IRA distribution to pay spousal support is taxable

During the pendency of a divorce, a taxpayer was ordered by a family court to transfer funds to an individual retirement account (IRA) in his spouse’s name. Where the taxpayer received a distribution of funds from his IRAs and then wrote checks to the spouse, the exclusion from taxation available under Sec. 408(d)(6) was inapplicable, and the distribution was subject to federal income tax, the Tax Court held.

Facts: In 2012, a Maryland state court ordered John Kirkpatrick to pay his wife spousal support while their divorce action was pending. Specifically, the consent order required him, within 14 days, to transfer $100,000 directly in a nontaxable transaction into an IRA appropriately titled in the wife’s name. Another provision required him to pay $40,000 for pendente lite attorney’s fees. The Kirkpatricks lived apart for all of 2013, and the final decree of divorce was entered in 2014.

During 2013, Kirkpatrick, who was more than 59½ years old at the time, withdrew funds from two existing IRAs from which he wrote checks to make payments directly to his wife and to third parties on her behalf. None of the funds were deposited by Kirkpatrick to any IRA account in his wife’s name. The Kirkpatricks filed a joint return for the 2013 tax year and treated a portion of the IRA distributions as nontaxable.

The IRS issued a notice of deficiency for the 2013 tax year, and Kirkpatrick timely filed a petition in Tax Court.

Issues: The Tax Court considered whether the distributions from the IRAs to Kirkpatrick and his subsequent transfer of the funds to his wife pursuant to the family court’s interim orders constituted a nontaxable transfer of an interest in an IRA under a divorce or separation agreement within the meaning of Sec. 408(d)(6). A distribution and transfer of funds qualifying under Sec. 408(d)(6) and Regs. Sec. 1.408-4(g)(1) are excluded from taxable income, and the transferred funds are treated as the IRA of the recipient spouse.

Kirkpatrick asserted that, because he made the payments before the divorce was final and the funds were eventually placed into an IRA by his spouse, in substance, there was a transfer of an interest in an IRA to his spouse.

The IRS contended that the exclusion was unavailable because Kirkpatrick did not transfer an interest in his IRAs to his wife, nor was there any transfer of funds from his IRA to one owned by her. Moreover, the IRS argued, Kirkpatrick did not comply with the consent order’s terms; therefore, his transfers should not be considered to have been made pursuant to it.

Holding: The Tax Court determined that the Sec. 408(d)(6) exclusion did not extend to the payments of $140,000 made to the wife in 2013. For Sec. 408(d)(6) to apply: (1) There must be a transfer of the IRA participant’s interest in the IRA to the spouse or former spouse, and (2) the transfer must be made under a divorce or separation instrument within the meaning of Sec. 71(b)(2)(A). (For divorce or separation instruments executed after Dec. 31, 2018, Sec. 71 is repealed, and the definition is provided under Sec. 121(d)(3)(C)(i).)

The court noted that the $40,000 distribution for payment of attorneys’ fees and costs was not required to be made into an IRA for the wife’s benefit, and the exclusion thus could not apply to it. Two commonly used methods for transferring an interest in an IRA to a spouse are to change the IRA’s name to that of the spouse or to direct the IRA trustee to transfer assets to the trustee of another IRA in the name of the spouse — a trustee-to-trustee rollover. Kirkpatrick used neither method.

Citing Bunney, 114 T.C. 259 (2000), the court reasoned that an interest in an IRA is not synonymous with the assets held by the IRA, and that receiving a distribution from an IRA and then making a payment of the funds to a spouse does not equate to a transfer of an interest in the IRA to the spouse.

• Kirkpatrick, T.C. Memo. 2018-20

— By Keith Kebodeaux, J.D., LL.M., MSA, a clinical assistant professor of accounting at Texas State University, San Marcos, Texas.