                         T.C. Memo. 1996-475



                       UNITED STATES TAX COURT



                    JO ANN PORTER, Petitioner v.
            COMMISSIONER OF INTERNAL REVENUE, Respondent



       Docket No. 12537-94.            Filed October 22, 1996.



       Thomas Smidt II, for petitioner.

       Franklin R. Hise, for respondent.



               MEMORANDUM FINDINGS OF FACT AND OPINION


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

the provisions of section 7443A(b)(3) and Rules 180, 181, and

182.    All section references are to the Internal Revenue Code in

effect for the taxable year in issue, unless otherwise indicated.
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All Rule references are to the Tax Court Rules of Practice and

Procedure.

     Respondent determined a deficiency in petitioner's 1991

Federal income tax in the amount of $1,811 and an accuracy-

related penalty under section 6662(a) in the amount of $362.    At

trial, respondent conceded the section 6662(a) penalty.

     The issue for decision in this case is whether the amount

received by petitioner Jo Ann Porter in 1991 as a portion of her

former spouse's military retirement pay constitutes taxable

income to her.

                           FINDINGS OF FACT

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

The stipulated facts and attached exhibits are incorporated by

this reference.    Petitioner resided in Albuquerque, New Mexico,

when her petition was filed.

     Petitioner married Kenneth R. Porter (Kenneth) on July 7,

1955.   Kenneth was a member of the U.S. Air Force from March 22,

1958, until he retired on July 1, 1979.       The location of

Kenneth's and petitioner's domicile from 1958 to 1979 is not

disclosed in the record.    Petitioner and Kenneth were divorced on

September 15, 1983.   They have not resided in the same household

since that time.

     Petitioner and Kenneth executed a Settlement Agreement and

Stipulation (Settlement Agreement) that became effective

September 15, 1983.   On that same date, the Settlement Agreement
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was ratified and incorporated into a Final Decree of Dissolution

of Marriage (Final Decree) by the District Court of the Second

Judicial District of the State of New Mexico, County of

Bernalillo.1        The Final Decree provided in relevant part as

follows:
      4.    AIR FORCE RETIREE PAY.

            * * *

      f. The treatment of Kenneth R. Porter's disposable retired pay, as
      defined in 10 U.S.C. section 1408(a)(4), as community and marital
      property of the member and the spouse is in accordance with the law of
      the State of New Mexico.

The Settlement Agreement, which referred to Jo Ann Porter as

"Petitioner" and Kenneth as "Respondent," provided in relevant

part as follows:
    II.    PROPERTY DECLARATION AND DIVISION:

           * * *

      B. Community Property. The Community Property of the parties is
      hereby divided equally as follows:

      1.    To the Petitioner, Jo Ann Porter as her sole and separate property:

           * * *

      (b) One-half of the Air Force Retiree Monthly Pay and benefits, as
      more fully defined below;

           * * *

      2. To the Respondent, Kenneth R. Porter as his sole and separate
      property.

           * * *

      (b) One-half of the Air Force Retiree Monthly Pay, as more fully
      defined below;



1
     The Final Decree provided: "The Settlement Agreement of the
parties is hereby ratified and made an integral and non-separable
part of this decree, is merged into the decree and shall operate
in every respect as an order and decision of the Court. The
parties are hereby ordered to carry out the terms and provisions
of said Settlement Agreement."
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          * * *

     C.    Air Force Retiree Pay.

          * * *

     7. The wife is entitled to receive as her sole and separate property
     50% of the ownership interest in Kenneth R. Porter's disposable retired
     pay, as defined by 10 U.S.C. section 1408(a)(4), as amended.

     10. During the interim period subsequent to the effective date of this
     agreement, Kenneth R. Porter will pay to Jo Ann Porter directly her 50%
     share of his disposable retired pay as defined by 10 U.S.C. section
     1408(a)(4), as amended, until the direct government payment is fully
     processed. Petitioner agrees to institute processing of such direct
     payment promptly. For the check for the month of September, or until a
     change is processed in the account into which the monies are paid,
     Petitioner will promptly pay to Respondent his one-half share of such
     monthly pay. Such pay is now paid directly into the account at Western
     Bank that Petitioner will be taking as her separate property toward the
     end of the month in which such pay is due.

Kenneth also agreed to pay petitioner as lump sum alimony the sum

of $7,661, due and payable by October 15, 1983, or within a

reasonable time thereafter.           There have been no modifications of

the Final Decree or the Settlement Agreement.

     Petitioner discussed the tax consequences of receiving her

community portion of Kenneth's disposable retired pay with her

attorney and Kenneth.         She understood that she was to receive her

portion of such pay net of taxes paid.            Petitioner did not

institute the processing of the direct Government pay.                 She

understood from Kenneth that he would file the necessary forms.

Direct deposits of petitioner's share of Kenneth's disposable

retired pay subsequently were reported on petitioner's monthly

bank account statements.            Petitioner never received a Form 1099-

R, Distributions From Pensions, Annuities, etc., or other

informational statement from the U.S. Air Force.
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     Petitioner has received a portion of Kenneth's disposable

retired pay since their divorce.    She has not included such

amounts in her gross income as reported on her Federal income tax

returns for any taxable year up to and including 1991.

     As reported on his 1991 Form 1099-R, the taxable amount of

Kenneth's military retirement pension for 1991 was $22,776.       The

amount withheld for Federal income tax was $2,561, so the after-

tax distribution was $20,215.    On his 1991 Form 1040, U.S.

Individual Income Tax Return, filed jointly with his wife Faye,

Kenneth included in his taxable income the amount of $22,776.      He

also reported as Federal income tax withheld, and credited

against his total tax, the amount of $2,561.    On line 29 of the

return, Kenneth deducted as alimony paid the amount of $10,107--

50 percent of $20,215, rounded down--and identified petitioner by

Social Security number as the recipient.    Petitioner did not

include the $10,107 distribution in her gross income for 1991 or

otherwise report it on her 1991 Form 1040.

                                OPINION

     Petitioner concedes in her posttrial brief that the portion

of Kenneth's disposable retired pay she received in 1991 is

"inherently" taxable income.    However, petitioner argues that

based upon the language of the Settlement Agreement and 10 U.S.C.

section 1408(a)(4) (1994), as amended and in effect during 1991,

such income is not taxable to her because she received it tax
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paid and also argues that she is entitled to one-half of the

income tax credit attributable to that income.

     Respondent has determined a deficiency in petitioner's

income tax for 1991 on the ground that the military retirement

payment of $10,107 received by petitioner in 1991 and omitted

from her return is gross income under section 61 and should have

been reported as income on such return.   Respondent's

determinations are presumed correct, and petitioner has the

burden of proving otherwise.    Rule 142(a); Welch v. Helvering,

290 U.S. 111, 115 (1933).

     In general, State law governs the creation of legal

interests and rights in property and Federal law determines the

Federal tax consequences of transactions affecting such rights.

United States v. Mitchell, 403 U.S. 190 (1971); Estate of Gamble

v. Commissioner, 69 T.C. 942, 948 (1978).

     As a preliminary matter, we conclude that the payment at

issue in this case represents petitioner's community property

interest in Kenneth's disposable retired pay.    New Mexico is a

community property State.   N.M. Stat. Ann. sec. 40-3-6 to 40-3-17

(Michie 1994); Ruggles v. Ruggles, 116 N.M. 52, 62, 860 P.2d 182,

192 (1993).   Community property is "property acquired by either

or both spouses during marriage which is not separate property."

N.M. Stat. Ann. sec. 40-3-8B.    Separate property includes

"property designated as separate property by a judgment or decree

of any court having jurisdiction" and "property designated as
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separate property by a written agreement between the spouses".

N.M. Stat. Ann. sec. 40-3-8A(3), (5).    The record in this case

establishes that Kenneth's disposable retired pay is community

property, even though Kenneth sought to deduct petitioner's

interest as alimony on his 1991 Form 1040.

     Section 61 provides that, in general, gross income means all

income from whatever source derived, including pensions.    Sec.

61(a)(11); sec. 1.61-11, Income Tax Regs.    The disposable retired

pay received by petitioner in 1991 was from a community interest

in a military pension and constitutes pension income to her under

section 61(a)(11).   Eatinger v. Commissioner, T.C. Memo. 1990-

310; Denbow v. Commissioner, T.C. Memo. 1989-92; Lowe v.

Commissioner, T.C. Memo. 1981-350.

     Section 31 provides that the amount withheld as income tax

on wages shall be allowed to the recipient of the income as a

credit against the income tax.    For the purpose of the credit,

the recipient of the income is the person subject to the income

tax imposed under subtitle A upon the wages from which the tax

was withheld.   Sec. 1.31-1(a), Income Tax Regs.   The regulations

explain further that if a husband and wife domiciled in a

community property State make separate returns, and each reports

for income tax purposes one-half of the wages received by the

husband, each spouse is entitled to one-half of the credit

allowable for the tax withheld with respect to such wages.    Id.
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       This Court, however, is without jurisdiction to consider

petitioner's contention that she is entitled to a withholding

credit under section 31 because under section 6211, a deficiency

is determined without regard to the amount of taxes withheld on a

petitioner's income.    Sec. 6211(a) and (b); Schlosser v.

Commissioner, 94 T.C. 816, 825 (1990); Redcay v. Commissioner, 12

T.C. 806, 809-810 (1949); Eatinger v. Commissioner, supra.

       We hold that the portion of petitioner's ex-husband's

disposable retired pay received by her during 1991 was derived

from her community interest therein and constitutes taxable

pension income to her under section 61(a)(11).          Eatinger v.

Commissioner, supra; Denbow v. Commissioner, supra; Lowe v.

Commissioner, supra; see also Stanton v. Commissioner, 21 B.T.A.

1380, 1381-1382 (1931); Calhoun v. Commissioner, T.C. Memo. 1992-

408.    Respondent is sustained on this issue.       If petitioner has

any remedies with respect to a credit for withholding taxes, they

lie elsewhere.    See Eatinger v. Commissioner, supra.

       To reflect the foregoing,


                                                Decision will be entered

                                           under Rule 155.
