Brotman v. Comm'r of Internal Revenue

• Decision Date: 24 August 1995
• Docket Number: No. 29294–91.,29294–91.
• Citation: 19 Employee Benefits Cas. 1850,105 T.C. No. 12,105 T.C. 141
• Parties: Barbara BROTMAN, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: U.S. Tax Court

105 T.C. 141

105 T.C. No. 12

19 Employee Benefits Cas. 1850

Barbara BROTMAN, Petitioner,

v.COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 29294–91.

United States Tax Court.

Aug. 24, 1995.

Pursuant to a purported qualified domestic relations order (QDRO) entered in the Court of Common Pleas for Montgomery County, Pennsylvania, P received a cash payment from a profit-sharing plan, in which her ex-husband participated. P subsequently filed a complaint in the U.S. District Court for the Eastern District of Pennsylvania, against her ex-husband and the plan administrator, raising the issue of whether the purported QDRO met the statutory requirements of a QDRO under sec. 206(d)(3) of the Employee Retirement Income Security Act of 1974 (ERISA), Pub.L. 93–406, 88 Stat. 829, 29 U.S.C. sec. 1056(d)(3) (1988). The District Court granted summary judgment in favor of the defendants. R has moved for partial summary judgment based upon the decision of the U.S. District Court. Held, whether a domestic relations order is a QDRO as described in sec. 414(p), I.R.C., is a different question from the tax consequences attaching to a QDRO which depend upon whether the profit-sharing plan is a qualified plan. Held, further, P is collaterally estopped from denying that the order entered in the Court of Common Pleas meets the descriptive requirements of a QDRO in sec. 414(p), I.R.C., a parallel provision to sec. 206(d)(3) of ERISA. Held, further, P is not collaterally estopped from raising the issue as to the tax exempt status of the profit-sharing plan. Mervin M. Wilf, for petitioner.

Keith L. Gorman and Kenneth J. Rubin, for respondent.

OPINION

TANNENWALD, Judge:

Respondent determined a deficiency in petitioner's 1988 Federal income tax of $11,752 and an addition to tax of $588 under section 6653(a)(1).¹ This case is before us on respondent's motion for partial summary judgment under Rule 121 that collateral estoppel precludes petitioner's claim that a domestic relations order entered January 7, 1988, by the Court of Common Pleas for Montgomery County, Pennsylvania, is not a “qualified domestic relations order” within the meaning of section 414(p).

The disposition of a motion for summary judgment under Rule 121(b) is controlled by the following principles: (a) The moving party must show the absence of dispute as to any material fact and that a decision may be rendered as a matter of law; (b) the factual materials and the inferences to be drawn from them must be viewed in the light most favorable to the party opposing the motion; (c) the party opposing the motion cannot rest upon mere allegations or denials, but must set forth specific facts showing there is a genuine issue for trial. O'Neal v. Commissioner, 102 T.C. 666, 674 (1994). Summary judgment is available to establish the collateral estoppel defense, as respondent seeks to do herein. Scooper Dooper, Inc. v. Kraftco Corp., 494 F.2d 840, 847 (3d Cir.1974).

The following facts are from the admissions of petitioner, the pleadings, and an affidavit produced by respondent with accompanying documents, none of which have been challenged by petitioner. Solely for the purposes of disposing of respondent's motion, we set forth a summary of the facts relevant to our discussion. Fed.R.Civ.P. 52(a); Sundstrand Corp. v. Commissioner, 98 T.C. 518, 520 (1992), affd. 17 F.3d 965 (7th Cir.1994).

Petitioner resided in Narberth, Pennsylvania, at the time of the filing of the petition.

From June 9, 1957, through February 16, 1978, petitioner was married to Matthew T. Molitch (Molitch or ex-husband). At all relevant times, Molitch was employed by Clark Transfer, Inc., and participated in the Clark Transfer Profit Sharing Plan (the plan).

On February 16, 1978, the Superior Court of New Jersey entered a divorce decree, ending the marriage between petitioner and Molitch, along with a property settlement agreement. Among other provisions, the agreement provided that 516 2/3 shares of Clark Transfer, Inc., common stock, jointly owned by petitioner and her ex-husband, were to be split, with petitioner receiving 173 1/3 shares. Further, Molitch was obligated to purchase 7 shares from petitioner each year, commencing in 1984, at a purchase price of $1,500 per share, and had the option of purchasing up to an additional 7 shares per year on the same terms, until all of petitioner's stock was purchased.

On March 20, 1987, petitioner filed a petition in the Court of Common Pleas for Montgomery County, Pennsylvania, registering the New Jersey divorce decree and property settlement, for the purpose of giving jurisdiction to the court to order additional payments of alimony from petitioner's ex-husband. On June 2, 1987, before Judge Horace Davenport, an agreement to amend the property settlement agreement between petitioner and Molitch was read into the record in that proceeding. Counsel for petitioner's ex-husband stated:

If your Honor pleases, the parties have agreed that Mr. Molitch will, through a qualified Domestic Relations Order which shall be submitted to Your Honor at a later time for execution and signature and approval, withdraw or have withdrawn from an existing pension that he has with the Clark Group the sum of $350,000.00. The purpose of doing it under a qualified Domestic Relations Order, Your Honor, is to avoid any tax consequences to Mr. Molitch for removing any monies from his pension. This sum will be paid over to Mrs. Brotman when it is received.

The agreement also provided that petitioner would transfer to Molitch all her then stock holdings in Clark Transfer, Inc., consisting of 140 shares.

In response to a query of the court, petitioner's counsel stated:

I merely add that this agreement will be reduced to writing and that the parties will acknowledge and sign the agreement when it is drafted.

Further, both petitioner and her ex-husband were sworn in by the court and asked to affirm their understanding and approval of the agreement as read into the record. Petitioner also answered in the affirmative when asked if she understood that she could not seek modification of certain waivers to amend or modify the agreement. Furthermore, petitioner testified that she was under the care of a treating psychiatrist, but that the psychiatrist did not indicate he doubted petitioner had the capacity to understand or accept the agreements. Petitioner also answered in the affirmative to a question of whether she felt she had that capacity.

Following the proceedings, counsel for petitioner wrote a letter to Judge Davenport requesting that the court not enter any order, with respect to the proceedings, until counsel could file a petition challenging the entry of a qualified domestic relations order in the proceedings. In particular, that letter asserted that there were serious questions remaining as to the tax consequences to petitioner or Molitch which would result from the entry of a qualified domestic relations order.

Finding no reason to delay the entry of the order, on January 7, 1988, the court entered a purported Qualified Domestic Relations Order (QDRO), which provided petitioner was to receive $350,000 out of Molitch's account in the plan.² The order stated, “It is intended that this Order shall qualify as a Qualified Domestic Relations Order under the Retirement Equity Act of 1984, P.L. 98.397.”

In 1988, petitioner received, and cashed, a check from the plan in the amount of $350,000. Of the total, petitioner placed $250,563 into an individual retirement account (IRA). Later in 1988, petitioner withdrew $30,000 from the IRA.

On December 30, 1988, petitioner filed a complaint in the U.S. District Court for the Eastern District of Pennsylvania, naming Molitch and David Gillis, the plan administrator and trustee, as defendants. The issue raised by petitioner's complaint involved whether the purported QDRO issued by the Court of Common Pleas met the statutory requirements of a QDRO under section 206(d)(3) of the Employee Retirement Income Security Act of 1974 (ERISA), Pub.L. 93–406, 88 Stat. 829, 29 U.S.C. sec. 1056(d)(3) (1988). As relief, petitioner sought “to reverse the illegal payments so she will continue tax benefits to which she is entitled under a 1978 Property Settlement Agreement between plaintiff and her former husband, one of the defendants, but to which she might not be entitled unless such reversal is effected.”

In support of these requests, petitioner alleged as follows:

20. By having the payments described in paragraph 11 (for plaintiff's medical expenses) and in paragraph 15 (for the purchase price of Clark Common Stock owed to plaintiff) made from his account in the Clark Profit Sharing Plan, Molitch participated in a scheme which was designed to avoid personal income tax on the $350,000 paid out of his account in the Clark Profit Sharing Plan under the Purported QDRO.

21. The $350,000 paid out of the Clark Profit Sharing Plan would have been taxable to Molitch as ordinary income under § 402(a) of the Internal Revenue Code of 1986 (the “Code”) when distributed to him under the provisions of § 401(a)(9) of the Code. If successful, the effect of the use of his account in the Clark Profit Sharing Trust to pay for his personal nondeductible obligations was the equivalent of Molitch's getting a deduction for such nondeductible payments of $350,000.

To implement this objective, petitioner asked the District Court to determine, among other things: (a) That the purported QDRO does not qualify as a QDRO as defined in ERISA; and (b) that, because the purported QDRO does not qualify as a QDRO, it is null and void and unenforceable.

Both defendants filed motions to dismiss, which the court treated as motions for summary judgment. In an opinion dated August 1, 1989, the District Court granted summary judgment in favor of the defendants. The court concluded that the order entered by Judge Davenport met ERISA's statutory definition of a QDRO.

On November 21, 1991, the...