Family Attorney
Taxability of IRA transfers and withdrawals resulting from divorce or separation
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The transfer of an interest in an IRA by a spouse to a current or former spouse under a divorce or separation instrument can be structured as a nontaxable event. In the context of a divorce or legal separation, several recent cases have examined what constitutes a “transfer of an interest” in an IRA. Although several of these cases involve taxpayers living in community property states, the analyses contained therein are also applicable to common law taxpayers. This article examines these decisions along with their tax planning implications. Bunney v. Commissioner In Bunney v. Commissioner, (1) the taxpayer and his wife resided in California, a community property state. The judgment dissolving their marriage in 1992 ordered that the taxpayer’s IRAs, which were funded with contributions that were community property, be divided equally between the taxpayer and his wife. The taxpayer withdrew $125,000 from his IRAs and deposited the proceeds in his money market savings account. Later that year, he transferred $111,600 to his former spouse in a transaction in which he acquired her interest in their former family residence. On his 1993 federal income tax return, the taxpayer reported in gross income the $13,400 in IRA distributions that he received but did not transfer to his former spouse. (2) In a case of first impression, the Tax Court in Bunney examined whether one half of community funds contributed to an IRA account established by an IRA participant are, upon distribution, taxable to the participant’s former spouse by virtue of the former spouse’s 50 percent ownership interest in the IRA under applicable community property law. (3) The Tax Court first analyzed IRC Section 408(d)(l), which provides that any amount paid or distributed out of an individual retirement plan shall be included in gross income by the payee or distributee, as the case may be, in the manner provided under section 72.” (4) Neither the Code nor the applicable Regulations define the terms “distributee” or “payee” as used in Section 408(d)(1). In construing a parallel provision governing the taxation of distributions from pension plans under Section 402, the Tax Court previously held in Darby v. Commissioner that a distributee is generally “the participant or beneficiary who, under the plan, is entitled to receive the distribution.” (5) Accordingly, the Tax Court in Bunney held that, for purposes of Section 408(d)(1), the taxpayer-as IRA participant and distributions recipient–is treated as the distributee of the IRA. The Tax Court noted that Section 408(g) explicitly provides that… Source : accessmylibrary.com |
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