                      124 T.C. No. 10



                UNITED STATES TAX COURT



          JOHN MICHAEL DUNKIN, Petitioner v.
     COMMISSIONER OF INTERNAL REVENUE, Respondent


Docket No. 4448-03.                 Filed March 31, 2005.


     Petitioner (P), who was divorced, was entitled to
retire and receive pension payments. If P had retired,
his former spouse would have been entitled under
California community property law to receive an amount
from P equal to one-half of his pension. However, P
continued working, delaying his receipt of pension
benefits. During the years P continued working, P’s
former spouse was entitled under California community
property law to receive a monthly payment from P equal
to one-half of the pension benefit which P had earned
during their marriage and which P would have received
if he had retired on the date of their divorce.

     Held, P’s gross income from his continued
employment, which he received in lieu of retirement
benefits, does not include the amount of payments to
which his former spouse was entitled under California
community property law on the basis of the pension
earned by P.
                               - 2 -

     John Michael Dunkin, pro se.

     Vicken Abajian, for respondent.



     COLVIN, Judge:   Respondent determined a deficiency of $8,222

in petitioner’s Federal income tax for 2000.    The sole issue for

decision is whether petitioner may reduce his gross income by the

$25,511 that he was required by California community property law

to pay to his former spouse in 2000.    We hold that he may.

     Unless otherwise stated, section references are to the

Internal Revenue Code as amended and in effect for 2000.

                         FINDINGS OF FACT

     Some of the facts have been stipulated and are so found.

Petitioner

     Petitioner resided in Long Beach, California, when the

petition was filed.

     The Superior Court for the County of Los Angeles,

California, entered a judgment of divorce for petitioner and his

former spouse on August 19, 1997.    As of 1997, petitioner had

been employed by the City of Los Angeles for 27 years.

     Petitioner participated in a defined benefit pension plan

(the pension plan) administered by the Board of Pension

Commissioners (the pension board).     He became eligible to receive

benefits under the pension plan on May 19, 1989.     The divorce

judgment provided in pertinent part as follows:
                               - 3 -



     2.   IDENTIFICATION, VALUATION AND DIVISION OF
          COMMUNITY PROPERTY

          (a) * * * [Petitioner’s former spouse] is awarded
     the following as her sole and separate property and
     shall assume and pay any encumbrances thereon and hold
     * * * [petitioner] indemnified therefrom:

              *      *     *     *     *     *     *

          (8) THE DEFINED BENEFIT PLAN:

          (a) One Half of the community interest in all
     benefits (including but not limited to service or
     disability pension, conditional survivorship rights,
     refundable contributions, cost-of-living adjustments)
     of * * * [petitioner’s] L.A. City Article XVIII/LAPD
     Defined Benefit Pension Plan * * *

          (b) The community interest shall be calculated per
     Brown Formula (marital period divided by employment
     period multiplied by * * * [petitioner’s] service
     entitlement).

     If petitioner had retired on August 19, 1997, his former

spouse would have been entitled to receive, and the pension board

would have paid to her as her community property interest in the

pension plan, $2,072 per month, representing one-half of his

monthly benefit.   Petitioner had not retired as of that date.
                              - 4 -

     Citing In re Marriage of Gillmore, 629 P.2d 1 (Cal. 1981),1

the superior court ordered petitioner to pay his former spouse

$2,072 per month until he retired.    The Court ordered as follows:

          (9) * * * [PETITIONER’S FORMER SPOUSE’S] EXERCISE
     OF “GILLMORE PENSION RIGHTS”:

          (a) The court finds, upon the stipulation of the
     parties, that the * * * [petitioner] has been eligible
     to retire and collect the pension under the DEFINED
     BENEFIT PLAN described herein above since May 19, 1989
     but he has not retired to date; and

          (b) That were he to retire as of date of trial, he
     would have accrued 27.7899 service years and would
     receive a starting pension benefit of $4,311.30 monthly
     * * * and * * * [petitioner’s former spouse] would be
     entitled to one half or $2,072 monthly; and

          (c) That * * * [petitioner’s former spouse] has
     exercised her “Gillmore Rights” to be paid her said
     monthly pension interest and therefore is awarded the
     same and * * * [petitioner] is ordered to pay directly
     to her $2,072 monthly * * * beginning as of April 1,
     1997 and continuing until he retires and the Plan
     begins direct payment to her pursuant to the award and
     order made in Par. 2(A)(8) herein. * * * .




     1
        A nonemployee spouse has the right to be paid the amount
to which that spouse would have been entitled if the employee
spouse had retired and begun drawing benefits in a pension plan
that, on the date of divorce, was fully vested, matured, and
drawable but was not paid because the employee spouse continued
to work. In re Marriage of Gillmore, 629 P.2d 1 (Cal. 1981). As
used in this Opinion, the term “nonemployee spouse” is the spouse
with a community property interest in the retirement benefits of
the other spouse (the employee spouse). If both spouses have
earned rights in retirement plans, each spouse is the
“nonemployee spouse” in relation to the retirement rights of the
other spouse.
                               - 5 -

The superior court also ordered that, if petitioner’s former

spouse dies before petitioner, her benefit will be payable to her

beneficiaries.

     The superior court ordered petitioner and his former spouse

to prepare a California qualified domestic relations order (QDRO)

to be signed by the judge and entered in the court’s record

providing that the pension plan would pay petitioner’s former

spouse $2,072 per month when petitioner retired.

     Petitioner paid his former spouse $25,511 in 2000 as ordered

in the divorce judgment.2   Petitioner deducted $26,604 as alimony

on his 2000 Federal income tax return.3

     Petitioner retired on September 22, 2002.   After petitioner

retired, the pension board separately paid petitioner and his

former spouse.4




     2
        The parties agree that petitioner paid his former spouse
$25,511 in 2000. They do not explain why that amount is more
than $2,072 x 12.
     3
        Petitioner concedes that $1,124 that he paid to his
former spouse on January 1, 2001, and that he included in the
$26,604, is not deductible for 2000.
     4
        Because he worked for 5 years after his divorce,
petitioner received a larger benefit than he would have received
if he had retired on the date of his divorce. However,
petitioner’s former spouse was entitled under California law, and
the pension board paid to her, an amount equal to one-half of the
benefit petitioner would have received if he had retired on the
date of the divorce. See In re Marriage of Gillmore, supra at 7
n.9.
                               - 6 -

                              OPINION

A.   Background and Contentions of the Parties

     The parties dispute whether petitioner is taxable on the

amount he paid to his former spouse because of her community

property rights in his pension.

     1.   Principles of California Community Property Law
          Relevant to This Case

     Under California community property law, each spouse has a

one-half ownership interest in the community estate, including

income earned by both spouses during their marriage.     Cal. Fam.

Code sec. 2550 (West 2004).

     A pension is deferred compensation for past employment.       In

re Marriage of Brown, 544 P.2d 561, 565 (Cal. 1976).     Pension

rights are community property, and, as part of a divorce

settlement or order, those rights can be distributed either

through periodic (e.g., monthly) retirement payments or by lump

sum based on the present value of the future benefit.5    In re


     5
        Under California law, parties to a divorce may divide
community property rights to pension plan benefits in different
ways. First, all pension rights may be awarded to the employee
spouse if the nonemployee spouse is compensated with other
community property equal in value to the present value of the
nonemployee’s share. In re Marriage of Gillmore, supra at 6-7;
In re Marriage of Skaden, 566 P.2d 249, 253 (Cal. 1977); In re
Marriage of Brown, 544 P.2d 561, 566 (Cal. 1976); Phillipson v.
Bd. of Admin., 473 P.2d 765, 774-775 (Cal. 1970). Second, the
employee spouse can pay the other spouse the present value of the
nonemployee spouse’s share of the pension plan. In re Marriage
of Gillmore, supra. Third, the employee spouse can pay the other
spouse a share of the retirement payments monthly. Id.
                                                   (continued...)
                                - 7 -

Marriage of Gillmore, supra at 8; In re Marriage of Brown, supra

at 567.    If pension benefits are distributed through periodic

payments, the nonemployee spouse may be entitled to up to one-

half of each payment; the allocation depends on the percentage of

the employee spouse’s working years that the parties were

married.    In re Marriage of Gillmore, supra at 6; In re Marriage

of Brown, supra at 562-563.

     In some situations, people may choose not to begin receiving

retirement benefits when they are first eligible to do so.

Postdivorce earnings are separate property, not community

property.    Cal. Fam. Code sec. 771 (West 2004) (earnings and

accumulations of each spouse following date of separation are

that spouse’s separate property).    Nonetheless, in these

situations under California law, a formerly married person is

entitled to payments based on the amount of pension benefits to

which the employee spouse would have been entitled if the

employee spouse had retired when first eligible.    In re Marriage



     5
      (...continued)
     Petitioner’s retirement plan at issue in this case is a
defined benefit plan. The record contains no evidence that
petitioner, his former spouse, or the superior court sought to
determine the present value of the former spouse’s interest in
petitioner’s retirement plan. See Projector, “Valuation of
Retirement Benefits in Marriage Dissolutions”, 50 L.A. Bar Bull.
No. 6, at 229 (1975) (valuation of a defined benefit plan
includes an estimate of the value of the pension measured at the
future retirement date, discounting for the time value of money,
mortality, and vesting) (cited in In re Marriage of Gillmore,
supra at 4 n.4).
                               - 8 -

of Gillmore, supra at 6.   This rule is intended to prevent the

employee spouse from unilaterally depriving the nonemployee

spouse of his or her interest in the retirement benefits by

transmuting community property into separate property.   In re

Marriage of Gillmore, 629 P.2d at 4; In re Marriage of Stenquist,

582 P.2d 96, 98 (Cal. 1978); In re Marriage of Fithian, 517 P.2d

449, 455 (Cal. 1974).6   Thus, California law protects the

substance of the former spouse’s community property rights even

though the employee spouse chooses to receive payments which are

not community property, such as income earned after the divorce,

instead of retirement benefits.   See In re Marriage of Gillmore,

supra at 6.7


     6
       Similarly, employee spouses who are eligible to receive
either retirement or disability payments may elect to receive
disability payments. Disability payments are not community
property under California law. In re Marriage of Jones, 531 P.2d
420, 425 (1975). However, in these situations, under California
law a formerly married person is entitled to payments based on
the amount of pension benefits to which the employee spouse would
have been entitled if the employee spouse had not elected to
receive disability payments. In re Marriage of Stenquist, 582
P.2d 96, 100-102 (Cal. 1978).
     7
        In In re Marriage of Gillmore, 629 P.2d at 6 n.7 (quoting
Note, “In re Marriage of Stenquist: Tracing the Community
Interest in Pension Rights Altered by Spousal Election”, 67 Cal.
L. Rev. 856, 879 (1979)), the California Supreme Court included
the following analysis:

     “[F]rom an economist’s perspective, the employee
     spouse’s compensation for continued employment is not
     the full amount of his paycheck. Rather, his
     compensation is only that amount above the pension
     benefits that he will not receive while he continues
                                                   (continued...)
                               - 9 -

     2.   Federal Taxation of Income Paid Pursuant to Rights in
          Community Property

     State law determines the rights of persons to income and

property, and Federal law governs the Federal taxation of those

rights.   United States v. Natl. Bank of Commerce, 472 U.S. 713,

722 (1985); United States v. Rodgers, 461 U.S. 677, 683 (1983);

Aquilino v. United States, 363 U.S. 509, 513 (1960).   Income is

taxed to the person who has the right to receive it.   Poe v.

Seaborn, 282 U.S. 101, 111-112 (1930); Lucas v. Earl, 281 U.S.

111, 114 (1930).   In Poe v. Seaborn, the U.S. Supreme Court held

that, under community property law in the State of Washington,

each taxpayer spouse owned an undivided one-half interest in the

income earned by each spouse during the marriage and was liable

for income tax on that one-half.8


     7
      (...continued)
     working. For example, in the matured pension
     situation, if the employee can receive retirement pay
     in the amount of X dollars without working, then his
     actual compensation for services rendered is not the
     amount of his paycheck, Y dollars, but Y minus X
     dollars. This is nothing more than a reapplication of
     the ‘benefits foregone’ formula of Stenquist (21
     Cal.3d. 779, 148 Cal.Rptr. 9, 582 P.2d 96). [Fn.
     omitted.] Therefore, rather than penalizing the spouse
     for not retiring, the contrary is true--the community
     is being penalized because it is forced to subsidize
     the employee spouse’s salary, which becomes his
     separate property.” * * *
     8
        Poe v. Seaborn, 282 U.S. 101 (1930), gave married
taxpayers in community property States the tax advantage of
income splitting. In 1948, to reduce the disparity between
community property and noncommunity property States, Congress
                                                   (continued...)
                                - 10 -

     We followed Poe v. Seaborn in Eatinger v. Commissioner, T.C.

Memo. 1990-310.    The taxpayer in Eatinger was the nonemployee

former spouse.    The employee spouse retired in 1972 and was

receiving monthly pension payments which were community property.

The Eatingers divorced in 1977.    The divorce court ordered the

employee spouse to pay his former spouse an amount equal to her

community property share of his monthly pension benefits.    We

held that the payments that a former spouse was entitled to

receive because of her rights under community property law were

taxable to the former spouse.    Similarly, the nonemployee former

spouse is liable for tax on his or her community property share

of a lump-sum distribution from a qualified pension plan.       Powell

v. Commissioner, 101 T.C. 489, 498 (1993).

     3.   Respondent’s Contentions

     Respondent contends: (a) Petitioner is taxable on the

payments he made to his former spouse on account of her community

property rights in his pension because, unlike the spouse in

Eatinger, petitioner was not yet receiving pension benefits; (b)

not taxing petitioner on payments he was required by California

community property law to make to his former spouse would be




     8
      (...continued)
authorized married taxpayers to file joint Federal income tax
returns. Revenue Act of 1948, ch. 168, 62 Stat. 110, 115.
However, Poe v. Seaborn has not been overturned by Congress or
overruled by the U.S. Supreme Court.
                              - 11 -

contrary to the assignment of income doctrine; and (c) the result

in this case is determined by section 402 and the QDRO rules.

B.   Whether the Fact That Petitioner Was Not Yet Receiving
     Pension Benefits Means He Is Taxable on Payments He Made to
     His Former Spouse on Account of Her Community Property
     Rights in His Pension

     Respondent contends that the fact that petitioner was not

yet receiving pension benefits means he is taxable on payments he

made to his former spouse on account of her community property

rights in his pension.

     The employee spouse in Eatinger v. Commissioner, supra, was

ordered to pay to his former spouse an amount equal to one-half

of his pension payments because his pension was community

property.   See In re Marriage of Brown, 544 P.2d 561 (Cal. 1976).

That was also why petitioner was ordered to pay an amount equal

to one-half of the pension he would have received if he had not

elected to continue working past the date of his divorce.    See In

re Marriage of Gillmore, supra at 6.

     Respondent contends that cases relating to the taxation of

community property, such as Poe v. Seaborn and Eatinger, do not

apply here because petitioner’s postdivorce wages are not

community property.   We disagree.   Respondent’s argument

overlooks the fact that California community property rights do

not depend on the form of the payments received by the employee

spouse or the source of the payments to the former, nonemployee

spouse.   In re Marriage of Gillmore, supra; In re Marriage of
                              - 12 -

Stenquist, supra.   Just as the rights of divorced spouses under

California law do not depend on the form of the payments to the

employee spouse, neither should the Federal taxation of those

rights.   Generally speaking, money is fungible.   See United

States v. Sperry Corp., 493 U.S. 52, 62 n.9 (1989); Berry

Petroleum Co. v. Commissioner, 104 T.C. 584, 643 n.37 (1995),

affd. without published opinion 142 F.3d 442 (9th Cir. 1998).

Because of the fungibility of money, we did not know whether the

employee spouse in Eatinger paid the nonemployee spouse from his

retirement benefits or from other funds.    Similarly, whether

petitioner paid his former spouse from current wages or

retirement benefits is not determinative here.     See Taylor v.

Campbell, 335 F.2d 841, 844-845 (5th Cir. 1964) (the source of an

otherwise deductible payment will not affect its deductibility

when proceeds from a property division in a divorce are used to

pay alimony); Benedict v. Commissioner, 82 T.C. 573, 579 (1984)

(quoting and applying Taylor v. Campbell, supra).

C.   Whether Petitioner’s Position Violates Assignment of Income
     Principles

     Respondent contends that the $25,511 petitioner paid to his

former spouse was an assignment of income that was taxable to

petitioner under Lucas v. Earl, supra.     In Lucas v. Earl, supra

at 114-115, the U.S. Supreme Court disregarded for Federal income

tax purposes an agreement between a husband and wife to share

equally in the income each received.   A holding for the taxpayers
                              - 13 -

would have meant that they, by contract, would have had the

benefits of joint filing and income splitting, features not added

to the Federal income tax until 1948.     See Revenue Act of 1948,

ch. 168, 62 Stat. 115.

     Respondent’s reliance on Lucas v. Earl, 281 U.S. 111 (1930),

is misplaced.   In that case, the Supreme Court decided how the

assignment of income doctrine applies to a contract between

husband and wife but did not discuss how the assignment of income

doctrine applies to community property.9    That issue was decided

in Poe v. Seaborn, 282 U.S. 101 (1930), in which, as stated

above, under community property law in the State of Washington,

each spouse was taxed on one-half of his or her own income and

one-half of the income of the other spouse.     In Poe v. Seaborn,

the U.S. Supreme Court distinguished Lucas v. Earl on grounds

that the earnings of a taxpayer in a community property State

were the property of the community and not of the taxpayer

providing services to earn income.     Because the nonemployee

spouse was entitled to the payments at issue here under community




     9
        The taxpayers in Lucas v. Earl, 281 U.S. 111 (1930),
lived in California. In 1920-21, spouses in California did not
have a vested present interest in all property of the community.
Community Property--Income and Estate Taxes, 32 Op. Att’y Gen.
435, 456 (1921); Donworth, “Federal Taxation of Community
Incomes–-The Recent History of Pending Questions”, 4 Wash. L.
Rev. 145, 148 n.40 (1929). In Lucas v. Earl, the Supreme Court
analyzed the issue based on contract law, not community property
law.
                                  - 14 -

property law, Poe v. Seaborn, supra, applies, not Lucas v. Earl,

supra.

D.   Whether Section 402 or QDRO Rules Govern This Case

     Respondent argues that the payments are tax free to

petitioner’s former spouse under section 402(a)10 (and, we

assume, contends inferentially that they are taxable to

petitioner) because the payments were not distributions from her

former husband’s pension plan.11     Section 402(a) provides how

distributions made from a qualified trust under a qualified

pension plan are taxed.   No distributions from a qualified trust

were made in this case.   Thus, contrary to respondent’s argument,

by its terms section 402 does not apply to this case.12

     We did not discuss section 402 in Eatinger v. Commissioner,

T.C. Memo. 1990-310, when we held that the nonemployee spouse was


     10
          Sec. 402(a) provides:

     SEC. 402(a). Taxability of Beneficiary of Exempt Trust.--

          Except as otherwise provided in this section, any
     amount actually distributed to any distributee by any
     employees’ trust described in section 401(a) which is
     exempt from tax under section 501(a) shall be taxable
     to the distributee, in the taxable year of the
     distributee in which distributed, under section 72
     (relating to annuities).
     11
       Because petitioner’s former spouse is not a party in this
case, we do not consider here how she might be taxed on the
payments at issue.
     12
       Respondent does not cite or rely on Karem v.
Commissioner, 100 T.C. 521 (1993). Unlike the instant case,
Karem involved taxation of a distribution from a pension plan.
                                - 15 -

taxable on her share of retirement benefits.13    Instead, we based

our decision on the former spouse’s ownership of retirement

rights under California community property law and the principle

that property is taxed to its owner.     See Poe v. Seaborn, supra.

We believe the same approach is appropriate here.

        An order to a retirement plan to pay an early retirement

benefit (i.e., a retirement benefit payable to the nonemployee

spouse before the employee spouse retires) can be a QDRO.       Sec.

414(p)(4).     Respondent contends that petitioner could have

obtained a QDRO providing an early retirement benefit to his

former spouse under which she would have been taxable on the

payments at issue.

     Because domestic relations are preeminently matters of State

law, Congress rarely intends to displace State authority in this

area.     Mansell v. Mansell, 490 U.S. 581, 587 (1989).   Even if

petitioner could have obtained an early retirement QDRO,

respondent does not contend that Federal law prohibits the

arrangement under California community property law that was made

in this case; i.e., petitioner paid his former spouse the benefit




     13
        The pension plan in Eatinger v. Commissioner, T.C. Memo.
1990-310, was not a qualified trust because it was a Government
plan, and, at that time, Government retirement plans were not
qualified plans. Karem v. Commissioner, supra at 526 n.4; see H.
Rept. 101-247, 1443 (1989).
                             - 16 -

to which she would have been entitled if he had retired.14    Since

use of an early retirement QDRO was not required here, we see no

“clear and unequivocal” congressional intent for Federal law to

supplant State law, see Mansell v. Mansell, supra, and no reason

to avoid taxation of petitioner according to his rights and

obligations under California community property law.

E.   Conclusion

     We conclude that petitioner may reduce his gross income by

$25,511 for 2000.


                                             Decision will be

                                        entered for petitioner.




     14
        Cf. Ablamis v. Roper, 937 F.2d 1450, 1459-1460 (9th Cir.
1991) (Employee Retirement Income Security Act of 1974, Pub. L.
93-406, sec. 1056(d), 88 Stat. 829, preempted a predeceasing
nonemployee spouse’s right under California community property
law to leave her interest in her former husband’s pension to a
third person in her will). The U.S. Court of Appeals in Ablamis
did not consider the Federal tax consequences of application of
community property law or hold that community property rights
should be disregarded in applying Federal tax law.
