Opinion
14810-19
07-14-2023
MIKE VAN, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
ORDER AND DECISION
Kathleen Kerrigan Chief Judge
On January 27, 2021, respondent filed a Motion for Summary Judgment pursuant to Rule 121. Petitioner filed an Opposition to the Motion for Summary Judgment on March 8, 2021.
Unless otherwise indicated, all statutory references are to the Internal Revenue Code, Title 26 U.S.C. (Code), in effect at all relevant times, all regulation references are to the Code of Federal Regulations, Title 26 (Treas. Reg.), in effect at all relevant times, and all Rule reference are to the Tax Court Rules of Practice and Procedure. All monetary amounts are rounded to the nearest dollar.
Background
There is no dispute as to the following facts drawn from the parties' Motion papers and attached Declarations and Exhibits. Petitioner resided in California when the Petition was timely filed. The Petition in this case was filed in response to a Notice of Deficiency issued July 15, 2019, in which respondent determined a deficiency of $2,277 for 2017. At issue is whether petitioner is liable for tax on a distribution of an individual retirement account (IRA).
On February 13, 2015, petitioner was ordered by the Santa Clara Superior Court in the State of California (State Court) to pay child support. According to the State Court, the order stemmed from a lawsuit for the dissolution of petitioner's marriage and child support. Petitioner is appealing the State Court order.
Throughout 2017, petitioner had an IRA in the form of a Retirement Insured Money Market account with CitiBank. On January 18. 2017, CitiBank notified petitioner that it had received a garnishment order for $21,361. On January 26, 2017, CitiBank notified petitioner that, due to the garnishment order, it had distributed $18,202 from his IRA. On August 25, 2017, CitiBank made a second distribution of $6,923 pursuant to the garnishment order. Both the January and August distributions (together, distributions) were noted on petitioner's year-end statement from CitiBank as "premature distribution due to levy."
Petitioner timely filed a Form 1040, U.S. Individual Income Tax Return, for 2017 on which he did not report the distributions as taxable income. In an attachment to his return, petitioner explained that he did not report the distributions as taxable income in part "[b]ecause the [State Court] case is still in progress without a proper resolution." On April 29, 2019, respondent mailed to petitioner a Notice CP2000 proposing an increase to petitioner's 2017 tax liability of $2,418, attributable to the unreported distributions. On May 13, 2019, respondent received from petitioner a Notice CP2000 Response Form and narrative letter indicating that petitioner disagreed with the proposed adjustment. In the letter petitioner stated that he disagreed with respondent's proposed adjustment because he believes the Department of Child Support Services (DCSS) illegally withheld the IRA funds for child support that he did not owe. On July 1, 2019, respondent responded to petitioner with a letter that stated that "any issues you have with [DCSS] does not pertain to reporting your income. You are responsible for reporting income you received even if the income was taken to pay your debts to another party."
Discussion
Summary judgment may be granted where the pleadings and other materials show that there is no genuine dispute as to any materials fact and that a decision may be rendered as a matter of law. Rule 121(b); Sundstrand Corp. v. Commissioner, 98 T.C. 518, 520 (1992), aff'd, 17 F.3d 965 (7th Cir. 1994). The burden is on the moving party (in this case, respondent) to show that there is no genuine dispute as to any material fact and that he or she is entitled to judgment as a matter of law. FPL Grp., Inc. & subs. v. Commissioner, 116 T.C. 73, 74-75 (2001). In all cases, the evidence is viewed in the light most favorable to the nonmoving party. Bond v. Commissioner, 100 T.C. 32, 36 (1993). The nonmoving party may not rest upon mere allegations or denials in his or her pleadings but must set forth specific facts showing that there is a genuine dispute for trial. Sundstrand Corp. v. Commissioner, 98 T.C. at 520.
Petitioner has failed to demonstrate, by affidavits or other acceptable materials, that there is a genuine issue for trial. Rule 121(d). Consequently, we conclude that there is not a dispute as to any material fact and that a decision may be rendered as a matter of law.
Except as otherwise provided in section 408, any amount paid or distributed out of an IRA shall be included in gross income by the payee or distributee in the manner provided under section 72. § 408(d)(1); Treas. Reg. § 1.408-4(a). Multiple distributions from an IRA during a taxable year shall be treated as one distribution. § 408(d)(2)(B).
Generally, when funds are removed from an IRA, the payee or distributee may recognize gross income on such distributions in the taxable year in which the distributions were made. Treas. Reg. § 408(a)(1). A taxpayer does not need to directly receive funds for the transfer of funds to constitute income to the taxpayer; the payment of a taxpayer's legal obligation is income to the taxpayer even if not actually received by the taxpayer. Poczatek v. Commissioner, 71 T.C. 371, 376-77 (1978), (citing Old Colony Trust Co. v. Commissioner, 279 U.S. 716 (1929)). An involuntary transfer of funds from an IRA to a former spouse that at least partially discharges a legal obligation to pay child support is taxable income. See Vorwald v. Commissioner, T.C. Memo. 1997-15, slip op. at 3 (citing Old Colony Trust Co. v. Commissioner, 279 U.S. 716, 729 (1929)).
Petitioner argues that his case is differentiable from the case respondent cited because the distributions made to DCSS have not to date been paid out and are instead "on hold" pending resolution of his appeal in the State Court case. Petitioner has also requested that respondent delay actions related to the distributions because he anticipates that the distributions to DCSS will be refunded to him following the resolution of the State Court case.
Under section 408(d)(3)(I), a taxpayer may receive a distribution from an IRA account that will not be treated as taxable income if the distribution is returned to the IRA account within 60 days. Section 408(d)(3)(I) also permits a taxpayer to seek a waiver of the 60-day requirement under circumstances "where the failure to waive such requirement would be against equity or good conscience, including . . . events beyond the reasonable control of the individual subject to such requirement." To qualify for this waiver, the taxpayer must have returned the funds to the IRA account. Petitioner has not provided any evidence that the funds were returned to his account within 60-days, nor has petitioner requested any waiver of the 60-day rollover requirement. For this reason the distributions do not fall under any exemption and must be included in petitioner's taxable income for 2017.
Conclusion
Here, the distribution from petitioner's IRA was distributed to the DCSS pursuant to the State Court's order. Although petitioner did not receive directly the IRA distributions, the distribution of income pursuant to a support order nevertheless constitutes income to a taxpayer. The distributions do not qualify for exemption under the exceptions to section 408 and must therefore be included in petitioner's taxable income for 2017.
To reflect the foregoing, it is hereby
ORDERED that respondent's Motion for Summary Judgment dated January 27, 2021, is granted. It is further
ORDERED and DECIDED that for the taxable year 2017 there is a deficiency in tax due from petitioner in the amount of $2,277.