October 6, 2019 10:58 pm

Transfer of IRA Costs Recipient Taxes

A wife was ordered by a divorce decree to transfer $10,000 from her retirement account  to her former husband. She instructed her broker to transfer this amount to an IRA set up for the former husband at the same brokerage firm. Within a week, he took a distribution of all the funds and closed the account. He received Form 1099-R reporting the distribution but he didn’t include it in his income.

The Tax Court said the distribution was taxable to him (William Elias Rosenberg, TC Memo 2019-124). He argued that substance should control rather than the form of the transaction. If the wife had taken a distribution from her IRA and given him the cash it wouldn’t have been taxable; it would have been part of a nontaxable property settlement that’s part of a divorce. But because there was actually an IRA—even for seven days—he had to treat the distribution as a taxable retirement distribution. To add insult to injury, because he was under age 59½, he was also subject to a 10% early distribution penalty.

Tax Glossary

Qualifying widow or widower

A filing status entitling the taxpayer with dependents to use joint tax rates for up to two tax years after the death of a spouse.

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