Amarasinghe v. Comm'r , 94 T.C.M. 447 ( 2007 )

T.C. Memo. 2007-333
UNITED STATES TAX COURT
JEANNE E. AMARASINGHE, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
DISAMODHA C. AMARASINGHE AND NARLIE AMARASINGHE, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket Nos. 14062-06, 15883-06. Filed November 6, 2007.
P-H failed to pay child support and alimony to P-W
as required by their divorce agreement. P-W obtained
an order from a domestic relations court demanding that
P-H withdraw all funds from his profit sharing plan
(the Plan) and pay them to P-W to satisfy his
delinquent child support and alimony obligations. P-H
complied.
On his 2002 income tax return, P-H reported the
distribution from the Plan as income and took a
deduction for alimony paid. P-H then filed an amended
return taking the position that the distribution from
the Plan was made under a qualified domestic relations
order (QDRO), and therefore under sec. 402(e)(1)(A),
I.R.C., was taxable income to P-W and not P-H. P-H
also removed the alimony deduction. P-W reported a
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portion of the funds she received as alimony on her
2002 income tax return but did not report any of the
funds as pension income.
R rejected P-H’s amended return, disallowed part
of the alimony deduction taken on the original return,
and determined a deficiency in his income tax for 2002.
R also determined a deficiency in P-W's income tax for
2002 for failing to report the entire distribution from
the plan as income.
P-W moves for an award of litigation costs.
Held: The domestic relations court order did not
give P-W the right to receive the distribution directly
from the Plan; thus, the court order was not a QDRO
under sec. 414(p)(1), I.R.C. Consequently, the
distribution was not made under a QDRO, so the
exception in sec. 402(e)(1), I.R.C., does not apply,
and P-H must include the distribution in his gross
income.
Held, further, P-W's original calculation that
$75,318 of the distribution was allocable to alimony
was correct, so that amount is income to P-W and is
deductible by P-H.
Held, further, P-W may not recover litigation
costs from P-H under sec. 7430, I.R.C.
Mark E. Slaughter, for petitioner Jeanne E. Amarasinghe.
Disamodha C. Amarasinghe and Narlie Amarasinghe, pro sese.
Veena Luthra, for respondent.
MEMORANDUM OPINION
GOEKE, Judge: By separate notices of deficiency, respondent
determined a deficiency of $12,085 in petitioners Disamodha and
Narlie Amarasinghe’s (Dr. Amarasinghe and his spouse) joint
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Federal income tax for 2002, and a deficiency of $36,548 in
petitioner Jeanne Amarasinghe’s (Ms. Amarasinghe) Federal income
tax for 2002. Because these cases present common issues of fact
and law, they were consolidated for purposes of trial, briefing,
and opinion. Rule 141(a).1 There are three issues for decision:
(1) Whether the distribution from Dr. Amarasinghe’s profit
sharing plan was made pursuant to a qualified domestic relations
order (QDRO) and therefore was taxable income to Ms. Amarasinghe
instead of Dr. Amarasinghe. We hold that it was not.
(2) If the distribution was not made pursuant to a QDRO,
what portion of the distribution was alimony and therefore income
to Ms. Amarasinghe and deductible by Dr. Amarasinghe. We hold
that $75,318 of the distribution was attributable to alimony.
(3) Whether Ms. Amarasinghe is entitled to an award of
litigation expenses from Dr. Amarasinghe. We hold that she is
not.
Background
The parties fully stipulated the facts in these cases
pursuant to Rule 122. The stipulation of facts and the
accompanying exhibits are incorporated herein by this reference.
1
Unless otherwise indicated, all Rule references are to
the Tax Court Rules of Practice and Procedure, and all section
references are to the Internal Revenue Code of 1986, in effect
for the year in issue.
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At the time they filed their separate petitions, petitioners
resided in Virginia.
Dr. Amarasinghe and Ms. Amarasinghe married in 1970 and
divorced in 1993. At the time of their divorce, they had three
children under the age of 18. In the Final and Permanent
Separation, Custody, Support and Property Settlement Agreement,
Dr. Amarasinghe agreed to pay lump-sum and periodic alimony,
child support, health insurance premiums, and automobile
insurance premiums to Ms. Amarasinghe.
On August 22, 2002, as a result of Ms. Amarasinghe’s
petition, the Juvenile and Domestic Relations District Court of
the City of Virginia Beach (Virginia Beach district court) found
that Dr. Amarasinghe was delinquent in his payments to Ms.
Amarasinghe and issued an order (the Order). The Order provided:
The Respondent [Dr. Amarasinghe] shall cash out and pay
over to the Petitioner [Ms. Amarasinghe] immediately
ALL funds in the Waddell & Reed Profit Sharing Plan and
Trust, approximately $188,000.00, more or less, and
said sums shall be deemed sufficient to bring current
all the Respondent’s * * * [child support and health
and automobile insurance premiums] through August 2002
as well as the balance of the lump sum due to the
Petitioner in the amount of $24,043.80 * * *.
The portion of the $188,000 not allocated to child support,
insurance premiums, and lump-sum spousal support would be deemed
sufficient to bring current the periodic spousal support owed.
Subsequent to the entry of the Order, Dr. Amarasinghe
instructed Waddell & Reed to transfer the funds from his account
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to Ms. Amarasinghe. However, for reasons not provided in the
record, Ms. Amarasinghe never received any funds directly from
Waddell & Reed.
As a result, in September of 2002 Ms. Amarasinghe petitioned
the Virginia Beach district court to hold Dr. Amarasinghe in
contempt for failure to comply with the Order. According to the
petition, Dr. Amarasinghe’s delinquent obligations included
$71,650 for child support and $32,400 for insurance premiums.
Furthermore, Dr. Amarasinghe had not paid the $24,043.80 lump-sum
spousal support set forth in the Order or any periodic spousal
support. On October 16, 2002, the Virginia Beach district court
held Dr. Amarasinghe in contempt and sentenced him to jail for 10
days.
The same day, Dr. Amarasinghe terminated his interest in the
Waddell & Reed Profit Sharing Plan and Trust (the Plan) and
requested a rollover of all his funds into an individual
retirement account (IRA) in his name that was established by
Waddell & Reed. Dr. Amarasinghe then requested a distribution of
all of the funds in his IRA, and Waddell & Reed issued nine
checks to Dr. Amarasinghe totaling $179,368. Dr. Amarasinghe
endorsed each of these checks to Ms. Amarasinghe’s attorney and
delivered them to her.
Dr. Amarasinghe and his spouse filed a joint 2002 Form 1040,
U.S. Individual Income Tax Return, in 2003. On the Form 1040,
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they reported $179,368 as taxable income from pensions and
annuities, and reported a deduction for alimony paid of $116,350.
In 2004, they filed a Form 1040X, Amended U.S. Individual Income
Tax Return, for 2002. On the Form 1040X, they removed the
$179,368 distribution from pensions and annuities income and the
$116,350 deduction for alimony paid.
Ms. Amarasinghe also filed a 2002 Form 1040 in 2003. On her
return, Ms. Amarasinghe reported income of $75,318 as alimony
received and did not report any income from pensions and
annuities.
On May 26, 2006, respondent issued a notice of deficiency to
Dr. Amarasinghe and his spouse. Respondent effectively
disallowed the Form 1040X amended return and determined that the
deduction for alimony paid was limited to $75,318. After
adjusting their deductions and credits, respondent determined a
deficiency in income tax of $12,085 for 2002.
On May 26, 2006, respondent issued a notice of deficiency to
Ms. Amarasinghe. Respondent determined that she received pension
income in the amount of $179,368 and that she received no alimony
income in 2002. After adjusting her deductions and exemptions,
respondent determined a deficiency in income tax of $36,548.
Petitioners timely filed separate petitions with this Court.
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Discussion
I. Qualified Domestic Relations Orders
Under sections 401(a) and 402(a), funds distributed from a
qualifying profit sharing plan are taxable to the distributee,
who is the participant or beneficiary entitled to receive the
distribution under the plan. Darby v. Commissioner, 97 T.C. 51,
58 (1991). Section 402(e)(1)(A) contains an exception to this
rule, and provides: “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)).” The parties agree that the Plan is a
qualifying profit sharing plan under section 401(a) and the Order
is a domestic relations order (DRO) under section 414(p)(1)(B).
A DRO qualifies as a QDRO only if it: (1) 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; (2) clearly specifies certain facts; and (3) does
not alter the amount or form of the plan benefits. Sec.
414(p)(1)-(3). In addition, the DRO must be presented to the
plan administrator, who must determine whether it is a QDRO.
Sec. 414(p)(6); Rodoni v. Commissioner, 105 T.C. 29, 35 (1995);
Karem v. Commissioner, 100 T.C. 521, 526 (1993). Finally, under
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section 402(e)(1)(A), an alternate payee is treated as the
distributee of a distribution from a qualifying plan only if the
distribution is made to the alternate payee under a QDRO.
Ms. Amarasinghe and respondent contend that the Order fails
to satisfy the requirement of section 414(p)(1)(A)(i) because it
does not recognize Ms. Amarasinghe as an alternate payee. The
statute defines an “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 to
receive all, or a portion of, the benefits payable under a plan
with respect to such participant.” Sec. 414(p)(8).
Specifically, Ms. Amarasinghe and respondent argue that Ms.
Amarasinghe is not recognized as an alternate payee because the
DRO does not give her an independent right to obtain the funds
directly from the Plan, but instead it directs Dr. Amarasinghe to
“cash out” and then pay the funds to Ms. Amarasinghe.
The present case is similar to, but distinguishable from,
Hawkins v. Commissioner, 102 T.C. 61, 62-63 (1994), revd. 86 F.3d
982 (10th Cir. 1996), where the disputed DRO provided: “Wife
shall receive as her separate property: a) Cash of One Million
Dollars ($1,000,000) from Husband’s share of the Arthur C.
Hawkins, DDS Pension Plan.” In interpreting the statute, the Tax
Court stated that because section 414(p) “allows parties to a
marital settlement agreement to allocate the tax burdens between
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them by the use of particular language, the intentions of the
parties are not controlling.” Id. at 70 (citing Commissioner v.
Lester, 366 U.S. 299, 304-305 (1961)). The Court compared the
QDRO provisions to the child support language in section 71(c) at
issue in Lester, and concluded that “a QDRO should be ‘clear and
specific’ and not ‘left to determination by inference or
conjecture.’” Id. at 73 (quoting Commissioner v. Lester, supra at
306). With these considerations in mind, the Court held that the
DRO was not a QDRO, in part because on its face it did not
create, recognize, or assign rights in the pension plan to Mrs.
Hawkins. Id. at 74. The Court concluded that identifying the
pension plan as the source of the $1 million payable to Mrs.
Hawkins was not a sufficient indication that she was an alternate
payee. Id. The Court noted that there were no clear signs that
a QDRO was intended, such as references to Mrs. Hawkins as the
alternate payee or as the person responsible for the taxes on the
distribution. Id.
Mr. Hawkins appealed the Court’s decision to the Court of
Appeals for the Tenth Circuit, which reversed this Court’s
ruling. Hawkins v. Commissioner, 86 F.3d 982 (10th Cir. 1996),
revg. 102 T.C. 61 (1994). The Court of Appeals held that the use
of the phrase “$1 million ‘from’ * * * [the pension plan]”
sufficiently created or recognized the contractual right in Mrs.
Hawkins required by section 414(p)(1)(A)(i). Id. at 990. The
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Court of Appeals decided that based on the legislative history of
the statute, the Court’s reading of section 414(p) was too narrow
and would make it unreasonably difficult for DROs to qualify as
QDROs. Id. at 991. Dr. Amarasinghe argues that the Court of
Appeals’ interpretation of section 414(p)(1)(A)(i) supports his
argument that the Order is a QDRO because, like the DRO in
Hawkins, the Order specifies the Plan as the source of the funds
that Dr. Amarasinghe must pay to Ms. Amarasinghe.
Ms. Amarasinghe and respondent argue, and we agree, that the
case before us is distinguishable from Hawkins v. Commissioner,
supra, because in the case before us the Order did not give Ms.
Amarasinghe a direct right to receive the distribution, but
instead required Dr. Amarasinghe to “cash out” first. In
Hawkins, the DRO at issue allowed the former spouse to receive
payments directly from the plan. Hawkins v. Commissioner, 102
T.C. 63.
A DRO fails to meet the requirements of section
414(p)(1)(A)(i) if it does not create or recognize in the
alternate payee the right to receive benefits directly from a
qualifying plan. Dr. Amarasinghe argues that the Order is a QDRO
because the “end result” it required was that Ms. Amarasinghe
receive funds originating from the Plan. However, this argument
urges us to ignore the statutory requirement that to be
qualified, a DRO must create or recognize in an alternate payee
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“the right to * * * receive all or a portion of the benefits
payable with respect to a participant under a plan”. Sec.
414(p)(1)(A)(i). A DRO that allows or orders the plan
participant to withdraw funds from the plan and then pay them to
a payee only gives the payee a right to funds held by the plan
participant, not to benefits from a qualifying plan. To allow
such a DRO to qualify as a QDRO would be to ignore the plain
meaning of section 414(p).
Our reading of section 414(p)(1)(A)(i) comports with our
earlier decisions,2 the legislative history of the statute, and
section 402(e)(1)(A). The Senate report states that Congress
intended section 414(p) to provide a “limited exception” to the
spendthrift provisions of the Internal Revenue Code that would
apply “under certain circumstances * * * In order to provide
rational rules for plan administrators”. S. Rept. 98-575, at 19
(1984), 1984-2 C.B. at 456. We believe that Congress intended
that section 414(p) should be read narrowly so that plan
administrators can easily identify DROs as QDROs and accordingly
make distributions directly to the alternate payees as required
by the QDROs, which will prevent plan participants from
2
See Karem v. Commissioner, 100 T.C. 521, 526 (1993)
(holding that a consent judgment was not a QDRO in part because
the distribution was paid to the plan participant and not to his
former spouse); Bougas v. Commissioner, T.C. Memo. 2003-194
(noting that a QDRO should specify an amount to be paid by the
plan to an alternate payee).
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dissipating the benefits before they reach the alternate payees.
To accept as a QDRO a DRO that allows the plan administrator to
shift the payment responsibility to the plan participant would
violate the purpose of section 414(p).
Even if the Order qualified as a QDRO on its face, we find
that the exception in section 402(e)(2) does not apply because
the procedural requirements of section 414(p)(6) were not
satisfied. Section 414(p)(6) provides the procedures for
determining whether a DRO meets the standards of a QDRO, and it
states that “the plan administrator shall promptly notify the
participant and each alternate payee of the receipt of such order
and the plan’s procedures for determining the qualified status of
domestic relations orders,” and “within a reasonable period after
receipt of such order, the plan administrator shall determine
whether such order is a qualified domestic relations order and
notify the participant and each alternate payee of such
determination.”
This Court has consistently held this subsection to mean
that to qualify as a QDRO, a DRO must “be presented to the plan
administrator and adjudged ‘qualified’ before any distribution is
made by the plan to the spouse or former spouse.” Karem v.
Commissioner, 100 T.C. 526; see also Rodoni v. Commissioner,
105 T.C. 35. This reduces any ambiguity as to whether a
distribution is made pursuant to a QDRO.
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If no plan administrator is specifically designated,3 and
the plan is not maintained by an employer, an employee
organization, or a group representing the parties, then the
default rule is that the person in control of the assets is the
plan administrator. Sec. 414(g); sec. 1.414(g)-1(b), Income Tax
Regs. In this case, the default plan administrator would be
Waddell & Reed as the person in control of the Plan’s assets.
There is no evidence that Waddell & Reed received a copy of
the Order or that Waddell & Reed made a determination that it was
a QDRO. Therefore, we find that the Order fails the procedural
requirements of section 414(p).
Additionally, when the distribution is actually made,
section 402(e)(1)(A) requires that it be made directly to the
alternate payee to qualify for the exception to section 402(a) by
requiring that the distribution be “made to the alternate payee
under a * * * [QDRO]”. (Emphasis added.) See Burton v.
Commissioner, T.C. Memo. 1997-20 (noting that in part because the
distribution was made to the plan participant and not his former
spouse, it was not “made by the plan administrator to an
alternate payee in response to the Decree”).
3
Dr. Amarasinghe asserts on brief that he was designated
as the plan administrator for the Plan. However, under Rule
143(b), statements in briefs are not evidence.
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In this case, Waddell & Reed distributed the Plan funds to
Dr. Amarasinghe, not Ms. Amarasinghe, and the fact that Ms.
Amarasinghe ultimately received the funds from the distribution
is not dispositive. Therefore, we conclude that the distribution
from the Plan was not made pursuant to a QDRO under section
402(e)(1)(A) because the Order failed to give Ms. Amarasinghe the
right to receive the benefits directly from the Plan, the
procedural requirements of section 414(p)(6) were not satisfied,
and Ms. Amarasinghe did not in fact receive the benefits directly
from the Plan.4
II. Alimony
The parties agree that a portion of the distribution should
be alimony. The amount Ms. Amarasinghe reported as alimony on
her 2002 Federal income tax return is $75,318, calculated by
beginning with the $179,368 that Ms. Amarasinghe received from
Dr. Amarasinghe, and subtracting $104,050 as the amount Ms.
Amarasinghe allocated to child support and insurance premiums in
her petition to the Virginia Beach district court.
Ms. Amarasinghe now asks us to consider an alternative
method that she claims to be simpler and more accurate. She
argues that we should begin with $109,200 as the total amount of
4
Ms. Amarasinghe and respondent contend that the Order is
not a QDRO because it also fails to satisfy the fact
specification requirements of sec. 414(p)(1)(A)(ii). However, we
need not address this issue.
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delinquent periodic alimony stated in her petition to the
Virginia Beach District court, subtract $71,843 as the amount of
periodic alimony that Ms. Amarasinghe waived according to the
Order, and add the result to the lump-sum spousal support of
$24,043.80. Under this calculation, $61,400.80 of the
distribution would be alimony.
The Order provides that the distribution would first bring
current Dr. Amarasinghe’s payments for child support, insurance
premiums,5 and lump-sum alimony, and the remainder would bring
current Dr. Amarasinghe’s periodic alimony payments. We find
that Ms. Amarasinghe’s original calculation mirrors this
intention because it first accounts for child support, insurance
premiums, and lump-sum alimony, and allocates the remaining
distribution to periodic alimony. By contrast, Ms. Amarasinghe’s
alternative first accounts for the lump-sum alimony and alimony
not waived; therefore more of the distribution is allocated to
child support and insurance premiums than necessary to bring
those obligations current, which would require Ms. Amarasinghe to
waive more of her periodic alimony than is necessary. Because we
find that Ms. Amarasinghe’s original calculation reflects the
allocation made in the Order and makes no unnecessary
allocations, we conclude that Dr. Amarasinghe may deduct $75,318
5
The parties agree that the insurance premiums constitute
child support.
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of the distribution under section 215(a), and Ms. Amarasinghe
must include $75,318 of the distribution as gross income under
section 71(a).
III. Litigation Costs
Ms. Amarasinghe seeks to recover reasonable litigation costs
from Dr. Amarasinghe and his spouse. Ms. Amarasinghe did not
raise the issue in a proper motion for litigation and
administrative costs under Rule 231, and therefore her claim is
premature. Even if Ms. Amarasinghe were to raise the issue in
accordance with Rule 231, she would not be entitled to costs from
Dr. Amarasinghe and his spouse because section 7430 does not
allow a petitioner to recover costs from another petitioner.
Sec. 7430(b)(2).
IV. Conclusion
On the record before us, we find that (1) the distribution
from the Plan was not made pursuant to a QDRO, (2) the parties’
determination of the amount of alimony as $75,318 is correct, and
(3) Ms. Amarasinghe is not entitled to litigation costs.
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To reflect the foregoing,
Decision will be entered
for petitioner in docket No.
14062-06.
Decision will be entered
for respondent in docket No.
15883-06.