                                 T.C. Memo. 2014-73



                           UNITED STATES TAX COURT



                  GINA B. WEAVER-ADAMS, Petitioner v.
             COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 13416-12.                         Filed April 28, 2014.



      Gina B. Weaver-Adams, pro se.

      Kimberly T. Packer, for respondent.



                             MEMORANDUM OPINION


      KROUPA, Judge: Respondent determined a $23,6551 deficiency in

petitioner’s Federal income tax and a $4,731 accuracy-related penalty under

section 66622 for 2009.

      1
          All amounts are rounded to the nearest dollar.
      2
          All section references are to the Internal Revenue Code (Code) in effect for
                                                                       (continued...)
                                          -2-

[*2] There are two issues for decision. We are first asked to decide whether a

distribution petitioner received from her ex-husband’s section 401(k) savings plan

(401(k)) is includable in her gross income for 2009. We hold that the distribution

is includable in petitioner’s gross income for 2009. The second issue is whether

petitioner is liable for an accuracy-related penalty under section 6662(a) for 2009.

We hold that she is.

                                     Background

      This case was submitted fully stipulated pursuant to Rule 122, and the facts

are so found. The stipulation of facts, the supplemental stipulation of facts and the

accompanying exhibits are incorporated by this reference. Petitioner resided in

California at the time she filed the petition.

      Petitioner was married to Michael Adams. On July 23, 2009, petitioner and

Mr. Adams (ex-husband) were divorced by final decree (Divorce Decree) in

California. Petitioner’s ex-husband participated in his employer’s 401(k), which

was administered by Mercer Trust Co. (Mercer).3 Petitioner was named an



      2
       (...continued)
2009, and all Rule references are to the Tax Court Rules of Practice and
Procedure, unless otherwise indicated.
      3
        Petitioner does not argue, and the record does not reflect, that any portion
of the 401(k) was funded with after-tax contributions.
                                         -3-

[*3] alternate payee of the 401(k) pursuant to a Qualified Domestic Relations

Order (QDRO) as part of the Divorce Decree. The QDRO provided that

petitioner, as alternate payee, was liable for any income tax on distributions from

the 401(k).4

      In 2009 petitioner requested and received a distribution of $103,098 from

Mercer (Distribution) as the alternate payee. Mercer issued petitioner a Form

1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing

Plans, IRAs, Insurance Contracts, etc., reflecting the Distribution and withheld

$10,310 in Federal income tax and $1,031 in State income tax. Petitioner reported

the Distribution on the tax return for 2009 as nontaxable pension and annuity

income.

      Respondent issued a deficiency notice for 2009 determining that the

Distribution is includable in petitioner’s gross income. Respondent also

determined that petitioner is liable for the accuracy-related penalty under section

6662(a). Petitioner timely filed the petition.




      4
       Additionally, the Divorce Decree created a “payment to complete division
of community estate” as a property settlement. The Divorce Decree did not
specify that the retirement distribution was nontaxable.
                                         -4-

[*4]                                 Discussion

       We are asked to consider whether petitioner is required to include the

Distribution in her gross income for 2009. We are also asked to consider whether

petitioner is liable for the accuracy-related penalty under section 6662(a). We

shall consider each of these issues in turn.5

I. Whether the Distribution Is Includable in Petitioner’s Gross Income

       We first consider whether petitioner is required to include the Distribution

in her gross income. Petitioner contends that her ex-husband was indebted to her

and paid her from the 401(k) to satisfy the debt. Petitioner argues that she was not

required to include the Distribution in her gross income because the debt created

basis in the 401(k) that exceeded the Distribution amount. Respondent argues that

the Distribution is includable in gross income. Additionally, respondent argues

that petitioner cannot have basis in the 401(k) as a transferee and distributee. We

begin with the governing law.

       Gross income includes all income from whatever source derived. Sec.

61(a). This includes distributions from annuities and employees’ trusts. Secs.

       5
        Petitioner does not claim the burden of proof shifts to respondent. See sec.
7491(a). Petitioner also did not establish she satisfies the requirements of the
statute to shift the burden of proof to respondent. See sec. 7491(a)(2). We
therefore find that the burden of proof remains with petitioner as to any factual
issue affecting her liability for the deficiency.
                                         -5-

[*5] 61(b), 72(a)(1), 402(b)(2). Employees’ trusts include qualified cash or

deferred arrangements for the benefit of employees that meet certain criteria. Sec.

401(k). Employees’ trust amounts categorized as employer contributions are not

distributable before the employee’s “severance from employment, death or

disability * * *, the attainment of age 59-1/2 * * * [or] upon hardship of the

employee.” Sec. 401(k)(2)(B)(i). Employer contributions include elective

contributions. Sec. 1.401(k)-1(a)(4)(ii), Income Tax Regs.

      Elective contributions are not included in the employee’s gross income in

the year of the contributions. Secs. 1.401(k)-1(a)(4)(iii), 1.402(a)-1(d)(2), Income

Tax Regs. Thus, elective contributions must be taxed in the year that they are

distributed. Sec. 1.402(a)-1(a)(1)(ii), Income Tax Regs. Distributions are taxable

in the year they are received because they are paid from pre-tax dollars. See sec.

402(a); sec. 1.402(a)-(1)(a)(1) and (2), Income Tax Regs. Tax may be deferred,

however, if the distribution is rolled over into an eligible retirement plan within 60

days of receipt. Sec. 402(a), (c). Distributions are taxed as ordinary income. See

sec. 72; Darby v. Commissioner, 97 T.C. 51, 58 (1991); Seidel v. Commissioner,

T.C. Memo. 2005-67.

      Thus, a distribution from a qualified retirement plan is taxable to the

distributee as ordinary income if it is not rolled over into an eligible retirement
                                         -6-

[*6] plan. Sec. 402(a), (c); Darby v. Commissioner, 97 T.C. at 58. Neither the

Code nor the regulations define the term “distributee.” This Court has concluded,

however, that the term ordinarily means the participant or beneficiary who, under

the plan, is entitled to receive the distribution. Darby v. Commissioner, 97 T.C. at

58; Seidel v. Commissioner, T.C. Memo. 2005-67.

      A spouse or former spouse of a plan participant who receives any

distribution or payment made pursuant to a QDRO6 is an alternate payee and is

subject to tax on the distribution or payments as the distributee. Sec.

402(e)(1)(A); Seidel v. Commissioner, T.C. Memo. 2005-67; see also sec.

414(p)(8) (defining “alternate payee”).7 If property is transferred incident to

divorce,8 the transferee’s basis is the adjusted basis of the transferor. Sec. 1041(b).

A participant in a 401(k) plan has no tax basis because the participant has not paid




      6
          As defined in sec. 414(p).
      7
       The parties agree that petitioner received the Distribution as part of the
QDRO. Similarly, neither party contests that petitioner was an alternate payee, as
defined in sec. 414(p)(8). The parties also agree that petitioner actually received
the Distribution in 2009. It is also undisputed that petitioner did not pay any tax
on the Distribution for 2009. Petitioner’s return for 2009 reported the Distribution
as nontaxable pension and annuity income.
      8
       A transfer is incident to divorce if it occurs within one year after the
marriage ends or if the transfer is related to the marriage ending. Sec. 1041(c).
                                          -7-

[*7] tax on the contributions, which are made in pre-tax dollars.9 See sec.

1.401(k)-1(a)(4)(iii), Income Tax Regs. Therefore, a taxpayer who receives the

distribution as a transfer of property incident to divorce does not have basis in the

former spouse participant’s retirement plan. See sec. 1.408-4(a)(2), Income Tax

Regs.

        We hold that the Distribution is includable in petitioner’s gross income. See

sec. 402(e)(1)(A); Seidel v. Commissioner, T.C. Memo. 2005-67. Further, we

hold that petitioner did not have basis in her ex-husband’s 401(k). See sec. 1.408-

4(a)(2), Income Tax Regs.

        Petitioner has no basis in the 401(k). Petitioner’s assertion that she has

basis in the 401(k) because she received the Distribution as part of the Divorce

Decree is legally unsupported.10 Petitioner received the Distribution as a transfer




        9
        We note that it is possible for a 401(k) plan to have an after-tax
contribution component and a corresponding basis for the plan participant. See,
e.g., sec. 402A (discussing treatment of Roth contributions); sec. 1.401(k)-
1(a)(4)(iii), Income Tax Regs. Nonetheless, petitioner does not argue, and the
record does not reflect, that any portion of the 401(k) was funded with after-tax
Roth contributions.
        10
        We place no weight on the documents submitted with the Supplemental
Stipulation. As a legal matter, petitioner cannot establish basis in the 401(k).
Petitioner’s potential basis is limited to the basis petitioner’s ex-husband had in
the 401(k) at the time of the transfer.
                                        -8-

[*8] of property made incident to divorce because it occured within one year11 of

the marriage ending and was related to the marriage ending. As a result, petitioner

received her ex-husband’s adjusted basis, which was zero. Petitioner’s ex-

husband contributed pre-tax dollars pursuant to the rules for tax-deferred 401(k)

plans and therefore had zero basis in the 401(k).

      Petitioner had the option to roll over the Distribution to an eligible

retirement plan or IRA within 60 days of receipt. Petitioner’s decision not to roll

over the Distribution requires the Distribution to be included in gross income.12

The 401(k) contributions were contributed in pre-tax dollars, and no tax was paid

on the funds making up the Distribution. Petitioner received the Distribution

pursuant to the QDRO,13 which specifically provides that petitioner was liable for

any tax on distributions from the 401(k). The Distribution cannot escape taxation

because petitioner erroneously believed that her ex-husband’s debt to her created

basis in the 401(k).



      11
        The Divorce Decree was entered on July 23, 2009 and petitioner received
the Distribution in the 2009 tax year.
      12
      Petitioner acknowledges that she requested and received the Distribution
from Mercer.
      13
        The Distribution was not subject to a 10% early distribution tax because
petitioner received the Distribution through the QDRO. See sec. 72(t)(2)(C).
                                         -9-

[*9] In toto, petitioner’s arguments are insufficient to rebut the presumption of

correctness of respondent’s deficiency determination. Whether petitioner’s ex-

husband owed petitioner a debt is irrelevant to determine whether the Distribution

is includable in gross income.14 Petitioner received the Distribution during the

2009 tax year making it within one year after the date the marriage ended on July

23, 2009 and constituting a transfer incident to divorce. Petitioner’s basis was

limited to her ex-husband’s basis. Because her ex-husband had zero basis, so too

did petitioner. Moreover, the QDRO specifically provides that petitioner was

liable for any tax on distributions from the 401(k). Petitioner did not and cannot

demonstrate that respondent’s deficiency determination is in error.15 Respondent


      14
        Previously, the Court has indicated that a distribution may be taxable to
the participant spouse, rather than the alternate payee, where the distribution is in
discharge of a legal obligation. See Warren v. Commissioner, T.C. Memo. 2009-
148 n.8 (discussing Vorwald v. Commissioner, T.C. Memo. 1997-15 (where an
IRA distribution was held taxable to participant rather than spouse because IRA
funds were transferred in partial discharge of participant’s child support
obligation)). There is nothing in the record indicating that petitioner’s ex-husband
transferred the 401(k) to petitioner in discharge of a legal obligation. Petitioner
received her interest in the 401(k) as part of a property settlement with her ex-
husband.
      15
         There are circumstances where the transfer of a spouse’s interest in an
individual retirement account, individual retirement annuity or a retirement bond
incident to divorce, is not considered to be a distribution or a taxable transfer by a
spouse to a former spouse. See sec. 1.408-4(g), Income Tax Regs. This is limited
to situations where the interest is merely transferred to the spouse, rather than
                                                                         (continued...)
                                         - 10 -

[*10] prevails. We find that petitioner failed to establish that the Distribution is

nontaxable, and therefore we sustain respondent’s determinations in the statutory

notice.

II. Accuracy-Related Penalty

      We next consider whether petitioner is liable for the accuracy-related

penalty. See sec. 6662(a). Respondent has the burden of production and must

present sufficient evidence that it is appropriate to impose the penalty. See sec.

7491(c); Higbee v. Commissioner, 116 T.C. 438, 446-447 (2001).

      A taxpayer is liable for an accuracy-related penalty as to any portion of an

underpayment attributable to, among other things, a substantial understatement of

income tax. Sec. 6662(a), (b)(2). There is a substantial understatement of income

tax if the amount of the understatement exceeds the greater of either 10% of the

tax required to be shown on the return, or $5,000. Sec. 6662(d)(1)(A); sec.

1.6662-4(a), Income Tax Regs.

      Petitioner reported she owed $1,559 for 2009 and respondent determined

that petitioner owed $24,214. Thus, petitioner understated the tax on her return by


      15
        (...continued)
liquidated, as here. See id. A distribution is taxable in the year it is received, but
tax may be deferred if the distribution is rolled over into an eligible retirement
plan within 60 days of receipt. See secs. 401(k), 402(a), (c).
                                        - 11 -

[*11] $22,655, which is greater than 10% of the tax required to be shown on the

return, and exceeds $5,000. Accordingly, respondent has met his burden of

production with respect to petitioner’s substantial understatement of income tax

for 2009.

      The accuracy-related penalty does not apply to any portion of an

underpayment, however, if it is shown that there was reasonable cause for the

taxpayer’s position and that the taxpayer acted in good faith with respect to that

portion. See secs. 6662(a), 6664(c)(1); sec. 1.6664-4(b), Income Tax Regs. The

determination of whether a taxpayer acted with reasonable cause and in good faith

is made on a case-by-case basis, taking into account all the pertinent facts and

circumstances, including the taxpayer’s efforts to assess his or her proper tax

liability and the knowledge and experience of the taxpayer. Sec. 1.6664-4(b)(1),

Income Tax Regs. The taxpayer bears the burden of proof with respect to

reasonable cause. Higbee v. Commissioner, 116 T.C. at 446.

      We understand petitioner to argue that she had reasonable cause for treating

the Distribution as nontaxable income because she contends that she relied in good

faith on the advice of her tax professional. Petitioner’s assertion is

unsubstantiated. Petitioner did not demonstrate that a tax professional advised her

to take the position that the Distribution was nontaxable income. Petitioner’s
                                        - 12 -

[*12] inclusion of an unauthenticated and unsigned document, purportedly created

by her tax professional, does not substantiate her claim. Moreover, there is

nothing in the record regarding whether the Distribution was nontaxable income.

Additionally, there is nothing in the record demonstrating that petitioner provided

the Form 1099-R to her tax professional. See Neonatology Assocs., P.A. v.

Commissioner, 115 T.C. 43, 99 (2000), aff’d, 299 F.3d 221 (3d Cir. 2002). In

sum, petitioner failed to establish that the Distribution was nontaxable.

      After considering all of the facts and circumstances, we find for respondent

regarding both the taxability of the Distribution and the accuracy-related penalty.

      We have considered all remaining arguments the parties made and, to the

extent not addressed, we conclude they are irrelevant, moot or meritless.

      To reflect the foregoing,


                                                       Decision will be entered

                                                 for respondent.
