PURSUANT TO INTERNAL REVENUE CODE SECTION 7463(b), THIS OPINION MAY NOT BE TREATED AS PRECEDENT FOR ANY OTHER CASE.
RUWE,
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.
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 2009 Tax Ct. Summary LEXIS 103">*104 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: 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. * * *
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.
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 2009 Tax Ct. Summary LEXIS 103">*107 issued to petitioner notices of deficiency for 2004 and 2005, respectively. Respondent determined that petitioner 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.
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."
Although State law determines the nature of a property interest, Federal law determines the Federal taxation of that property interest.
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. 52009 Tax Ct. Summary LEXIS 103">*109
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.
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."
In 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. * * *
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 that double taxation would occur. 62009 Tax Ct. Summary LEXIS 103">*113 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,
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.↩
2. Washington is a community property State.↩
3. In September 1982, in response to
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).↩
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.
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.
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."
