After a 24-year marriage, the couple settled their divorce in a mediation by agreeing on the terms of a marital dissolution agreement (“MDA”).  The agreement was that the husband would receive a large amount of real property, and in exchange he would give the wife $115,000 from his retirement account.  The funds from the retirement account would be separated by a qualified domestic relations order.

The MDA included the following terms:

2.5 As a division of marital property, the husband will pay to the wife the sum of $115,000.00, which shall be paid from his retirement account pursuant to paragraph 4.0 below, for any and all interest she has in the marital property…

4.0 PENSION/RETIREMENT ACCOUNTS: Husband maintains a 401(k) account through his employment with Johnson Controls, with the present balance being approximately $200,000.00, after deducting the loans outstanding on said account in the amount of approximately $16,000.00. The parties agree that wife shall receive the total sum of one hundred fifteen thousand dollars ($115,000.00) from said 401(k) account, pursuant to the terms of a qualified domestic relations order (QDRO).

 A few weeks after the MDA was signed, the parties met in court to finalize their divorce.  On the same day the divorce was granted, the parties signed a QDRO which contained the following language:

11. Taxation

For purposes of Section 402 and 72 of the Code, any alternate payee who is the spouse or former spouse of the participant shall be treated as the distributee of any distributions or payments made to the alternate payee under the terms of the order and, as such, will be required to pay the appropriate federal, state, and local income taxes on such distributions.

In this case, the wife is the “alternate payee”.  A few months after the QDRO was signed, wife discovered that if she cashed out the $115,000, she would only receive $90,000 due to the various taxes and penalties.

The parties returned to the trial court.  Wife argued that the agreement between the parties was that she was to receive $115,000 for her share of the marital property, and this amount should be paid to her after any taxes had been paid upon it.  In effect, she wanted the husband to withdraw whatever amount of money it would take to pay the penalties and taxes and still give her the full $115,000 in cash.  Husband also asked the court to force the wife to sign deeds to the property over to him.  His argument was that he was under no duty to pay her anything before she released the property to him.

 Trial Court:  Husband must pay the taxes

After review of the case, the trial court said that because the payment to the wife was in the nature of a division of marital property, she should receive the full $115,000 without any reduction due to taxes.  The husband disagreed with this position and appealed the decision.

Appellate Court: MDA and QDRO must work together

The wife’s argument to the Appellate Court was that the terms of the qualified domestic relations order were in conflict with the terms of the marital dissolution agreement.  She stated that the MDA controls the division of property, and that document dictates that she would receive the full $115,000.  In her opinion, the QDRO was invalid because it contained terms not found in the MDA.

The husband argued that both parties entered into the two agreements freely, with full disclosure, without any fraud or misrepresentation, and the agreements should be enforced as written.  He stated that the terms clearly require the wife to pay the taxes on the retirement funds and there was never any surprise about this provision.

First, the court noted that in cases of divorce, a marital dissolution agreement merges into the final decree and becomes an order of the court.  Similarly, a qualified domestic relations order also becomes incorporated into the MDA.  Together, the MDA, QDRO, and final decree all become components of the agreement between the parties.  These written agreements are contracts and the courts interpret them using contract principles.

The Court quoted the following language from a prior case in regard to the interpretation of contracts:

It is a well-recognized principle of contract construction that the intention of the parties as ascertained from the entire context of their agreement is controlling. And where an executed agreement refers to other documents and makes their conditions part of the executed agreement, the documents must be interpreted together as the agreement of the parties.


Taking its words in their ordinary and usual meaning, no substantive clause must be allowed to perish by construction, unless insurmountable obstacles stand in the way of any other course. Seeming contradictions must be harmonized if that course is reasonably possible. Each of its provisions must be considered in connection with the others, and, if possible, effect must be given to all. A construction which entirely neutralizes one provision should not be adopted if the contract is susceptible of another which gives effect to all of its provisions. The courts will look to the entire instrument, and, if possible, give such construction that each clause shall have some effect, and perform some office.

GavelLooking at the language of the two documents (quoted at the top of this page), it is true that the marital dissolution agreement does not expressly state that the wife should have to pay the taxes on the funds from the husband’s retirement account.  However, there is also no language to suggest that she would not be responsible for for the taxes and penalties.  What is does say is that the funds will be paid “pursuant to the terms of a qualified domestic relations order”.

The QDRO, on the other hand, clearly states that the wife will have to pay any “appropriate federal, state, and local income taxes on such distributions”.  The Court was of the opinion that when the two documents were read together and treated as a single agreement of the parties, there was no question that the wife was obligated to pay the taxes.