Lead Opinion
Respondent determined a deficiency in petitioner’s 1988 Federal income tax of $11,752 and an addition to tax of $588 under section 6653(a)(1).
The disposition of a motion for summary judgment under Rule 121(b) is controlled by the following principles: (a) The moving party must show the absence of dispute as to any material fact and that a decision may be rendered as a matter of law; (b) the factual materials and the inferences to be drawn from them must be viewed in the light most favorable to the party opposing the motion; (c) the party opposing the motion cannot rest upon mere allegations or denials, but must set forth specific facts showing there is a genuine issue for trial. O’Neal v. Commissioner,
The following facts are from the admissions of petitioner, the pleadings, and an affidavit produced by respondent with accompanying documents, none of which have been challenged by petitioner. Solely for the purposes of disposing of respondent’s motion, we set forth a summary of the facts relevant to our discussion. Fed. R. Civ. P. 52(a); Sundstrand Corp. v. Commissioner,
Petitioner resided in Narberth, Pennsylvania, at the time of the filing of the petition.
On February 16, 1978, thé Superior Court of New Jersey entered a divorce decree, ending the marriage between petitioner and Molitch, along with a property settlement agreement. Among other provisions, the agreement provided that 516% shares of Clark Transfer, Inc. common stock, jointly owned by petitioner and her ex-husband, were to be split, with petitioner receiving 173% shares. Further, Molitch was obligated to purchase 7 shares from petitioner each year, commencing in 1984, at a purchase price of $1,500 per share, and had the option of purchasing up to an additional 7 shares per year on the same terms, until all of petitioner’s stock was purchased.
On March 20, 1987, petitioner filed a petition in the Court of Common Pleas for Montgomery County, Pennsylvania, registering the New Jersey divorce decree and property settlement, for the purpose of giving jurisdiction to the court to order additional payments of alimony from petitioner’s ex-husband. On June 2, 1987, before Judge Horace Davenport, an agreement to amend the property settlement agreement between petitioner and Molitch was read into the record in that proceeding. Counsel for petitioner’s ex-husband stated:
If your Honor pleases, the parties have agreed that Mr. Molitch will, through a qualified Domestic Relations Order which shall be submitted to Your Honor at a later time for execution and signature and approval, withdraw or have withdrawn from an existing pension that he has with the Clark Group the sum of $350,000.00. The purpose of doing it under a qualified Domestic Relations Order, Your Honor, is to avoid any tax consequences to Mr. Molitch for removing any monies from his pension. This sum will be paid over to Mrs. Brotman when it is received.
The agreement also provided that petitioner would transfer to Molitch all her then stock holdings in Clark Transfer, Inc., consisting of 140 shares.
In response to a query of the court, petitioner’s counsel stated:
I merely add that this agreement will be reduced to writing and that the parties will acknowledge and sign the agreement when it is drafted.
Following the proceedings, counsel for petitioner wrote a letter to Judge Davenport requesting that the court not enter any order, with respect to the proceedings, until counsel could file a petition challenging the entry of a quаlified domestic relations order in the proceedings. In particular, that letter asserted that there were serious questions remaining as to the tax consequences to petitioner or Molitch which would result from the entry of a qualified domestic relations order.
Finding no reason to delay the entry of the order, on January 7, 1988, the court entered a purported qualified domestic relations order (qdro), which provided petitioner was to receive $350,000 out of Molitch’s account in the plan.
In 1988, petitioner received, and cashed, a check from the plan in the аmount of $350,000. Of the total, petitioner placed $250,563 into an individual retirement account (IRA). Later in 1988, petitioner withdrew $30,000 from the IRA.
On December 30, 1988, petitioner filed a complaint in the U.S. District Court for the Eastern District of Pennsylvania, naming Molitch and David Gillis, the plan administrator and trustee, as defendants. The issue raised by petitioner’s complaint involved whether the purported QDRO issued by the Court of Common Pleas met the statutory requirements of a
In support of these requests, petitioner alleged as follows:
20. By having the payments described in paragraph 11 (for plaintiffs medical expenses) and in paragraph 15 (for the purchase price of Clark Common Stock owed to plaintiff) made from his account in the Clark Profit Sharing Plan, Molitch participated in a scheme which was designed to avoid personal income tax on the $350,000 paid out of his account in the Clark Profit Sharing Plan under the Purported QDRO.
21. The $350,000 paid out of the Clark Profit Sharing Plan would have been taxable to Molitch as ordinary income under §402(a) of the Internal Revenue Code of 1986 (the “Code”) when distributed to him under the provisions of §401(a)(9) of the Code. If successful, the effect of the use of his account in the Clark Profit Sharing Trust to pay for his personal nondeductible obligations was the equivalent of Molitch’s getting a deduction for such nondeductible payments of $350,000.
To implement this objective, petitioner asked the District Court to determine, among other things: (a) That the purported QDRO does not qualify as a QDRO as defined in ERISA; and (b) that, because the purported QDRO does not qualify as a QDRO, it is null and void and unenforceable.
Both defendants filed motions to dismiss, which the court treated as motions for summary judgment. In an opinion dated August 1, 1989, the District Court granted summary judgment in favor of the defendаnts. The court concluded that the order entered by Judge Davenport met ERISA’s definition of a QDRO.
On November 21, 1991, the District Court entertained petitioner’s motion for reconsideration. Such motion was denied in an order dated December 17, 1991. No appeal was taken.
In her 1988 Federal income tax return, petitioner reported a capital gain from the transfer of her 140 shares of Clark Transfer, Inc., based upon her having received $210,000 or $1,500 per share. In the notice of deficiency, respondent determined that petitioner had failed to report as income the
Petitioner asserts that she is not collaterally estopped by the decision of the U.S. District Court from contending that the order of the Montgomery County Court of Common Pleas does not constitute a QDRO for Federal income tax purposes. Petitioner’s position rests upon assertions relating to the technical requirements of a QDRO and the U.S. District Court’s decision in respect thereto, and assertions that the U.S. District Court’s decision did not extend to a determination of thе QDRO status of such order for Federal income tax purposes and that the order should not be accorded such status because the plan was not entitled to exempt status. Respondent counters that, by virtue of the decision of the U.S. District Court, petitioner is collaterally estopped from contending that the order of the Montgomery County court was not a QDRO. Both petitioner and respondent appear to have posited their arguments on the assumption that, if such order was a QDRO, petitioner would be taxable on the excess of the $350,000 distribution she received over the rollover into the IRA (respondent does not seek to tax the amount of the rollover
The injeсtion of the provision of section 414(p), establishing the requirements of a QDRO, came as a result of problems created by the antialienation provisions embodied in the labor and tax provisions of ERISA. In 1984, these provisions were modified to except from their operation “qualified domestic relations orders”, the requirements of which were set forth in detail “For purposes of * * * section 401(a)(13)”. See sec. 414(p), infra note 8. The exception was accomplished by amending the antialienation requirement of a qualified plan and specifying that the antiassignment rule would not apply to a provision in the plan permitting assignment by means of a QDRO. See sec. 401(a)(13). At the same time, section 402(a), entitled “Taxability of Beneficiary of Exempt Trust”, was amended to provide: “For purposes of subsection (a)(1) and section 72”, a spouse who was designated as an alternative payee under a QDRO would be considered a “distributee” in determining the taxability of distributions from the tax-exempt plan under section 402(a)(1). See sec. 402(a)(9) (now embodied in sec. 402(e) setting forth “Other Rules Applicable to Exempt Trusts”). The provisions of section 402(b)(2), relating to the “Taxability of Beneficiaries of Nonexempt Trust” categorized as “distributees”, were not changed.
Under the doctrine of collateral estoppel, “once an issue is actually and necessarily determined by a court of competent jurisdiction, that determination is conclusive in subsequent suits based on a different cause of action involving a party to the prior litigation.” Montana v. United States,
Respondent argues that collateral estoppel should apply because each of the conditions set forth in Peck v. Commissioner,
(1) The issue in the second suit must be identical in all respects with the one decided in the first suit.
(2) There must be a final judgment rendered by a court of competent jurisdiction.
(3) Collateral estoppel may be invoked against parties and their privies ■ to the prior judgment.
(4) The parties must actually have litigated the issues and the resolution of these issues must have been essential to the prior decision.
(5) The controlling facts and applicable legal rules must remain unchanged from those in the prior litigation.
[Citations omitted.]
Petitioner argues that the first and fifth conditions have not been met. Petitioner also contends she did not have a full and fair opportunity to litigate the QDRO issue, and that there are special circumstances that warrant an exception to the normal rules of preclusion. See Montana v. United States, supra at 155.
1. Identity of Issues
It is a well-established rule that collateral estoppel focuses on the identity of issues, not the identity of legal proceedings.
The issue decided by the District Court was whether the order entered by the Court of Common Pleas for Montgomery County, Pennsylvania, was a valid QDRO under ERISA section 206(d)(3), 29 U.S.C. sec. 1056(d)(3) (1988). Respondent argues that because the definition of a QDRO in ERISA section 206(d)(3), 29 U.S.C. sec. 1056(d)(3) (1988),
The similarity between section 414(p) and ERISA section 206(d)(3), 29 U.S.C. sec. 1056(d)(3), is more than coincidental. The statutes were enacted simultaneously in the Retirement Equity Act of 1984, Pub. L. 98-397, 98 Stat. 1433-1436, 1445-1449.
Indeed, because of the “mirror-like” nature of certain corresponding IRC and ERISA sections, the Court of Appeals for the Third Circuit, to which an appeal in this case will lie, has stated that, when interpreting a section of ERISA, it is аppropriate to look for guidance to sources which have interpreted its “mirror-like counterpart” in the Internal Revenue Code. Gillis v. Hoechst Celanese Corp.,
In sum, for purposes of determining whether the District Court decided there was a QDRO, section 414(p) and ERISA section 206(d)(3), 29 U.S.C. sec. 1056(d)(3), are interchangeable, and it is immaterial which statute was actually cited by the District Court. Nor is there any doubt that petitioner had the opportunity to litigate and actually litigated the issue of whether there was a QDRO in thе U.S. District Court. See Parklane Hosiery Co. v. Shore,
2. Change in Controlling Facts or Legal Rules
a. Facts
Petitioner’s argument that there has been a change in controlling facts is supported only by her repeated assertion that the profit sharing plan was not a qualified plan at the time of the distribution. Even were this correct, it does not represent a change in controlling facts insofar as the descriptive requirements and consequently the existence of a QDRO are concerned.
b. Legal Rules
Nor has there been a change in controlling law. Petitioner argues there has been a change in law due to a document published by the Department of Labor, wherein the agency requested information from the public to assist the agency in
Petitioner argues that the Department of Labor, through the document, “has stated unambiguously that a requirement of law is that a plan ‘must establish, and a plan administrator must observe,’ written procedures relating to QDRO’s.”
Petitioner’s reliance is misplaced. The agency was merely summarizing ERISA section 206(d)(3)(G) and (H) for the purpose of soliciting comments on a contemplated regulation. The agency was not attempting to change, or even to fill in, the statutory provisions.
3. Special Circumstances
The remaining two arguments of petitioner are that she did not have a full and fair opportunity to litigate the QDRO issue, аnd that special circumstances warrant an exception to the normal rules of preclusion. Under the three-part test enumerated in Montana v. United States,
With respect to the contours of the special circumstances exception, the Supreme Court stated: “Redetermination of issues is warranted if there is reason to doubt the quality, extensiveness, or fairness of procedures followed in prior litigation.” Montana v. United States,
In support of her argument that she did not have a full and fair opportunity to litigate, petitioner asserts that, due to the disposition of the District Court by way of summary judgment, she was not able to engage in discovery in the first proceeding, particularly with respect to whether the plan was a qualified plan under sections 401(a) and 501(a). In the context of resolving the issue of the existence of a QDRO, petitioner’s argument is misplaced. As we have already pointed out, the question whether a domestic relations order meets the descriptive requirements of a QDRO does not depend upon the qualification of the plan to which it relates. See supra p. 147. Nothing in the record before us suggests that there is any dispute as to the facts relating to the existence of a QDRO herein because the descriptive requirements of a qualified domestic relations order were satisfied, or that had discovery been made availablе to petitioner in the District Court proceeding, any dispute as to those facts would have been developed.
In sum, we find no special circumstances warranting an exception to the normal rule of preclusion by way of collateral estoppel.
We conclude that petitioner is collaterally estopped by the decision of the U.S. District Court from asserting herein that the order of the Montgomery County court is not a QDRO.
Such conclusion does not, however, dispose of the question whether collateral estoppel precludes petitioner from litigating
Unquestionably, the issue of the tax-exempt status of the plan for Federal income tax purposes was not directly litigated in the District Court. Indeed, there is no indication in the record herein that the issue was even raised by petitioner in the proceeding before the District Court relating to the existence of a QDRO under ERISA, nor was it an essential ingredient of the District Court’s decision. Cf. O’Leary v. Liberty Mut. Ins. Co.,
Moreover, aside from the question of the District Court’s jurisdiction, our analysis herein establishes that the issues of the existence of a qdro for Federal income tax purposes, i.e., a domestic relations order that meets the descriptive requirements of section 414(p), and the tax consequences flowing therefrom in relation to the tax-exempt status of the plan to which the order relates, are separate issues. This being the case, a determination as to the first issue does not preclude the considération of the second issue. The Court of Appeals for the Eighth Circuit faced a similar situation in Richardson v. Phillips Petroleum Co.,
We find further support for our conclusion that there are separate issues herein, so that collateral estoppel does not apply, in our decision in Vallone v. Commissioner,
We hold that collateral estoppel does not operate to preclude petitioner from litigating the issue of the tax-exempt status of the plan. In this connection, we note that although respondent, in her original memorandum in suppоrt of her motion, urged collateral estoppel as to the tax-exempt status of the plan in the context of whether the order of the Montgomery County Court was a QDRO, she states in her reply brief:
Most importantly, respondent does not contend that petitioner is precluded by collateral estoppel from arguing the Plan was not qualified. Respondent contends estoppel applies to preclude petitioner from denying the DRO was a QDRO. The qualification of the Plan is not an issue presently before the Court. [Fn. ref. omitted.]
Finally, we turn to the question of whether the qualification of the plan is at issue before us. The issue was not adverted to in the petition that was filed on November 12, 1992, nor in the reply to respondent’s amendment to answer filed on May 12, 1994. The first indication that such issue
Respondent urges that, since this case has been pending since 1991, petitioner should not be permitted now to raise the issue in light of the absence of sufficient details of the facts upon which petitioner relies. In this connection, we note that several continuances hеrein were consented to by respondent based in part upon the ground that respondent needed more time to decide whether to assert a deficiency against Molitch. We further note that in July 1994 respondent consented to the taking of the deposition of the administrator of the plan in which the operation of the plan and its impact on the plan’s tax-exempt status apparently were explored. Petitioner asserts in her memorandum that such deposition has revealed loan activities and payments of legal fees that could affect the plan’s exempt status. Under these circumstances, and given the fact that the case will have to be calendared for trial on other unresolved issues, we are not disposed, at this time, to deny petitioner the right to pursue the issue of the qualification of the plan.
However, we think petitioner should, if she so desires, file an appropriate notice to amend her petition to raise the plan qualification issue setting forth sufficient facts to indicate that petitioner’s position has merit and keeping in mind that the time frame for qualification is a narrow one, namely at or about the time of the distribution to petitioner. Respondent will be given an opportunity to respond, after which the Court will decide whether petitioner should be permitted to pursue the issue.
The Court also wishes the parties to understand that the consequences of the disposition of the qualification issue may involve the extent to which the doctrine of assignment of income comes into play, the proper treatment for tax purposes of the value of the stock transferred to Molitch by petitioner, and any other consideration which should be treated as having been furnished by her, and the impact, if any, of section 1041. See Balding v. Commissioner,
An appropriate order will be issued.
Notes
Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the year in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.
Petitioner admits to thе above sentence, with the qualification that at the time she suffered from a psychological disorder known as dissociation. Because of the disorder, petitioner avers she was incapable of placing the property settlement on the record, or agreeing to entry of the qualified domestic relations order. Petitioner, however, was represented by counsel, who was cognizant of petitioner’s problem and who questioned petitioner in open court about it, as did Molitch’s counsel.
See Rodoni v. Commissioner,
As far as the record herein discloses, respondent has not sought to protect her position as a potential stakeholder by determining a deficiency against Molitch.
For a detailed description of the evolution of the QDRO provisions, including the legislative history, see Darby v. Commissioner,
In Montana v. United States,
ERISA sec. 206(d)(3)(B), 29 U.S.C. sec. 1056(d)(3)(B) (1988), provides:
(B) For purposes of this paragraph—
(i) the term “qualified domestic relations order” means a domestic relations order—
(I) which creates or recognizes the existence of an alternate payee’s right to, or assigns to an alternate payee the right to, receive all or a portion of the benefits payable with respect to a participant under a plan, and
(II) with respect to which the requirements of subparagraphs (C) and (D) are met, and
(ii) the term “domestic relations order” means any judgment, decree, or order (including approval of a property settlement agreement) which—
(I) relates to the provision of child support, alimony payments, or marital property rights to a spouse, former spouse, child, or other dependent of a participant, and
(II) is made pursuant to a State domestic relations law (including a community prоperty law).
Sec. 414(p)(1) provides:
(1) In GENERAL.—
(A) Qualified domestic relations order. — The term “qualified domestic relations order” means a domestic relations order—
(i) which creates or recognizes the existence of an alternate payee’s right to, or assigns to an alternate payee the right to, receive all or a portion of the benefits payable with respect to a participant under a plan, and
(ii) with respect to which the requirements of paragraphs (2) and (3) are met.
(B) Domestic relations order. — The term “domestic relations order” means any judgment, decree, or order (including approval of a property settlement agreement) which—
(i) relates to the prоvision of child support, alimony payments, or marital property rights to a spouse, former spouse, child, or other dependent of a participant, and
(ii) is made pursuant to a State domestic relations law (including a community property law).
“The reason that many ERISA sections have such counterparts in the IRC is that, to encourage employers to establish pension plans, Congress provides favorable tax treatment for plans which comply with ERISA’s requirements.” Gillis v. Hoechst Celanese Corp.,
See Disabled American Veterans v. Commissioner,
Cf. also Day v. Commissioner,
Cf. Hawkins v. Commissioner,
See also Barnette v. Commissioner,