Darby v. Comm'r of Internal Revenue

• Decision Date: 24 July 1991
• Docket Number: Docket No. 44488-86.
• Citation: 97 T.C. 51,14 Employee Benefits Cas. 1152,97 T.C. No. 4
• Parties: LEWIS D. DARBY, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
• Court: U.S. Tax Court

14 Employee Benefits Cas. 1152

97 T.C. 51

97 T.C. No. 4

LEWIS D. DARBY, Petitioner

v.COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 44488-86.

United States Tax Court

Filed July 24, 1991.

When petitioner (H) was divorced from his former wife (W), in 1976, H was a fully vested participant in his employer's tax- qualified profit-sharing plan. The divorce decree ordered H to pay $75,000 to W, about half of the value of H's interest in the plan at that time. The decree ordered H to pay the $75,000 at the rate of $60 per week until (1) it was all paid, or (2) H died or retired (in which event the balance was due as a lump sum). The decree also ordered H to assign to W that portion of H's interest in the plan needed to satisfy H's obligation to W; H made the assignment. H retired in 1983, received a lump-sum distribution from the plan, and paid the remaining balance due (about $53,000) to W.

HELD: (1) H, not W, is the distributee and must include the entire 1983 plan distribution in his income. Sec. 402(a)(1), I.R.C. 1954.

(2) No portion of the $75,000 H paid to W is excludable from H's income under sec. 72, I.R.C. 1954. Clinton Meyering, for the petitioner.

Julia A. Caroff, for the respondent.

CHABOT, JUDGE:

Respondent determined a deficiency in Federal individual income tax against petitioner for 1983 in the amount of $19,056.58.

After a concession by petitioner, ¹ the issues for decision are as follows:

(1) Whether petitioner properly excluded from income the portion of a lump-sum distribution he received from his employer's profit-sharing plan, which he paid to his former wife pursuant to a court order, on the basis that she (and not he) was the distributee for purposes of section 402(a)(1) ² for that portion of the distribution.

(2) Alternatively, whether all or any portion of the amount petitioner paid to his former wife is excludable from petitioner's gross income under section 72.

FINDINGS OF FACT

Some of the facts have been stipulated; the stipulation and the stipulated exhibits are incorporated herein by this reference.

When the petition was filed in the instant case, petitioner resided in Farmington Hills, Michigan.

Petitioner's former wife, Yolanda Darby (hereinafter sometimes referred to as “Yolanda”), was granted a divorce from petitioner on November 8, 1976, by the Circuit Court for Wayne County, Michigan.

At the time of this divorce, petitioner was a fully vested participant in “The Savings and Profit Sharing Fund of Sears Employees” (hereinafter sometimes referred to as “the Sears Plan”). The Sears Plan was a tax-qualified profit-sharing plan under section 401(a).

The “Default Judgment of Divorce” (hereinafter sometimes referred to as “the Divorce Decree”) provides, in pertinent part, as follows:

ALIMONY

IT IS FURTHER ORDERED AND ADJUDGED that neither the Plaintiff [Yolanda] nor the Defendant [petitioner] are entitled to any permanent alimony from each other.

* * *

PROPERTY SETTLEMENT

IT IS FURTHER ORDERED AND ADJUDGED that the household furniture, furnishings and appliances owned by the parties hereto and presently in and upon the marital premises of the parties * * * shall on and after this date be the sole and separate property of the Plaintiff, YOLANDA DARBY, free and clear of any claim of the Defendant, LEWIS D. DARBY, and that the personal belongings of the parties be and are hereby awarded to the respective parties as an equitable division and settlement thereof.

[Each is to have the automobile that is registered in that one's name. Each is to have the checking and savings accounts that are registered in that one's name.]

IT IS FURTHER ORDERED AND ADJUDGED that the marital property located at 15410 Greenfield Road, Detroit, Michigan, * * * is hereby awarded to the Plaintiff, YOLANDA DARBY, free and clear of any interest or claim of the Defendant;

IT IS FURTHER ORDERED AND ADJUDGED that the vacant property located at Highland, Michigan, * * * is hereby awarded to the Defendant, LEWIS D. DARBY, free and clear of any interest or claim of the Plaintiff;

IT IS FURTHER ORDERED AND ADJUDGED that the Defendant, LEWIS D. DARBY, shall pay to the Plaintiff, YOLANDA DARBY, the sum of Seventy Five Thousand Dollars ($75,000.00) as follows: The Defendant LEWIS D. DARBY, is to pay the same at the rate of Sixty Dollars ($60.00) per week by way of a wage Assignment, and continue to so pay until such time as the Seventy Five Thousand Dollars ($75,000.00) is paid in full, or Defendant dies, or shall retire from his employment, whichever is sooner, at which time the balance of said sum shall be due and owing to Plaintiff as a lump sum payment, and Defendant hereby ASSIGNS to Plaintiff such portion of his interest in Savings and Profit Sharing Fund of Sears Employes, [sic] necessary to satisfy the balance, determined at the time of his death or retirement as aforesaid, and the Defendant shall notify said Fund of the above Assignment, and the Assignment, or this Judgment in lieu thereof, may be recorded in the County Register of Deeds or appropriate office, wherein the Fund is located so as to give notice of the same.

IT IS FURTHER ORDERED AND ADJUDGED that the Defendant, LEWIS D. DARBY, is hereby awarded his interest in said Pension and Profit Sharing Plan of Sears, Roebuck & Co., subject, however, to Plaintiff's interest in same as hereinabove set forth.

IT IS[sic] FURTHER ORDERED AND ADJUDGED that each party hereto shall forthwith execute and deliver to the other suitable Quit Claim Deeds Assignments and Bills of Sale to such property to effect such transfer of title, and on the failure thereof, this Judgment shall stand in lieu thereof and a copy of same may be recorded in the Office of the Register of Deed in the County wherein said property is located.

The $75,000 awarded to Yolanda in the Divorce Decree was determined by reference to the estimated value of petitioner's interest in the Sears Plan at the time of the divorce and is about one-half of that value. Both petitioner and Yolanda understood the $75,000 to represent Yolanda's share of petitioner's interest in the Sears Plan. The Sears Plan was the subject of discussion between petitioner's and Yolanda's attorneys.

Pursuant to the Divorce Decree, petitioner executed a document entitled “Assignment of Partial Interest of Lewis D. Darby in his Savings and Profit Sharing Fund of Sears Employees” [sic] (hereinafter sometimes referred to as “the Assignment”). The Assignment, ³ dated October 27, 1976, ⁴ was directed to the Sears Plan and provides in pertinent part as follows:

You are hereby notified that the undersigned has ASSIGNED to YOLANDA DARBY, under Court Order of Judgment of Divorce, * * * the sum of Seventy Five Thousand Dollars ($75,000.00), or the portion of the same, remaining unpaid at the time of my death or my retirement, whichever is sooner, a copy of which Judgment is attached.

This document is your authority to pay moneys which may become due to me under my contract with said [Sears Plan], BUT, you are further ordered not to pay any money to YOLANDA DARBY until the amount of the balance of the Seventy Five Thousand Dollars ($75,000.00) due and owing at the time of my death or retirement, as aforesaid, is determined by appropriate and reasonable proofs.

The Assignment was filed with the plan administrator of the Sears Plan (hereinafter sometimes referred to as “the Plan Administrator”). The $60 payments required under the Divorce Decree were deducted weekly from petitioner's pay check, beginning shortly after the Divorce Decree was entered and continuing until his retirement in January 1983. A total of $22,030 was paid to Yolanda in this manner. ⁵ Petitioner did not deduct any portion of this $22,030 as alimony on his tax returns for 1976 through 1983. Yolanda did not remember whether she included any of the $22,030 in her income for those years.

On his retirement, petitioner received a lump sum distribution (within the meaning of section 402(e)) under the Sears Plan in the amount of $182,481.39. The distribution consisted of 6,485 shares of Sears, Roebuck and Co. (hereinafter sometimes referred to as “Sears”) stock and a check in an amount exceeding $52,970. Petitioner deposited the check in his personal bank account. Sometime later, on two separate occasions, petitioner sold the Sears stock.

On February 1, 1983, petitioner drew a check on his personal account in the amount of $52,970, payable to Yolanda. In the “Memo” section of the check he wrote “Property Settlement.” This amount represented the balance of the $75,000 due to Yolanda pursuant to the Divorce Decree. Yolanda did not report any portion of the $52,970 on her 1983 tax return.

The $182,481.39 lump sum distribution under the Sears Plan consisted entirely of contributions made by Sears and earnings on those contributions. Petitioner did not include in his gross income in the year contributed or in any other year the contributions Sears made under the Sears Plan on his behalf, or the earnings on those contributions.

The Plan Administrator did not make any distribution under the plan directly to Yolanda. When petitioner retired from Sears, the Sears Plan contained a provision prohibiting any participant from assigning his or her benefits. This provision reads as follows:

7.7 NON-ALIENATION OF BENEFITS. Except as otherwise expressly provided herein, no participant or beneficiary shall be entitled to withdraw, transfer, assign or hypothecate the money and securities, or any part thereof, credited to the participant's accounts in the [Sears Plan]. No interest in the [Sears Plan] shall be anticipated, charged or encumbered by any participant or beneficiary. Except as may be required by the tax withholding provisions of any statutes, the interest or interests of each and every participant or beneficiary in the [Sears Plan] shall not be subject to, or reached by, any legal process in satisfaction of any debt, claim, liability or obligation -- including alimony...