1995 U.S. Tax Ct. LEXIS 39">*49 Petitioners understand the problems inherent in allowing an employee/distributee to make a tax-free rollover into any individual's IRA. Thus, they contend that their interpretation of "an eligible retirement plan" should be limited to the facts of this case, namely, the transfer of a lump-sum distribution from a qualified plan to a retirement plan in the name of the employee's spouse, incident to a divorce. We reject this contention. The relevant statutes apply generally. There is nothing in section 402(a)(5) that permits a tax-free rollover of a distribution to an employee/distributee into an IRA of his or her spouse. We must therefore look to other statutory exceptions to the general rule of section 402(a)(1).

Qualified Domestic Relations Order

Section 402(a)(6)(F) provides an exception to the general rule for certain rollovers by recipients of distributions made pursuant to qualified domestic relations orders (QDRO). To qualify as a tax-free rollover under section 402(a)(6)(F), certain requirements must be met. First, the balance to the credit of the recipient must be distributed to the recipient within 1 taxable year. Second, the distribution must be by reason of 1995 U.S. Tax Ct. LEXIS 39">*50 a QDRO. Finally, the recipient must transfer, or roll over, the distributed property into an IRA or other qualified plan. Respondent argues that the series of transfers made by petitioners did not qualify as a tax-free rollover pursuant to section 402(a)(6)(F), because the lump-sum distribution was not made by reason of a qualified domestic relations order.

A QDRO is a domestic relations order which (1) 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, (2) clearly specifies certain facts, and (3) does 105 T.C. 29">*35 not alter the amount or form of the benefits under the plan. Sec. 414(p)(1)(A), (2), and (3). A domestic relations order is defined as "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 * * * and (ii) is made pursuant to a State domestic relations law (including a community property law)." Sec. 414(p)(1)(B). Respondent concedes that the Judgment of Dissolution, 1995 U.S. Tax Ct. LEXIS 39">*51 which incorporated petitioners' Marital Agreement, is a domestic relations order.

We find that petitioners' Judgment of Dissolution does not qualify as a QDRO. The Judgment of Dissolution did not create or recognize the existence of Mrs. Rodoni's right to receive all or a portion of the benefits payable with respect to Mr. Rodoni under the plan. The Marital Agreement, which was incorporated into the Judgment of Dissolution, provided that Mrs. Rodoni was to receive the community property interest in the profit sharing plan, which amount was to be transferred into an IRA in the name of Mrs. Rodoni. This agreement was not executed until well after Mr. Rodoni received his lump-sum distribution from the profit sharing plan, nor was it ever presented to the plan administrator or to the trustee of the profit sharing plan. Mr. Rodoni's interest in the profit sharing plan terminated upon receipt of the balance to the credit of his account; there were no longer any benefits payable from the plan with respect to Mr. Rodoni. Any subsequent court order could not create or recognize rights that no longer existed.

Petitioners argue that because a QDRO creates or recognizes an alternate payee's1995 U.S. Tax Ct. LEXIS 39">*52 right to plan benefits, such an order need not be entered prior to the distribution from the plan. Petitioners argue that the Judgment of Dissolution, which incorporated the Marital Agreement, confirmed or recognized Mrs. Rodoni's right to the pension plan benefits. We do not think that Congress intended the QDRO exception ⁵ to be broad enough to encompass orders entered long after the benefits have been distributed.

105 T.C. 29">*36 Congress clearly intended that the QDRO exception be construed narrowly. ⁶ As the Senate report states:

The committee believes that the spendthrift rules should be clarified by creating a limited exception that permits benefits under a pension, etc., plan to be divided under certain1995 U.S. Tax Ct. LEXIS 39">*53 circumstances. In order to provide rational rules for plan administrators, the committee believes it is necessary to establish guidelines for determining whether the exception to the spendthrift rules applies. In addition, the committee believes that conforming changes to the ERISA preemption provision are necessary to ensure that only those orders that are excepted from the spendthrift provisions are not preempted by ERISA. [S. Rept. 98-575, at 19 (1984), 1984-2 C.B. 447, 456; emphasis added.]

1995 U.S. Tax Ct. LEXIS 39">*54 Implicit in these procedural rules, and in their underlying purpose to provide rational rules to guide plan administrators, is the requirement that a domestic relations order be presented to the plan administrator and adjudged "qualified" before any distribution is made by the plan to the spouse or former spouse. Karem v. Commissioner, 100 T.C. 521">100 T.C. 521, 100 T.C. 521">526 (1993); see Cummings v. Briggs & Stratton Retirement Plan, 797 F.2d 383">797 F.2d 383, 797 F.2d 383">389 (7th Cir. 1986).

The terms of Sunset Farms' profit sharing plan also contemplate a determination of an order's qualified status before any benefits are distributed:

16.01 Non-Alienation of Benefits

(a) General. * * * no Participant or Beneficiary shall have the right to alienate, anticipate, commute, pledge, encumber or assign any of the benefits 105 T.C. 29">*37 or payments which he may expect to receive, contingently or otherwise, under this Plan * * *

* * *

(c) Qualified Domestic Relations Order. The Plan Administrator and Trustee may comply with a court order which is determined to be a qualified domestic order, as defined in IRC section 414(p), including the establishment of a separate account1995 U.S. Tax Ct. LEXIS 39">*55 or distribution of benefits, to the extent permitted by applicable law. [Emphasis added.]

Furthermore, the judgment fails to qualify as a QDRO, because it fails to clearly specify certain facts as required by section 414(p)(2). In order to constitute a QDRO, a domestic relations order must "clearly specify": (1) The name and last known mailing address of the participant and the alternate payee, (2) the amount or percentage of the participant's benefits to be paid to the alternate payee, (3) the number of payments or period to which such order applies, and (4) each plan to which such order applies. Sec. 414(p)(2)(A)-(D).

The requirement that certain facts be clearly specified serves the purpose of aiding the plan administrator in determining whether a domestic relations order is qualified and thus covered by the limited exception to the antialienation and preemption rules. Hawkins v. Commissioner, 102 T.C. 61">102 T.C. 61, 102 T.C. 61">74-75 (1994).1995 U.S. Tax Ct. LEXIS 39">*56 Petitioners' Judgment of Dissolution fails to specify clearly the requisite facts. With respect to the profit sharing plan, the Marital Agreement provided:

Wife shall receive as her sole and separate share of the community property * * *

The community property interest in Husband's employment related pension and profit sharing plan with Sunset Farms, Inc., which sums shall be transferred into an IRA account in the name of Wife in such a manner as to protect their tax free status as pre taxed deferred compensation. * * *

We will assume that the plan administrator had reason to know the current mailing addresses of Mr. and Mrs. Rodoni so as not to disqualify the order on that ground. See S. Rept. 98-575, supra at 20, 1984-2 C.B. at 457. We will also assume that the phrase "Husband's employment related pension 105 T.C. 29">*38 and profit sharing plan with Sunset Farms, Inc." sufficiently identified the plan to which the order applied, since Sunset Farms had only one profit sharing plan. However, the order did not clearly specify the number of payments or period to which it applied, and it did not clearly specify the amount of benefits to be paid. While the phrase1995 U.S. Tax Ct. LEXIS 39">*57 "community property interest" may at first blush seem to be a sufficient specification of the amount of benefits to be paid, Mr. Rodoni actually transferred the proceeds from his entire interest in the plan to Mrs. Rodoni, and petitioners argue on brief that the order required the transfer of Mr. Rodoni's entire interest rather than just the community property interest. Thus, in the context of this case, the phrase is ambiguous, and the order fails to clearly specify the amount of benefits to be paid.

Petitioners contend that the requirement that certain facts be clearly specified is not to be rigidly applied, especially in the context of a closely held business, where the participant is an officer, director, or major shareholder of the plan administrator. This Court rejected a similar argument in 102 T.C. 61">Hawkins v. Commissioner, supra at 75-76. Recognizing an exception to the specification requirement for closely held businesses would directly contradict the plain language of section 414(p)(2) requiring a QDRO to "clearly specify certain facts". As we stated in Hawkins, "a QDRO should be 'clear and specific' and not 'left to determination by inference1995 U.S. Tax Ct. LEXIS 39">*58 or conjecture.' To allow otherwise would be to spawn again 'a relentless stream of litigation'". 102 T.C. 61">Id. at 73.

Doctrine of Substantial Compliance

Petitioners argue in the alternative that because they substantially complied with the provisions of section 402(a)(5) or (6)(F), the series of transfers qualifies as a tax-free rollover.

Where the requirements of a statute relate to the substance or essence of the statute, they must be rigidly observed. Taylor v. Commissioner, 67 T.C. 1071">67 T.C. 1071, 67 T.C. 1071">1077 (1977); Sperapani v. Commissioner, 42 T.C. 308">42 T.C. 308, 42 T.C. 308">331 (1964). On the other hand, if the requirements are procedural or directory in that they do not go to the essence of the thing to be done, but rather are given with a view to the orderly conduct of 105 T.C. 29">*39 business, they may be fulfilled by substantial compliance. 67 T.C. 1071">Taylor v. Commissioner, supra at 1077-1078; Dunavant v. Commissioner, 63 T.C. 316">63 T.C. 316, 63 T.C. 316">319-320 (1974); 42 T.C. 308">Sperapani v. Commissioner, supra at 330-331.

First, petitioners argue that the requirements of section 402(a)(5)1995 U.S. Tax Ct. LEXIS 39">*59 are merely procedural or directory in that, had Mr. Rodoni rolled over his lump-sum distribution into an IRA in his name, and the Judgment of Dissolution directed the transfer of the IRA from Mr. Rodoni to Mrs. Rodoni, the transfers would have been tax free pursuant to section 408(d)(6). We disagree.

In enacting subchapter D, Congress has provided a comprehensive and detailed legislative scheme, which affords employers and employees substantial tax advantages; however, there are risks when a taxpayer does not precisely follow the detailed requirements. Orzechowski v. Commissioner, 69 T.C. 750">69 T.C. 750, 69 T.C. 750">757 (1978), affd. 592 F.2d 677">592 F.2d 677 (2d Cir. 1979); see also Wood v. Commissioner, 93 T.C. 114">93 T.C. 114, 93 T.C. 114">119 (1989); Tassinari v. Commissioner, T.C. Memo. 1984-445, affd. without published opinion 774 F.2d 1148">774 F.2d 1148 (1st Cir. 1985).

As we previously stated, the requirements of section 402(a)(5) were intended to ensure that an employee's benefits will be used for his retirement savings and to provide guidance to plan administrators. We therefore hold that the requirement1995 U.S. Tax Ct. LEXIS 39">*60 of section 402(a)(5) that a tax-free rollover to an IRA be to an IRA established for the benefit of the employee who received the distribution is not merely procedural with a view to the orderly conduct of business, but rather it relates to the essence of the statute.

Second, petitioners argue that they substantially complied with the QDRO provisions of section 414(p) and thus qualify for tax-free rollover treatment under section 402(a)(6)(F). We need not address whether all the requirements of section 414(p) go to the essence of the statute or are merely procedural, because we find that the requirements which the Judgment of Dissolution and Marital Agreement failed to meet ⁷105 T.C. 29">*40 are substantial and fundamental requirements for a QDRO. Hawkins v. Commissioner, 102 T.C. 61">102 T.C. 76.

1995 U.S. Tax Ct. LEXIS 39">*61 Accordingly, we find that petitioners did not comply with the requirements for a tax-free rollover pursuant to section 402(a)(5) or (6)(F), and, therefore, the lump-sum distribution that Mr. Rodoni received from the profit sharing plan in the taxable year 1988 constitutes gross income to him pursuant to section 402(a)(1).

Under section 72(t), a 10-percent tax is imposed on an early distribution ⁸ from a qualified retirement plan, to the extent that the distribution is includable in gross income. Because Mr. Rodoni received an early distribution that was includable in gross income, he is subject to this tax.

Under section 4980A(a), a 15-percent tax is imposed on excess distributions from a qualified retirement plan. An excess distribution is defined1995 U.S. Tax Ct. LEXIS 39">*62 as the aggregate amount of the retirement distributions with respect to any individual during any calendar year to the extent it exceeds $ 150,000. Sec. 4980A(c)(1). Because Mr. Rodoni's lump-sum distribution exceeded $ 150,000, he is also subject to this tax, except that he is entitled to an offset for the amount of tax imposed by section 72(t). Sec. 4980A(b).

Under section 4973(a), a 6-percent tax is imposed on excess contributions to an IRA. An excess contribution is defined as an amount contributed to an IRA less any qualified rollovers and less the amount allowable as a deduction under section 219 (i.e., $ 2,000). Sec. 4973(b)(1). Because Mrs. Rodoni made an excess contribution to her IRA, none of which constituted a qualified rollover, she is subject to this tax.

Decision will be entered under Rule 155.