(a) Facts: The wife sued the husband for divorce in Maryland. A Maryland court issued a pendente lite order, providing for temporary support. In addition, the order required the husband to “transfer to Ms. Kirkpatrick the sum of One Hundred Thousand Dollars ($100,000.00) directly (and in a non‑taxable transaction) into an IRA appropriately titled in Ms. Kirkpatrick’s name” and to “pay to the Plaintiff a lump sum of Forty Thousand Dollars ($40,000.00) . . . for Pendente Lite Attorney’s Fees and Suit Money.” 2018 WL 1040955, at *4. The parties were eventually divorced.
The husband did not transfer any money into an IRA in the wife’s name, but he did make a series of payments to her in the amounts required by the above order. The payments were made with funds withdrawn from two IRAs.
The parties filed a joint tax return for the year in which the payments were made. They reported distributions of $411,155, of which only $116,489 was reported as taxable. Among the deductions claimed was a $140,000 deduction under § 408(d)(6) for payments under the Maryland order. The IRS disallowed the deduction, and the parties sought relief in the Tax Court.
(b) Issue: Were the parties entitled to a deduction under § 408(d)(6)?
(c) Answer to Issue: No.
(d) Summary of Rationale: The parties were not entitled to deduct the $40,000 in temporary attorney’s fees. The Maryland court simply ordered payment of that amount; it did not order that payment be made from an IRA or, indeed, from any specific source. Section 408(d)(6) applies only where the order or agreement requires “[t]he transfer of an individual’s interest in an individual retirement account.” I.R.C. § 408(d)(6) (emphasis added).
The $100,000 payment was also not deductible. “[T]his Court has held that for section 408(d)(6) to apply . . . there must be a transfer of the IRA participant’s interest in the IRA to his spouse or former spouse.” Kirkpatrick, 2018 WL 1040955, at *15. The Maryland order did not require the husband to transfer to the wife an interest in an IRA. It required him to pay $100,000 into an IRA and to do so in a nontaxable manner, but it did not state a specific source from which the payment had to come.
Because the husband was free to make the payment from any source he desired, the order did not require the husband to transfer to the wife an interest in an IRA. “[T]aking distributions from IRAs and writing checks to one’s spouse is not the appropriate form for a tax-free transfer of an account incident to divorce under section 408(d)(6).” Id. at *17. The court relied directly on Bunney v. Commissioner, 114 T.C. 259 (2000), which reached the same result.