Do-It Yourselfer Loses in Tax Court - Version 2.0

See Addition at the end of this blog and the italicized text in the blog.

I am not very handy around the house. In fact, you could say I’ve always been a klutz. However, the internet has elevated me into to the high-functioning klutz category. With YouTube videos, online instructions, and chat rooms, I can fix a lot of things around the house and passably maintain equipment with small engines that are needed at our house in the woods. Now, I am a semi-do-it-yourselfer.

Jeremy Ray Summers is obviously a pretty determined do-it-yourselfer. During the year in question in his Tax Court case, he was a manufacturing technician. So, I’ll bet he is pretty handy around the house. He also (a) represented himself and his wife in divorce court; (b) apparently prepared his own tax return; and (c) represented himself in Tax Court. And he almost got it all right. Almost.

The controversy before the Tax Court involved how Jeremy and his now-ex-wife Karie split up his IRA which they agreed to share equally in connection with their divorce. Karie wanted to take care of some her debts before the divorce was final. So, before the divorce court ruled on his divorce, he withdrew the total proceeds of his Individual Retirement Account (“IRA”) and wrote a check to pay off Karie’s car loan. He transferred another $71 to her to ensure that she received her full 50% interest in the IRA. This took place in 2013 when Jeremy was 35 years old.

Section 72(t)(1) of the Internal Revenue Code provides for a 10% additional tax on distributions from a qualified plan, including an IRA, to a taxpayer younger than age 59 ½ years. There are exceptions. Section 72(t)(2)(C) excepts from the 10% additional tax a distribution that is made “to an alternate payee pursuant to a qualified domestic relations order (“QDRO”). Among other requirements, a QDRO must be a judgment, decree or order by a court. The distribution from Jeremy’s IRA was not caused by a court’s judgment, decree or order.

Jeremy paid the income taxes on the taxable IRA distribution on his 2013 tax return. He did not pay the 10% additional tax with the return. He conceded in Tax Court that he should have paid the 10% additional tax on his share of the IRA. He contended that he should not have to pay the $869 attributable to the half of the IRA that indirectly went to Karie. He argued that the exception under Section 72(t)(2)(C) should apply. The Tax Court explained that one of the reasons that he had to pay the 10% additional tax was that the distribution was not made pursuant to a QDRO.

Tax Court Judge Lauber felt bad for Jeremy. “We have great sympathy for the petitioner’s position. . .” “To their credit they were determined to do this (divorce) in the least acrimonious manner possible.” “We have considerable sympathy for petitioner’s position: In effect, his willingness to help minimize stress on his soon-to-be ex-wife disabled him from satisfying the statutory requirements.” But Judge Lauber said he had no choice: the law is the law. Jeremy owed the 10% additional tax on Karie’s share.

Not bad for a do-it-yourselfer, Jeremy. You were within $869 of the right answer.

ADDITION: After publishing the first version of this blog, a distant memory arose in my aging mind. As a result thereof, I respectfully offer a correction to the Tax Court’s analysis and reasoning, but not to its conclusion. The Tax Court offered as one reason for ruling against Jeremy the lack of a QDRO. A QDRO was not needed. Section 408(d)(6) says that a transfer of all or part of an individual’s interest in an IRA to a spouse or a former spouse pursuant to a divorce or separation instrument is not to be considered a taxable transfer; there is no requirement for a QDRO in the case of an IRA transfer, as there is in the case of a transfer of an interest in a qualified retirement plan. Jeremy would still have lost the case; he made the transfer of the interest in the IRA before there was any divorce or separation instrument.

VKM