T.C. Memo. 2003-194
UNITED STATES TAX COURT
EDWARD A. BOUGAS III, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 13256-01. Filed July 2, 2003.
Edward A. Bougas III, pro se.
Steven W. Ianacone, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
GOLDBERG, Special Trial Judge: Respondent determined a
deficiency in petitioner’s Federal income tax for the taxable
year 1998 in the amount of $25,000. Unless otherwise indicated,
section references are to the Internal Revenue Code in effect for
the year at issue.
The issue for decision is whether petitioner is liable for
the 10-percent additional tax under section 72(t) on a $250,000
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early distribution from his individual retirement account (IRA).
FINDINGS OF FACT
Some of the facts have been stipulated and are so found.
The stipulation of facts and the attached exhibits are
incorporated herein by this reference. At the time the petition
was filed, petitioner resided in Millburn, New Jersey.
Petitioner was married to Kathleen O. Bougas (Ms. Bougas) on
December 27, 1969. On July 11, 1996, petitioner and Ms. Bougas
were separated. On April 6, 1998, in a Dual Judgment of Divorce
Incorporating Property Settlement Agreement (divorce judgment)
filed in the Superior Court of New Jersey for Monmouth County
(New Jersey court), petitioner and Ms. Bougas were ordered
divorced.
The divorce judgment, inter alia, ordered petitioner to pay
(1) a lump sum of $150,000 tax free to Ms. Bougas, (2) Ms.
Bougas’s credit card debt of $46,714.41 to various credit card
companies, and (3) a $10,000 attorney’s fee to Ms. Bougas’s
lawyer. Further, the divorce judgment contains a provision that
petitioner’s 401(k) and IRA accounts shall be his sole and
exclusive property, free and clear of any claims by Ms. Bougas.
No provision exists in the divorce judgment dictating that
petitioner must pay the ordered obligations from his IRA account.
The divorce judgment did not provide for a specific source of
funds from which petitioner was required to pay his divorce
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obligations. Petitioner was free to pay the ordered obligations
from whatever sources he had available. There is no mention of a
qualified domestic relations order (QDRO) in the divorce
judgment, nor any reference to making Ms. Bougas an alternate
payee on petitioner’s IRA.
In a June 27, 1997, divorce hearing held at the New Jersey
court, the Honorable Milton H. Gelzer, J.S.C., suggested that
petitioner withdraw pension funds to prevent foreclosure on the
marital home, even though such withdrawal may be subject to an
early withdrawal penalty. There was no mention of a QDRO at the
divorce hearing.
Sometime prior to the divorce, petitioner rolled over an
amount from his 401(k) retirement plan at Salomon, Smith Barney
into an IRA at Charles Schwab. Because petitioner’s resources
were limited at the time he was required to pay the amounts
ordered in the divorce judgment, he chose to take a distribution
from his IRA. Petitioner requested a distribution from his IRA
in the amount of $250,000, without presenting the plan
administrator with a copy of the divorce judgment. Charles
Schwab honored petitioner’s request and distributed a check to
petitioner in his name. On March 20, 1998, petitioner deposited
the $250,000 check into his personal checking account at Republic
National Bank of New York (RNB).
On March 31, 1998, petitioner paid Ms. Bougas by personal
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check the $150,000 ordered in the divorce judgment. On April 1,
1998, petitioner paid Ms. Bougas’s $10,000 attorney’s fee by
check made payable to Frank Louis. By checks dated April 19 and
20, 1998, petitioner paid the various credit card companies for
the debts incurred by Ms. Bougas. All the checks mentioned above
were drawn against petitioner’s personal checking account at RNB.
No funds were transferred from petitioner’s IRA directly to Ms.
Bougas or any other party to satisfy the terms of the divorce
judgment.
On his 1998 Federal income tax return, petitioner reported
the $250,000 distribution from his IRA as income. However,
petitioner did not report an additional tax of 10 percent of the
total distribution for the early withdrawal from the IRA.
Respondent determined in the notice of deficiency that petitioner
is liable for the additional tax on an early distribution from a
qualified retirement plan. Although admitting that a QDRO was
never issued, petitioner asserts he is not liable for the
additional tax on the early distribution because the divorce
judgment and his actions meet the criteria of a QDRO within the
spirit of the law.
OPINION
We decide the deficiency issue in this case on the basis of
the preponderance of the evidence in the record without regard to
the burden of proof. Accordingly, we need not decide whether
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section 7491(a)(1) is applicable in this case. See Higbee v.
Commissioner, 116 T.C. 438 (2001).
A “domestic relations order” is defined in pertinent part as
any judgment which 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 QDRO is a specific type of domestic relations
order which 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 72(t) provides for an additional tax of 10 percent
on any amount received as an early distribution from a qualified
retirement plan. A “qualified retirement plan” includes an IRA.
See sec. 4974(c)(4). The section 72(t) additional tax does not
apply in certain situations, and the sole exception on which
petitioner relies is section 72(t)(2)(C). That section provides
that distributions from qualified retirement plans are not
subject to the additional tax if they are made to an alternate
payee pursuant to a QDRO within the meaning of section 414(p)(1).
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
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to receive all, or a portion of, the benefits payable under a
plan with respect to such participant.
To qualify for the section 72(t)(2)(C) exception to the
additional tax the distribution must be made by the plan
administrator to an alternate payee in response to a QDRO.
Section 414(p) provides certain procedural rules with respect to
domestic relations orders to provide guidance to plan
administrators when making QDRO determinations. “Implicit in
these procedural rules, and in their underlying purpose to
provide rational rules to guide plan administrators, is the
requirement that a domestic relations order be presented to the
plan administrator and adjudged ‘qualified’ before any
distribution is made by the plan to the spouse or former spouse.”
Rodoni v. Commissioner, 105 T.C. 29, 36 (1995).
The New Jersey court entered the divorce judgment with
respect to petitioner and Ms. Bougas. The divorce judgment
waived any right, title, or claim by Ms. Bougas to petitioner’s
IRA account. The divorce judgment relates to marital property
rights of petitioner and Ms. Bougas pursuant to the domestic
relations laws of New Jersey. The divorce judgment is therefore
a domestic relations order under section 414(p)(1)(B).
However, the divorce judgment did not effectively create or
recognize Ms. Bougas’s right as an alternate payee to receive any
portion of petitioner’s IRA, nor did it award Ms. Bougas any
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interest in petitioner’s IRA. See sec. 414(p)(1)(A). Petitioner
initiated, received, and controlled the distribution from his
IRA, which funds he used to comply with the divorce judgment.
Since petitioner was the plan participant and the distribution
was made directly to him, petitioner was not an alternate payee.
See sec. 414(p)(8). In addition, petitioner never submitted a
copy of the divorce judgment to the plan administrator prior to
requesting and receiving the distribution from the IRA.
Therefore, the divorce judgment does not qualify as a QDRO under
section 414(p).
Since petitioner is not an alternate payee and the section
414(p) requirements for a QDRO were not met, 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.
Perhaps realizing he may not prevail under the language of
section 414(p), petitioner claims that the facts in this case
indicate compliance with the QDRO provisions within the spirit of
the law. Where the requirements of a statute relate to the
substance or essence of the statute, they must be rigidly
observed. Taylor v. Commissioner, 67 T.C. 1071, 1077 (1977);
Sperapani v. Commissioner, 42 T.C. 308, 331 (1964). On the other
hand, if the requirements are procedural or directory in that
they do not go to the essence of the thing to be done, but rather
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are given with a view to the orderly conduct of business, they
may be fulfilled by substantial compliance. Taylor v.
Commissioner, supra at 1077-1078; Sperapani v. Commissioner,
supra at 330-331.
We need not address whether all the requirements of section
414(p) go to the essence of the statute or are merely procedural
because we find that the divorce judgment and petitioner’s
actions fail to comply substantially with the QDRO requirements
in section 414(p). See Rodoni v. Commissioner, supra at 39-40.
Petitioner never submitted a copy of the divorce judgment to
the plan administrator for a determination, nor was he even
required by the divorce judgment to pay the ordered obligations
from his IRA. The divorce judgment fails to name Ms. Bougas as
an alternate payee, fails to specify clearly an amount or
percentage of petitioner’s IRA that was to be paid by the plan to
Ms. Bougas, and fails to create or recognize any rights of Ms.
Bougas to receive any portion of petitioner’s IRA. See sec.
414(p)(1) and (2). In direct conflict with the requirements of
section 414(p), the divorce judgment explicitly states that the
IRA is petitioner’s sole and exclusive property, free and clear
of any claims of Ms. Bougas. Clearly, the divorce judgment did
not substantially comply with the section 414(p) QDRO
requirements.
Petitioner further claims that he should not be penalized
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for following the direction of the New Jersey court. Petitioner
contends that the New Jersey court required him to make the IRA
distributions to pay his divorce obligations. This same argument
was rejected in Czepiel v. Commissioner, T.C. Memo. 1999-289,
affd. without published opinion 86 AFTR 2d 2000-7304, 2000-1 USTC
par. 50,134 (1st Cir. 2000). As in Czepiel, petitioner was not
required to pay his divorce obligations from his IRA; petitioner
chose to use the IRA because he had no other source of funds to
pay his divorce obligations. Here, the IRA distribution was made
voluntarily by petitioner, with his active participation and
control, and not at the order of any court. See id.
Petitioner also blames the New Jersey court for not issuing
a QDRO. However, the New Jersey court did not order petitioner
to pay his divorce obligations from his IRA; the New Jersey court
merely suggested during a divorce hearing that the IRA was a
potential source to meet petitioner’s obligations. Because the
New Jersey court did not award Ms. Bougas any rights or interest
in petitioner’s IRA, there was no reason for that court to issue
a QDRO. In addition, it does not appear from the record that
petitioner or his attorney ever requested a QDRO.
Petitioner testified that he expressed concerns to his
attorney about taking a distribution from his IRA, but he
ultimately did as his attorney instructed. Petitioner further
testified that had he “been aware there was such a thing as a
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qualified domestic relations order, and that there would have
been some type of a penalty, [he] most certainly would have
requested [his] attorney to make sure that it was done in full
compliance.” Assuming petitioner was given inadequate advice by
his counsel, this is not the proper forum for petitioner to seek
redress for that alleged wrong. Estate of Quirk v. Commissioner,
T.C. Memo. 1995-234.
On the record before the Court, we find that petitioner is
liable for the 10-percent additional tax on the $250,000 early
distribution from his IRA, pursuant to section 72(t).
To reflect the foregoing,
Decision will be entered
for respondent.