Pfister v. Commissioner, IRS

PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
GAY M. PFISTER, 
Petitioner-Appellant,
v.  No. 02-2288
COMMISSIONER OF INTERNAL REVENUE,
Respondent-Appellee.

Appeal from the United States Tax Court.
(Tax Ct. No. 00-1846)
Argued: October 28, 2003
Decided: February 27, 2004
Before LUTTIG, WILLIAMS and GREGORY, Circuit Judges.
Affirmed by published opinion. Judge Gregory wrote the opinion in
which Judge Luttig and Judge Williams joined.
COUNSEL
ARGUED: Mark Edward Kellogg, BECKER, HADEED, KEL-
LOGG & BERRY, P.C., Springfield, Virginia, for Appellant. Karen
Deborah Utiger, Tax Division, UNITED STATES DEPARTMENT
OF JUSTICE, Washington, D.C., for Appellee. ON BRIEF: Eileen
J. O’Connor, Assistant Attorney General, Kenneth L. Greene, Tax
Division, UNITED STATES DEPARTMENT OF JUSTICE, Wash-
ington, D.C., for Appellee.
2 PFISTER v. COMMISSIONER OF INTERNAL REVENUE
OPINION
GREGORY, Circuit Judge:
Gay M. Pfister ("Pfister") appeals from the United States Tax
Court’s decision that there is a deficiency in income tax due for the
taxable year 1997, in the amount of $3,654.00 for a $13,061.00 pay-
ment she received as her portion of her ex-husband’s disposable
retirement pay for that year. The issue is whether the Tax Court cor-
rectly held that the $13,061.00 payment made to Pfister by the
Defense Finance and Accounting Service ("DFAS"), pursuant to a
Property and Support Settlement Agreement ("Agreement") and a
valid divorce decree, is not excludable from income under 26 U.S.C.
§ 61(a). Finding no reversible error, we affirm.
I.
The facts were fully stipulated before the Tax Court, so they are
not in dispute before us. The case may be summarized as follows.
Pfister and her former husband were married on July 15, 1961.
Pfister’s ex-husband served in the United States Air Force for twenty-
two years, retiring in January 1982. Upon his retirement, Pfister’s for-
mer spouse was entitled to and did receive a pension. The couple
decided to divorce several years after Pfister’s former husband retired.
In anticipation of their divorce, the couple entered into an Agreement
on March 13, 1986, which provided that Pfister "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 [Uniformed Services Former Spouses’ Protection Act,
Pub. L. 97-252, 96 Stat. 718, 730-731 (1982) (‘USFSPA’)"]. (J.A. at
35) (emphasis added.) The couple divorced on April 1, 1986, and the
Fairfax County Circuit Court incorporated the terms of the parties’
Agreement into the final divorce decree.
Believing the payments to her were neither "alimony" nor "retire-
ment" pay, Pfister treated the payments she received during 1997 as
non-taxable distributions for purposes of her 1997 income tax return.
In 1999, the IRS sent Pfister an income tax deficiency statement for
the 1997 tax year, stating that she owed $3,654.00 in taxes on the
PFISTER v. COMMISSIONER OF INTERNAL REVENUE 3
$13,061.00 she received from her former husband’s pension for that
year. (J.A. at 21.) Pfister challenged the IRS’s classification of the
payments as taxable income. On February 15, 2000, the Tax Court
held that the pension payments constituted taxable income to Pfister,
on which she owed a tax deficiency. This appeal followed.
II.
On appeal, we are only presented with disputed legal issues
because, as previously stated, the parties submitted stipulated facts to
the Tax Court. Therefore, we review the Tax Court’s legal conclu-
sions de novo. See Estate of Godley v. Comm’r, 286 F.3d 210, 213
(4th Cir. 2002); Waterman v. Comm’r, 179 F.3d 123, 126 (4th Cir.
1999); Ripley v. Comm’r, 103 F.3d 332, 334 n.3 (4th Cir. 1996).
III.
Gross income is defined as "all income from whatever source
derived." 26 U.S.C. § 61(a). Congress expressly provided that pen-
sions are a source of income. Id. § 61(a)(11). Pfister does not contend
that her ex-husband’s military retirement pay is not a pension; rather,
based upon Pfister’s flawed interpretation of the USFSPA’s definition
of "disposable retired pay," 10 U.S.C. § 1408(a), Pfister contends that
she is statutorily entitled to her portion of her former husband’s retire-
ment pay without any tax liability. Pfister’s argument is without
merit.
In 1986, when the Pfisters divorced, § 1408 defined "disposable
retired pay" as "the total monthly retired or retainer pay to which a
member is entitled less amounts which . . . are properly withheld for
Federal, State, or local income tax purposes. . . ." 10 U.S.C.
§ 1408(a)(4). Based upon that definition, Pfister claims that "it should
be clear that § 1408 contemplates that a spouse is to receive payment
after federal taxes have been charged to the owner of the pension."
(Appellant’s Br. at 9) (emphasis added.) Essentially, Pfister argues
that because "disposable retired pay," by definition, is calculated after
taxes are withheld, it should not be taxed upon payment to the retir-
ee’s spouse or former spouse. Implicit in that argument is Pfister’s
contention that she is not the owner of one-half of her former hus-
4 PFISTER v. COMMISSIONER OF INTERNAL REVENUE
band’s retirement pay. Therefore, the issue becomes whether Pfister
owns her portion of her ex-husband’s retirement pay.
IV.
We hold that Pfister is the owner of one-half of her former hus-
band’s retirement pay, and she is therefore liable to pay the assessed
income tax deficiency. When Congress passed the USFSPA in 1981,
it enabled spouses and former spouses of military retirees to have an
ownership interest in a retiree’s retirement pay. Prior to this legisla-
tion, the Supreme Court held in McCarty v. McCarty, 453 U.S. 210
(1981), that a military retiree’s retirement pay was property in which
the retiree’s spouse or former spouse could not claim an interest. The
USFSPA was passed for the sole purpose of overturning McCarty.
See S. Rep. 97-502 (stating that the purpose of the USFSPA was to
"remove the effect of the United States Supreme Court decision in
McCarty v. McCarty, 453 U.S. 210 (1981)"). Under the USFSPA,
federal, state, and other courts may now divide military retirement
pay when "fixing the property rights between the parties to a divorce,
dissolution, annulment or legal separation." S. Rep. 97-502. Specifi-
cally, the USFSPA provides in pertinent part:
a court may treat disposable retired pay payable to a mem-
ber for pay periods beginning after June 25, 1981, 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. A court may not treat retired pay as property
in any proceeding to divide or partition any amount of
retired pay of a member as the property of the member and
the member’s spouse or former spouse if a final decree of
divorce . . . affecting the member and the member’s spouse
or former spouse (A) was issued before June 25, 1981, and
(B) did not treat . . . any amount of retired pay of the mem-
ber as property of the member and the member’s spouse or
former spouse.
10 U.S.C. § 1408(c)(emphasis added.) Because Pfister’s former hus-
band began receiving his retirement pay after 1981, and the couple
divorced after 1981, it is, therefore, undisputed that the terms of the
USFSPA apply to the retirement pay at issue.
PFISTER v. COMMISSIONER OF INTERNAL REVENUE 5
Pfister seems to argue that, for tax purposes, she is not the "owner"
of one-half of her former husband’s pension. Pfister’s argument, how-
ever, cannot be reconciled with the text of the USFSPA or with the
couple’s own intent. Pfister and her former husband stated in their
Agreement that she would be the "owner of, and receive, one-half of
husband’s disposable retired or retainer pay" for the rest of the
Pfisters’ lives. (J.A. at 42) (emphasis added). Furthermore, in April
1986, the Fairfax County Circuit Court incorporated the previous lan-
guage into the Pfisters’ final divorce decree, as it was authorized to
do pursuant to the USFSPA. Pfister, therefore, is undoubtedly the
owner of one-half of her ex-husband’s military retirement pay, and as
the owner, she is liable for any applicable income taxes.
It is well established that military retirement payments "are gross
income to the party who owns the right to those payments pursuant
to the division of property in a divorce." Weir v. Comm’r, 82 T.C.M.
(CCH) 281, 283 (2001). See also Eatinger v. Comm’r, 59 T.C.M.
(CCH) 954, 957 (1990) (same); Lowe v. Comm’r, 42 T.C.M.
334, 336 (1981) (same). Moreover, as the Tax Court noted, "[i]t is
axiomatic in Federal tax law that income is taxable to the legal owner
of the * * * property producing the income." (J.A. 43.) (quoting Miles
Prod. Co. v. Comm’r, T.C. Memo. 1969-274, aff’d, 457 F.2d 1150
(5th Cir. 1972)). Pfister provides no theory on which to contradict this
conclusion. Accordingly, we conclude that the Tax Court properly
deemed Pfister to be the owner of one-half of her former husband’s
military retirement pay.
V.
Finally, Pfister contends that the Tax Reform Act of 1984 ("Act"),
shields her portion of her former spouse’s retirement pay from income
tax liability. The Act generally provides that "[n]o gain or loss shall
be recognized on a transfer of property from an individual to (1) a
spouse, or (2) a former spouse, but only if the transfer is incident to
the divorce." 26 U.S.C. § 1041(a). A transfer of property is "incident
to divorce" if it either "(1) occurs within one year after the date on
which the marriage ceases, or (2) is related to the cessation of mar-
riage." Id. at § 1041(c). Further, the Act provides that the transferee
succeeds to the transferor’s basis. Id. at § 1041(b)(2).
6 PFISTER v. COMMISSIONER OF INTERNAL REVENUE
Pfister argues that the payments she receives from her former hus-
band’s retirement pay constitute transfers of property incident to
divorce, which are not taxable. Pfister’s argument is erroneous. Pfister
receives her portion of the retirement payments as separate property,
in accordance with the provisions of the USFSPA and pursuant to a
valid divorce decree, which incorporated the parties’ Agreement,
making Pfister owner of one-half of her ex-husband’s retirement pay.
As the Tax Court previously held, "[t]he 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 peti-
tioner’s gross income." (J.A. 49) (emphasis added.) Pfister is correct
when she asserts that the actual transfer of the property right is a non-
taxable event, but the income produced from the property transferred
is a taxable distribution, for which she is responsible to pay income
taxes.
VI.
Finding no reversible error, we affirm the Tax Court’s decision that
there was a deficiency in income tax due from Pfister for the portion
of her ex-husband’s retirement payment she received during the tax-
able year 1997.
AFFIRMED