                     T.C. Summary Opinion 2004-160



                        UNITED STATES TAX COURT



     MARIA ANTOINETTE WALTON MITCHELL AND LARRY G. MITCHELL,
                          Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 1751-03S.                Filed November 23, 2004.


     Maria Antoinette Walton Mitchell and Larry G. Mitchell, pro

sese.

     Roger P. Law and Ron S. Chun, for respondent.



        ARMEN, Special Trial Judge:   This case was heard pursuant to

the provisions of section 7463 of the Internal Revenue Code in

effect at the time that the petition was filed.1     The decision to



     1
        Unless otherwise indicated, all subsequent section
references are to the Internal Revenue Code in effect for 2000,
the taxable year in issue. All monetary amounts are rounded to
the nearest dollar.
                                - 2 -

be entered is not reviewable by any other court, and this opinion

should not be cited as authority.

     Respondent determined a deficiency in petitioners’ Federal

income tax of $1,400 for the taxable year 2000.

     The issue for decision is whether $4,958 received in 2000 by

petitioner Maria Antoinette Walton Mitchell for her interest in

her former husband’s military retired pay is includable in

petitioners’ gross income.    We hold that it is.

Background

     Some of the facts have been stipulated, and they are so

found.   We incorporate by reference the parties’ stipulation of

facts and accompanying exhibits.

     At the time that the petition was filed, petitioners resided

in Victorville, California.    (References to petitioner in the

singular are to petitioner Maria Antoinette Walton Mitchell.)

     Before her marriage to petitioner Larry G. Mitchell,

petitioner was married to Bobbie Leon Walton (Mr. Walton).

Petitioner and Mr. Walton were married on March 3, 1973, at which

time Mr. Walton was on active duty in the U.S. Air Force (USAF).2

Petitioner and Mr. Walton separated in or about November 1985,

and their divorce became final on August 29, 1986, pursuant to a

final judgment (divorce judgment) entered by the Superior Court



     2
         Mr. Walton enlisted in the U.S. Air Force on July 20,
1964.
                                     - 3 -

of the State of California, San Bernardino County (the superior

court).   At the time of their divorce, Mr. Walton was still on

active duty in the USAF.       In the divorce judgment, the superior

court reserved jurisdiction with respect to the distribution of

petitioner’s interest in the portion of Mr. Walton’s military

retirement benefits earned during marriage.

     On August 1, 1990, Mr. Walton retired from the USAF after 26

years on active duty and began receiving military retired pay.3

Petitioner subsequently petitioned the superior court with

respect to her interest in Mr. Walton’s military retired pay.       On

January 2, 1991, the superior court entered a Qualified Domestic

Relations Order (QDRO),4 which states, in pertinent part:

          2. Servicemember [Mr. Walton] retired from the
     United States Air Force on August 1, 1990, with fully
     vested retirement rights and benefits, a portion of
     which are community property of Servicemember and of
     Servicemember’s former spouse, Petitioner, (hereinafter
     referred to as “Non-Servicemember”) [petitioner].

                     *     *     *    *      *   *   *

          4. * * * Non-Servicemember is now entitled to an
     order dividing the military retirement to the extent
     same was earned by Servicemember during the marriage to


     3
        Generally, a servicemember is eligible to retire and to
receive nondisability military retired pay after at least 20
years of service. See 10 U.S.C. secs. 8911, 2914, 2991 (2000).
There is no evidence in the record to suggest that Mr. Walton
received any disability military retired pay.
     4
        A QDRO is a domestic relations order that satisfies
specific requirements and provides for the payment of benefits
from a qualified plan to a spouse, former spouse, child, or other
dependent of a plan participant. See sec. 414(p).
                                  - 4 -

     Non-Servicemember.

                     *    *   *    *      *   *   *

          8. Non-Servicemember shall be awarded as her sole
     and separate property, one-half (½) of the community
     property interest in Servicemember’s net disposable
     military retirement pay as set forth in the California
     case of Mansell v. Mansell decided by the U.S. Supreme
     Court on May 30, 1989, wherein the net disposable
     military retirement pay is defined as the net after
     deducting (a) amounts owned [sic] by the military
     member to the United States; (b) required by law to be
     deducted from total pay, including employment taxes,
     and fines and forfeitures ordered by courts-martial;
     (c) properly deducted from Federal, State and [sic]
     income taxes; (d) withheld pursuant to other provisions
     under the Internal Revenue Code; (e) deducted to pay
     government life insurance premiums; and (f) deducted to
     create an annuity for the former spouse (10 U.S.C.
     #1408 (a)(4)(A)-(F).

          9. The community property interest in the
     Servicemember’s net disposable retirement pay is
     determined to be 48.7%.[5]

          10. Non-Servicemember’s interest in
     Servicemember’s net disposable retirement pay is
     determined to be 24.35%.[6]

     Sometime in 1991, petitioner began receiving monthly

payments from the Defense Finance and Accounting Service (DFAS)

for her interest in Mr. Walton’s military retired pay pursuant to

the QDRO.   For the taxable year 2000, petitioner received

payments from DFAS in the aggregate amount of $4,958.   DFAS


     5
        This percentage is calculated as follows: The years of
marriage through the date of separation (12.66 years) divided by
the length of Mr. Walton’s military career (26 years).
     6
        This percentage is calculated as follows: Petitioner’s
one-half interest of the community property interest (.5 x 48.7
percent).
                                - 5 -

issued to petitioner a Form 1099-R, Distributions From Pensions,

Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance

Contracts, etc., for the taxable year 2000, which reported both

the gross distribution and the taxable amount as $4,958 and the

amount of Federal income tax withheld as zero.7

     Petitioners timely filed a joint Form 1040, U.S. Individual

Income Tax Return.   On the return, petitioners did not report the

$4,958 that petitioner received from DFAS.

     On November 4, 2002, respondent issued to petitioners a

notice of deficiency for the taxable year 2000.   In the notice,

respondent determined that petitioners failed to report the

$4,958 in their gross income.

     Thereafter, on January 27, 2003, petitioners filed with the

Court an imperfect petition.    On April 4, 2003, petitioners filed

an amended petition disputing respondent’s determinations.

Paragraph 4 of the amended petition states:

     I, we disagree with all the proposed changes. Divorce
     papers for Maria A. Mitchell (Walton) states that taxes
     from her ex-spouse’s retirement shall be taken from ex-
     spouse’s allotment before Maria’s allotment is given.
     By taking taxes from Maria’s portion we feel that the
     same allotment is being taxed twice.




     7
        Petitioner did not receive any statement from DFAS
indicating the gross amount of Mr. Walton’s military retired pay
and the amount of taxes withheld in 2000.
                                 - 6 -


Discussion8

     It is a well-settled principle that State law determines the

nature of the property interest created while Federal law governs

the Federal taxation of that property interest.    United States v.

Mitchell, 403 U.S. 190 (1971).    Furthermore, the tax liability

for income from property attaches to the owner of such property.

Eatinger v. Commissioner, T.C. Memo. 1990-310 (citing Helvering

v. Clifford, 309 U.S. 331, 334 (1940); Blair v. Commissioner, 300

U.S. 5, 12 (1937); Poe v. Seaborn, 282 U.S. 101 (1930); Lucas v.

Earl, 281 U.S. 111 (1930)).

     In 1982, the Congress enacted the Uniformed Services Former

Spouses’ Protection Act (USFSPA), Pub. L. 97-252, sec. 1002, 96

Stat. 730, which added section 1408 to title 10 of the United

States Code (hereinafter 10 U.S.C. sec. 1408).9   Under 10 U.S.C.

sec. 1408(c)(1) (2000), a State court may treat disposable

military retired pay in a divorce proceeding either as property

solely of the servicemember or as property of the military

retiree and his or her spouse in accordance with the law of the



     8
        We decide the issue in this case without regard to the
burden of proof under sec. 7491(a) because the issue is
essentially one of law.
     9
        The USFSPA reversed the decision of the U.S. Supreme
Court, which held that a State court could not order a division
of nondisability military retired pay as part of a distribution
of community property in divorce proceedings. See McCarty v.
McCarty, 453 U.S. 210 (1981).
                                - 7 -

jurisdiction of such court.10   If a divorce was effective before

February 3, 1991, only the “disposable retired pay”, which is the

total monthly retired pay to which a member is entitled less,

inter alia, amounts properly withheld for Federal, State, or

local income taxes, may be treated as the property of the member

and his spouse.    10 U.S.C. sec. 1408(a)(4)(C) (1988); National

Defense Authorization Act for Fiscal Year 1991 (NDAA), Pub. L.

101-510, sec. 555(b)(3), (e)(2), 104 Stat. 1485, 1569.    For

divorces effective on or after February 3, 1991, Federal, State,

and local income taxes do not serve to reduce the total monthly

retired pay when determining the amount of disposable retired

pay.    10 U.S.C. sec. 1408(a)(4) (1994); NDAA sec. 555(b)(3),

(e)(2).

       In the State of California, community property principles

apply in divorce proceedings.    Consistent with these principles,

each spouse is considered to have a one-half ownership interest

in all property earned by either spouse during marriage.    See

Cal. Fam. Code sec. 2550 (West 2004).    Under California law,

military retirement benefits earned during marriage are community

property.    Casas v. Thompson, 720 P.2d 921, 925 (Cal. 1986); see

In re Marriage of Gillmore, 629 P.2d 1, 3 (Cal. 1981); In re



       10
        In its decision in Mansell v. Mansell, 490 U.S. 581
(1989), the Supreme Court confirmed that the USFSPA empowered
State courts to divide only disposable nondisability military
retired pay in divorce proceedings.
                               - 8 -

Marriage of Brown, 544 P.2d 561, 563 (Cal. 1976).    Accordingly,

where California law applies, each spouse has a one-half interest

in military retirement benefits earned during marriage.

     As a general rule, the Internal Revenue Code imposes a tax

on the taxable income of every individual.    See sec. 1.    For

purposes of calculating taxable income, section 61 defines gross

income as “all income from whatever source derived” unless

otherwise specifically excluded.   Sec. 61.   Gross income

specifically includes amounts derived from pensions.    Sec.

61(a)(11).   Military retired pay constitutes a pension within the

meaning of that section.   See Eatinger v. Commissioner, supra (“A

military retirement pension, like other pensions, is simply a

right to receive a future income stream from the retiree’s

employer.”); sec. 1.61-2(a)(1), Income Tax Regs.; sec. 1.61-

11(a), Income Tax Regs. (“Pensions and retirement allowances paid

either by the Government or by private persons constitute gross

income unless excluded by law.”); see also 31 U.S.C. sec.

9502(1)(B)(x) (1994) (“Military Retirement System” is a

Government pension plan); 10 U.S.C. 1461(a) (2000) (defining the

Department of Defense Military Retirement Fund).

     Petitioners do not dispute that the superior court awarded

petitioner a community property interest in Mr. Walton’s military

retired pay, and that petitioner received in 2000 total payments

of $4,958, with zero Federal income tax withheld, from DFAS for
                                - 9 -

her interest.   Petitioners contend, however, that the payments

petitioner received for her interest in Mr. Walton’s military

retired pay are not subject to income tax pursuant to the QDRO

and pursuant to statements allegedly made by the superior court

judge.11   Petitioners’ contentions are misplaced.

     Petitioners assert that the QDRO states that “taxes shall be

taken out of ex-spouse’s allotment before Maria’s [petitioner’s]

share of allotment is given”.   In essence, petitioners’ assertion

is consistent with the operative language of the QDRO.    The QDRO

awarded petitioner as her sole and separate property a one-half

interest in the community property interest in Mr. Walton’s “net

disposable military retirement pay”.    The QDRO defined “net

disposable military retirement pay” as “the net after deducting

* * * properly deducted Federal, State and [sic] income taxes”.

This definition is consistent with the plain language of 10

U.S.C. sec. 1408(a)(4)(C) (1988), as it was in effect when the

superior court entered both the final judgment and the QDRO.    See

id. (disposable military retired pay is defined as the total

monthly retired pay less, inter alia, properly withheld Federal,

State, and local income taxes).   Clearly, the QDRO directed that


     11
        Petitioners also contend that they have never reported
such payments on their tax returns since 1991 and that they never
received anything from the IRS until the 2000 audit. We note
that each tax year stands on its own and that the Commissioner
may challenge in a succeeding year what was overlooked or
condoned in previous years. Rose v. Commissioner, 55 T.C. 28,
31-32 (1970).
                               - 10 -

petitioner’s allotment is calculated based on Mr. Walton’s

military retired pay after income taxes are withheld (not on his

gross military retired pay).   This calculation, however, does not

mean that petitioner’s allotment is not taxable, nor does it mean

that petitioner’s allotment is exempt from tax liability because

taxes were already withheld on Mr. Walton’s allotment.12

Moreover, there is nothing in the QDRO stating that petitioner’s

interest in Mr. Walton’s military retired pay is not taxable.   As

a matter of law, we are aware of no provisions in either the

Internal Revenue Code or the USFSPA in effect at the time of the

final judgment and the QDRO excluding petitioner’s allotment from

gross income.

     Petitioners also contend that the superior court judge

purportedly stated that petitioner’s portion would not be

taxable.   In this regard, petitioner testified at trial that the

superior court judge stated that “their code was all wives were

paid and they did not have to pay taxes on the money.”13

Although petitioners did not introduce into evidence a transcript

of the divorce proceedings to corroborate such purported


     12
        Taxes withheld on Mr. Walton’s allotment would
presumably have been credited to Mr. Walton’s account.
     13
        At trial, petitioner repeatedly referred to a purported
“penal code” that made her interest nontaxable. Although it is
unclear what purported penal code petitioner relies upon, we are
not aware of any such penal code. Rather, it is the Internal
Revenue Code that governs the taxation of the payments at issue.
See sec. 61(a)(11).
                              - 11 -

statement, even if petitioners had done so, it is doubtful that

such statement would support their contention because the

division of Mr. Walton’s military retired pay is based on the

QDRO, rather than on statements purportedly made at trial.

     Nevertheless, the crux of petitioners’ contention is that

petitioner’s payments are subject to double taxation.14   In this

regard, petitioners contend that they are being asked to pay

income tax on the amount petitioner actually receives, which

amount is calculated based on Mr. Walton’s net military retired

pay after income taxes are withheld.15   However, based on the

record, we are unable to determine whether double taxation would

result because petitioners did not introduce any evidence

demonstrating the gross amount of Mr. Walton’s military retired

pay and the various taxes that were withheld therefrom.

     Admittedly, Congress recognized that subtracting tax

withholdings from the computation of disposable retired pay

created unfairness.   H. Rept. 101-665, at 279-280 (1990).   As a

result, Congress amended the definition of “disposable retired

pay” such that income taxes withheld are not taken into account


     14
        Petitioners’ contention that petitioner’s payments are
subject to double taxation assumes a fact not shown by the
record.
     15
        Petitioner also argues that she is not receiving the
correct amount of money. We note that this Court is not the
proper forum to address petitioner’s complaint and that such
complaint should be addressed to the court that has jurisdiction
over the QDRO and/or to DFAS.
                              - 12 -

in computing disposable retired pay.   10 U.S.C. sec.

1408(a)(4)(C) (1988 & Supp. III 1991); NDAA sec. 555(b)(3),

(e)(2).   This amendment, however, is effective only for divorces

entered into on or after February 3, 1991, which date is after

both petitioner’s final judgment and the QDRO and is therefore

not applicable in the instant case.    10 U.S.C. sec. 1408(a)(4)(C)

(1988 & Supp. III 1991); NDAA sec. 555(b)(3), (e)(2).

     Based on the law as it was in effect on the date of

petitioner’s final judgment and the date of the QDRO,

petitioner’s interest is calculated on Mr. Walton’s military

retired pay less income taxes withheld.   As explained earlier,

petitioner’s interest is taxable.    Accordingly, we conclude that

the $4,958 received in 2000 by petitioner for her interest in Mr.

Walton’s military retired pay is includable in petitioners’ gross

income.

     However unfair the outcome in this case may seem to

petitioners, the gap in the USFSPA that this case highlights is

not one that can be closed by judicial fiat, and a remedy, if

any, must originate with Congress.

     We have considered all of petitioners’ arguments, and, to

the extent that we have not specifically addressed them, we

conclude them to be without merit.

     Reviewed and adopted as the report of the Small Tax Case

Division.
                        - 13 -

To reflect the foregoing,



                                  Decision will be entered

                             for respondent.
