Rodoni v. Comm'r of Internal Revenue

• Decision Date: 24 July 1995
• Docket Number: No. 28636–92.,28636–92.
• Citation: 105 T.C. No. 3,19 Employee Benefits Cas. 1733,64 USLW 2116,105 T.C. 29
• Parties: Mario RODONI and Donna Rodoni, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: U.S. Tax Court

105 T.C. 29

105 T.C. No. 3

19 Employee Benefits Cas. 1733

64 USLW 2116

Mario RODONI and Donna Rodoni, Petitioners

v.COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 28636–92.

United States Tax Court

July 24, 1995.

RUWE, Judge:

Respondent determined a deficiency of $146,544 in petitioners' 1988 Federal income tax. After concessions, the issues for decision are: (1) Whether the lump-sum distribution from a qualified profit sharing plan to petitioner Mario Rodoni (Mr. Rodoni) and its subsequent transfer into the individual retirement accounts of petitioner Donna Rodoni (Mrs. Rodoni) qualify as a tax-free rollover under section 402(a)(5); ¹ or (2) whether such transfers qualify as a tax-free rollover under section 402(a)(6)(F).

FINDINGS OF FACT

Some of the facts have been stipulated and are so found. The stipulation of facts, supplemental stipulation of facts, and attached exhibits are incorporated herein by this reference. Petitioners resided in Santa Cruz, California, at the time they filed their petition.

Petitioners were married on April 7, 1962. On February 22, 1985, Mrs. Rodoni filed a petition for dissolution of petitioners' marriage in the Superior Court of California for the County of Santa Cruz.

Throughout petitioners' marriage, and until May 23, 1988, Mrs. Rodoni was not employed outside the home. From 1972 until the present, Mr. Rodoni has been a shareholder, director, and employee of Sunset Farms, Inc. (Sunset Farms), a California corporation engaged in row-crop farming.

Sunset Farms adopted a profit sharing plan and trust (profit sharing plan) in 1973, and it adopted a defined benefit pension plan and trust (defined benefit plan) in 1980. Mr. Rodoni was a participant in both of these plans, and both plans were qualified under section 401(a).

In March 1986, the board of directors of Sunset Farms resolved to terminate the profit sharing plan effective March 31, 1986. Upon termination of the profit sharing plan, each participant could elect to have his vested benefit payable in one of two ways: (1) A 100–percent lump-sum distribution, or (2) a transfer of 100 percent of the vested benefit to the defined benefit plan. Mr. Rodoni elected to have his vested benefit payable in a lump-sum distribution.

On February 5, 1988, Mr. Rodoni received a check in the amount of $307,204.46, representing a lump-sum distribution of the balance of his account in the profit sharing plan. This distribution included a community property component of approximately $205,000 and a separate property component of approximately $102,000. Mr. Rodoni hand delivered the check to Mrs. Rodoni on the same day he received it. Mrs. Rodoni, on that day, deposited the check into a joint certificate of deposit account at Commercial Pacific Savings and Loan Association, Santa Cruz, California (Commercial Pacific account).

On April 4,, 1988, within 60 days of Mr. Rodoni's receipt of the lump-sum distribution, Mrs. Rodoni withdrew all the funds in the Commercial Pacific account, $310,669.39, represented by two checks—one for $200,000 and one for $110,669.39. On the same day, Mrs. Rodoni deposited $92,000 of the $110,669.39 check into an account at Eureka Federal Savings & Loan, Santa Cruz, California (Eureka Federal), receiving back from Eureka Federal a check for the difference of $18,669.39. Also on that day, Mrs. Rodoni deposited the $200,000 Commercial Pacific check and the $18,669.39 Eureka Federal check into an account at Dean Witter Reynolds, Inc., Santa Cruz, California (Dean Witter). Both of these accounts were designated as rollover individual retirement accounts, and both accounts were in the name of Mrs. Rodoni alone. Mrs. Rodoni subsequently consolidated the Eureka Federal account into the Dean Witter account.

On October 25, 1988, Mrs. Rodoni executed a written Marital Settlement Agreement (Marital Agreement), and on December 22, 1988, Mr. Rodoni executed the Marital Agreement. The Marital Agreement was attached to and incorporated by reference in the Judgment of Dissolution of Marriage of petitioners, which was entered by the Superior Court of California for the County of Santa Cruz on January 24, 1989, nunc pro tunc to December 31, 1988. The Marital Agreement provided that Mrs. Rodoni was to receive the community property interest in the profit sharing plan, which amount was to be transferred into an individual retirement account (IRA) in the name of Mrs. Rodoni.

OPINION

Generally, a distribution from a qualified employees' trust is taxable to the distributee in the year of distribution. Sec. 402(a)(1). Section 402(a)(5)(A) provides an exception to the general rule for certain “rollovers” by the employee. Similarly, section 402(a)(6)(F) provides an exception for certain rollovers by recipients of distributions pursuant to qualified domestic relations orders. Petitioners argue that the transfer of Mr. Rodoni's lump-sum distribution to Mrs. Rodoni's IRA falls within one of these exceptions. Alternatively, petitioners argue that if the transfer does not strictly meet the conditions for tax-free treatment under either of these provisions, then the transfer substantially complied with these provisions so as to permit tax-free treatment. We will address each argument in turn.

Tax-Free Rollover

Section 402(a)(5) provides that where the balance to the credit of an employee in a qualified trust is paid to him, and the employee transfers any portion of the distribution to “an eligible retirement plan” within 60 days of receipt, then the amount so distributed shall not be includable in gross income. Sec. 402(a)(5)(A), (C). The parties do not dispute that the lump-sum distribution to Mr. Rodoni represented the balance to the credit of Mr. Rodoni in the profit sharing plan, nor do they dispute that the proceeds of the distribution were transferred to Mrs. Rodoni's IRA within 60 days of Mr. Rodoni's receipt of the distribution. The only question is whether the proceeds of the distribution were transferred to “an eligible retirement plan”.

Petitioners contend that a plan need not be established by, or for the benefit of, the employee/distributee to constitute “an eligible retirement plan”. Respondent, on the other hand, argues that because Mrs. Rodoni was not an employee or a distributee of the lump-sum distribution, her IRA does not constitute “an eligible retirement plan”. Neither party cites any cases directly on point; the question of whether a spouse's IRA constitutes an eligible retirement plan for purposes of section 402(a)(5) appears to be an issue of first impression.

The term “eligible retirement plan” is defined to include “an individual retirement account described in section 408(a)”. Sec. 402(a)(5)(E)(iv)(I). An individual retirement account is defined in section 408(a) ² as “a trust created or organized in the United States for the exclusive benefit of an individual or his beneficiaries”. Thus, reading section 402(a)(5) in conjunction with section 408(a), a tax-free rollover requires a distribution to an employee and a transfer by the employee to a trust created for the exclusive benefit of an individual or his beneficiaries. Secs. 402(a)(5)(A), 408(a). The inclusion of an individual's beneficiaries as persons who could receive potential benefits from an IRA appears to recognize that, under some circumstances, certain IRA benefits may pass to others without jeopardizing the trust's qualification as an individual retirement account. However, as its name suggests, the essence of an IRA is that it is a retirement account created to provide retirement benefits to “an individual”.³

In the context of sections 402(a)(5)(E)(iv)(I) and 408(a), “ an individual” does not mean “ any individual”. Section 402(a)(1) provides the general rule that a distribution from a qualified employees' trust is taxable to the distributee, in the year of distribution. Section 402(a)(5) provides a limited exception to the general rule for rollovers by an employee where certain requirements are met. Section 402(a)(5)(A) was enacted for the purpose of promoting portability of pension benefits where an employee changes jobs or the pension plan terminates. S. Rept. 93–383, at 71–72 (1973), 1974–3 C.B. (Supp.) 80, 150–151; H. Rept. 93–807, at 29–30 (1974), 1974–3 C.B. (Supp.) 236, 264–265; H. Conf. Rept. 93–1280, at 341–342 (1974), 1974–3 C.B. 415, 502–503. The specific requirements of section 402(a)(5)(A) are designed to ensure that the employee's benefits will be used for that employee's retirement savings. S. Rept. 93–383, supra at 132, 1974–3 C.B. (Supp.) at 211. Indeed, the legislative history states:

the bill permits an individual, subject to limitations, where he receives a final distribution from an employer under a qualified plan, to contribute this amount to his own individual retirement account without these transfers giving rise to any tax. [S. Rept. 93–383, supra at 72, 1974–3 C.B. (Supp.) at 151; emphasis added.]

To allow an employee to escape tax on distributions from a plan that he transfers for the exclusive benefit of someone other than himself is contrary to the purpose for which section 402(a)(5)(A) was enacted. We, therefore, conclude that under section 402(a)(5), a tax-free rollover to an IRA requires that the IRA be one that is established for the benefit of the “individual” employee who received the distribution from an employees' trust. ⁴

Petitioners understand the problems inherent in allowing an employee/distributee to make a tax-free rollover into any individual's IRA. Thus, they contend that their interpretation of “an eligible retirement plan” should be limited to the facts of this case, namely, the transfer of a lump-sum distribution from a qualified plan to a retirement plan in the name of the employee's spouse, incident to a divorce. We reject this contention. The relevant statutes apply generally. There is nothing in section 402(a)(5) that permits a tax-free rollover of a distribution to an...