T.C. Summary Opinion 2005-68
UNITED STATES TAX COURT
MARGRET LOUISE KELLEY, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 6639-04S. Filed June 2, 2005.
Margret Louise Kelley, pro se.
Beth A. Nunnink, for respondent.
ARMEN, Special Trial Judge: This case was heard pursuant to
the provisions of section 7463 of the Internal Revenue Code in
effect at the time that the petition was filed.1 The decision to
1
Unless otherwise indicated, all subsequent section
references are to the Internal Revenue Code in effect for 2001,
the taxable year in issue, and all Rule references are to the Tax
Court Rules of Practice and Procedure.
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be entered is not reviewable by any other court, and this opinion
should not be cited as authority.
Respondent determined a deficiency in petitioner’s Federal
income tax for the taxable year 2001 in the amount of $633.
However, prior to trial, respondent filed a motion for leave to
file answer out of time in order to assert an increased
deficiency. See sec. 6214(a). Petitioner did not object to
respondent’s motion, and the Court granted it. Accordingly, the
deficiency at issue in this case is $1,900.
After a concession by petitioner,2 the only issue for
decision is whether a $16,909 distribution made to petitioner as
an alternate payee under a qualified domestic relations order is
taxable to her as the distributee of such distribution. We hold
that it is.
Background
Some of the facts have been stipulated, and they are so
found.
At the time that the petition was filed, petitioner resided
in Asheville, North Carolina.
Petitioner and William A. Kelley (Mr. Kelley) were married
in August 1954. The couple separated on June 11, 1986.
Thereafter, in December 1986, the Superior Court of Orange
2
Petitioner concedes that a capital gain distribution of
$138 that she received from Wachovia Securities Inc. is
includable in her income.
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County, California (the Superior Court), entered a judgment of
dissolution of marriage.
In June 1962, Mr. Kelley began employment with Aerospace
Corp. of El Segundo, California. In July 1963, Mr. Kelley became
a participant in the Aerospace Employees’ Retirement Plan
(Retirement Plan).3 Mr. Kelley retired from Aerospace Corp. in
November 1985.
Incident to the matrimonial action between petitioner and
Mr. Kelley, the Superior Court issued an Order On Division Of
Aerospace Employees’ Retirement Plan Benefits in July 1986. In
its order, the Superior Court found that Mr. Kelley had earned
benefits under the Retirement Plan, which the court decided were
community property in their entirety. The Superior Court also
decided that petitioner had a 50-percent interest in those
benefits, and it directed the Retirement Plan to pay petitioner
her community interest in those benefits. The Superior Court
expressly retained jurisdiction “to make such further orders as
are deemed appropriate to enforce or clarify the provisions of
this order.”
In December 1992, the Superior Court entered a Stipulated
Qualified Domestic Relations Order (QDRO), which was approved as
to form and content by petitioner and Mr. Kelley, as well as
3
Mr. Kelley’s interest in the Retirement Plan was funded
by Aerospace Corp.
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their attorneys, and the plan administrator of the Retirement
Plan. The QDRO stated, in relevant part, that petitioner, Mr.
Kelley, and the Superior Court intended that the QDRO be a
qualified domestic relations order within the meaning of the
Internal Revenue Code of 1986, as amended.4 The QDRO also
identified Mr. Kelley as the “plan participant” and petitioner as
the “alternate payee”. As to petitioner, the QDRO included the
following provisions:
4. This Order hereby creates and recognizes as to
the [Aerospace Employees’ Retirement] Plan described
above the existence of the Alternate Payee’s right as
of June 11, 1986 to 50% in said Plan, plus any cost of
living adjustments.
5. The Alternate Payee elects the SINGLE LIFE
ANNUITY under the Plan to receive her benefits in the
Plan created and recognized in Paragraph 4 of this
Order.
After entry of the QDRO, petitioner began to receive,
directly from the administrator of the Retirement Plan, her 50-
percent interest in Mr. Kelley’s retirement benefits. Petitioner
received these benefits through direct deposit to her bank
account on the first of each month. Shortly after the end of
each calendar year, petitioner also received a Form 1099-R,
Distributions From Pensions, Annuities, Retirement or Profit-
Sharing Plans, IRAs, Insurance Contracts, etc., or similar
4
The order also stated that it was “intended to be a QDRO
pursuant to the [California Family Law] Act, and its provisions
shall be administered and interpreted in conformity with the
Act.”
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statement, from the Retirement Plan reporting the amount of the
distribution.
During 2001, petitioner received $16,909 pursuant to the
QDRO. On her return for that year, petitioner disclosed this
amount in its entirety on line 16a, “Total pensions and
annuities”, but reported “0” on line 16b as the taxable amount.
In explanation, petitioner wrote “see addendum (commun. prop.)”
and attached to her return a copy of the Superior Court’s July
1986 order. Petitioner had consistently followed this approach
for every year that she had received a distribution.
Respondent contends that the amount actually paid to
petitioner in 2001, i.e., $16,909, is includable, in its
entirety, in petitioner’s income for that year. Petitioner
contends that she received no property settlement per se in her
divorce from Mr. Kelley and that her community property interest
in his retirement benefits is essentially a “return of capital”
and therefore not taxable. Petitioner also points out that on
three separate occasions over the years, respondent’s Service
Centers have issued “no change” letters after inquiring into the
status of her interest in Mr. Kelley’s retirement benefits.
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Discussion5
Generally, under section 402(a), a distribution from a
qualified retirement plan is taxable to the distributee.6
Neither the Code nor the regulations define the term
“distributee”. The Court, however, has construed the term to
mean the participant or beneficiary who, under the plan, is
entitled to receive the distribution. Darby v. Commissioner, 97
T.C. 51, 58 (1991); Estate of Machat v. Commissioner, T.C. Memo.
1998-154. In the present case, Mr. Kelley would be the
distributee because, under the Retirement Plan, he is the
participant or beneficiary who is entitled to receive the
distribution.
However, section 402(e)(1)(A) provides an exception to the
general rule of section 402(a). Thus, section 402(e)(1)(A)
provides that for purposes of section 402(a);
an alternate payee who is the spouse or former spouse
of the participant shall be treated as the distributee
of any distribution or payment made to the alternate
payee under a qualified domestic relations order (as
defined in section 414(p)).
5
We decide the issue in this case without regard to the
burden of proof. See generally sec. 7491(a); Rule 142(a);
INDOPCO Inc. v. Commissioner, 503 U.S. 79, 84 (1992); Welch v.
Helvering, 290 U.S. 111, 115 (1933).
6
Neither party has raised any issue regarding the
qualified status of the Retirement Plan. Suffice it to say that
there is nothing in the record that would lead us to think that
the employees’ trust is not described in sec. 401(a) and not
exempt from tax under sec. 501(a).
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In other words, a distribution made to an alternate payee under a
qualified domestic relations order will be taxable to the
alternate payee, and not to the plan participant or beneficiary,
because section 402(e)(1)(A) treats the alternate payee as the
distributee of the distribution. Seidel v. Commissioner, T.C.
Memo. 2005-67.
As relevant herein, section 414(p)(1)(A) defines a
“qualified domestic relations order” as a domestic relations
order “which creates or recognizes the existence of an alternate
payee’s right to, or assigns to an alternate payee the right to,
receive all or a portion of the benefits payable with respect to
a participant under a plan”. The term “domestic relations order”
means any judgment, decree, or order that relates to the
provision of alimony payments or marital property rights to a
spouse or former spouse of a plan participant and that is made
pursuant to a State domestic relations law, specifically
including a community property law. Sec. 414(p)(1)(B); see
Dunkin v. Commissioner, 124 T.C. (2005) (slip op. at 6-7)
(discussing relevant principles of California community property
law).
In the present case, neither party has raised any issue
regarding the status of the Superior Court’s December 1992 order
as a qualified domestic relations order, and there is nothing in
the record that would lead us to question its status as such.
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Indeed, the Superior Court’s order expressly states that the
parties and the court intend that it constitute a qualified
domestic relations order within the meaning of the Internal
Revenue Code; moreover, all of the requirements of section
414(p)(1) through (3) appear to be satisfied. See generally
Brotman v. Commissioner, 105 T.C. 141, 147, 149-150 (1995);
Burton v. Commissioner, T.C. Memo. 1997-20.
In sum, the $16,909 distribution that was received by
petitioner in 2001 from the Retirement Plan was received by her
as an alternate payee under a qualified domestic relations order.
Accordingly, pursuant to section 402(e)(1)(A), petitioner is
treated as the distributee of the distribution and, pursuant to
section 402(a), the distribution is includable in her income.
We recognize that from a property perspective, petitioner
might not have taken anything from her 32-year marriage other
than a 50-percent interest in Mr. Kelley’s retirement plan.
Unfortunately for petitioner, this fact does not serve to
overcome the clear mandate of section 402 defining the taxability
of distributions from an employees’ trust.
Finally, we recognize that on several occasions in the past,
respondent’s Service Centers apparently issued “no change”
letters to petitioner after inquiring into the status of her
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interest in Mr. Kelley’s retirement benefits.7 Suffice it to say
that the “mere acceptance or acquiescence in returns filed by a
taxpayer in previous years creates no estoppel against the
Commissioner nor does the overlooking of an error in a return
upon audit create any such estoppel.” Mora v. Commissioner, T.C.
Memo. 1972-123; see Dixon v. United States, 381 U.S. 68, 72-73
(1965); Automobile Club of Mich. v. Commissioner, 353 U.S. 180,
183-184 (1957); McGuire v. Commissioner, 77 T.C. 765, 779-780
(1981). In other words, even though the Commissioner may have
overlooked or accepted the tax treatment of a certain item on a
taxpayer’s returns for many previous years, the Commissioner is
not precluded from correcting that error on the taxpayer’s return
for a subsequent year. Garrison v. Commissioner, T.C. Memo.
1994-200 (and cases cited therein), affd. without published
opinion 67 F.3d 299 (6th Cir. 1995).
In conclusion, we hold for respondent on the disputed issue.
Reviewed and adopted as the report of the Small Tax Case
Division.
7
The record does not disclose what prompted respondent’s
Service Centers to issue the “no change” letters. Perhaps the
Service Centers acted solely on the basis of the Superior Court’s
July 1986 order and without knowledge of the December 1992 QDRO.
However, we need not speculate on this matter because, as
discussed infra in the text, respondent is not estopped from
correcting an error.
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To reflect our disposition of the disputed issue, as well as
petitioner’s concession,8
Decision will be entered
for respondent in the amount
of the increased deficiency of
$1,900.
8
See supra note 2.