T.C. Memo. 1997-15

UNITED STATES TAX COURT

MARK J. VORWALD, Petitioner v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 26410-95. Filed January 8, 1997.

Mark J. Vorwald, pro se.

Fred E. Green, Jr., for respondent.

MEMORANDUM OPINION

CARLUZZO, Special Trial Judge: This case was heard pursuant

to the provisions of section 7443A(b)(3) and Rules 180, 181, and

182. Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect for the year at issue. All

Rule references are to the Tax Court Rules of Practice and

Procedure.
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Respondent determined a deficiency in petitioner's 1992

Federal income tax in the amount of $2,119.30, and an addition to

tax pursuant to section 6651(a) in the amount of $529.83.

The issues for decision are: (1) Whether petitioner must

include in income as a distribution from his individual

retirement account the amount transferred therefrom to his former

spouse in a garnishment proceeding; and, if so, (2) whether the

distribution is subject to the additional tax imposed by section

72(t). During the trial respondent's counsel conceded the

addition to tax and advised the Court that the deficiency

determined in the notice was overstated inasmuch as it failed to

take into account the allowance of the standard deduction.

Background

Some of the facts have been stipulated, and they are so

found. Petitioner filed his 1992 Federal income tax return on

June 15, 1995. He was single as of the close of 1992 and resided

in Buellton, California, at the time that the petition was filed.

In 1986, petitioner opened an individual retirement account

(IRA) at the Deer Valley Federal Credit Union in Phoenix, Arizona

(Deer Valley). The history of petitioner's contributions to the

IRA is unknown. As of March 18, 1992, there was at least

$8,483.25 in the account.

On or about September 4, 1991, a judgment in the amount of

$10,670.24 was entered against petitioner in favor of his former

spouse, Kathleen J. Vorwald, for arrearages in child support
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payments. In a subsequent garnishment proceeding, on or about

March 18, 1992, Kathleen J. Vorwald was awarded a judgment in the

amount of $8,483.25 against Deer Valley. Pursuant to this

judgment, Deer Valley was ordered to transfer $8,483.25 from the

IRA to Kathleen J. Vorwald, which transfer apparently took place

during 1992.

Petitioner did not become aware that his former spouse

garnished his IRA until he was so notified by respondent during

the course of the examination that eventually led to this

proceeding.

In the notice of deficiency, respondent determined that the

amount paid to Kathleen J. Vorwald by Deer Valley from the IRA

pursuant to the garnishment proceeding constitutes a distribution

to petitioner that is includable in his 1992 income. Respondent

further determined that the distribution is subject to the

additional tax imposed by section 72(t).

Discussion

We first consider whether under the circumstances present in

this case, the transfer of the funds from the IRA to petitioner's

former spouse is tantamount to a distribution from the IRA to

petitioner. For the following reasons, we find that it is.

Because the transfer of funds from the IRA to petitioner's

former spouse at least partially discharged a legal obligation he

owed to her, the transfer to her is the equivalent of receipt by

him. Old Colony Trust Co. v. Commissioner, 279 U.S. 716, 729
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(1929); see Poczatek v. Commissioner, 71 T.C. 371, 378 (1978). 

We note that had petitioner voluntarily assigned his interest in

the IRA to his former spouse in connection with the debt that he

owed to her, the assignment would be deemed a distribution. Sec.

1.408-4(a)(2), Income Tax Regs. Furthermore, a taxpayer cannot

avoid the Federal income tax consequences resulting from a

particular transaction by transferring the proceeds of the

transaction to a creditor in satisfaction of a debt. As noted by

the Supreme Court in Helvering v. Horst, 311 U.S. 112, 116

(1940):

If the taxpayer procures payment directly to his

creditors of the items of interest or earnings due him,

* * * [citations omitted] he does not escape taxation

because he did not actually receive the money.

We understand that unlike the transfer involved in 

Helvering v. Horst, supra, or contemplated by the above

regulation, the transfer in this case was hardly "voluntary";

however, we attach no significance to such a distinction. We

consider the transfer to petitioner's spouse to constitute a

distribution to petitioner.

Distributions from an IRA are includable in income in

accordance with section 72. Sec. 408(d). The distribution was

not received by petitioner as an annuity; consequently, the

provisions of section 72(e) are applicable. Consistent with the

presumption of correctness applicable to respondent's

determination, Welch v. Helvering, 290 U.S. 111, 115 (1933), and
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because there is no evidence in the record that petitioner made

nondeductible contributions to the IRA, we must assume that his

tax basis in the IRA was zero. Sec. 1.408-4(a)(2), Income Tax

Regs. It follows that he can be given no credit for any

investment in the IRA, within the meaning of section 72(e)(6) and

72(e)(3)(A)(ii). We also note that petitioner makes no argument,

and nothing in the record suggests, that the provisions of

section 408(d)(6) and section 1.408-4(g), Income Tax Regs.,

relating to transfers between spouses or former spouses, have

application in this case. Consequently, the entire amount of the

distribution is allocated to, and must be included in,

petitioner's income. Sec. 72(e)(3)(A); sec. 1.408-4(a)(1),

Income Tax Regs. Accordingly, respondent's adjustment increasing

petitioner's income by the IRA distribution is sustained.

The IRA is a qualified retirement plan within the meaning of

section 72(t). Sec. 4974(c)(4). Section 72(t)(1) imposes an

additional tax equal to 10 percent of the portion of any

distribution from a qualified retirement plan that is includable

in the taxpayer's gross income. Several exceptions to the

imposition of the additional tax are enumerated in section

72(t)(2). Petitioner has presented neither evidence nor argument

in support of the application of any of the exceptions, and we

are satisfied that none apply. Accordingly, the additional tax

imposed by section 72(t) is applicable to the distribution, and

respondent's determination in this regard is sustained.
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To reflect the foregoing, including the allowance of the

standard deduction not previously taken into consideration, and

respondent's concession,

Decision will be

entered under Rule 155.