                  T.C. Summary Opinion 2010-135



                     UNITED STATES TAX COURT



               DONALD A. HACKENBERG, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 19377-08S.              Filed September 9, 2010.



     Donald A. Hackenberg, pro se.1

     Vladislav M. Rozenzhak, for respondent.



     CARLUZZO, Special Trial Judge:    This case was heard pursuant

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

effect when the petition was filed.2   Pursuant to section


     1
      Timothy L. Taggart, specially recognized, appeared for
petitioner on brief.
     2
      Unless otherwise indicated, section references are to the
Internal Revenue Code of 1986, as amended, in effect for the
year in issue. Rule references are to the Tax Court Rules of
                                                   (continued...)
                                - 2 -

7463(b), the decision to be entered is not reviewable by any

other court, and this opinion shall not be treated as precedent

for any other case.

     In a notice of deficiency dated June 2, 2008, respondent

determined a $7,395 deficiency in and a $1,290 section 6662(a)

accuracy-related penalty with respect to petitioner’s 2006

Federal income tax.

     The issue for decision is whether a distribution, or any

portion of it, from a retirement plan maintained by petitioner’s

former employer, is includable in petitioner’s income.

                             Background

     All of the facts have been stipulated and are so found.      At

the time the petition was filed, petitioner resided in

California.

     Petitioner and Linda Hackenberg (Ms. Hackenberg) married in

March 1984.   Apparently, they resided in California at all times

relevant here.   They separated in 2005.   Their marriage was

dissolved pursuant to a judgment of dissolution dated December

29, 2006, issued by the Superior Court of California (the

judgment).    The judgment includes and incorporates a document

titled “Judgment -- Addendum to Judgment” (the addendum) that,

among other things, encompasses the division of marital property.



     2
      (...continued)
Practice and Procedure.
                               - 3 -

The addendum was signed and dated by Ms. Hackenberg on July 10,

2006, and by petitioner on July 23, 2006.

     Petitioner was formerly employed by Orange County,

California (county), and as a county employee participated in the

Orange County Employees Retirement System (OCERS).   According to

the addendum, petitioner and Ms. Hackenberg “were married for

approximately one-half of the time” that petitioner was a county

employee.

     As best we can determine from the record, petitioner began

receiving distributions from OCERS at some point before 2006.

OCERS’s records show that it made and reported a $27,346.68

distribution to petitioner during 2006 (the distribution).

Starting on January 1, 2006, and ending on December 1, 2006, the

distribution was made in monthly installments deposited directly

into a joint checking account maintained by petitioner and Ms.

Hackenberg.   Although maintained as a joint account, the account

was used exclusively for her benefit.

     According to the addendum, as of the date it was signed

petitioner was “currently paying to” Ms. Hackenberg “the entirety

of the monthly amount he receives” from OCERS.   The addendum

memorializes the stipulation between petitioner and Ms.

Hackenberg “that it is their intention that * * * [he] shall

continue to fully pay to * * * [her] the monthly amount * * *
                               - 4 -

[he] receives from * * * [OCERS] through and including the month

of July, 2007”.   After that date, the addendum provides that

     contingent upon * * * [petitioner’s] complete
     performance of the above-stated terms * * *, [Ms.
     Hackenberg] shall irrevocably relinquish any and all
     legal or equitable interests in * * * [petitioner’s]
     pension with * * *[OCERS], and said pension shall
     thereafter be * * * [his] sole and separate property.

     The income reported on petitioner’s timely filed 2006

Federal income tax return does not include the distribution, and

the distribution is not otherwise disclosed on that return.     In

the above-referenced notice of deficiency respondent determined

that the distribution is includable in petitioner’s income and

adjusted petitioner’s income accordingly.    Other adjustments made

in the notice of deficiency have been agreed to and need not be

discussed.   The distribution is disclosed, but not included in

the income shown on an amended return submitted to respondent

after the notice of deficiency was issued.

                             Discussion

     The parties agree with the fundamental principle that a

distribution from a retirement account is includable in the

income of the distributee.   See secs. 61(a)(11), 72.

Nevertheless, according to petitioner, the distribution is not

includable in his income because:   (1) Pursuant to California

community property law, the addendum transmuted his interest in

the OCERS retirement plan into Ms. Hackenberg’s; and (2)

regardless of any transmutation, the distribution was made
                               - 5 -

pursuant to a qualified domestic relations order.     Respondent

disagrees on both points, and so do we.

I. Petitioner’s Interest in the OCERS Retirement Plan

     In general, property interests are determined by State law.

Zinsmeister v. Commissioner, T.C. Memo. 2000-364 (citing Hoover

v. Commissioner, 102 F.3d 842, 845 (6th Cir. 1996), affg. T.C.

Memo. 1995-183), affd. 21 Fed. Appx. 529 (8th Cir. 2001).

Petitioner’s interest in the OCERS retirement plan is determined

according to the laws of the State of California.

     Property acquired by spouses while domiciled in California

is community property.   Cal. Fam. Code sec. 760 (West 2004).      On

the other hand, property owned before marriage or property earned

or accumulated while spouses live separate and apart from each

other is the separate property of the spouse who so owned,

earned, or accumulated it.   Id. secs. 770(a), 771.    A spouse’s

entitlement to a share of the community property arises at the

time that the property is acquired.    Eatinger v. Commissioner,

T.C. Memo. 1990-310.   Under California community property law,

each spouse has a one-half ownership interest in the community

estate, including income earned by both spouses during their

marriage.   Cal. Fam. Code sec. 2550 (West 2004).

     Although petitioner and Ms. Hackenberg were apparently

living separate and apart at the time the distribution was made,

their respective interests in the OCERS retirement plan were
                                - 6 -

acquired before their separation.    They were married for

approximately one-half of the time that benefits under the OCERS

retirement plan accrued.    Therefore, one-half of the OCERS

retirement plan is community property and the other one-half is

petitioner’s separate property.    See id. secs. 770(a), 771.    It

follows that absent a valid transmutation agreement between them,

at the time of their divorce or separation petitioner was

entitled to receive three-quarters of any benefits attributable

to the OCERS retirement plan, including income generated by the

plan, and Ms. Hackenberg would be entitled to receive the

remaining one-fourth.

II. Whether Petitioner’s Interest in OCERS Has Been Transmuted

     Spouses subject to California’s community property laws may

by agreement transmute property as follows:    (a) Community

property into separate property of either spouse; (b) separate

property of either spouse into community property; and (c)

separate property of one spouse into separate property of the

other spouse.   Id. sec. 850.   A transmutation agreement “‘is not

valid unless made in writing by an express declaration that is

made, joined in, consented to, or accepted by the spouse whose

interest in the property is adversely affected.’”    Benson v.

Benson, 116 P.3d 1152, 1156 (Cal. 2005) (quoting Cal. Fam. Code

sec. 852(a) (West 2004)).    In order to effect a transmutation,

the writing must “expressly [state] that the characterization or
                               - 7 -

ownership of the property is being changed.”    Bolton v.

MacDonald, 794 P.2d 911, 918 (Cal. 1990) (express declaration

creating a joint tenancy must declare interest being transferred

“to be a joint tenancy”).

     Although the arrangement contemplated by the addendum

was already in effect, the addendum was not in existence

before July 1, 2006.   Consequently, the addendum could not be

considered a transmutation agreement between petitioner and Ms.

Hackenberg with respect to any portion of the distribution made

before August 1, 2006.   As to the portion of the distribution

made on or after that date, we find that the addendum is not an

express, written declaration of petitioner’s intent to transmute

his interest in the OCERS retirement plan, or any portion of it,

into Ms. Hackenberg’s separate property.   The addendum obligates

petitioner to pay the amount he receives from OCERS to Ms.

Hackenberg for a specified period, but it does not contemplate

that any portion of his interest in the OCERS retirement plan was

to become Ms. Hackenberg’s separate property.   To the contrary,

the addendum states that after July 2007, if petitioner made all

of the agreed payments, any rights or benefits attributable to

the OCERS retirement plan would be petitioner’s “sole and

separate property”, thereby effectively transmuting what was

otherwise Ms. Hackenberg’s community property interest in the

OCERS retirement plan into petitioner’s separate property.
                                - 8 -

     The addendum does not transmute petitioner’s interest in the

OCERS retirement plan into Ms. Hackenberg’s.    In general, income

attributable to income-generating property is includable in the

income of the taxpayer who owns the property.    Simply put, the

addendum, which memorializes petitioner’s agreement to transfer

to Ms. Hackenberg only certain of the income generated by the

OCERS retirement plan, is, for Federal income tax purposes,

nothing more than an impermissible assignment of income.    See

Lucas v. Earl, 281 U.S. 111, 114 (1930).

III. Whether the Judgment is a Qualified Domestic Relations Order

     The parties agree that the OCERS retirement plan is a

qualified retirement plan described in sections 72 and 401.

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

retirement plan is taxable to the distributee.    Neither the

Internal Revenue Code nor the regulations defines the term

“distributee”.   The term, however, is generally construed to mean

the participant or beneficiary who under the plan is entitled to

receive the distribution.   Darby v. Commissioner, 97 T.C. 51, 58

(1991); Estate of Machat v. Commissioner, T.C. Memo. 1998-154.

When the term is construed in that manner, petitioner is the

“distributee” because under the OCERS retirement plan, he is

the participant or beneficiary who is entitled to receive

distributions from that plan.
                                - 9 -

     There is an exception to this general rule in section

402(e)(1)(A), which provides:   “an alternate payee who is the

spouse or former spouse of the 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)).”

     The term “domestic relations order” (DRO) means any

judgment, decree, or order that relates to the provision of

alimony payments or marital property rights to a spouse or former

spouse of a plan participant and that is made pursuant to a State

domestic relations law, specifically including a community

property law.   Sec. 414(p)(1)(B).      The judgment dissolved

petitioner’s marriage to Ms. Hackenberg and provides for the

division of the marital property between them pursuant to

California law; therefore it qualifies as a DRO.      See id.

     According to petitioner, the judgment further fits within

the definition of a qualified domestic relations order (QDRO).

Petitioner recognizes that the judgment was not in place at the

time the distribution was made but argues that it should be given

retroactive effect.

     A DRO qualifies as a QDRO only if it:      (1) 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
                               - 10 -

under a plan; (2) clearly specifies certain facts, including the

names and addresses of the participant and the alternate payee,

the amount to be paid to the alternate payee, and the number of

payments or period to which the order applies; and (3) does not

alter the amount or form of the plan benefits.    Sec. 414(p)(1)-

(3).   In addition, the DRO must be presented to the plan

administrator, who must determine the “qualified status” of the

DRO.   Sec. 414(p)(6); Rodoni v. Commissioner, 105 T.C. 29, 35

(1995); Karem v. Commissioner, 100 T.C. 521, 526 (1993).

Finally, under section 402(e)(1)(A), an alternate payee is

treated as the distributee of a distribution from a qualifying

plan only if the distribution is made directly to the alternate

payee under a QDRO.    Amarasinghe v. Commissioner, T.C. Memo.

2007-333, affd. 282 Fed. Appx. 228 (4th Cir. 2008); see also

Burton v. Commissioner, T.C. Memo. 1997-20 (noting that in part

because the distribution was made to the plan participant and not

his former spouse, it was not “made by the plan administrator to

an alternate payee in response” to a decree).

       The judgment was not presented to the OCERS retirement plan

administrator for a determination of whether it was a QDRO.      See

sec. 414(p)(6).    In addition, the distribution from the OCERS

retirement plan was not made directly to Ms. Hackenberg as an

alternate payee.    See sec. 402(e)(1)(A); see also Amarasinghe v.

Commissioner, supra.    Consequently, the judgment does not fit
                              - 11 -

within the definition of a QDRO, and Ms. Hackenberg is not

treated as an alternate payee with respect to petitioner’s share

of the distribution.3   Accordingly, for Federal income tax

purposes the judgment does not alter petitioner’s status as the

distributee of his share (three-quarters) of the distribution.

     Because the addendum did not transmute petitioner’s interest

in the OCERS retirement plan into Ms. Hackenberg’s, and because

the judgment is not a QDRO, three-quarters of the distribution is

includable in petitioner’s 2006 income.

     To reflect the foregoing,


                                          Decision will be entered

                                    under Rule 155.




     3
      Because we find that the judgment is not a QDRO, we need
not address petitioner’s argument that the judgment should be
given retroactive effect.
