Powell v. Comm'r of Internal Revenue

• Citation: 101 T.C. 489,17 Employee Benefits Cas. 2194,101 T.C. No. 32
• Decision Date: 29 November 1993
• Docket Number: 18163–91.,Nos. 14217–91,s. 14217–91
• Parties: Rodney L. POWELL, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.Flora B. POWELL, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: United States Tax Court

101 T.C. 489

101 T.C. No. 32

17 Employee Benefits Cas. 2194

Rodney L. POWELL, Petitioner,

v.COMMISSIONER OF INTERNAL REVENUE, Respondent.Flora B. POWELL, Petitioner

v.COMMISSIONER OF INTERNAL REVENUE, Respondent.

Nos. 14217–91

18163–91.

United States Tax Court

Nov. 29, 1993.

Clyde R. Maxwell, Irvine, CA, for petitioner in docket No. 14217–91.

Roger A. Grad, Irvine, CA, for petitioner in docket No. 18163–91.

Willis B. Douglass, Laguna Niguel, CA, for respondent.

OPINION

TANNENWALD, Judge:

In these consolidated cases, respondent determined deficiencies of $20,623 in the Federal income tax of Rodney L. Powell (Rodney) for the taxable year 1984 and $16,237 in the Federal income tax of Flora B. Powell (Flora) for the taxable year 1985. The issue for decision is whether a distribution from a qualified pension plan of Rodney's employer is taxable in its entirety to Rodney or in part to Rodney and in part to Flora.

The cases were submitted fully stipulated under Rule 122.¹ The stipulated facts are so found, and the stipulation and the exhibits attached thereto are incorporated herein by this reference.

Each of the petitioners resided in California at the times their petitions herein were filed. They filed cash-basis, separate returns for the years in question with the Internal Revenue Service, Fresno, California.

Rodney and Flora were married on November 26, 1968. On May 5, 1983, judgment of dissolution of marriage was entered in the divorce proceeding entitled Flora B. Powell v. Rodney L. Powell, in the Superior Court of San Bernardino County, California, Cause No. OFL 20071. Rodney appealed this judgment to the Court of Appeal for the Fourth Appellate District of California. The Court of Appeal affirmed the judgment of the Superior Court on June 21, 1984. The judgment became final and enforceable on August 21, 1984.²

At all material times prior to July 9, 1984, Rodney was an employee of Rockwell International Corporation and as such became a participant in the Rockwell International Corporation Savings Plan (the plan). At all material times, the plan was a qualified plan under section 401(a).

The judgment in the divorce proceeding contains the following language:

IT IS FURTHER ORDERED, ADJUDGED AND DECREED that petitioner [Flora B. Powell] is awarded the following community property as her sole and separate property:

1. 58.96844% of savings plan in respondent's [Rodney L. Powell] name through Rockwell International with an approximate value of $39,661.00.

* * *

IT IS FURTHER ORDERED, ADJUDGED AND DECREED that respondent is awarded the following community property as his sole and separate property:

1. 41.03156% of the savings plan standing in the name of the respondent at Rockwell International in the value of $27,597.00.

* * * IT IS FURTHER ORDERED, ADJUDGED AND DECREED that the respondent has the option of keeping the plan intact and paying the petitioner the sum of $39,661, plus interest thereon at the rate of 10% per annum from September 2, 1981 until paid.

Rodney terminated participation in the plan on July 9, 1984. During the second half of 1984, Rodney requested and received a lump-sum distribution of the entire plan account. The distribution took the form of 3,370 shares of the common stock of Rockwell International Corporation. The distributions of stock represented pre-tax company contributions previously paid by Rockwell International Corporation into the plan account.

During 1984, 1,400 shares of the distributed stock were sold in the open market for a total price of $40,957.37. These proceeds were initially received by Rodney. The balance of the shares was sold during 1984 or 1985. ³ On December 31, 1984, Rodney delivered to his attorney for transmittal to Flora a check for $39,661. On a date between December 31, 1984, and April 4, 1985, Rodney's attorney delivered a check for $39,661 on behalf of Rodney to Flora's attorney. A check dated April 4, 1985, in the amount of $29,661 was distributed by the attorneys to Flora representing Rodney's payment less $10,000 in attorney's fees.

The issue before us is whether the provisions of sections 401(a)(13) and 402(a)(1) supersede the usual rules relating to the taxability of the income of married persons who are residents of a community property State (in this case, California).

Section 401(a)(13), which was added to the Internal Revenue Code by section 1021(c) of the Employee Retirement Income Security Act of 1974 (ERISA), Pub.L. 93–406, 88 Stat. 829, 937, provides in pertinent part:

(13) A trust shall not constitute a qualified trust under this section unless the plan of which such trust is a part provides that benefits provided under the plan may not be assigned or alienated. * * *⁴

Section 402(a)(1) provides in pertinent part:

(a) Taxability of Beneficiary of Exempt Trust.—

(1) General rule.—* * * the amount actually distributed to any distributee by any employees' trust described in section 401(a), which is exempt from tax under section 501(a) shall be taxable to him, in the year in which so distributed * * *

The critical question herein is whether, by virtue of the California community property law, Flora can be considered a “distributee” of the plan benefits.

Several aspects of the case deserve preliminary comment. First, since the taxable year of Rodney is 1984,⁵ the provisions of the Retirement Equity Act of 1984 (REA), Pub.L. 98–397, sec. 204(b), 98 Stat. 1426, 1445, which added section 414(p) to the Code, covering the effect of qualified domestic relations orders are not applicable herein, and the parties do not argue otherwise. See Darby v. Commissioner, 97 T.C. 51 (1991). Second, none of the parties contest the proposition that, under California law, the distribution from the plan constituted income of the marriage community of Rodney and Flora, see In re Marriage of Campa, 152 Cal.Rptr. 362, 367 (Ct.App.1979), appeal dismissed 444 U.S. 1028 (1980), and that it should be considered ordinary income under the Internal Revenue Code. The parties also agree that, under the usual rule, Rodney and Flora would each be taxable on their respective shares of such income. United States v. Mitchell, 403 U.S. 190 (1971); United States v. Malcolm, 282 U.S. 792 (1931). Third, none of the parties have articulated any view as to the impact of ERISA section 514(a), 29 U.S.C. sec. 1144(a) (1988), which provides for the preemption of State laws. See Stone v. Stone, 632 F.2d 740, 742 (9th Cir.1980), cert. denied 453 U.S. 922 (1981); Darby v. Commissioner, supra at 59. In any event, as far as this case is concerned, the preemptive effect of section 514(a) depends upon the interpretation accorded to the word “distributee” in section 402(a)(1) in light of the antialienation provisions of section 401(a)(13). See Sav. & Profit Sharing Fund of Sears Emps. v. Gago, 717 F.2d 1038, 1040 (7th Cir.1983); cf. Darby v. Commissioner, supra. As will subsequently appear, however, we believe that the judicial and legislative attitudes in respect of preemption and antialienation, where community property interests are involved, are an appropriate element to be considered in determining the meaning of “distributee”, which is not defined either in the statute or the regulations. Cf. Darby v. Commissioner, supra.

Rodney argues that Flora is taxable on the amount she received because her right to share in the benefits under the plan was acquired not by way of transfer from him but directly by virtue of California community property law, with the result that she was a “distributee” under section 402(a)(1) and section 401(a)(13) is inapplicable. He points out that Darby v. Commissioner, supra, involved the division of pension benefits under ERISA in a noncommunity property State and therefore is not controlling. In the alternative, Rodney contends that, if we hold that the entire distribution is taxable to him, he acquired Flora's share of $39,661 by payment of that amount to her and his basis for computing how much should be included in his income should be increased by that amount.

Petitioner Flora argues that she acquired her share of the benefits by transfer in contravention of the antialienation provisions of section 401(a)(13) and that, although Darby v. Commissioner, supra, is factually distinguishable, its reasoning is applicable herein with the result that the total amount of the benefits are taxable to Rodney. Flora does not address Rodney's alternative position.

Respondent points out that she is a stakeholder but, nevertheless, states her agreement with Flora's position on the basis of the reasoning of Darby v. Commissioner, supra. She also disputes Rodney's alternative position on the basis of our rejection of a similar contention in Darby. See 97 T.C. at 72–73.

An essential ingredient of our analysis is the status of the distribution involved herein under California law. There is not the slightest doubt that, under that law, the distribution was community property in which Rodney and Flora each acquired their interest from the beginning of the employment of Rodney covered by the plan, i.e., each obtained an ownership interest in the pension rights ab initio. In re Marriage of Lawson, 256 Cal.Rptr. 283, 285 (Ct.App.1989); In re Marriage of Campa, 152 Cal.Rptr. at 368; see Operating Engineers, etc. v. Zamborsky, 650 F.2d 196, 201 (9th Cir.1981).

Another significant ingredient is reflected in the judicial attitude in respect of the interplay between Federal laws and State community property laws. This attitude is set forth in the following statement by the Supreme Court in Mansell v. Mansell, 490 U.S. 581, 587 (1989):

Because domestic relations are preeminently matters of state law, we have consistently recognized that Congress, when it passes general legislation, rarely intends to displace state authority in this area. See, e.g., Rose v. Rose, 481 U.S. 619, 628 (1987); Hisquierdo v. Hisquierdo, 439 U.S. 572, 581 (1979). Thus we have held that we will not find...