T.C. Summary Opinion 2001-69
UNITED STATES TAX COURT
MARSHA K. HUGGINS, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 4878-00S. Filed May 14, 2001.
Marsha K. Huggins, pro se.
Ralph W. Jones, for respondent.
DEAN, Special Trial Judge: This case was heard pursuant to
the provisions of section 7463 of the Internal Revenue Code in
effect at the time the petition was filed. Unless otherwise
indicated, subsequent section references are to the Internal
Revenue Code in effect for the year at issue. The decision to be
entered is not reviewable by any other court, and this opinion
should not be cited as authority.
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Respondent determined a deficiency of $1,363 in
petitioner’s Federal income tax for taxable year 1997. The sole
issue for decision is whether petitioner is entitled to exclude
from income, the payments she received from a former spouse
incident to a divorce proceeding.
This case was submitted fully stipulated without trial under
Rule 122. The accompanying exhibits are incorporated herein by
reference.
Background
Petitioner resided in Astoria, Oregon, at the time her
petition was filed in this case.
Petitioner's marital relationship with her former husband
was dissolved by a decree of dissolution of marriage (decree) by
the Circuit Court of the State of Oregon, the final and effective
date of which was January 18, 1986. The decree includes a
provision providing that her former husband will pay to her "a
sum of money equaling one-half of monthly net amount, after
deductions for federal and state taxes, of the U.S. Coast Guard
retirement pension received by [petitioner's former husband].
Payment to [petitioner] shall not be included as taxable income
to [petitioner], nor shall such payments be deductible by
[petitioner's husband]." The decree directs that the payments be
made directly to petitioner and continue until the mortgage on
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the marital home is paid, or the marital home is sold, or
foreclosed upon by the mortgage holder.
During 1997, petitioner received the court-ordered payments
directly from the U.S. Coast Guard.1 Petitioner filed timely a
Federal income tax return for 1997 that did not report as income
the receipt of the payments she received under the decree.
On January 21, 2000, the Internal Revenue Service (IRS)
received an amended tax return from petitioner reporting total
pensions and annuities of $6,563 but showing the taxable amount
as zero.
Discussion
Respondent determined in the statutory notice of deficiency
that petitioner must include in income the payments received from
the U.S. Cost Guard as a result of the decree. Respondent argues
that what petitioner got under the decree "is simply a right to
receive a future stream of income".
Under the law of Oregon, the court may issue a decree of
marital dissolution which provides for the division, or other
disposition between the parties, of their real or personal
property "as may be just and proper". Or. Rev. Stat. sec.
107.105(f)(1999), added to Or. Rev. Stat. in 1983; see Richardson
1
By Federal statute, the payments end in accordance with the
court order but not later than the date of death of the retiree
or the former spouse to whom payments are being made. See 10
U.S.C. sec. 1408(d)(4) (1994).
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v. Richardson, 769 P.2d 179, 183 (Or. 1989). "A retirement plan
or pension or an interest therein shall be considered as
property." Or. Rev. Stat. sec. 107.105(f) (1999).
The U.S. Coast Guard Retirement system is a "government
pension plan". 31 U.S.C. sec. 9502(1)(B)(ii) (1994). Under the
authority of 10 U.S.C. sec. 1408(c) (1994), payment of retired or
retainer pay in compliance with court orders, the State of Oregon
may treat military2 pension benefits as marital property. See
Valley v. Valley, 775 P.2d 332 (Or. Ct. App. 1989); Wood v. Wood,
676 P.2d 338 (Or. Ct. App. 1984).
Gross income includes income from pensions. Sec. 61(a)(11);
Singleton v. Commissioner, T.C. Memo. 1988-508. In general,
income is taxable in the year in which it is received. See sec.
451(a). Congress has provided specialized rules in the
employees' plan area. Under section 402(a)(1), the general rule
is that a distribution from an exempt employees' trust (under a
tax-qualified employees' plan) is taxed to the "distributee"
under section 72, which generally provides for current taxation
of distributions as ordinary income.
The statute does not define the word "distributee" as used
in section 402(a)(1); neither do the regulations. The Court has
concluded that a distributee of a distribution under a plan
2
The Coast Guard is a military service and a branch of the
armed forces of the United States at all times. See 14 U.S.C.
sec. 1 (1994).
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ordinarily is the participant or beneficiary who, under the plan,
is entitled to receive the distribution. See Darby v.
Commissioner, 97 T.C. 51, 58 (1991); Estate of Machat v.
Commissioner, T.C. Memo. 1998-154; Smith v. Commissioner, T.C.
Memo. 1996-292.
Section 402(e)(1)(A), however, provides an exception to this
general rule. Section 402(e)(1)(A) provides that an "alternate
payee", who is the spouse or former spouse of the plan
participant, shall be treated as the distributee of any
distribution or payment made to the "alternate payee" under a
"qualified domestic relations order" (QDRO) as defined in section
414(p). Therefore, a distribution made to such an alternate
payee under a QDRO will be taxable to that alternate payee, and
not to the plan participant, because section 402(e)(1)(A) treats
the alternate payee as the distributee.
As originally enacted, the QDRO rules did not affect
governmental plans. See H. Rept. 101-247, 1443 (1989). In 1989,
however, Congress amended the tax rules relating to governmental
plans to conform them to the qualified plans discussed above,
applying the QDRO rules to distributions from governmental plans.
Omnibus Budget Reconciliation Act of 1989 (OBRA), Pub. L. 101-
239, sec. 7841(a)(2), 103 Stat. 2427-2428.
Section 414(p)(11) is applicable to transfers of marital
interests after the date of enactment of OBRA, December 19, 1989,
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for tax years ending after the date of enactment. See OBRA sec.
7841(a)(3), 103 Stat. 2428. The court order in this case was
issued in 1985; it precedes the effective date of section
414(p)(11) and cannot qualify as a QDRO.
The decree provided that petitioner is to receive a "sum of
money equaling one-half" of her former spouse's Coast Guard
retirement pension, after deduction of Federal and State taxes,
and that such amount is not to be taxable income to her or
deductible by her former spouse. The language of the court's
direction that the amount not be taxable to petitioner or
deductible by her former spouse disqualifies the payments from
being considered as alimony. See sec. 71(b)(1)(B). The payments
are to continue until the mortgage is paid or the house is sold.
The payments constitute a division of marital property. Estate
of Goldman v. Commissioner, 112 T.C. 317, 323-324 (1999), affd.
without published opinion sub nom. Schutter v. Commissioner, 242
F.3d 390 (10th Cir. 2000).
The language of the decree also meets the requirement of 10
U.S.C. sec. 1408(a)(2)(C) (1994) for direct payment to petitioner
out of the retired pay of petitioner's former spouse:
in the case of a division of property, [the court
order] specifically [provides] for the payment of an
amount, expressed in dollars or as a percentage of
disposable retired pay, from the disposable retired pay
of a member to the spouse or former spouse of that
member. [Emphasis supplied].
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The Supreme Court in McCarty v. McCarty, 453 U.S. 210
(1981), held that Federal statutes governing military retirement
pay prevented State courts from treating military retirement pay
as community property. In direct response to McCarty, Congress
in 1982 enacted the Uniform Services Former Spouses' Protection
Act (Act), 10 U.S.C. sec. 1408 (1994). Although enacted to
authorize State courts to treat "disposable retired or retainer
pay" of a member of the Armed Forces as community property, the
language also covers property divisions in common law, or
equitable distribution states. See Mansell v. Mansell, 490 U.S.
581, 584 n.2 (1989); see S. Rept. 97-502 at 2-3.
For purposes of the Act, the term "disposable retired pay"
means the monthly retired pay "to which a member is entitled"
less stated amounts.3 10 U.S.C. sec. 1408(a)(4) (1994). The
term "spouse or former spouse" means the husband or wife or
former spouse of a member who was married to the member before
the court order. 10 U.S.C. sec. 1408(a)(6) (1994). Under 10
U.S.C. sec. 1408(c)(2) (1994), payments to a spouse "with respect
to a division of retired pay as the property of a member and the
member's spouse under this subsection may not be treated as
3
The definition of "disposable retired pay" under 10 U.S.C.
sec. 1408(a)(4) (1982), changed after the date of the decree.
See National Defense Authorization Act for Fiscal Year 1991, Pub.
L. 101-510, sec. 555(b), (e)(2), 101 Stat. 1569-1570.
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amounts received as retired pay for service in the uniformed
services."
The above referenced language of the Act leads to the
conclusion that although a State court "may treat disposable
retired pay payable to a member" as property of the member and
his spouse for State law purposes, the retired pay is that of the
member. The Act itself does not give the former spouse an
interest in the retired pay. Here, the court ordered payments to
petitioner out of the disposable retired pay of her former
spouse. The decree did not, and could not, make her the
recipient of "retired pay". See 10 U.S.C. sec. 1408(c)(1) and
(2) (1994). Petitioner received a division of property in the
form of monthly payments. This was not a taxable event. See
sec. 1041.
As Oregon is not a community property State,4 the decree
here did not have the effect of dividing a preexisting community
ownership of the retired pay of petitioner's former spouse. See
Powell v. Commissioner, 101 T.C. 489, 497-499 (1993); Darby v.
Commissioner, 97 T.C. 51, 67 (1991). Because the retired pay,
out of which petitioner received her payments, is that of
petitioner's former spouse, he remains taxable on his retired
4
See, e.g., Swan v. Swan, 720 P.2d 747, 752 (Or. 1986); Wood
v. Wood, 676 P.2d 338, 340 (Or. Ct. App. 1984).
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pay. See sec. 61(a)(11); Jones v. Commissioner, 82 T.C. 586
(1984).
Respondent's position is not sustained, and petitioner may
exclude from income amounts received in 1997 as a division of
property incident to divorce.
Reviewed and adopted as the report of the Small Tax Case
Division.
Decision will be entered
for petitioner.