                       T.C. Memo. 2002-198



                     UNITED STATES TAX COURT


                  GAY M. PFISTER, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent


     Docket No. 1846-00.                Filed August 8, 2002.


     Mark E. Kellogg, for petitioner.

     Richard F. Stein, and Timothy B. Heavner, for respondent.


                       MEMORANDUM OPINION

     POWELL, Special Trial Judge:   Respondent determined a

deficiency of $3,654 in petitioner’s 1997 Federal income tax.

The issue is whether amounts received by petitioner from her

former husband’s military retirement pay are includable in

petitioner’s gross income.   Petitioner resided in Virginia Beach,

Virginia, at the time the petition was filed.
                                 - 2 -

                              Background

     This case was submitted fully stipulated under Rule 122.1

The facts may be summarized as follows.2   Petitioner and her

former husband, Lewis M. Pfister, Jr., were married on July 15,

1961.    Petitioner and her former husband were divorced by a Final

Decree of Divorce, entered on April 1, 1986, by the Circuit Court

of Fairfax County, Virginia.    This decree has not been modified

in any way since its entry.

     Petitioner’s former husband retired from the United States

Air Force on January 31, 1982.    At the time of the divorce, he

was receiving retirement pay as a result of this service.    The

divorce decree incorporated a “Property And Support Settlement

Agreement” (hereinafter jointly referred to as the “decree”),

which provided:

          12. HUSBAND’S MILITARY BENEFITS. It is the agreement
     of the parties that the wife shall hereafter have all
     benefits and privileges bestowed upon her as a spouse of a
     former member of the United States Armed forces on active
     duty, same being pursuant to Uniformed Services Former
     Spouses’ Protection Act, Public Law 97-252, said
     entitlements to include, by way of example, commissary, PX,
     and medical benefit privileges as more specifically set
     forth in said Act.




     1
        Unless otherwise indicated, section references are to the
Internal Revenue Code in effect for the year in issue, and Rule
references are to the Tax Court Rules of Practice and Procedure.
     2
        The facts are not in dispute and the issue is primarily
one of law. Sec. 7491, concerning burden of proof, has no
bearing on this issue.
                               - 3 -

          The parties further agree that effective with the
     August 1984 payment, the wife shall be owner of, and
     receive, one-half of husband’s disposable retired or
     retainer pay, [i.e.], during the joint lives of the parties,
     the husband and wife shall each receive one-half of
     husband’s disposable retired or retainer pay, as defined in
     the above Act, accruing to him on a monthly basis as a
     result of his active duty service in the United States Armed
     Forces. The wife shall also be named permanent and
     irrevocable beneficiary of husband’s Survivor’s Benefit Plan
     in connection with said military retirement.

          The parties agree that any decree of divorce hereafter
     entered between them shall include therein all appropriate
     language necessary to effectuate the foregoing. The parties
     further agree to execute any and all other documentation
     necessary to effectuate the intent and understandings
     expressed in this paragraph. [Emphasis added.]

     Pursuant to the provisions of the decree, petitioner

received $13,061 during 1997, representing her half of the

disposable retirement pay.   Petitioner did not report this amount

on her 1997 Federal income tax return.

     Respondent determined that the $13,061 was properly

includable in petitioner’s gross income for 1997 as pension

income under section 61(a)(11).   Petitioner maintains that the

payments represent a nontaxable division of property.

                             Discussion

     In general, gross income is defined by section 61 as

follows:

     SEC. 61.   GROSS INCOME DEFINED.

          (a) General Definition.–-Except as otherwise provided
     * * * gross income means all income from whatever source
     derived, including * * *

     *          *        *          *        *          *         *
                                  - 4 -


           (11) Pensions * * *.

Petitioner does not argue, nor would we agree, that military

retirement pay is not a pension within the meaning of section

61(a)(11).   Weir v. Commissioner, T.C. Memo. 2001-184; see also

Eatinger v. Commissioner, T.C. Memo. 1990-310; sec. 1.61-11,

Income Tax Regs.   Additionally, we note:   “It is axiomatic in

Federal tax law that income is taxable to the legal owner of the

* * * property producing the income”.     Miles Prod. Co. v.

Commissioner, T.C. Memo. 1969-274, affd. 457 F.2d 1150 (5th Cir.

1972); see also Helvering v. Clifford, 309 U.S. 331 (1940).       The

pension payments are gross income to the party who owns the right

to those payments pursuant to the division of property in a

divorce.   See, e.g., Weir v. Commissioner, supra; Eatinger v.

Commissioner, supra; Lowe v. Commissioner, T.C. Memo. 1981-350.

     In McCarty v. McCarty, 453 U.S. 210 (1981), the Supreme

Court held that State courts lacked the power to divide military

retirement benefits pursuant to divorce.3    The Court found that


     3
        McCarty v. McCarty, 453 U.S. 210 (1981), dealt with the
State of California and its community property regime. The issue
before the Court was whether the retiree’s military retirement
pay constituted property in which the retiree’s former spouse
could claim an interest. The case at hand deals with the laws of
the Commonwealth of Virginia, a common law State, where there is
equitable division of the former husband’s military retirement
pay. This distinction is of no consequence to our decision in
this case as the McCarty case and the applicable Federal
statutes, infra, apply both to community property jurisdictions
and to common law jurisdictions such as Virginia whose laws
                                                   (continued...)
                               - 5 -

Congress, in enacting the military retirement system then in

place, “designed to accomplish two major goals:   to provide for

the retired service member, and to meet the personnel management

needs of the active military forces.”    Id. at 232-233.   The Court

held that “The community property division of retired pay has the

potential to frustrate each of these objectives.”    Id. at 233.

In noting that “in no area has the Court accorded Congress

greater deference than in the conduct and control of military

affairs”, the Court invalidated the California law at issue as

being preempted by Federal law.   Id. at 236.

     In response, Congress enacted the Uniformed Services Former

Spouses’ Protection Act (USFSPA), 10 U.S.C. sec. 1408 (2000).      In

general, 10 U.S.C. section 1408(c)(1), provides, inter alia

     a court may treat disposable retired or retainer pay payable
     to a member * * * either as property solely of the member or
     as property of the member and his spouse in accordance with
     the law of the jurisdiction of such court.

     The provisions of the USFSPA were intended “to restore the

law to what it was when the courts were permitted to apply State

divorce laws to military retired pay”.   S. Rept. 97-502, at 5

(1982).   The USFSPA did not create any right or entitlement to

military retired pay, nor did it either require or prohibit any



     3
      (...continued)
relating to the equitable division of marital property vest a
spouse with interests analogous to those she would possess in a
community property State. See Mansell v. Mansell, 490 U.S. 581,
584 n.2 (1989); S. Rept. 97-502, at 2, 3 (1982).
                                - 6 -

division of retired pay by a State court.     Id. at 4.   Instead,

the USFSPA specifically allows State courts to treat military

retired pay “either as the property solely of the member or as

the property of the member and his spouse.”     Id.   Further, 10

U.S.C. section 1408(c)(2), provides:

     Notwithstanding any other provision of law, this section
     does not create any right, title, or interest which can be
     sold, assigned, transferred, or otherwise disposed of
     (including by inheritance) by a spouse or former spouse.

The Senate report states that

     nothing in section 1408 creates, gives, or permits to exist
     any right, title, or interest which may be sold, assigned,
     transferred, or otherwise disposed of by a spouse or former
     spouse. It is recognized that this limitation is contrary
     to certain concepts of property laws, especially the
     concepts of community property laws. That is, it is
     recognized that when a division of property is made pursuant
     to a divorce proceeding in a State having community property
     laws, each spouse usually becomes the sole owner of his or
     her portion of the community property so that the spouse can
     sell, assign, transfer, or otherwise dispose of that
     property without limitation. These rights normally include
     the right to transfer the property upon death by will or
     through intestate succession laws. * * * [S. Rept. 97-502,
     supra at 16.]

     The report further noted that Congress did not wish to give

the former spouse any greater rights in the military retired pay

than those possessed by the military retiree.    Since the military

retiree is prohibited from selling, assigning, transferring, or

otherwise disposing of his right to receive retired pay, it

follows that the former spouse would also be so limited.      Id.    We

find that 10 U.S.C. section 1408(c)(2) does not limit a court of

competent jurisdiction from awarding an ownership interest to the
                              - 7 -

spouse, as so restricted, if the court otherwise has that power.

In short, that section is an anti-alienation provision that

limits a nonmember spouse from disposing of the interest.   We

consider, therefore, whether the State court has the authority to

divide the military pension between the member and the spouse.

     Va. Code Ann. section 20-107.3 (Michie 1986), provides in

pertinent part as follows:

          Sec. 20-107.3. Court may decree as to property of the
     parties.--A. Upon decreeing the dissolution of a marriage
     * * * the court * * * shall determine the legal title as
     between the parties, and the ownership * * * of all property
     * * * of the parties * * *.

     *        *         *         *         *         *            *

          2. Marital property is * * *(ii) * * * All property
     including that portion of pensions, profit-sharing or
     retirement plans of whatever nature, acquired by either
     spouse during the marriage * * *.

     *        *         *         *         *         *            *

          C. The court shall have no authority to order the
     conveyance of * * * marital property not titled in the names
     of both parties * * *. This subsection shall not be
     construed to prevent the court from directing payment of a
     percentage of pension, profit sharing or retirement benefits
     as authorized under subsection G below.

          D. Based upon the equities and the rights and
     interests of each party in the marital property, the court
     may grant a monetary award * * * to either party. The party
     against whom a monetary award is made may satisfy the award
     * * * by conveyance of property, subject to approval of the
     court.

     *        *         *         *         *         *            *

          G. The court may direct payment of a percentage of
     pension, profit-sharing or retirement benefits, whether
                                - 8 -

     vested or nonvested, payable in a lump sum or over a period
     of time and only as such benefits are payable. * * *

          H. Nothing in this section shall be construed to
     prevent the affirmation, ratification and incorporation in a
     decree of an agreement between the parties pursuant to
     sections 20-109 and 20-109.1.

Va. Code Ann. section 20-109.1 (Michie 1986), empowers a court to

affirm, ratify, or incorporate by reference into a final order

any valid agreement by the parties.     Aster v. Gross, 371 S.E.2d

833, 837-838 (Va. Ct. App. 1988); Parra v. Parra, 336 S.E.2d 157,

163 (Va. Ct. App. 1985).

     The decree in this case incorporated the agreement of the

parties dividing the military retirement pay of petitioner’s

former husband.   From the language of the agreement, it is clear

that the parties intended petitioner to “be owner of, and

receive, one-half of husband’s disposable retired or retainer

pay”.    The court had the authority to enforce this agreement, and

nothing in the USFSPA or Virginia law prevents petitioner from

receiving as separate property the right to one-half of her

former husband’s military retired pay if the parties so agree.

See 10 U.S.C. sec. 1408; Va. Code Ann. secs. 20-107.3(H) and 20-

109.1 (Michie 1986); Aster v. Gross, supra; Parra v. Parra,

supra.   Indeed, the court must incorporate such an agreement in

the decree.    Parra v. Parra, supra.

     The cases relied on by petitioner, Gamble v. Gamble, 421

S.E.2d 635 (Va. Ct. App. 1992), Williams v. Williams, 354 S.E.2d
                               - 9 -

64 (Va. Ct. App. 1987), and Sawyer v. Sawyer, 335 S.E.2d 277 (Va.

Ct. App. 1985), are not on point.    These cases involve the

question whether a Virginia court can order an equitable division

of pension benefits without agreement of the parties.    Here, the

parties entered into an agreement dividing the ownership interest

of the former husband’s military retirement benefit.    Pursuant to

Va. Code Ann. sections 20-107.3(H) and 20-109.1, the State court

had the authority and discretion to affirm, ratify, or

incorporate by reference into the final order this valid

agreement by the parties.   See Aster v. Gross, supra; Parra v.

Parra, supra; see also Mozley v. Commissioner, T.C. Memo. 2001-

125, affd. 22 Fed. Appx. 214 (4th Cir. 2001), cert. pending No.

01-10303 (May 16, 2002).

     Finally, petitioner’s argument that section 1041 renders

receipt of the pension payments nontaxable is misguided.    Section

1041 deals with transfers of property between spouses or incident

to divorce.   In general, it provides that (1) no gain or loss

shall be recognized to the transferor on such a transfer and (2)

the transferee succeeds to the transferor’s basis.    See Weir v

Commissioner, T.C. Memo. 2001-184.     Under Virginia law, and prior

to divorce, the rights to the pension that accrued to

petitioner’s former husband were solely his.    In accordance with

USFSPA and the State court’s decree incorporating the parties’

agreement, however, petitioner received as her separate property,
                                - 10 -

pursuant to an equitable division of the marital estate, a one-

half interest in the disposable military retired pay of her

former husband.    The acquisition of this property right by

petitioner may be a transfer of property subject to section 1041,

but, like her former husband, petitioner had no basis in this

property, and the distributions from the pension are includable

in petitioner’s gross income.

       Therefore, the payments representing petitioner’s interest

in her former husband’s military retirement pay are gross income

to her.    See, e.g., Weir v. Commissioner, supra; Eatinger v.

Commissioner, T.C. Memo. 1990-310; Lowe v. Commissioner, T.C.

Memo. 1981-350.    Respondent’s position is sustained, and

petitioner must include in her gross income the amounts received

in 1997 as a division of her former husband’s military retirement

pay.

       To reflect the foregoing,

                                          Decision will be entered

                                     for respondent.
