully failed and refused to obey the divorce judgment

in that he neglected and refused to pay $29,000 to Ms. Czepiel as

a division of marital assets. That temporary order on contempt

directed Mr. Czepiel to pay Ms. Czepiel the sum of $29,000 on or

before April 11, 1995, and continued the hearing with respect to

Mr. Czepiel's contempt until that date.

On March 1, 1995, Mr. Czepiel filed another motion with the

Family Court for clarification of the divorce judgment, in which

he asked, inter alia, that the Family Court "break down the

$29,000 division of marital property to specify the amount taken

as equity in the house [marital residence]." On March 29, 1995,

the Family Court denied that motion as it pertained to that

request.
 - 5 -

On April 11, 1995, after a hearing, the Family Court issued

another temporary order on contempt. In that order, the Family

Court found that Mr. Czepiel was guilty of contempt of court for

having willfully failed and refused to obey the divorce judgment

in that he neglected and refused to pay the sum of $29,000 as a

division of marital assets. That temporary order on contempt

directed Mr. Czepiel to pay that sum to Ms. Czepiel's attorney on

or before 4:00 P.M. on April 12, 1995, and indicated that in the

event that Mr. Czepiel failed to comply with that order, the

Family Court would impose sanctions of $100 per day. That order

also continued the hearing with respect to Mr. Czepiel's contempt

until April 25, 1995.

On April 11, 1995, in an effort to comply partially with the

Family Court's order, Mr. Czepiel directed BayBank to transfer

$21,000 from his IRA account No. 39231705 (IRA 1) and $8,000 from

his IRA account No. 36009969 (IRA 2) to Ms. Czepiel's IRA at

Fleet Bank. Ms. Czepiel refused the two transfers from Mr.

Czepiel's IRA's at BayBank because she believed that those

transfers did not constitute cash payments and would be taxable

to her when she withdrew the funds from her IRA at Fleet Bank.

On April 12, 1995, Ms. Czepiel filed a motion to enforce the

contempt judgment against Mr. Czepiel and to impose fines on him

(Ms. Czepiel's motion). In that motion, Ms. Czepiel indicated

that Mr. Czepiel refused to comply with the divorce judgment and
 - 6 -

instead attempted to transfer funds from his IRA's to her IRA.

In Ms. Czepiel's motion, Ms. Czepiel asked the Family Court to

order Mr. Czepiel to pay by certified check or money order by

4:00 P.M. on April 14, 1995, the sum of $29,000 to which she was

entitled under the divorce judgment. Ms. Czepiel also requested

that the Family Court impose daily fines of $100 as previously

established in the temporary order on contempt issued by the

Family Court on April 11, 1995. The Family Court granted Ms.

Czepiel's motion on April 14, 1995.

On April 25, 1995, after a hearing, the Family Court issued

a temporary order on contempt. In that order, the Family Court

found that Mr. Czepiel failed to pay the sum of $29,000 pursuant

to the Court's temporary order of contempt issued on April 11,

1995, imposed sanctions on Mr. Czepiel in the amount of $1,300,

directed him to pay Ms. Czepiel's attorney a total of $30,300

(increased amount awarded to Ms. Czepiel) by 4:00 P.M. on April

25, 1995, and indicated that in the event that Mr. Czepiel failed

to comply with the foregoing orders, it would issue a capias for

his arrest and incarceration.

On May 3, 1995, Mr. Czepiel prepared and submitted to

BayBank an IRA withdrawal form with respect to IRA 1. In that

form, Mr. Czepiel directed BayBank to withdraw $22,300 from that

IRA and to mail a check in the amount of that withdrawal to Mr.

Czepiel's home address. The reason checked by Mr. Czepiel in the
 - 7 -

IRA withdrawal form with respect to his requested withdrawal of

$22,300 from IRA 1 was "Premature distribution (distribution

before age 59½ and not disabled or taking substantially equal

instalments over life expectancy)". On May 5, 1995, BayBank

complied with Mr. Czepiel's request, withdrew $22,300 from IRA 1,

and mailed him a check for that amount. On the same day, Mr.

Czepiel gave Ms. Czepiel's attorney $22,300. Mr. Czepiel at-

tempted to withdraw $8,000 from IRA 2 in order to pay the tax due

on the premature withdrawal from IRA 1 and to pay the excess, if

any, to Ms. Czepiel. However, petitioner did not succeed in

withdrawing those funds from IRA 2 because they were lost elec-

tronically, which resulted in delays in Family Court proceedings.

On May 10, 1995, Mr. Czepiel filed a motion with the Family

Court for reconsideration of division of assets. In that motion,

Mr. Czepiel asked that "the $29000.00 further division of assets

be broken down as $12,500 cash and $16,500 as a transfer of

IRA's". On June 14, 1995, the Family Court denied Mr. Czepiel's

motion.

Also on May 10, 1995, Mr. Czepiel filed a motion with the

Family Court for reconsideration and elimination of the $1,300 in

sanctions that that court had imposed on him. The Family Court

denied that motion.

As of May 11, 1995, Mr. Czepiel still had not paid Ms.

Czepiel $8,000 of the $30,300 increased amount awarded to Ms.
 - 8 -

Czepiel. Consequently, on that date, the Family Court issued a

capias ordering Mr. Czepiel's arrest.

On May 26, 1995, Mr. Czepiel filed a motion with the Family

Court for instructions regarding "How To Divide Marital Property"

under the divorce agreement. In that motion, Mr. Czepiel in-

dicated that "There is no cash money in the divorce to divide and

pay my wife $29,000. Please issue a court order on how I can pay

the $29,000. I need to know what to do to accomplish this. I

need specific instructions." On June 14, 1995, the Family Court

denied Mr. Czepiel's motion.

On July 21, 1995, after hearing, the Family Court issued a

judgment of contempt in which it found Mr. Czepiel guilty of

contempt of court for having willfully failed and refused to obey

the divorce judgment in that he neglected and refused to pay Ms.

Czepiel the balance of $8,000 as a division of marital assets.

The Family Court ordered in that judgment that Mr. Czepiel be

incarcerated in the Hampden County jail in Ludlow, Massachusetts,

until he purged himself of his contempt by payment of $8,000. On

the same date, Mr. Czepiel was arrested at the courthouse in

Springfield, Massachusetts, and immediately transported to and

incarcerated in that facility.

On July 27, 1995, while Mr. Czepiel was incarcerated, he

withdrew $8,000 from IRA 2, which BayBank paid by issuing a check

to him in that amount. On July 31, 1995, Mr. Czepiel transferred
 - 9 -

the $8,000 that he withdrew from IRA 2 to Ms. Czepiel's attorney.

Consequently, on July 31, 1995, the Family Court ordered pe-

titioner's release from jail.

BayBank charged Mr. Czepiel a fee (premature withdrawal fee)

in the amount of $362 for his having made premature distributions

from his IRA's. BayBank charged that fee against the balances in

those IRA's.

The Internal Revenue Service did not receive petitioner's

tax return for 1995 until March 17, 1997. In that return,

petitioner included in his gross income $46,902 of wages but did

not include therein any portion of the amounts totaling $30,662

that were distributed from his IRA's during that year (IRA

distributions).

In the notice of deficiency (notice) issued to petitioner

for 1995, respondent determined, inter alia, that petitioner

failed to include in his gross income $30,7622 which was dis-

tributed from his IRA's during that year and that he is liable

2
Respondent determined in the notice, and the parties stipu-
lated and contend on brief, that petitioner's IRA distributions
during 1995 totaled $30,762. We disagree. On the record before
us, we have found that petitioner's IRA distributions consisted
of the $22,300 which he withdrew from IRA 1, the $8,000 which he
withdrew from IRA 2, and the $362 which was withdrawn from his
IRA's to pay the premature withdrawal fee which BayBank charged
Mr. Czepiel and that those distributions totaled $30,662. See
Cal-Maine Foods, Inc. v. Commissioner, 93 T.C. 181, 195 (1989).
 - 10 -

for the 10-percent additional tax under section 72(t)(1) with

respect to that amount.

OPINION

Petitioner bears the burden of proving that the determina-

tions in the notice are erroneous. See Rule 142(a); Welch v.

Helvering, 290 U.S. 111, 115 (1933).

We first consider whether the IRA distributions are in-

cludible in petitioner's gross income for 1995. Petitioner

contends that they are not. In support of that contention,

petitioner argues that

there was gross negligence by the [Family] court and my
ex-wife's lawyer that caused the money to be removed
from the IRA. * * *

* * * * * * *

This was a forced withdrawal. * * *

* * * * * * *

This is a QDRO in substance. 414(p)

1. Payment was made directly to spouse.

2. Recipient (Ex-wife) did not put distribu-
tion in a qualified plan.

3. Ex-wife should be subject to tax for not
putting it in a qualified plan.

4. No liability for petitioner- Section
402(a)(9)(Now section 402(e)(i)(a) state
an exception to this general \ rule. An
alternate payee (who is a wife or former
wife of the plan participant) shall be
treated as the distrubutee of any distri-
 - 11 -

bution made to such payee under a QDRO.
[Reproduced literally.]

Petitioner appears to be arguing that the divorce judgment

is a qualified domestic relations order (QDRO) as defined in

section 414(p) because the Family Court in effect ordered him to

satisfy the increased amount awarded to Ms. Czepiel by making the

IRA distributions since the only funds available to him in

January 1995 to pay that amount consisted of approximately

$33,000 on deposit in his IRA's. Respondent counters that the

divorce judgment is not a QDRO and that petitioner's reliance on

section 402(e)(1)(A) is misplaced. We agree with respondent.

The provision requiring a taxpayer to include in gross

income an amount paid or distributed from an IRA is section

408(d)(1). That section provides:

(1) In general.--Except as otherwise provided in
this subsection, any amount paid or distributed out of
an individual retirement plan shall be included in
gross income by the payee or distributee, as the case
may be, in the manner provided under section 72.

The term "individual retirement plan" in section 408(d)(1)

includes an IRA. See sec. 7701(a)(37)(A).

Section 402(e)(1)(A) on which petitioner relies does not

operate as an exception to section 408(d)(1).3 Only an exception

3
Even if it did, on the record before us, we find that
petitioner has failed to establish that the divorce judgment
qualifies as a QDRO as defined in sec. 414(p).
 - 12 -

provided in section 408(d) may change the result mandated by

section 408(d)(1). See sec. 408(d)(1). Thus, unless an ex-

ception in section 408(d) applies in the instant case, petitioner

must include the IRA distributions in his gross income for 1995.

The only exception to section 408(d)(1) that might apply in

the present case is section 408(d)(6), which provides:

(6) Transfer of account incident to divorce.--The
transfer of an individual's interest in an individual
retirement account or an individual retirement annuity
to his spouse or former spouse under a divorce or
separation instrument described in subparagraph (A) of
section 71(b)(2) is not to be considered a taxable
transfer made by such individual notwithstanding any
other provision of this subtitle, and such interest at
the time of the transfer is to be treated as an in-
dividual retirement account of such spouse, and not of
such individual. Thereafter such account or annuity
for purposes of this subtitle is to be treated as
maintained for the benefit of such spouse.

In order for the exception in section 408(d)(6) to apply in

the instant case, inter alia, there must have been a transfer of

petitioner's interest in his IRA's to Ms. Czepiel, his former

spouse. Petitioner did not transfer all or a portion of his

interest in his IRA's to Ms. Czepiel. He received distributions

from those IRA's and paid the funds distributed to him from those

IRA's to Ms. Czepiel.

Another requirement that must be satisfied in order to come

within the exception to section 408(d)(1) provided in section

408(d)(6) is that the transfer of an individual's interest in an

IRA must be made under a divorce or separation agreement de-
 - 13 -

scribed in section 71(b)(2)(A). Although the divorce judgment of

the Family Court qualifies as a divorce or separation agreement

described in section 71(b)(2)(A), that judgment did not order

petitioner to transfer all or a portion of his interest in his

IRA's to Ms. Czepiel. The divorce judgment of the Family Court

ordered petitioner to pay Ms. Czepiel "the sum of twenty-nine

thousand ($29,000.) dollars as a further division of marital

property".

On the record before us, we find that the petitioner has

failed to establish that the IRA distributions are to be excluded

from his gross income for 1995.4

We next consider whether petitioner is liable for the 10-

percent additional tax under section 72(t)(1) (early withdrawal

tax) with respect to the IRA distributions. Section 72(t)(1)

provides:

(1) Imposition of additional tax.--If any tax-
payer 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.

A "qualified retirement plan" includes an IRA. See sec.

4974(c)(4). According to petitioner, the early withdrawal tax

does not apply because the IRA distributions are not includible

4
The record contains no evidence regarding the amounts that
Mr. Czepiel contributed to his IRA's.
 - 14 -

in his gross income for 1995. We reject that contention. We

have found that those distributions are includible in peti-

tioner's gross income for that year.

As we understand it, petitioner argues in the alternative

that he is not liable for the early withdrawal tax with respect

to the IRA distributions because the Family Court in effect

required him to make those distributions in order to pay the

increased amount awarded to Ms. Czepiel, and he therefore made

those distributions involuntarily. In support of his alternative

position, petitioner relies on Larotonda v. Commissioner, 89 T.C.

287 (1987), and Murillo v. Commissioner, T.C. Memo. 1998-13,

affd. without published opinion on other issues 166 F.3d 1201 (2d

Cir. 1998). Respondent counters that there are no statutory ex-

ceptions to the early withdrawal tax which apply in the instant

case and that the cases relied on by petitioner are distinguish-

able from the present case and therefore are not controlling

here.

We first address whether there are any statutory exceptions

in section 72(t) to the early withdrawal tax which apply here.

On the record before us, we find that petitioner has failed to

show that any such statutory exceptions apply so as to preclude

imposition of the early withdrawal tax with respect to the IRA

distributions.
 - 15 -

We turn now to petitioner's reliance on Larotonda v. Com-

missioner, supra, and Murillo v. Commissioner, supra. We find

those cases to be distinguishable from the present case and

petitioner's reliance on them to be misplaced.

In Larotonda, the Commissioner of Internal Revenue (Com-

missioner) assessed a tax deficiency against the taxpayer and

thereafter levied upon his retirement plan, which was a so-called

KEOGH plan. See Larotonda v. Commissioner, supra at 289. The

Commissioner argued that the taxpayer's gross income included the

levied funds and that the early withdrawal tax imposed by former

section 72(m)(5)(B) applied to those funds. See id. at 290. We

held that although the levied funds were includible in the

taxpayer's gross income, the early withdrawal tax did not apply

with respect to those funds. See id. at 291, 292. We examined

the legislative history behind former section 72(m)(5)(B) and

concluded that "Congress intended to prevent the voluntary, tax-

motivated withdrawal of funds by taxpayers prior to retirement

age." Id. at 292. We found on the record in Larotonda that no

such voluntary, tax-motivated withdrawal of funds occurred, see

id., and that "To the contrary, the funds were withdrawn pursuant

to respondent's levy, an involuntary act, without any active

participation", id., by the taxpayer.

In Murillo v. Commissioner, supra, the taxpayer entered into

a plea agreement as a result of having been indicted for various
 - 16 -

financial crimes. In a related civil proceeding, a decree of

forfeiture was issued pursuant to 18 U.S.C. sec. 981 (1994),

which required the taxpayer to forfeit his funds on deposit in a

variety of accounts, including certain IRA's. See id. Although

the taxpayer included the funds forfeited from his IRA's as gross

income in his tax return, he did not report in that return that

he was liable for the early withdrawal tax with respect to those

funds. See id. We held on the record presented to us in Murillo

that Larotonda v. Commissioner, supra, was controlling. We

indicated in Murillo that

the decree of forfeiture not only triggered but was
itself the event which constituted the IRA withdrawals.
* * * Moreover, * * * petitioner herein neither re-
ceived nor had control of the use of the IRA distribu-
tions. * * *

Id. Consequently, we held in Murillo that the taxpayer was not

liable for the early withdrawal tax. See id.

In Larotonda v. Commissioner, supra, the Commissioner's levy

triggered the taxable event without any active participation by

the taxpayer, and we were concerned that Congress did not intend

the additional tax under former section 72(m)(5) to apply to such

a situation. In Murillo v. Commissioner, supra, the decree of

forfeiture that forfeited to the United States, inter alia, the

taxpayer's IRA accounts "not only triggered but was itself the

event which constituted the IRA withdrawals." In contrast, in

the present case, the IRA distributions were not made without any
 - 17 -

active participation by petitioner. Petitioner initiated,

received, and controlled the withdrawals from his IRA's, which he

used to pay Ms. Czepiel the sum of $30,300 which the Family Court

ordered him to pay her, and the additional distribution from

petitioner's IRA's of $362 was made by BayBank in order to pay

that bank's fee for Mr. Czepiel's having made those premature

withdrawals.

On the record before us, we find that petitioner has failed

to show that the early withdrawal tax does not apply to the IRA

distributions totaling $30,662.5

To reflect the foregoing and the concessions of the parties,

Decision will be entered

under Rule 155.

5
We have considered all of the contentions and arguments of
petitioner that are not addressed herein and find them to be
without merit and/or irrelevant.