                  T.C. Memo. 2000-219



                UNITED STATES TAX COURT



            STEPHEN R. JONES, Petitioner v.
     COMMISSIONER OF INTERNAL REVENUE, Respondent



Docket No. 13203-99.                      Filed July 20, 2000.


     Petitioner (H) and his former wife (W) filed for
divorce in 1992. In April of 1994, H and W prepared a
draft marital settlement agreement that required H to
transfer his interest in his IRA to W. In May of 1994,
H cashed out his IRA and later endorsed the
distribution check over to W. Shortly thereafter, H
and W executed the marital settlement agreement. Held:
the IRA distribution is not excludable from H’s income
under sec. 408(d)(6), I.R.C. because the distribution
did not constitute the transfer of H’s “interest” in
his IRA.



Philip Garrett Panitz and Ryan D. Schaap, for petitioner.

Mark A. Weiner, for respondent.
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                        MEMORANDUM OPINION

     LARO, Judge:   This case is before the Court fully

stipulated.   See Rule 122.   Petitioner petitioned the Court to

redetermine respondent’s determination of a deficiency in Federal

income tax for petitioner’s 1994 taxable year of $27,351 and an

addition to tax under section 6651(a)(1) of $6,838.

     The issues for decision are:

     1.   Whether petitioner’s gross income includes a $68,121

distribution to him from his individual retirement annuity (IRA).

We hold it does.

     2.   Whether petitioner is subject to the 10-percent

additional tax for early distributions under section 72(t).      We

hold he is.

     3.   Whether petitioner is liable for the addition to tax

pursuant to section 6651(a)(1) for failure to file his 1994

Federal income tax return timely.    We hold he is.

     Unless otherwise indicated, section references are to the

Internal Revenue Code in effect for the year in issue.    Rule

references are to the Tax Court Rules of Practice and Procedure.

Dollar amounts are rounded to the nearest dollar.

                              Background

     When the petition in this case was filed, petitioner resided

in Palm Desert, California.    On March 21, 1990, petitioner

established an IRA with the Prudential Insurance Company of
                                - 3 -

America (Prudential).    Petitioner was the sole participant in

this IRA.    On or about January 29, 1992, petitioner and his then

wife, Cynthia Jones (Ms. Jones), commenced divorce proceedings in

the Ventura County Superior Court.      As of 1994, petitioner and

Ms. Jones were completing their divorce and settling the division

of their property.

     At petitioner’s direction, on May 26, 1994, Prudential

issued a check to petitioner for his full IRA account balance of

$68,121.    Petitioner was 47 years old at the time of the

distribution.

     On or before June 12, 1994, petitioner endorsed the

Prudential check over to Ms. Jones.      Ms. Jones did not deposit

the IRA distribution check into an IRA or an Individual

Retirement Account.

     On June 14, 1994, petitioner and Ms. Jones executed a 16-

page Stipulation for Judgment and Marital Settlement Agreement

(MSA).   The MSA was filed with the Ventura County Superior Court

on July 15, 1994.    The MSA had been completed in draft form as

early as April 1994.    In relevant part, the MSA provides:

          9. Property Awarded to Wife. Husband's interest
     in the separate property IRA with Prudential Securities
     shall be transferred to the respondent CYNTHIA L.
     JONES, and thereafter will be her sole and separate
     property.
                                - 4 -

A Judgment of Dissolution of Marriage between petitioner and Ms.

Jones was filed on January 5, 1995, terminating the marital

status of petitioner and Ms. Jones as of December 24, 1994.

     Petitioner’s 1994 Federal income tax return, which he filed

on July 15, 1996, did not report the $68,121 distribution from

the Prudential IRA as income.

                            Discussion

Issue 1.   Taxability of the IRA Distribution

     Section 408(d)(1) provides that any amount distributed from

an IRA “shall be included in gross income by the payee or

distributee, as the case may be, in the manner provided under

section 72.”   Petitioner contends that by endorsing his IRA

distribution check to his spouse, whom he was divorcing, he

complied with an exception to section 408(d)(1) contained in

section 408(d)(6), which provides:

          (6) TRANSFER OF ACCOUNT INCIDENT TO DIVORCE.--
The transfer of an individual's interest in an individual
retirement account or an individual retirement annuity to his
spouse or former spouse under a divorce or separation instrument
described in subparagraph (A) of section 71(b)(2) is not to be
considered a taxable transfer made by such individual
notwithstanding any other provision of this subtitle, and such
interest at the time of the transfer is to be treated as an
individual retirement account of such spouse, and not of such
individual. Thereafter such account or annuity for purposes of
this subtitle is to be treated as maintained for the benefit of
such spouse.

     As set forth, there are two requirements that must be met

for the exception of section 408(d)(6) to apply:   (1) There must

be a transfer of the IRA participant's "interest" in the IRA to
                                 - 5 -

his or her spouse or former spouse (nonparticipant spouse), and

(2) such transfer must have been made under a section 71(b)(2)(A)

divorce or separation instrument.        See Bunney v. Commissioner,

114 T.C. 259, 265 (2000).

     The first requirement under section 408(d)(6) is that the

IRA participant transfer his or her interest in the IRA to the

nonparticipant spouse.   The parties disagree as to the meaning of

the word “interest” in this context.1      Petitioner asserts that

“interest” is synonymous with the money or other assets that

comprise an IRA account and that the transfer of distributed IRA

funds by way of an endorsed check is a transfer of an interest in

the IRA.   Respondent asserts that the endorsement was not a

transfer of the petitioner’s interest in his IRA because

petitioner’s interest in the IRA was extinguished as of the time

he withdrew the funds.

     We agree with respondent.    The transfer of IRA assets by a

distributee to a nonparticipant spouse does not constitute the

transfer of an interest in the IRA under section 408(d)(6).      See

Bunney v. Commissioner, supra at 265; Czepiel v. Commissioner,

T.C. Memo. 1999-289.   The fact that petitioner endorsed the


     1
      In Bunney v. Commissioner, 114 T.C. 259, 265 n.6 (2000), we
acknowledged two commonly used methods of transferring an
interest in an IRA, as described in IRS Publication 590; to wit,
(1) Changing the name on the IRA to that of the nonparticipant
spouse or (2) directing the trustee of the IRA to transfer the
IRA assets to the trustee of an IRA owned by the nonparticipant
spouse.
                                - 6 -

distribution check to his wife, rather than first depositing the

funds in his own bank account, does not change the result.

Section 408(d)(6) offers a means to avoid having the interest

transfer treated as a distribution.     See sec. 1.408-4(g)(1),

Income Tax Regs.2    It does not permit the IRA participant to

allocate to a nonparticipant spouse the tax burden of an actual

distribution.    See Bunney v. Commissioner, supra at 265, n.7.      We

recognize that where a nonparticipant spouse in a divorce prefers

to receive cash rather than an interest in an IRA, the parties

may find it desirable to have the participant simply withdraw the

IRA funds.    However, such withdrawals do not fall under the

limited exception set forth in section 408(d)(6).

     Respondent also contends that the transfer was not made

under a written instrument incident to a divorce decree within

the meaning of sections 408(d)(6) and 71(b)(2)(A).     In light of

our holding above, it is unnecessary to decide this issue.




     2
        Sec. 1.408-4(g)(1), Income Tax Regs., provides, in relevant
part:

     The transfer of an individual’s interest, in whole or in
     part, in an individual retirement account, individual
     retirement annuity, or a retirement bond, to his former
     spouse under a valid divorce decree or written instrument
     incident to such divorce shall not be considered to be a
     distribution from such an account or annuity to such
     individual or his former spouse * * *.
                               - 7 -

Issue 2.   Section 72(t) Additional Tax

     Section 72(t) imposes a 10-percent additional tax on early

distributions from qualified retirement plans.    Petitioner was

not yet 59 1/2 when he withdrew the funds from his IRA and the

evidence does not support the applicability of any other

exception from tax under section 72(t)(2).   Accordingly,

petitioner is liable for the 10-percent additional tax on early

withdrawal.

Issue 3.   Addition to Tax Under Section 6651

     Respondent determined an addition to tax under section

6651(a) for petitioner’s failure to file his 1994 Federal income

tax return timely based upon a rate of 25 percent.    Section

6651(a)(1) imposes an addition to tax equal to 5 percent per

month of the underpayment up to a maximum of 25 percent for

untimely filed returns.   This addition to tax is not imposed if

the failure to file timely was due to reasonable cause and not

due to willful neglect.   Petitioner's 1994 Federal income tax

return was due to be filed on April 15, 1995.    Petitioner filed

his 1994 Federal income tax return on July 15, 1996.    The record

in this case is void of any evidence of the reason for

petitioner’s failure to file his return timely.     Accordingly, we

sustain respondent’s determination of an addition to tax under

section 6651(a)(1).
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     We have carefully considered petitioner’s other arguments

for a result contrary to those expressed herein, and, to the

extent not discussed above, find them to be irrelevant or without

merit.

                                            Decision will be entered

                                      for respondent
