PFISTER v. COMMISSIONER ( 2002 )

GAY M. PFISTER, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent

PFISTER v. COMMISSIONER

No. 1846-00

United States Tax Court

T.C. Memo 2002-198; 2002 Tax Ct. Memo LEXIS 204; 84 T.C.M. (CCH) 172;

August 8, 2002., Filed

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Decision for respondent.

[1] Mark E. Kellogg, for petitioner.

[2] Richard F. Stein, and Timothy B. Heavner , for respondent.

Powell, Carleton D.

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POWELL

Mark E. Kellogg, for petitioner.

Richard F. Stein, and Timothy B. Heavner , for respondent.

             MEMORANDUM OPINION

POWELL, Special Trial Judge : Respondent determined a deficiency of $ 3,654 in petitioner's 1997 Federal income tax. The issue is whether amounts received by petitioner from her former husband's military retirement pay are includable in petitioner's gross income. Petitioner resided in Virginia Beach, Virginia, at the time the petition was filed.

             Background

This case was submitted fully stipulated under Rule 122. ^{*205 Petitioner's former husband retired from the United States Air Force on January 31, 1982. At the time of the divorce, he was receiving retirement pay as a result of this service. The divorce decree incorporated a "Property And Support Settlement Agreement" (hereinafter jointly referred to as the "decree"), which provided:}

   12. HUSBAND'S MILITARY BENEFITS. It is the agreement of

   the parties that the wife shall hereafter have all benefits and

   privileges bestowed upon her as a spouse of a former member of

   the United States Armed forces on active duty, same being

   pursuant to Uniformed Services Former Spouses' Protection Act,

   Public Law 97-252, said entitlements to include, by way of

   example, commissary, PX, and medical benefit privileges as more

   specifically set forth in said Act.

   The parties further agree that effective with the August 1984

   payment, the wife shall be owner of, and receive,

   one-half of husband's disposable retired or retainer pay,

   [i.e.], during the joint lives of the parties, the husband and

   wife shall each receive one-half of husband's disposable

   retired or retainer pay, as defined in the above Act, accruing

   to him on a monthly basis as a result of his active duty service

   in the United States Armed Forces. The wife shall also be named

   permanent and irrevocable beneficiary of husband's Survivor's

   Benefit Plan in connection with said military retirement.

   The parties agree that any decree of divorce hereafter entered

   between them shall include therein all appropriate language

   necessary to effectuate the foregoing. The parties further agree

   to execute any and all other documentation necessary to

   effectuate the intent and understandings expressed in this

   paragraph. [Emphasis added.]

Pursuant to the provisions of the decree, petitioner received $ 13,061 during 1997, representing her half of the disposable retirement pay. Petitioner did not report this amount on her 1997 Federal income tax return.

Respondent determined that the $ 13,061 was properly includable in petitioner's gross income for 1997 as pension income under section 61(a)(11). Petitioner maintains that the payments represent a nontaxable division of property.

              Discussion

In general, gross income is defined by section 61 as follows:

   SEC. 61. GROSS INCOME DEFINED.

   (a) General Definition. -- Except as otherwise provided * * *

   gross income means all income from whatever source derived,

   including * * *

     * * * * * * *

   (11) Pensions * * *.

Petitioner does not argue, nor would we agree, that military retirement pay is not a pension within the meaning of section 61(a)(11). Weir v. Commissioner, T.C. Memo 2001-184">T.C. Memo. 2001-184; see also Eatinger v. Commissioner, T.C. Memo. 1990-310; sec. 1.61-11, Income Tax Regs. Additionally, we note: "It is axiomatic in Federal tax law that income is taxable to the legal owner of the * * * property producing the income". Miles Prod. Co. Commissioner, T. C. Memo. 1969-274, affd. 457 F.2d 1150">457 F.2d 1150 (5th Cir. 1972); see also Helvering v. Clifford, 309 U.S. 331">309 U.S. 331, 84 L. Ed. 788">84 L. Ed. 788, 60 S. Ct. 554">60 S. Ct. 554 (1940). The pension payments are gross income to the party who owns the right to those payments pursuant to the division of property in a divorce. See, e. g., Weir v. Commissioner, supra T.C. Memo 2001-184">T.C. Memo 2001-184 ; Eatinger v. Commissioner, T.C. Memo 1990-310">T.C. Memo 1990-310; Lowe v. Commissioner, T.C. Memo 1981-350">T.C. Memo. 1981-350.

In McCarty v. McCarty, 453 U.S. 210">453 U.S. 210, 69 L. Ed. 2d 589">69 L. Ed. 2d 589, 101 S. Ct. 2728">101 S. Ct. 2728 (1981), the Supreme Court held that State courts lacked the power to divide military retirement benefits pursuant to divorce. ^{Id. at 232-233. The Court held that "The community property division of retired pay has the potential to frustrate each of these objectives." Id. at 233. In noting that "in no area has the Court accorded Congress greater deference than in the conduct and control of military affairs", the Court invalidated the California law at issue as being preempted by Federal law. Id. at 236.}

In response, Congress enacted the Uniformed Services Former Spouses' Protection Act (USFSPA), 10 U. S. C. sec. 1408 (2000). In general, 10 U. S. C. section 1408( c)( 1), provides, inter alia

   a court may treat disposable retired or retainer pay payable to

   a member * * * either as property solely of the member or as

   property of the member and his spouse in accordance with the law

   of the jurisdiction of such court.

The provisions of the USFSPA were intended "to restore the law to what it was when the courts were permitted to apply State divorce laws to military retired pay". S. Rept. 97-502, at 5 (1982). The USFSPA did not create any right or entitlement to military retired pay, nor did it either require or prohibit any division of retired pay by a State court. Id. at 4. Instead, the USFSPA specifically allows State courts to treat military retired pay "either as the property solely of the member or as the property of the member and his spouse." Id. Further, 10 U.S.C. section 1408(c)(2), provides:

   Notwithstanding any other provision of law, this section does

   not create any right, title, or interest which can be sold,

   assigned, transferred, or otherwise disposed of (including by

   inheritance) by a spouse or former spouse.

The Senate report states that

   nothing in section 1408 creates, gives, or permits to exist any

   right, title, or interest which may be sold, assigned,

   transferred, or otherwise disposed of by a spouse or former

   spouse. It is recognized that this limitation is contrary to

   certain concepts of property laws, especially the concepts of

   community property laws. That is, it is recognized that when a

   division of property is made pursuant to a divorce proceeding in

   a State having community property laws, each spouse usually

   becomes the sole owner of his or her portion of the community

   property so that the spouse can sell, assign, transfer, or

   otherwise dispose of that property without limitation. These

   rights normally include the right to transfer the property upon

   death by will or through intestate succession laws. * * * [S.

   Rept. 97-502, supra at 16.]

The report further noted that Congress did not wish to give the former spouse any greater rights in the military retired pay than those possessed by the military retiree. Since the military retiree is prohibited from selling, assigning, transferring, or otherwise disposing of his right to receive retired pay, it follows that the former spouse would also be so limited. Id. We find that 10 U.S.C. section 1408(c)(2) does not limit a court of competent jurisdiction from awarding an ownership interest to the spouse, as so restricted, if the court otherwise has that power. In short, that section is an anti-alienation provision that limits a nonmember spouse from disposing of the interest. We consider, therefore, whether the State court has the authority to divide the military pension between the member and the spouse.

Va. Code Ann. section 20-107.3 (Michie 1986), provides in pertinent part as follows:

   Sec. 20-107.3. Court may decree as to property of the parties.

   -- A. Upon decreeing the dissolution of a marriage * * * the

   court * * * shall determine the legal title as between the

   parties, and the ownership * * * of all property * * * of the

   parties * * *.

   * * * * * * *

   2. Marital property is * * *( ii) * * * All property including

   that portion of pensions, profit-sharing or retirement plans of

   whatever nature, acquired by either spouse during the marriage *

   * *.

   * * * * * * *

   C. The court shall have no authority to order the conveyance of

   * * * marital property not titled in the names of both parties *

   * *. This subsection shall not be construed to prevent the court

   from directing payment of a percentage of pension, profit

   sharing or retirement benefits as authorized under subsection G

   below.

   D. Based upon the equities and the rights and interests of each

   party in the marital property, the court may grant a monetary

   award * * * to either party. The party against whom a monetary

   award is made may satisfy the award * * * by conveyance of

   property, subject to approval of the court.

   * * * * * * *

   G. The court may direct payment of a percentage of pension,

   profit-sharing or retirement benefits, whether

   vested or nonvested, payable in a lump sum or over a period of

   time and only as such benefits are payable. * * *

   H. Nothing in this section shall be construed to prevent the

   affirmation, ratification and incorporation in a decree of an

   agreement between the parties pursuant to sections 20-109 and

   20-109.1.

Va. Code Ann. section 20-109.1 (Michie 1986), empowers a court to affirm, ratify, or incorporate by reference into a final order any valid agreement by the parties. Aster v. Gross, 7 Va. App. 1">7 Va. App. 1, 371 S.E.2d 833">371 S.E.2d 833, 837-838 (Va. Ct. App. 1988); Parra v. Parra, 1 Va. App. 118">1 Va. App. 118, 336 S.E.2d 157">336 S.E.2d 157, 163 (Va. Ct. App. 1985).

The decree in this case incorporated the agreement of the parties dividing the military retirement pay of petitioner's former husband. From the language of the agreement, it is clear that the parties intended petitioner to "be owner of, and receive, one- half of husband's disposable retired or retainer pay". The court had the authority to enforce this agreement, and nothing in the USFSPA or Virginia law prevents petitioner from receiving as separate property the right to one-half of her former husband's military retired pay if the parties so agree. See 10 U. S. C. sec. 1408;Va. Code Ann. secs. 20-107.3( H) and 20-109.1 (Michie 1986); Aster v. Gross, supra; Parra v. Parra, supra.Indeed, the court must incorporate such an agreement in the decree. Parra v. Parra, supra.

The cases relied on by petitioner, Gamble v. Gamble, 14 Va. App. 558">14 Va. App. 558, 421 S.E.2d 635">421 S.E.2d 635 (Va. Ct. App. 1992), Williams v. Williams, 4 Va. App. 19">4 Va. App. 19, 354 S.E.2d 64">354 S.E.2d 64 (Va. Ct. App. 1987), and Sawyer v. Sawyer, 1 Va. App. 75">1 Va. App. 75, 335 S.E.2d 277">335 S.E.2d 277 (Va. Ct. App. 1985), are not on point. These cases involve the question whether a Virginia court can order an equitable division of pension benefits without agreement of the parties. Here, the parties entered into an agreement dividing the ownership interest of the former husband's military retirement benefit. Pursuant to Va. Code Ann. sections 20-107.3(H) and 20- 109.1, the State court had the authority and discretion to affirm, ratify, or incorporate by reference into the final order this valid agreement by the parties. See Aster v. Gross, supra; Parra v. Parra, supra; see also Mozley v. Commissioner, T.C. Memo 2001-125">T.C. Memo. 2001-125, affd. 22 Fed. Appx. 214">22 Fed. Appx. 214 (4th Cir. 2001), cert. pending No. 01-10303 (May 16, 2002).

Finally, petitioner's argument that section 1041 renders receipt of the pension payments nontaxable is misguided. Section 1041 deals with transfers of property between spouses or incident to divorce. In general, it provides that (1) no gain or loss shall be recognized to the transferor on such a transfer and (2) the transferee succeeds to the transferor's basis. See Weir v Commissioner, T.C. Memo 2001-184">T.C. Memo. 2001-184. Under Virginia law, and prior to divorce, the rights to the pension that accrued to petitioner's former husband were solely his. In accordance with USFSPA and the State court's decree incorporating the parties' agreement, however, petitioner received as her separate property, pursuant to an equitable division of the marital estate, a one-half interest in the disposable military retired pay of her former husband. The acquisition of this property right by petitioner may be a transfer of property subject to section 1041, but, like her former husband, petitioner had no basis in this property, and the distributions from the pension are includable in petitioner's gross income.

Therefore, the payments representing petitioner's interest in her former husband's military retirement pay are gross income to her. See, e. g., Weir v. Commissioner, supra T.C. Memo 2002-184">T.C. Memo 2002-184; Eatinger v. Commissioner, T.C. Memo 1990-310">T.C. Memo 1990-310; Lowe v. Commissioner, T.C. Memo 1981-350">T.C. Memo 1981-350. Respondent's position is sustained, and petitioner must include in her gross income the amounts received in 1997 as a division of her former husband's military retirement pay.

To reflect the foregoing,

Decision will be entered for respondent.

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Footnotes

• 1. Unless otherwise indicated, section references are to the Internal Revenue Code in effect for the year in issue, and Rule references are to the Tax Court Rules of Practice and Procedure.↩

• 2. The facts are not in dispute and the issue is primarily one of law. Sec. 7491, concerning burden of proof, has no bearing on this issue.↩

• 3. McCarty v. McCarty, 453 U.S. 210">453 U.S. 210, 69 L. Ed. 2d 589">69 L. Ed. 2d 589, 101 S. Ct. 2728">101 S. Ct. 2728 (1981), dealt with the State of California and its community property regime. The issue before the Court was whether the retiree's military retirement pay constituted property in which the retiree's former spouse could claim an interest. The case at hand deals with the laws of the Commonwealth of Virginia, a common law State, where there is equitable division of the former husband's military retirement pay. This distinction is of no consequence to our decision in this case as the McCarty case and the applicable Federal statutes, infra, apply both to community property jurisdictions and to common law jurisdictions such as Virginia whose laws relating to the equitable division of marital property vest a spouse with interests analogous to those she would possess in a community property State. See Mansell v. Mansell, 490 U.S. 581">490 U.S. 581, 584, 104 L. Ed. 2d 675">104 L. Ed. 2d 675, 109 S. Ct. 2023">109 S. Ct. 2023↩ n. 2 (1989); S. Rept. 97-502, at 2, 3 (1982).