CourtListener opinion 4335340

Evidence quotes

Clean opinion text

T.C. Memo. 2005-67

 UNITED STATES TAX COURT

 LAURA D. SEIDEL, Petitioner v.
 COMMISSIONER OF INTERNAL REVENUE, Respondent

 Docket No. 8964-03. Filed March 31, 2005.

 Laura D. Seidel, pro se.

 John Strate and Rex Lee, for respondent.

 MEMORANDUM FINDINGS OF FACT AND OPINION

 GOLDBERG, Special Trial Judge: Respondent determined a

deficiency in petitioner's Federal income tax of $24,593 and an

additional tax of $4,397.87 pursuant to section 72(t) for the

taxable year 1999. Unless otherwise indicated, section

references are to the Internal Revenue Code in effect for the
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year in issue, and all Rule references are to the Tax Court Rules

of Practice and Procedure.

 After concessions by the parties, the issues for decision

are: (1) Whether petitioner received a taxable distribution of

$77,000 from Lee Seidel's (petitioner's former husband) section

401(k) plan (401(k) plan) pursuant to a Qualified Domestic

Relations Order (QDRO) which designated her as the alternate

payee; (2) whether petitioner is entitled to business deductions

and cost of goods sold claimed on Schedule C, Profit or Loss From

Business, for an activity named Port of Mystery, involving the

sale and repair of antique jewelry; (3) whether petitioner is

liable for the 10-percent additional tax pursuant to section

72(t) because she received an early distribution from her own

401(k) plan and from Lee Seidel's 401(k) plan; (4) whether

petitioner is entitled to an additional itemized deduction on

Schedule A, Itemized Deductions, for taxable year 1999 for

mortgage interest in the amount of $2,471.09; (5) whether

petitioner is entitled to an additional itemized deduction for

legal fees in the amount of $2,058.50 paid to Robert Fruitman,

petitioner's divorce attorney, in taxable year 1999; and (6)

whether petitioner underwent more than one inspection of her

books of account for taxable year 1999.
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 FINDINGS OF FACT

 Some of the facts have been stipulated and are so found.

The stipulation of facts and the attached exhibits thereto are

incorporated herein by this reference. Petitioner resided in

Yuba City, California, on the date the petition was filed in this

case.

Taxability of 401(k) Distribution Pursuant to a QDRO

 Petitioner married Lee Seidel (Mr. Seidel) on October 23,

1993. During the marriage, Mr. Seidel was employed by the

California Water Service Company (CWSC). Mr. Seidel's employment

with CWSC commenced in 1974 and continued beyond the dissolution

of the marriage. As an employee of CWSC, Mr. Seidel was a

participant in a tax-deferred savings plan (CWSC 401(k))

sponsored by CWSC pursuant to section 401(a) and (k). Mr.

Seidel's participation in the CWSC 401(k) plan began sometime

between 1983 and 1985, prior to his marriage to petitioner, and

continued during the marriage. Mr. Seidel's CWSC 401(k) plan

consisted of a separate property interest for contributions made

prior to his marriage to petitioner, and a community property

interest for contributions made during his marriage to

petitioner. The parties agree that the community property

interest in Mr. Seidel's CWSC 401(k) plan totals $77,000.

 Petitioner and Mr. Seidel each entered the marriage with

separate property interests. Petitioner had her own house which

was encumbered by a first mortgage. Mr. Seidel had his own house
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which he had purchased. Mr. Seidel's house was encumbered by a

first and second mortgage. After their marriage, Mr. Seidel

moved into petitioner's house.

 During the beginning years of their marriage, petitioner and

Mr. Seidel took out a second mortgage on petitioner's house. The

proceeds of this second mortgage were used to pay off the second

mortgage on Mr. Seidel's house, to pay off some of petitioner's

debts, and to purchase household assets.

 Petitioner and Mr. Seidel separated on February 11, 1998.

During settlement negotiations to dissolve the marriage,

petitioner was represented by attorney, Robert Fruitman (Mr.

Fruitman). Mr. Seidel was represented by his attorney, Francis

L. Adams (Mr. Adams). The marriage was dissolved by the Superior

Court of California, County of Sutter (California Superior

Court), on April 27, 1999.

 With respect to the division of Mr. Seidel's CWSC 401(k)

plan, petitioner and Mr. Seidel agreed to a Marital Settlement

Agreement, dated April 19, 1999, and entered by the California

Superior Court on April 27, 1999, which provided:

 the parties presently have a partial community interest
 [$77,000.00] in Husband's 401K and Husband has a partial
 separate property interest in his 401K. The parties agree
 that the sum of SEVENTY SEVEN THOUSAND DOLLARS AND NO/100
 ($77,000.00) shall be withdrawn from the 401K plan held in
 Husband's name. Husband will then deduct the federal and/or
 state penalties and the federal and state taxes and any
 other taxes for early withdraw [sic] from that amount, and
 from that remaining balance, Husband shall arrange for the
 payment of the two (2) debts owed to First Community
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 Financial Services, which are secured by deeds of trust on
 wife's home. After those two (2) debts are paid, any
 balance of the proceeds shall be split equally between the
 parties. Any proceeds remaining in Husband's 401K plan
 shall be confirmed to Husband as his sole and separate
 property.

 The Marital Settlement Agreement was reviewed by Lillick &

Charles, LLP, Attorneys at Law (Lillick & Charles), and by the

administrator of the CWSC 401(k) plan, for whom Lillick & Charles

acted as counsel. Based upon this review, the plan administrator

refused to comply with the Marital Settlement Agreement because

it did not constitute a QDRO. Due to Mr. Seidel's continuing

employment, the plan administrator would not distribute the

called for amount to Mr. Seidel.

 Mr. Fruitman and Mr. Adams negotiated a second Marital

Settlement Agreement which incorporated a Domestic Relations

Order (DRO). They submitted the proposed QDRO with their

respective party's approval to Lillick & Charles on May 28, 1999.

The Marital Settlement Agreement did not provide for the payment

of funds from petitioner to Mr. Seidel for use in making the

mortgage interest payment at issue in the present case.

Petitioner expressly waived all spousal support in the Marital

Settlement Agreement.

 Lillick & Charles advised Mr. Fruitman and Mr. Adams on June

7, 1999, that the proposed DRO was satisfactory, met the

requirements of a QDRO, and that the plan administrator would

make the distribution pursuant to the QDRO.
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 On July 19, 1999, Mr. Seidel, Mr. Adams, petitioner, and Mr.

Fruitman signed a Stipulation and Order with respect to the QDRO.

This Stipulation and Order, which was stamped "Endorsed Filed

Aug. 3, 1999\ by the Superior Court of the State of California