T.C. Summary Opinion 2009-103
UNITED STATES TAX COURT
GLENDA J. STRAND, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket Nos. 5814-07S, 24963-07S. Filed July 9, 2009.
Robert E. Bergman, for petitioner.
Brenda M. Fitzgerald, for respondent.
RUWE, Judge: These consolidated cases were heard pursuant
to the provisions of section 74631 of the Internal Revenue Code
in effect when the petitions were filed. Pursuant to section
7463(b), the decisions to be entered are not reviewable by any
1
Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the years at issue, and
all Rule references are to the Tax Court Rules of Practice and
Procedure.
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other court, and this opinion shall not be treated as precedent
for any other case.
Respondent determined $2,300 and $1,943 deficiencies in
petitioner’s 2004 and 2005 Federal income taxes, respectively.
The issue for decision is whether the $12,621 petitioner received
in 2004 and the $12,952 petitioner received in 2005 for her
interest in her former husband’s military retirement pension are
includable in her gross income.
Background
These cases were submitted fully stipulated in accordance
with Rule 122. The stipulations of fact and the attached
exhibits are incorporated herein by this reference. At the time
the petitions were filed, petitioner resided in Georgia.
Petitioner married Douglas H. Strand (Mr. Strand) on October 15,
1960. Nearly 20 years later petitioner and Mr. Strand separated
and declared their marriage irretrievably broken. On May 8,
1980, petitioner and Mr. Strand entered into a Property
Settlement Agreement (agreement) filed in the Superior Court,
State of Washington, County of Spokane (superior court).2 In
pertinent part, the agreement states:
2
Washington is a community property State.
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It is understood that the Husband is receiving from the
Federal Government a monthly retirement payment. This
monthly payment arises from the military service of the
Husband. Husband expressly promises and agrees that he
will instruct the appropriate branch or department of
the U. S. Army to pay to Wife one-half of 75% of the
monthly amount received or to be received by Husband.
[T]his amount to Wife will increase as there is any
increase made in payments to Husband and similarly if
Husband’s payment should be reduced for any reason,
then the one-half of 75% would be reduced accordingly.
Husband agrees that the assignment to Wife of the one-
half of 75% of all future payments shall be irrevocable
until the death of Wife or upon the Wife becoming
remarried. * * *
The couple divorced on August 28, 1980. The superior court
Decree of Dissolution of Marriage (decree) ratified, confirmed
and approved the agreement in all respects.
A year after their divorce, the Supreme Court held that
military retirement pay was not property subject to division upon
marital dissolution under community property laws. McCarty v.
McCarty, 453 U.S. 210 (1981). In the light of the Supreme
Court’s decision in McCarty, Mr. Strand sought modification of
the agreement in superior court. On June 2, 1982, the superior
court determined that “the criteria for retroactive application
of McCarty v. McCarty are not applicable in this case” and not
only found that the decree should be kept in full force but also
emphasized that “The military pension payments to petitioner are
property and not maintenance.”3
3
In September 1982, in response to McCarty, Congress
enacted the Uniformed Services Former Spouses’ Protection Act
(continued...)
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In September 1986 the Department of the Army, per
petitioner’s request, determined that petitioner was entitled to
begin receiving direct payments “for division of property from
the U. S. Army retired pay of Douglas H. Strand”. The direct
payments were to begin on or about August 1986.
For taxable years 2004 and 2005 petitioner received payments
from the Defense Finance and Accounting Service (DFAS) of $12,621
and $12,952, respectively, for her interest in Mr. Strand’s
military retirement pension. DFAS issued to petitioner Forms
1099-R, Distributions From Pensions, Annuities, Retirement or
Profit-Sharing Plans, IRAs, Insurance Contracts, etc., for 2004
and 2005 which indicated that the $12,621 and $12,952 payments
were both the gross distributions and taxable amounts for 2004
and 2005, respectively.
On petitioner’s timely filed Forms 1040, U.S. Individual
Income Tax Return, for both 2004 and 2005, she did not report the
payments received from DFAS. On January 16 and August 20, 2007,
respondent issued to petitioner notices of deficiency for 2004
and 2005, respectively. Respondent determined that petitioner
3
(...continued)
(USFSPA) as part of the Dept. of Defense Authorization Act, 1983,
Pub. L. 97-252, sec. 1002, 96 Stat. 730-738 (1982), which
authorized State courts to treat military retirement pay in
accordance with State law, thereby allowing State courts to
consider military pensions as community assets for distribution
in divorce proceedings. USFSPA was made retroactive to the day
before McCarty was decided (i.e., June 25, 1981). Id.
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failed to report the $12,621 and $12,952 payments in her gross
income for 2004 and 2005, respectively.4
Petitioner timely filed petitions contesting the notices of
deficiency. The cases were consolidated for trial, briefing and
opinion on September 10, 2008.
Discussion
Gross income is defined as “all income from whatever source
derived” unless otherwise specifically excluded. Sec. 61(a).
Specifically included in gross income are amounts derived from
pensions. Sec. 61(a)(11). “A military retirement pension, like
other pensions, is simply a right to receive a future income
stream from the retiree’s employer.” Eatinger v. Commissioner,
T.C. Memo. 1990-310; see also Mitchell v. Commissioner, 131 T.C.
___, ___ (2008) (slip op. at 7) (“Military retired pay
constitutes a pension within the meaning of * * * [section
61(a)(11)].”); secs. 1.61-2(a)(1), 1.61-11(a), Income Tax Regs.
Although State law determines the nature of a property
interest, Federal law determines the Federal taxation of that
property interest. Mitchell v. Commissioner, supra at ___ (slip
op. at 7) (citing United States v. Mitchell, 403 U.S. 190, 197
(1971)). Tax liability for income from property attaches to the
4
In the notice of deficiency for tax year 2004, respondent
also disallowed petitioner’s claimed $12 medical expense
deduction. Petitioner, however, has not contested this
adjustment, and consequently we deem it conceded. See Rule
34(b)(4).
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owner of the property. Blair v. Commissioner, 300 U.S. 5, 12
(1937).
Petitioner argues that the payments made to her from Mr.
Strand’s military retirement pension are not includable in her
gross income because the payments were received as a division of
property, rather than as alimony, and therefore are not taxable
to her under section 1041. Petitioner further asserts that
because taxes were withheld from the total gross distribution
from DFAS before her separate share was calculated, any tax she
is required to pay amounts to double taxation.5
In 1980, the year of petitioner and Mr. Strand’s divorce,
the law of the State of Washington was that a military pension
was community property to the extent that community funds had
been invested in it and it was before the court for consideration
in a dissolution proceeding. Wilder v. Wilder, 534 P.2d 1355,
5
Petitioner also theorizes that since she “has not been
required before now, 2004 and 2005, to pay any Federal Income Tax
on the monies received by her pursuant to * * * [the agreement]”,
she should not now be treated any differently. However, each tax
year stands on its own and must be separately considered. Haeder
v. Commissioner, T.C. Memo. 2001-7 (citing United States v.
Skelly Oil Co., 394 U.S. 678, 684 (1969)).
Petitioner’s position is in the nature of an argument for
equitable estoppel. It is well settled, however, that the
Commissioner cannot be estopped from correcting a mistake of law,
even where a taxpayer may have relied to his detriment on that
mistake. Dixon v. United States, 381 U.S. 68, 72-73 (1965); Auto
Club of Mich. v. Commissioner, 353 U.S. 180, 183-184 (1957); see
also Massaglia v. Commissioner, 286 F.2d 258, 262 (10th Cir.
1961), affg. 33 T.C. 379 (1959); Zuanich v. Commissioner, 77 T.C.
428, 432-433 (1981).
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1357 (Wash. 1975); see also In re Marriage of Giroux, 704 P.2d
160, 161 (Wash. Ct. App. 1985) (“Before 1981, the Washington
Supreme Court recognized that a military pension was community
property to the extent that community funds or community labor
have been invested and, as such, could be divided.”). In
accordance with the agreement and incident to the divorce, we
find that petitioner received, as her separate property, rights
to and an interest in Mr. Strand’s military retirement pension.
Generally, no gain or loss is recognized on a transfer of
property from an individual to a former spouse, but only if the
transfer is incident to the divorce. Sec. 1041(a). However, “It
is arguable that section 1041 has no application to an equal-in-
value division of the property of a marital community, since
there is no transfer of property but only a partition of the
community.” Weir v. Commissioner, T.C. Memo. 2001-184 (citing
Commissioner v. Mills, 183 F.2d 32, 34 (9th Cir. 1950), affg. 12
T.C. 468 (1949), and Walz v. Commissioner, 32 B.T.A. 718, 720
(1935)). In any event, section 1041 is inapplicable to any
transfer in 1980 incident to either the agreement or the decree,
since any such transfer would be pursuant to an instrument that
predates the effective date of section 1041. See Deficit
Reduction Act of 1984, Pub. L. 98-369, sec. 421, 98 Stat. 793
(adding section 1041, generally effective for transfers after
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July 18, 1984, but in some cases effective for transfers after
December 31, 1983).
In Weir v. Commissioner, supra, discussing the division of
community property incident to divorce that occurred before the
enactment of section 1041, we stated:
Law predating section 1041 establishes that, in
the case of an approximately equal division of
community property on divorce, no gain is recognized on
the theory that no sale or exchange has occurred but
only a nontaxable partition, and the basis of the
property set aside for each spouse is its basis to the
community prior to the divorce. * * *
Petitioner is correct when she asserts that the actual transfer
of the property right is not a taxable event. Thus, in 1980
petitioner recognized no gain (or loss) on receipt of her
separate property rights in Mr. Strand’s military retirement
pension. But because the community, and therefore petitioner,
has no basis in the military retirement pension, the income from
the property transferred is a taxable distribution, on which
petitioner is responsible to pay income taxes. Accordingly, the
military retirement pension payments she received are includable
in gross income. Sec. 61(a)(11); sec. 1.61-11(a), Income Tax
Regs.
With respect to petitioner’s alternative assertion that her
paying tax on the military retirement pension payments would
amount to double taxation, the record is devoid of any evidence
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that double taxation would occur.6 Petitioner has not offered
any evidence to establish what amount, if any, of the pension
payments was included in Mr. Strand’s taxable income.
Consequently, we find her assertion to be without merit.
In conclusion, we hold that the $12,621 and $12,952 pension
payments made directly to petitioner in 2004 and 2005,
respectively, were made in accordance with her separate property
interest in Mr. Strand’s military retirement pension and are
includable in petitioner’s gross income for the year in which
they were received.
We have considered all of the parties’ arguments; and to the
extent we have not specifically addressed them, we conclude them
to be moot, irrelevant, or without merit.
To reflect the foregoing,
Decisions will be entered
for respondent.
6
We note that “Congress amended the definition of
‘disposable retired pay’ such that the disposable retired pay is
not reduced by income taxes withheld.” Mitchell v. Commissioner,
131 T.C. ___, ___ (2008) (slip op. at 10) (citing 10 U.S.C. sec.
1408(a)(4) (Supp. III 1991), and the National Defense
Authorization Act for Fiscal Year 1991, Pub. L. 101-510, sec.
555(b)(3), (e)(2), 104 stat. 1569, 1570 (1990)). This amendment,
however, is effective only for divorces entered into on or after
Feb. 3, 1991. Id.