                     T.C. Summary Opinion 2003-5



                       UNITED STATES TAX COURT



              EARL R. AND MARY A. PALMER, Petitioners v.
             COMMISSIONER OF INTERNAL REVENUE, Respondent


     Docket No. 3233-01S.                Filed January 14, 2003.


     Earl R. and Mary A. Palmer, pro se.

     Brook D. Remick, for respondent.



     COUVILLION, Special Trial Judge:    This case was heard

pursuant to section 74631 in effect at the time the petition was

filed.   The decision to be entered in this case is not reviewable

by any other court, and this opinion should not be cited as

authority.




     1
          Unless otherwise indicated, section references are to
the Internal Revenue Code in effect for the year at issue.
                                - 2 -


     Respondent determined a deficiency of $3,255 in petitioners'

Federal income tax for 1994.

     The sole issue for decision is whether amounts received by

Mary A. Palmer (petitioner) during 1994 from her former husband's

military retirement pay are includable in petitioners' gross

income under section 61(a)(11).2

     Some of the facts were stipulated.    Those facts, with the

exhibits annexed thereto, are so found and are incorporated

herein by reference.    Petitioners, husband and wife, were

residents of Round Rock, Texas, at the time the petition was

filed.

     Petitioner was previously married to Robert V. Simon (Mr.

Simon).    They were divorced by a Texas State court on June 27,

1977.    At the time of their divorce, petitioner's former spouse,

Mr. Simon, was retired from the U.S. Air Force and was receiving

military retirement benefits.    Although the record is not clear

as to the number of children petitioner and Mr. Simon had, the

divorce decree between petitioner and Mr. Simon referred to two

children who were under 18 years of age at the time of the

divorce.    Petitioner was designated managing conservator of the



     2
          One other adjustment in the notice of deficiency
relates to the taxable portion of Social Security benefits
petitioners received during 1994. This is a computational
adjustment that will be resolved by the Court's holding on the
retirement pay question.
                                - 3 -


two children, and Mr. Simon was designated possessory

conservator.3   Mr. Simon was required, in the divorce decree, to

pay to petitioner $50 per month for each child until each child

attained 18 years of age.    There was no provision in the decree

requiring Mr. Simon to pay alimony to petitioner.    With regard to

Mr. Simon's military retirement benefits, the divorce decree

provided:


          Petitioner, MARY ANN SIMON, is awarded the following
     property as her separate property and estate:

            *      *        *      *       *        *      *

                6. A ½ interest in and to the right, title and
                interest of Respondent's U.S. Air Force Retirement
                Pension after deduction of the Survivor's Benefit
                Payment and U.S. Income tax based on two
                deductions, said amount currently being $564.73,
                and a ½ interest in and to any future increases in
                said Retirement Pension.

            *      *        *      *       *        *      *

          Respondent, ROBERT V. SIMON, is awarded the following
     property:

            *      *        *      *       *        *      *

                5. A ½ interest in and to the right, title and
                interest of his U.S. Air Force Retirement Pension
                after deduction of the Survivor's Benefit Payment
                and U.S. Income Tax based on two deductions and a
                ½ interest in and to any future increases in said
                Retirement Pension.


     3
          From the general references to these conservatory
designations in the divorce decree, the Court surmises that, for
all practical purposes, petitioner had legal custody of the two
children in the traditional sense.
                               - 4 -



     It is evident from the divorce decree that Mr. Simon's

military retirement benefits, after the referenced deductions,

were divided equally between him and petitioner.

     The parties stipulated that the portion of Mr. Simon's

military retirement benefits for petitioner was paid directly to

petitioner by the Defense Finance and Accounting Service–-

Cleveland Center, Cleveland, Ohio (DFAS).   For the year 1994,

DFAS issued to Mr. Simon a document entitled Former Spouse

Earnings Statement, which reflected payments during 1994 of

$15,564.36 to petitioner that were characterized as "Division of

Property" payments.   This document does not reflect the gross

amount of Mr. Simon's pension and the amounts deducted or

withheld from his and petitioner's portions for survivor's

insurance premiums and Federal income and employment taxes.   DFAS

did not issue an information return to petitioner for the year

1994 to reflect the gross amount of her portion of the pension

and the deductions and withholdings relating to her interest.    In

a trial memorandum, respondent stated that DFAS issued an

information return to Mr. Simon that reflected the gross amount

of the retirement payments, the deductions and withholdings, and,

in a separate statement, which the parties stipulated, entitled

Former Spouse Earnings Statement", $15,564.36 was listed as a

"Division of Property" payment to "Palmer Mary A. Simon".
                                - 5 -


Petitioners did not challenge respondent's assertion regarding

the information return by DFAS to Mr. Simon.4

     For the year in question, as well as in prior years,

petitioners did not include the retirement benefits received from

DFAS as income on their Federal income tax returns.   In an audit

during 1987 of petitioners' 1981, 1984, and 1985 tax returns,

respondent's examining agent had proposed including in income the

retirement benefits petitioner received from DFAS; however, at

respondent's appellate division level, the proposal of the

examining agent was reversed.

     For the year at issue, respondent determined in the notice

of deficiency that the 1994 retirement benefits to petitioner

were includable in gross income.   Respondent made no allowance or

credit for the amount withheld as Federal income tax from

petitioner's portion of the retirement benefits.   As noted



     4
          Mr. Simon, on his Federal income tax return for 1994,
reported the full amount of the retirement benefits and claimed
an alimony deduction in the amount of $15,564. Respondent issued
a notice of deficiency to Mr. Simon disallowing the claimed
deduction, and a petition was filed on behalf of his estate in
this Court challenging that determination. Estate of Robert V.
Simon, Deceased, Kathleen L. Nailor, Executrix v. Commissioner,
docket No. 3549-01S. A stipulated decision was entered in that
case on Oct. 18, 2002, which provides "That there is no
deficiency in income tax due from petitioner or overpayment due
to petitioner for the taxable year 1994." The record of that
case does not include any information return from DFAS relating
to the retirement benefits in question; however, respondent
allowed a reduction of the benefits taxable to Mr. Simon for the
amount paid to petitioner.
                              - 6 -


earlier, the entirety of the withheld taxes was reflected on the

information return sent to Mr. Simon.

     Petitioners presented two arguments.   First, because

respondent, in 1987, held administratively that petitioner's

retirement benefits were not includable in gross income for 1981,

1984, and 1985, the same position should apply for the year at

issue, and, second, if the retirement benefits are includable in

gross income, the amount withheld as Federal income tax by DFAS

as to those benefits should be allowed to petitioners as a

credit.

     Petitioners do not dispute the fact that Texas is a

community property State, that military retirement benefits

accrued or earned during marriage are community property, owned

in indivision by each spouse in equal proportions, and that

retirement benefits are compensation for services rendered over

the course of employment and are not a gift or gratuity.     Denbow

v. Commissioner, T.C. Memo. 1989-92.    Moreover, in the event of a

divorce or a division of the community property, the retirement

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

right to those payments pursuant to the division of the parties.

Weir v. Commissioner, T.C. Memo. 2001-184; Eatinger v.

Commissioner, T.C. Memo. 1990-310.

     Addressing petitioners' first contention, the law is well

settled that respondent is not bound or estopped by prior
                               - 7 -


erroneous acts or omissions of internal revenue agents or

employees.   Estate of Emerson v. Commissioner, 67 T.C. 612, 617-

618 (1977); Auto. Club v. Commissioner, 353 U.S. 180 (1957).

Prior administrative determinations that involve the same or

related taxpayers do not preclude the Internal Revenue Service

from making a contrary determination for a different year.      Coors

v. Commissioner, 60 T.C. 368, 406 (1973).    The Court holds,

therefore, that, even though respondent held in 1987 that the

retirement benefits from Mr. Simon's pension were not gross

income for petitioners' 1981, 1984, and 1985 tax years,

respondent is not estopped or barred in this case from taking a

contrary position for a subsequent tax year.

     Petitioners' second argument is that, because petitioner's

portion of her former husband's retirement benefits was reduced

for Federal income taxes, the withholdings relating to her

interest should be credited against the deficiency.    This Court

has held that the credit for withheld taxes allowable under

section 31 does not enter into the computation of deficiencies

determined under section 6211(a) and (b)(1).     Redcay v.

Commissioner, 12 T.C. 806, 809-810 (1949).     Moreover, 10 U.S.C.

section 1408(c)(1) (1988), relating to retired military benefits

refers to the "disposable retired or retainer pay" of military

personnel.   By definition, as to divorces effective prior to

February 3, 1991, the phrase "disposable retired pay" means the
                               - 8 -


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

among other items, amounts properly withheld for Federal, State,

or local income taxes.   10 U.S.C. sec. 1408(a)(4)(C) (1988).5

Because the Court's authority under 10 U.S.C. section 1408(c)(1)

to divide a community military retirement pension is limited to

the amount that is net of income taxes, all income tax withheld

is attributable to the service member spouse, which, in this

case, is Mr. Simon.   Eatinger v. Commissioner, supra.     If

petitioner has any remedy with respect to the taxes that were

withheld out of that portion of the retirement of Mr. Simon that

was allotted to her in the community property settlement, that

remedy is not in this Court.   Respondent, therefore, is sustained

in this case.

     Reviewed and adopted as the report of the Small Tax Case

Division.



                                            Decision will be entered

                                       for respondent.




     5
          For divorces effective on or after Feb. 3, 1991,
Federal, State, and local income taxes are not excluded from the
total monthly retired pay when determining the disposable retired
pay. 10 U.S.C. sec. 1408(a)(4) (1994); National Defense
Authorization Act for Fiscal Year 1991, Pub. L. 101-510, sec.
555(b)(3) and (e)(2), 104 Stat. 1569, 1570. The divorce in this
case became effective in 1977.
