Academic journal article Journal of Accountancy

Is Division of an IRA a Taxable Event?

Academic journal article Journal of Accountancy

Is Division of an IRA a Taxable Event?

Article excerpt

Generally the transfer of property from one spouse to another due to a divorce is a nontaxable exchange under IRC section 1041. IRC section 408(d)(6) further states that the transfer of an individual's interest in an individual retirement account (IRA) to a former spouse also is a nontaxable event.

Norma Cohen received a divorce in 1997 under an agreement that postponed to a later date any resolution of the financial matters. In June 1999 the Superior Court of New Jersey ordered that an IRA previously established by her ex-husband in his name should be divided equally. The IRA had assets of about $120,000. In July 1999 Cohen opened an IRA in her own name, into which her ex-husband transferred $60,000 from his IRA. Late in 1999, Cohen requested the $60,000 be withdrawn from her IRA in a check payable to her. She endorsed the check over to her ex-spouse to purchase his remaining interest in the former marital home. She did not report the $60,000 distribution on her 1999 tax return. She believed the $60,000 transfer from her ex-husband's IRA represented a distribution from his IRA that was taxable to him and a subsequent $60,000 cash transfer of marital assets to her IRA. She then had a $60,000 basis in her IRA, which made the $60,000 withdrawal from her IRA a tax-free distribution. The IRS disagreed. Cohen petitioned the Tax Court for relief.

Result. For the IRS. Cohen argued the $60,000 transfer did not satisfy the requirements of section 408(d)(6) since the court order had directed an equal division of the $120,000 IRA but had not required a new IRA be established to receive the rollover. …

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