Academic journal article Journal of Accountancy

IRAs Can Be Taxing

Academic journal article Journal of Accountancy

IRAs Can Be Taxing

Article excerpt

Under a 1995 divorce judgment, Richard Czepiel was ordered to pay, "as a further division of the marital property," $29,000 to his ex-wife Kathleen. Czepiel's only assets at the time were $33,000, which he had on deposit in two separate IRAs.

In order to satisfy the terms of the judgment, Czepiel directed his banks to liquidate the IRAs and issue him checks for the proceeds. He then wrote a check to his ex-wife as full payment of the divorce judgment.

The next year, Czepiel failed to include the IRA withdrawals as income on his 1995 tax return. Subsequently, the IRS issued a deficiency notice, claiming he was liable for taxes related to the IRA distributions under IRC section 408(d)(1).

Czepiel took the IRS to court. In Commissioner v. Richard D. Czepiel (TC Memo. 1999-289), he argued that the divorce judgment was a qualified domestic relations order (QDRO), as defined in IRC section 414(p), because the Family Court had in effect ordered him to make the withdrawal. He contended that since the divorce judgment was a QDRO, his ex-wife should be taxed on the IRA proceeds. He also argued that the 10% penalty for early withdrawal of funds from an IRA (IRC section 72 (t)) should not apply to him because the withdrawals had been involuntary. …

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