                           T.C. Memo. 2001-125



                          UNITED STATES TAX COURT



                   DORIS NEILL MOZLEY, Petitioner v.
             COMMISSIONER OF INTERNAL REVENUE, Respondent



        Docket No. 4865-00.                Filed May 30, 2001.


        Doris Neill Mozley, pro se.

        Timothy B. Heavner, for respondent.



                MEMORANDUM FINDINGS OF FACT AND OPINION


     JACOBS,     Judge:     Respondent   determined   deficiencies   in

petitioner’s Federal income taxes of $964 for 1995 and $3,442 for

1996.

     The issue for decision is whether petitioner’s receipt of a

portion of military retirement pay to which petitioner’s former

husband otherwise was entitled constitutes receipt of taxable: (1)
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Alimony     pursuant     to    sections   61(a)(8)   and   71;   or,   in    the

alternative, (2) pension income pursuant to section 61(a)(11).

     Unless otherwise indicated, all section references are to the

Internal Revenue Code in effect for the years in issue.

                                 FINDINGS OF FACT

     Some    of   the    facts    have    been   stipulated   and   are   found

accordingly.      The stipulation of facts and the attached exhibits

are incorporated herein by this reference.

Background

     Petitioner resided in Richmond, Virginia, at the time she

filed her petition.           She timely filed Federal income tax returns

for 1995 and 1996.

     On June 15, 1952, petitioner married Paul David Mozley.                 Mr.

Mozley served in the U.S. Navy Medical Corps for 20 years and

retired in 1975.        Upon his retirement, Mr. Mozley began receiving

military retirement payments.

The Agreement

     In April 1983, petitioner and Mr. Mozley divorced.                     They

reached an agreement (the agreement) concerning the division of

their property as well as the amount of alimony petitioner was to

receive. Pursuant to the agreement, petitioner was to receive one-

half of Mr. Mozley’s disposable military retirement pay until her
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death, regardless of her marital status.         Both petitioner and Mr.

Mozley were represented by counsel during the course of their

divorce proceedings.

     The   District   Court   of   Pitt    County,   North       Carolina   (the

district court), adopted the agreement as part of its April 19,

1983, Judgment and Order (the April 1983 Judgment).               The portions

of the April 1983 Judgment, as relevant to the issue before us,

provide as follows:

          8.   In full and final settlement of all claims
     existing between the parties, and in particular, in full
     and final settlement of any claims that the plaintiff
     [petitioner] may have against the defendant [Mr. Mozley]
     for alimony pendente lite, alimony, and attorney’s fees,
     and as a full and final property and marital settlement
     resolving all issues between the parties including
     equitable distribution of marital property, the parties
     do hereby stipulate, agree, contract, and pray that the
     court order and enter as its mandate, the following:


     *           *       *           *          *            *          *


          (i) The defendant shall pay to the plaintiff as
     alimony a sum equal to 22 percent of his salary that he
     actually receives other than the retired/retainer pay
     that he receives by virtue of his retirement from the
     United States Navy. * * *


     *           *       *           *          *            *          *


           (l) * * * As additional alimony, the plaintiff
     shall   receive    a   portion    of   the   defendant’s
     retired/retainer pay that he receives by virtue of his
     previous military service. * * * The remaining pay * *
     * shall be divided equally between the parties. The
     portion of this pay allotted to the plaintiff * * * shall
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    be considered as alimony by the plaintiff and included by
    her in her taxable income. * * * [These payments] shall
    continue on the 10th day of each month thereafter until
    the death of the plaintiff regardless of her marital
    status * * *

    *         *            *          *           *         *         *

         (n) All payments required to be made by the
    defendant to the plaintiff are intended to be payments of
    alimony and said payments of alimony shall be deductible
    by the defendant and taxable to the plaintiff on their
    federal and state income tax returns.      The plaintiff
    shall declare said payments received as alimony and
    income to her on her tax returns.

         (o) This agreement has been negotiated and executed
    on the assumption that the payments made by the defendant
    to the plaintiff or made on his behalf will be deductible
    by the defendant and taxable to the plaintiff. If, as a
    result of a final and binding judicial determination, or
    because of the subsequent change in the governing law or
    its authorizative [sic] interpretation, it is established
    that any or all of said payments will no longer be
    taxable to the plaintiff or deductible to the defendant,
    the provisions regarding alimony shall be subject to
    renegotiation. If the defendant and the plaintiff are
    unable to arrive at a mutually satisfactory readjustment
    of these provisions to take account of the changed tax
    impact, then the matter shall be submitted to a court for
    final and binding determination. Such renegotiatibility
    [sic] shall in no event effect [sic] the validity of the
    remaining provisions of this consent order and property
    settlement.

     In   August   1996,       petitioner   and   Mr.   Mozley   amended   the

agreement (the amended agreement), and the district court entered

a Memorandum of Order, incorporating the amended agreement.                In

relevant part, this order stated:

         10.(b)    [The payment to petitioner of half of
    her former spouse’s military retirement pay should
    continue as agreed] except that the plaintiff shall
    receive the payment directly from the Navy in the
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     manner presently being paid by the Navy and the
     parties agree that this arrangement shall continue
     without protest by the parties regarding the method
     used by the Navy to compute the amount paid to the
     plaintiff, subject to the 15% limitation for
     disability portion of the Navy retirement.

     From August 1983 through the date of trial (January 8, 2001),

petitioner received a portion of Mr. Mozley’s military retirement

pay from the Navy Finance Center in Cleveland, Ohio.

     During the years in issue, petitioner received a total of

$14,588 for 1995 and $13,880 for 1996, as her share of Mr. Mozley’s

military retirement pay.

Petitioner’s Returns

     Petitioner    reported    her   share     of   Mr.   Mozley’s   military

retirement pay as income on her Federal income tax returns for 1983

through 1990; she did not do so for 1991 through 1999.

Notice of Deficiency

     In the notice of deficiency, respondent determined that the

military retirement payments petitioner received in 1995 and 1996

constituted taxable alimony to her.

                                  OPINION

     We first decide whether the military retirement payments

petitioner received during the years in issue constituted taxable

alimony,   as   respondent    contends,   or   a    nontaxable   division   of

property, as petitioner maintains.

     Gross income includes amounts received as alimony or separate
                                    - 6 -

maintenance payments.      See secs. 61(a)(8), 71(a).         At the time of

petitioner’s divorce in 1983, section 71 provided:

           If a wife is divorced or legally separated from her
           husband under a decree of divorce * * *, the wife’s
           gross income includes periodic payments * * *
           received after such decree in discharge of * * * a
           legal obligation which, because of the marital or
           family relationship, is imposed on or incurred by
           the husband under the decree or under a written
           instrument incident to such divorce or separation.

     Section 71 was amended by the Deficit Reduction Act of 1984

(DEFRA 1984), Pub. L. 98-369, sec. 422(a), 98 Stat. 494, 795.

However, DEFRA 1984 is applicable only to divorce instruments

executed after December 31, 1984, or modified after December 31,

1984, where the modified instrument states that the amended version

of section 71 will apply.       See DEFRA 1984, supra at 798.      Here, the

agreement was entered in April 1983 and the modified agreement was

entered in August 1996.       The amended agreement neither modified the

description or terms (i.e., the amount and frequency) of the alimony

payments   nor    expressly    provided     that   amended   section   71   was

applicable.      Thus, we apply former section 71 to determine whether

the military retirement payments petitioner received constitute

alimony.

     Pursuant to former section 71, only payments in the nature of

maintenance or support (as opposed to a transfer of property between

spouses) are treated as alimony for Federal income tax purposes.

See, e.g., Hoover v. Commissioner, 102 F.3d 842, 844-845 (6th Cir.
                                - 7 -

1996), affg. T.C. Memo. 1995-183.   In determining whether payments

constitute alimony or a division of property, we are not bound by

the labels assigned to the payments by the parties         in   their

agreement.    See Hesse v. Commissioner, 60 T.C. 685, 691 (1973),

affd. without published opinion 511 F.2d 1393 (3d Cir. 1975).      On

the other hand, in deciding the character of an award in a divorce

or separation decree, we give great weight to the language and

structure of the decree.   See, e.g., Griffith v. Commissioner, 749

F.2d 11, 13 (6th Cir. 1984), affg. T.C. Memo. 1983-278.     Whether

payments represent support or a property settlement is a question

of the parties’ intent.    See Hoover v. Commissioner, supra at 845.

We ascertain this intent not only from the underlying agreement but

from the particular facts and circumstances involved.    See, e.g.,

Boucher v. Commissioner, 710 F.2d 507, 509 (9th Cir. 1983), affg.

T.C. Memo. 1981-258.

     This Court has frequently looked to State law in considering

whether payments between spouses constitute alimony or a property

settlement.   See Yoakum v. Commissioner, 82 T.C. 128, 140 (1984).

Here, the applicable State law is that of North Carolina, and we

therefore look to the law of that State.   Under North Carolina law

(as existing at the time of petitioner’s         divorce), military

retirement pay was the separate property of the spouse who had

served in the military (here, Mr. Mozley) and was not subject to
                                  - 8 -

division or distribution by a court.1      See N.C. Gen. Stat. secs. 50-

20(b)(2), 50-20(a) (1981).        Thus, as applicable to the instant

situation, even though the district court lacked authority to order

a division of Mr. Mozley’s military retirement pay, Mr. Mozley had

the ability to divide his retirement payments with petitioner; and

in fact, he agreed to do so pursuant to paragraph 8(l) of the

agreement.

     On the basis of the clear and unambiguous language of the

agreement and amended agreement, we conclude that the payments to

petitioner should be characterized as alimony.              We reach this

conclusion   based    on    the   following.     First,    the     agreement

characterizes the payments in question as “alimony” and contains

other provisions that specifically relate to the division of the

parties’ property.2    Second, the agreement specifically provides

that the payments in question are “intended to be payments of

alimony”.    Third,   the   agreement     specifically    states   that   the



     1
          After the entry of petitioner’s divorce, North Carolina
amended its law, effective Aug. 1, 1983, to treat military
retirement pension as marital property, thus subjecting military
retirement to a Court’s equitable distribution authority. See
N.C. Gen. Stat. sec. 50-20 (1999); Morris v. Morris, 339 S.E.2d
424 (N.C. Ct. App. 1986).
     2
          We are mindful that par. 8(l), which refers to the
payment of one-half of Mr. Mozley’s military retirement payments
as “additional alimony” to petitioner, closely followed par.
8(i), which discusses “alimony”. Reading these paragraphs in
tandem supports our conclusion that the payments at issue
constitute alimony.
                                 - 9 -

payments are to be taxable to petitioner and deductible by Mr.

Mozley.   Fourth, the agreement states that if the intended tax

consequences   of   the   payments   (i.e.,   taxable   to     petitioner;

deductible by Mr. Mozley) were judicially altered, the amount to be

paid to petitioner would become subject to renegotiation.

     The language of the agreement is unambiguous; it contains

express direction that the military retirement payments petitioner

is to receive constitute alimony. These payments were (1) periodic;

(2) received after a decree in discharge of a legal obligation; and

(3) because of the marital or family relationship, imposed on or

incurred by the husband under the decree or under a written

instrument incident to such divorce or separation.           See Brodersen

v. Commissioner, 57 T.C. 412, 415-416 (1971).

     Both petitioner and Mr. Mozley were represented by counsel.

There is nothing in the record to indicate that the agreement was

negotiated other than at arm’s length. We therefore assume that the

parties considered their respective tax obligations.

     To conclude, considering all of the facts and circumstances

herein, we hold that the military retirement payments petitioner

received during the years in issue were in the nature of alimony and

thus constitute taxable income to her.

     In light of this holding, we need not address the issue of

whether the retirement payments constitute pension income.
                             - 10 -

    We have considered all arguments raised by petitioner and find

them to be without merit.   Moreover, we have reviewed all cases

cited by petitioner and find them either distinguishable or in

accord with the conclusion reached herein.

     To reflect the foregoing,



                                        Decision will be entered

                                   for respondent.
