Hawkins v. C.I.R.

• Decision Date: 14 June 1996
• Docket Number: 94-9011,Nos. 94-9009,s. 94-9009
• Citation: 86 F.3d 982
• Parties: -5114, 65 USLW 2044, 96-1 USTC P 50,316, 20 Employee Benefits Cas. 1513, Pens. Plan Guide P 23920R Arthur C. HAWKINS, Petitioner-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee. Glenda R. HAWKINS, Petitioner-Appellee, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellant.
• Court: U.S. Court of Appeals — Tenth Circuit

Page 982

86 F.3d 982

78 A.F.T.R.2d 96-5114, 65 USLW 2044,

96-1 USTC P 50,316,

20 Employee Benefits Cas. 1513,

Pens. Plan Guide P 23920R

Arthur C. HAWKINS, Petitioner-Appellant, v.COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.

Glenda R. HAWKINS, Petitioner-Appellee, v.COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellant.

Nos. 94-9009, 94-9011.

United States Court of Appeals Tenth Circuit.

June 14, 1996.

Douglas G. Schneebeck of Modrall, Sperling, Roehl, Harris & Sisk, P.A., Albuquerque, New Mexico, (Stuart R. Butzier, with him on the brief), for Petitioner-AppellantArthur C. Hawkins.

Patricia Tucker of Laflin, Lieuwen, Tucker, Pick & Heer, P.A., Albuquerque, New Mexico, for Petitioner-AppelleeGlenda R. Hawkins.

Robert W. Metzler, United States Department of Justice, Tax Division, Washington, DC, (Loretta C. Argrett, Assistant Attorney General, and Kenneth L. Greene, with him on the brief), for Respondent-Appellee/Respondent-AppellantCommissioner of Internal Revenue.

Before EBEL and HOLLOWAY, Circuit Judges, and BROWN, District Judge.^*

EBEL, Circuit Judge.

These two consolidated appeals present the question whether husband or wife should bear the income tax burden of a $1 million pension distribution made to the wife pursuant to a marital dissolution decree.Resolution of this question turns on whether the marital settlement agreement incorporated into the parties' dissolution decree constitutes a "qualified domestic relations order"("QDRO") within the meaning of section 414(p) of the Internal Revenue Code. 26 U.S.C. § 414(p).The Tax Court below held that the incorporated settlement agreement did not satisfy the statutory definition of a QDRO and ordered the husband to pay the tax.Hawkins v. Commissioner, 102 T.C. 61, 1994 WL 26316(1994).We have jurisdiction under 26 U.S.C. § 7482(a)(1) and now reverse.

BACKGROUND

AppellantArthur C. Hawkins("Arthur") and AppelleeGlenda R. Hawkins("Glenda") were married on July 17, 1965.Arthur, an orthodontist, was the president and sole shareholder of Arthur C. Hawkins, D.D.S., P.A., a New Mexico professional corporation.In 1972, Arthur established the Arthur C. Hawkins, D.D.S. Pension Plan (the "Plan") for the benefit of the corporation's employees, and named himself the sole trustee and administrator of the Plan.As of July 31, 1986, the value of Arthur's accrued benefit under the Plan was $1,072,932.97.

On January 5, 1987, Arthur and Glenda entered into a Marital Settlement Agreement (the "Agreement") as part of a divorce proceeding pending in the Second Judicial District Court, County of Bernalillo, State of New Mexico(the "divorce court").The provisions of the Agreement were incorporated by reference into the final marital dissolution decree issued by the divorce court on January 7, 1987(the "Dissolution Decree").The relevant portions of the Agreement provide as follows:

6.WIFE'S COMMUNITY PROPERTY: As a compromise distribution of the community property, [Glenda] shall receive as her separate property:

(a) Cash of One Million Dollars ($1,000,000.00) from [Arthur]'s share of the Arthur C. Hawkins, D.D.S. Pension Plan....

....

7.HUSBAND'S COMMUNITY PROPERTY: As a compromise distribution of the community property, [Arthur] shall receive as his separate property: ...

(l )A.C. Hawkins, D.D.S., P.A., including all equipment, accounts receivable, inventory, goodwill and pension plan, net value, approximately $294,000.

....

9.WIFE'S COMMUNITY DEBTS: [Glenda] assumes, shall timely pay and shall hold [Arthur] harmless for the following debts: ....

(b)[t]he tax obligation an [sic] any asset or proceeds which she is receiving pursuant to this Agreement;

....

12.GENERAL PROVISIONS: ...

H.Transfer of Property: Each party shall immediately allow the other to take possession of the property transferred to that party by this Agreement.

(Appellant App.at 257-261.)

The $1 million cash payment referred to by Paragraph 6(a) of the Agreement was paid to Glenda in installments between January 7, 1987, and March 16, 1987.These installments were paid by checks written on the Plan's bank account.Upon receipt of these payments, Glenda did not redeposit the funds into the Plan, nor did she roll the funds over into any other qualified plan within the sixty day grace period allowed by 26 U.S.C. § 402(a)(5).¹Neither Arthur nor Glenda reported the payment as income on their separately filed 1987 federal income tax returns.

Ordinarily, any funds distributed from a qualifying pension plan are taxable to the plan participant or beneficiary who, under the plan, is entitled to receive the distribution.Darby v. Commissioner, 97 T.C. 51, 58, 1991 WL 134804(1991).Yet under section 402(a)(9) of the Code, ² the "spouse or former spouse" of the plan participant who receives "any distribution or payment made ... under a qualified domestic relations order (as defined in section 414(p))" shall be considered an "alternate payee" and taxed on such distribution or payments as the distributee.I.R.C. § 402(a)(9).Accordingly, the tax liability for the $1 million distribution from Arthur's Plan will be allocated either to Arthur or Glenda depending upon whether the Agreement as incorporated into the Dissolution Decree satisfies the statutory definition of a QDRO.A domestic relations order qualifies as a QDRO under the Code only if it: (1) creates, recognizes or assigns to an alternate payee the right to receive all or a portion of the benefits payable under a plan; (2) clearly specifies certain information about the plan; and (3) does not alter in a prohibited manner the amount or form of the benefits payable under the plan.I.R.C. § 414(p)(1)-(3).

Concerned that he might be taxed on the $1 million distribution, Arthur filed a Motion for Entry of Qualified Domestic Relations Order nunc pro tunc with the divorce court in March 1989.In this motion, Arthur argued that because the Agreement was intended to be a QDRO, Glenda was liable for the tax on the distribution.Arthur therefore asked the court to enter a QDRO nunc pro tunc to the date of the divorce.In the alternative, Arthur argued that Glenda was liable for the tax under Paragraph 9 of the Agreement, which provides that Glenda "assumes, shall timely pay and shall hold [Arthur] harmless for ... [t]he tax obligation ... [on] any asset or proceeds which she is receiving pursuant to this Agreement."

In an order filed August 2, 1989, the divorce court denied Arthur's motion on all grounds.First, the court found that nothing in the Agreement specified that a QDRO was intended by the parties, or that Glenda was intended to be an alternate distributee of the Plan.Second, because it had not retained any jurisdiction over the Agreement (other than to enforce its literal terms and to modify child custody issues), the court held that it had no jurisdiction to enter a QDRO nunc pro tunc to the date of the original divorce decree.Finally, the court refrained from ruling on Arthur's request to enforceParagraph 9 of the Agreement so as to require Glenda to pay tax on the $1 million distribution on the ground that the Commissioner of Internal Revenue ("Commissioner") had not yet assessed a deficiency in either Arthur or Glenda's 1987 income tax and thus the issue of enforcing the Agreement was not ripe.

Subsequent to the divorce court proceeding, the Commissioner issued notices of deficiency to both Arthur and Glenda.The notices required Arthur and Glenda each to include the distribution in their gross income for 1987.After receiving the notices, Arthur and Glenda both filed petitions in the United States Tax Court challenging the assessed deficiencies.In an order dated March 23, 1993, the Tax Court consolidated the two cases for decision.The parties' principal dispute in the Tax Court proceeding was whether the Agreement incorporated into the Hawkins' marital dissolution decree was a QDRO.In addition, Glenda and the Commissioner argued that Arthur was collaterally estopped from relitigating the QDRO issue by virtue of the divorce court's August 2, 1989 order.On cross-motions for summary judgment, the Tax Court held that because the QDRO question was not definitively decided by the divorce court's August 2, 1989 order, Arthur was not precluded from relitigating it.Hawkins, 102 T.C. at 68-70.However, the Tax Court ultimately concluded that the Agreement was not a QDRO and granted Glenda's motion for summary judgment against the Commissioner.Id. at 70-77.Correspondingly, the court granted the Commissioner's motion for summary judgment against Arthur and ordered Arthur to include the $1 million in his gross income for 1987. Id.

On June 9, 1994, Arthur filed a timely notice of appeal from the Tax Court's order.As a protective measure, the Commissioner also appealed the grant of summary judgment in favor of Glenda.The Commissioner takes no position on the merits of these consolidated appeals, contending simply that either Arthur or Glenda is taxable on the distribution.Thus, the Commissioner argues, if we reverse the grant of summary judgment in Arthur's case, we should grant summary judgment in favor of the Commissioner in Glenda's case.³

DISCUSSION

We review decisions of the United States Tax Court"in the same manner and to the same extent as decisions of the district courts in civil actions tried without a jury."I.R.C. § 7482(a).Accordingly, we review purely factual issues for clear error, and purely legal questions under the de novo standard.National Collegiate Athletic Ass'n v. Commissioner, 914 F.2d 1417, 1420(10th Cir.1990).We also review de novo the use of collateral estoppel to bar relitigation of an issue.Meredith v. Beech Aircraft Corp., 18 F.3d 890, 894(10th Cir.1994).

I.

Glenda first contends that Arthur is precluded from arguing that the Agreement is a QDRO because the New Mexico divorce court considered and rejected this same argument in 1989.Under the Full Faith and Credit...