                  T.C. Summary Opinion 2005-51



                     UNITED STATES TAX COURT



                  LEE E. SEIDEL, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 8003-03S.               Filed April 19, 2005.


     Lee E. Seidel, pro se.

     John W. Strate and Rex Lee, for respondent.



     GOLDBERG, Special Trial Judge:   This case was heard pursuant

to the provisions of section 7463 of the Internal Revenue Code in

effect at the time the petition was filed.   The decision to be

entered is not reviewable by any other court, and this opinion

should not be cited as authority.   Unless otherwise indicated,

subsequent section references are to the Internal Revenue Code in

effect for the year in issue, and all Rule references are to the

Tax Court Rules of Practice and Procedure.
                               - 2 -

     Respondent determined a deficiency in petitioner’s Federal

income tax of $9,170 for taxable year 1999.   In the notice of

deficiency, respondent increased petitioner’s gross income by

$30,030 and reduced by $601 the miscellaneous itemized deductions

taken by petitioner.

     The issue for decision is whether petitioner is taxable on

one-half of the net distribution of $60,060 made from his

California Water Service Company 401(k) plan pursuant to a

marital settlement agreement dissolving his marriage to Laura

Seidel (Ms. Seidel).   Respondent’s computational adjustment of

$601 to petitioner’s claimed miscellaneous itemized deductions

will be resolved by our holding on the issue.

     Some of the facts have been stipulated and are so found.

The stipulation of facts and the attached exhibits thereto are

incorporated herein by this reference.   Petitioner resided in

Yuba City, California, on the date the petition was filed in this

case.

     Petitioner married Ms. Seidel on October 23, 1993.   During

the marriage, petitioner was employed by the California Water

Service Company (CWSC).   Petitioner’s employment with CWSC

commenced in 1974 and continued beyond the dissolution of the

marriage.   As an employee of CWSC, petitioner was a participant

in a tax-deferred savings plan (CWSC 401(k)) sponsored by CWSC

pursuant to section 401(a) and (k).    Petitioner’s participation
                                 - 3 -

in the CWSC 401(k) plan began sometime between 1983 and 1985,

prior to his marriage to Ms. Seidel, and continued during the

marriage.    Petitioner’s CWSC 401(k) plan consisted of a separate

property interest for contributions made prior to his marriage to

Ms. Seidel and a community property interest for contributions

made during his marriage to Ms. Seidel.      The parties agree that

the community property interest in petitioner’s CWSC 401(k) plan

totals $77,000.

     Petitioner and Ms. Seidel each entered the marriage with

separate property interests.   Ms. Seidel had her own house, which

was encumbered by a first mortgage.      Petitioner had his own

house, which he had purchased.    Petitioner’s house was encumbered

by a first and second mortgage.    After their marriage, petitioner

moved into Ms. Seidel’s house.

     During the beginning years of their marriage, petitioner and

Ms. Seidel took out a second mortgage on Ms. Seidel’s house.      The

proceeds of this second mortgage were used to pay off the second

mortgage on petitioner’s house, to pay off some of Ms. Seidel’s

debts, and to purchase household assets.

     Petitioner and Ms. Seidel separated on February 11, 1998.

During settlement negotiations to dissolve the marriage, Ms.

Seidel was represented by an attorney, Robert Fruitman (Mr.

Fruitman).   Petitioner was represented by his attorney, Francis

L. Adams (Mr. Adams).   The marriage was dissolved by the Superior
                               - 4 -

Court of California (California Superior Court), County of

Sutter, on April 27, 1999.

     With respect to the division of petitioner’s CWSC 401(k)

plan, Ms. Seidel and petitioner agreed to a Marital Settlement

Agreement, dated April 19, 1999, and entered by the California

Superior Court on April 27, 1999, which provided:

     the parties presently have a partial community interest
     [$77,000.00] in Husband’s 401K and Husband has a partial
     separate property interest in his 401K. The parties agree
     that the sum of SEVENTY SEVEN THOUSAND DOLLARS AND NO/100
     ($77,000.00) shall be withdrawn from the 401K plan held in
     Husband’s name. Husband will then deduct the federal and/or
     state penalties and the federal and state taxes and any
     other taxes for early withdraw [sic] from that amount, and
     from that remaining balance, Husband shall arrange for the
     payment of the two (2) debts owed to First Community
     Financial Services, which are secured by deeds of trust on
     wife’s home. After those two (2) debts are paid, any
     balance of the proceeds shall be split equally between the
     parties. Any proceeds remaining in Husband’s 401K plan
     shall be confirmed to Husband as his sole and separate
     property.

     The Marital Settlement Agreement was reviewed by Lillick &

Charles, LLP, Attorneys at Law (Lillick & Charles), and by the

administrator of the CWSC 401(k) plan, for whom Lillick & Charles

acted as counsel.   Based upon this review, the plan administrator

refused to comply with the Marital Settlement Agreement because

it did not constitute a Qualified Domestic Relations Order

(QDRO).   Due to petitioner’s continuing employment, the plan

administrator would not distribute the called for amount to

petitioner.
                               - 5 -

     Mr. Fruitman and Mr. Adams negotiated a second Marital

Settlement Agreement which incorporated a Domestic Relations

Order (DRO).   They submitted the proposed QDRO with their

respective party’s approval to Lillick & Charles on May 28, 1999.

Ms. Seidel expressly waived all spousal support in the Marital

Settlement Agreement.

     Lillick & Charles advised Mr. Fruitman and Mr. Adams on June

7, 1999, that the proposed DRO was satisfactory, met the

requirements of a QDRO, and that the plan administrator would

make the distribution pursuant to the QDRO.

     On July 19, 1999, petitioner, Mr. Adams, Ms. Seidel, and Mr.

Fruitman signed a Stipulation and Order with respect to the QDRO.

This Stipulation and Order, which was stamped “Endorsed Filed

Aug. 3, 1999” by the California Superior Court, requested that

the court issue an order as follows:

     1. A completed Qualified Domestic Relations Order will be
     prepared and submitted to the Plan for approval and the Plan
     will advise counsel of their approval prior to the
     signatures of the parties and their counsel and prior to
     the submission to the court.

     The parties presently have a partial community interest
     ($77,000.00) in Husband’s 401K and Husband has a partial
     separate property interest in his 401K. The parties agree
     that the sum of SEVENTY SEVEN THOUSAND DOLLARS AND ZERO
     CENTS ($77,000.00) shall be withdrawn from the 401K plan in
     Wife’s name, as an Alternate Payee, and paid over to
     Wife’s attorney. The Plan’s administrators will
     automatically withhold a portion of the Federal and State
     tax obligation resulting from early withdrawal of the funds.
     Wife’s attorney will pay out of the remaining fund balance
     an amount sufficient to pay off the two (2) debts owed to
     First Community Financial Services (in the approximate
                                - 6 -

     amount of $28,000), which are secured by a deed of trust on
     Wife’s home. The remaining fund balance shall be used to
     pay Husband the sum of TEN THOUSAND DOLLARS AND ZERO CENTS
     ($10,000.00). Any remaining balance shall belong to Wife.
     Wife’s attorney shall accomplish all disbursements from the
     withdrawn funds within thirty (30) days of receipt. Any
     proceeds remaining in Husband’s 401K plan shall be confirmed
     to husband as his sole and separate property.

     The QDRO issued by the California Superior Court on August

3, 1999, was stamped “Endorsed Filed”.    This QDRO stated in

paragraph 4:

     The AP [alternate payee] account will be distributed upon
     receipt by the Plan of an endorsed filed copy of this
     Qualified Domestic Relations Order and an endorsed filed
     copy of the Stipulation and Order that concerns this
     Qualified Domestic Relations Order.

Unlike the Stipulation and Order filed August 3, 1999, this QDRO

made no mention of the distribution of $10,000 to petitioner or

the distribution of funds to pay the debts secured by the deed of

trust.   However, the QDRO incorporated into its terms the

Stipulation and Order.

     Ms. Seidel, through her attorney as her agent, received a

net distribution of $60,060 ($77,000 less Federal and State taxes

withheld of $16,940).    Ms. Seidel also received a Form 1099-R,

Distributions from Pensions, Annuities, Retirement or Profit-

Sharing Plans, issued by New York Life Insurance Company for

taxable year 1999 reflecting a taxable distribution of $77,000.

Upon receipt of this distribution, Ms. Seidel did not redeposit

the funds into the CWSC 401(k) plan, nor did she roll the funds
                                 - 7 -

over into any other qualified plan within the 60-day grace period

allowed by section 402(c).1

     On August 27, 1999, Ms. Seidel signed cashier’s checks as

follows:

     Check No.           Payee                         Amount

     2016074195          Lee Seidel                    $10,000.00
     2016074191          First Community
                                                   1
                         Financial Services         $24,159.66
     2016074192          First Community
                                                       1
                         Financial Services             $6,847.46
     1
      These check payments made to First Community Financial
Services were made to pay off the principal balance of a second
mortgage on petitioner’s house, which was a liability assumed
during petitioner and Ms. Seidel’s marriage, and as such was a
joint liability, and to pay off another unspecified joint
liability.

     However, Ms. Seidel reported only $30,030 of the $77,000

pension distribution on her 1999 Federal income tax return.         This

amount represents one-half of the net distribution from

petitioner’s CWSC 401(k) plan.    In the notice of deficiency

mailed to Ms. Seidel respondent determined that she failed to

report the additional $46,970 distribution from New York Life

from petitioner’s CWSC 401(k) plan.




     1
      Although a qualified pension plan is exempt from taxation
under sec. 501(a), any amounts actually distributed from such a
plan generally must be included in the distributee’s gross
income. Sec. 402(a). In order to avoid the tax consequence of a
plan distribution, the distributee may “roll over” the amount of
the distribution into another eligible plan within 60 days. Sec.
402(c).
                                 - 8 -

     Although Ms. Seidel reported one-half of the net

distribution of $60,060, or $30,030 in gross income on her 1999

Federal income tax return, she claimed the entire credit of

$15,400 for the Federal income tax withheld on the $77,000

distribution from petitioner’s CWSC 401(k) plan, together with an

itemized deduction on Schedule A of $1,540 for the State and

local income taxes withheld on the $77,000 distribution.

     Petitioner did not report any part of the distribution from

the CWSC 401(k) plan on his Form 1040, U.S. Individual Income Tax

Return, for taxable year 1999.

     Following the examination by the Internal Revenue Service

(IRS) of petitioner’s and Ms. Seidel’s 1999 Federal income tax

returns, petitioner took the position that Ms. Seidel should

include the full amount of the distribution of $77,000 in her

income for 1999, and Ms. Seidel took the position that petitioner

should include one-half of the distribution in his income.    As a

result, respondent issued notices of deficiency to both

petitioner and Ms. Seidel to avoid the possibility of being in a

whipsaw position.   Respondent determined that petitioner failed

to report $30,030 (one-half of the net distribution) in his

income for 1999, and Ms. Seidel was responsible for additional

income in the amount of $46,970.    Ms. Seidel filed a petition to

this Court at docket No. 8964-03, in which she contested her

liability as to the additional one-half of the net distribution,
                                 - 9 -

which she did not report on her 1999 income tax return, from

petitioner’s CWSC 401(k) plan.    Ms. Seidel’s case and this case

were tried separately on the Court’s San Francisco, California,

Trial Session beginning on March 1, 2004.    On March 31, 2005, we

filed an opinion in Ms. Seidel’s case.     Seidel v. Commissioner,

T.C. Memo. 2005-67.

                            Discussion

     As a general rule, the determinations of the Commissioner in

a notice of deficiency are presumed correct, and the taxpayer

bears the burden of proving the Commissioner’s determinations in

the notice of deficiency to be in error.    Rule 142(a); Welch v.

Helvering, 290 U.S. 111, 115 (1933).     We decide the issue in this

case without regard to the burden of proof.    Accordingly, we need

not decide whether the general rule of section 7491(a)(1) is

applicable in this case.   See Higbee v. Commissioner, 116 T.C.

438 (2001).

Taxability of Section 401(k) Distribution Pursuant to QDRO

     As previously stated, because petitioner took the position

that Ms. Seidel should include the full amount of the

distribution in income and Ms. Seidel took the position that

petitioner should include one-half of the distribution in income,

respondent issued notices of deficiency to petitioner and Ms.

Seidel to avoid the possibility of being in a whipsaw position.

Thus, respondent asserted that petitioner was responsible for
                                - 10 -

including the unreported income in the amount of $30,030 on his

1999 tax return, and respondent also asserted that Ms. Seidel was

responsible for including in income the amount of $46,970

representing the difference between $77,000 and the $30,030

reported on her 1999 tax return.

     In the present circumstance, respondent is caught in a

potential “whipsaw” position.    A whipsaw occurs when different

taxpayers treat the same transaction involving the same items

inconsistently, thus creating the possibility that income could

go untaxed or two unrelated parties could deduct the same

expenses on their separate returns.      In such circumstances,

respondent is fully entitled to defend against inconsistent

results by determining in notices of deficiency that both parties

to the transaction are liable for the deficiency.      Estate of

Dooley v. Commissioner, T.C. Memo. 1992-557; Moore v.

Commissioner, T.C. Memo. 1989-306.

     Respondent in the notice of deficiency determined that

petitioner is responsible for including the unreported income

from the CWSC 401(k) plan distribution in the amount of $30,030.

However, at trial respondent conceded that petitioner should be

liable for tax on the following portions of the QDRO

distribution:   (1) Petitioner’s receipt of a cash payment in the

amount of $10,000 from Ms. Seidel after her attorney received the

distribution pursuant to the QDRO; and (2) petitioner’s portion
                             - 11 -

of the debts to First Community Financial Services, in the amount

of $15,503, which were paid off by the proceeds received from the

distribution pursuant to the QDRO.    Respondent relies on the

reasoning put forth by this Court in Darby v. Commissioner, 97

T.C. 51 (1991), to support this contention.

     Respondent is basically using Ms. Seidel’s arguments relying

on community property principles and beneficial recipient as put

forth in the companion case to this case in Seidel v.

Commissioner, T.C. Memo. 2005-67, to support his argument that

petitioner is responsible for the above portions of the CWSC

401(k) plan distribution to Ms. Seidel.

     As previously stated, respondent contends that petitioner

should be liable for one-half of the QDRO distribution:    (1) Due

to the community property law of California, or (2) due to the

“beneficial receipt of the proceeds by petitioner.”

     Generally, under section 402(a), a distribution from a

qualified retirement plan is taxed to the distributee.    Section

402(a) provides in part:

          Except as otherwise provided in this section, any
     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 the
     distributee, in the taxable year of the distributee in which
     distributed, under section 72 (relating to annuities).

Under section 402(a), the general rule is that a distribution

from an exempt employees’ trust (under a tax-qualified employees’

plan) is taxed to the “distributee” under section 72, which
                               - 12 -

generally provides for current taxation of distributions as

ordinary income.

     The Code does not define the word “distributee” as used in

section 402(a); neither do the regulations.   The Court has

concluded that a distributee of a distribution under a plan

ordinarily is the participant or beneficiary who, under the plan,

is entitled to receive the distribution.   See Darby v.

Commissioner, supra at 58; Estate of Machat v. Commissioner, T.C.

Memo. 1998-154; Smith v. Commissioner, T.C. Memo. 1996-292.

     Section 402(e)(1)(A), however, provides an exception to this

general rule.   Section 402(e)(1)(A) provides that an “alternate

payee” who is the spouse or former spouse of the plan participant

shall be treated as the distributee of any distribution or

payment made to the “alternate payee” under a “qualified domestic

relations order” as defined in section 414(p).   Therefore, a

distribution made to such an alternate payee under a QDRO will be

taxable to the alternate payee, and not to the plan participant,

because section 402(e)(1)(A) treats the alternate payee as the

distributee.

     The Retirement Equity Act of 1984 (REA), Pub. L. 98-397,

sec. 204(b), 98 Stat. 1445, added section 414(p), which defines a

QDRO.   Section 414(p) provides, in pertinent part, the following:

     SEC. 414(p). Qualified Domestic Relations Order Defined.--
For purposes of this subsection and section 401(a)(13)--

           (1) In general.--
                                  - 13 -

                 (A) Qualified domestic relations order.--The term
                 “qualified domestic relations order” means a
                 domestic relations order--

                         (i) which creates or recognizes the existence
                         of an alternate payee’s right to, or assigns
                         to an alternate payee the right to, receive
                         all or a portion of the benefits payable with
                         respect to a participant under a plan, and

                         (ii) with respect to which the requirements
                         of paragraphs (2) and (3) are met.

                 (B) Domestic relations order.-–The term “domestic
                 relations order” means any judgment, decree, or
                 order (including approval of a property settlement
                 agreement) which--

                         (i) relates to the provision of child
                         support, alimony payments, or marital
                         property rights to a spouse, former spouse,
                         child, or other dependent of a participant,
                         and

                         (ii) is made pursuant to a State domestic
                         relations law (including a community property
                         law).

Prior to the enactment of the Retirement Equity Act, some courts

had held that State law domestic support orders assigning or

attaching pension benefits were preempted by ERISA’s spendthrift

provision.    S. Rept.    98-575, at 20 (1984), 1984-2 C.B. 447, 456

(recognizing conflicting decisions).       Congress’ primary intent in

recognizing the QDRO exception was to clarify that these domestic

support obligations did not fall within the scope of ERISA

preemption.    See Mackey v. Lanier Collection Agency & Serv.,

Inc., 486 U.S. 825, 838-839 (1988).
                                 - 14 -

       The parties are in agreement that petitioner’s CWSC 401(k)

plan meets the requirements of section 401(a).     That being so,

distributions from the CWSC 401(k) plan are governed by section

402.

       Respondent relies on Powell v. Commissioner, 101 T.C. 489

(1993), in arguing that the funds distributed through the QDRO

remained community property and should be taxed as an indirect

distribution.    Interpreting Darby v. Commissioner, supra, the

Court in Powell v. Commissioner, supra at 498, stated that “an

owner was not necessarily a distributee and * * * [that Darby]

specifically observed that its statement that a ‘distributee’ had

to be a participant or beneficiary was not an exclusive

definition of that word.”      Applying the law as modified by REA,

the Court in Powell found that the plan participant’s former

spouse was the “distributee” and thereby taxable on her share of

the pension benefits.    Id.

       The QDRO incorporated by its own terms the Stipulation and

Order filed August 3, 1999.     The QDRO also included a calculation

of the community property interest in petitioner’s CWSC 401(k)

plan and the Stipulation and Order provided for the division of

such community property interest.     The terms of the Stipulation

and Order governed Ms. Seidel’s actions and those of her attorney

as to the proceeds received through the distribution from

petitioner’s CWSC 401(k) plan.     The Stipulation and Order
                              - 15 -

required Ms. Seidel’s attorney to pay out of the fund so

distributed, within 30 days of its receipt by him, two

liabilities owed jointly by Ms. Seidel and petitioner to First

Community Financial Services, and to pay to petitioner $10,000.

In fact, Ms. Seidel’s attorney made these payments, and Ms.

Seidel never actually received the proceeds that went to fulfill

these obligations.

     Based on the particular facts of this case, we find that

under the present QDRO, which by its terms incorporated the

Stipulation and Order filed August 3, 1999, Ms. Seidel was

alternate payee of only a portion of the distribution; i.e.,

$51,497.   See Seidel v. Commissioner, T.C. Memo. 2005-67.    The

remainder of $25,503 is attributable to petitioner as beneficiary

and distributee, and it consists of $15,503, which is one-half of

the two joint liabilities paid off by the proceeds of the CWSC

401(k) distribution, plus the $10,000 check given to petitioner

from the proceeds of the CWSC 401(k) distribution, in compliance

with the Stipulation and Order.

     Therefore, we hold that petitioner is liable for the tax on

the indirect distribution which he received in the amount of

$25,503.   We note that petitioner’s distribution from his CWSC

401(k) plan is not one-half of the total community property

interest in such plan.   We assume such division was a result of
                             - 16 -

negotiations during the dissolution of petitioner’s and Ms.

Seidel’s marriage.

     As stated in Powell v. Commissioner, supra at 498-499:

     Our conclusion is not affected by the fact that initially
     the entire distribution was made to * * * [Ms. Seidel]. We
     think * * * [she] received the distribution * * * on behalf
     of the community and that * * * [her] later payment to * * *
     [petitioner], * * * [by way of cash and relief of joint
     liabilities], was a transfer to * * * [him] of funds that at
     all times belonged to * * * [him].

     Respondent’s computational adjustment to petitioner’s

claimed miscellaneous itemized deductions will be decided by our

holding on the issue.

     Reviewed and adopted as the report of the Small Tax Case

Division.


                                   Decision will be entered

                              under Rule 155.
