Rollover of qualified plan benefits - importance of form.

A recent Tax Court case, Rodini, 105 TC No. 3 (1995), illustrates the importance of form in successfully rolling over distributions from a qualified retirement plan.

The taxpayers were formerly married and resided in California, a community property state. Divorce proceedings began in 1985, and were finalized on Dec. 31, 1988. The husband was a shareholder, director and employee of a farming operation incorporated in California, and participated in the farm's profit-sharing and defined benefit pension plans. In 1986, on termination of the profit-sharing plan, the husband elected to receive his vested benefits in a lumpsum payment that included a community property component and a separate property component. The couple's Marital Settlement Agreement, executed in 1988, provided that the wife was to receive the community property portion of the profit-sharing payment. The husband transferred the entire distribution to his wife, who within 60 days used the money to establish two separate rollover individual retirement accounts (IRAs). The IRS determined that such transfers of the funds were not qualified rollovers.

Under Sec. 402(a)(1), a distribution from a qualified employees' trust is taxable to the distributee in the year of distribution. Sec. 402(a)(5)(A) provides an exception for certain rollovers by an employee, and Sec. 402(a)(6)(F) provides another exception for rollovers of distributions pursuant to qualified domestic relations orders (QDROS). The court held that the Sec. 402(a)(5) exception applies only to rollovers to IRAs established for the exclusive benefit of the employee who received the lump-sum distribution. Further, the lump-sum distribution did not meet the requirement of Sec. 402(a)(5)(F), that the distribution must be made pursuant to a QDRO, because the settlement agreement was entered into several years after the distribution of the profit-sharing plan.

Because the transfers did not comply with the requirements for a tax-free rollover under Sec. 402(a)(5)(A) or (a)(6)(F), the lumpsum distributions were gross income to the husband subject to excise tax under Sec. 72(t). In addition, the wife was liable for excise taxes for excess contributions to an IRA under Sec. 4973(a). Although the rollover rules have changed somewhat from the provisions involved in the case, the underlying principles should continue under present law.