                   T.C. Summary Opinion 2003-1



                     UNITED STATES TAX COURT



                  NELL B. NEWELL, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 9839-01S.              Filed January 7, 2003.



     Clarence F. Frazier, for petitioner.

     Brandi B. Darwin, for respondent.



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

the provisions of section 7463 of the Internal Revenue Code in

effect at the time the petition was filed.   The decision to be

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

should not be cited as authority.   Unless otherwise indicated,

subsequent section references are to the Internal Revenue Code in

effect for the year in issue.
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     Respondent determined a deficiency in petitioner’s Federal

income tax of $1,549 for the taxable year 1999.

     The issue for decision is whether amounts petitioner

received pursuant to a divorce decree are includable in her

income as pension income or, alternatively, as alimony income.

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

The stipulations of fact and the attached exhibits are

incorporated herein by this reference.    Petitioner resided in

Jacksonville Beach, Florida, on the date the petition was filed

in this case.

     Petitioner and her former husband, James Fredrick Newell,

Jr., married in 1953 and divorced in 1984.    At the time of the

divorce, Mr. Newell was receiving monthly military retirement

payments from the United States Navy Finance Center.    The assets

owned by petitioner and Mr. Newell at that time consisted

primarily of the marital residence, the military pension, a car,

a truck, a boat, and household furnishings.    Upon divorce,

petitioner received the car and household furnishings, and Mr.

Newell received the truck and the boat.    Petitioner bought Mr.

Newell’s interest in the marital residence using funds which she

had borrowed from her daughter.   The divorce decree, entered by

the Circuit Court of the City of Virginia Beach, Virginia, on

April 3, 1984, nunc pro tunc as of February 29, 1984, provided in

relevant part as follows:
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          It is further ADJUDGED, ORDERED, and DECREED that the
     defendant [Mr. Newell] shall pay to the complainant
     [petitioner] the sum of $583.00 per month as spousal support
     on the first day of each month beginning February 1, 1984,
     and no spousal support shall be allowed to the defendant.

          It is further ADJUDGED, ORDERED, and DECREED that based
     upon the equities and the rights and interests of each party
     in the marital property and all factors and considerations
     as set out in Section 20-107.3, Code of Virginia, and
     pursuant to that Code section a monetary award is hereby
     granted to the complainant to be paid by the defendant to
     the complainant in consecutive monthly installments of
     $1,017.00 each on the first day of each month beginning
     February 1, 1984, until death of one of the parties.

          And it appearing that defendant receives and/or is
     entitled to receive monthly retired or retainer pay by
     virtue of his United States Navy retirement aforesaid and
     that complainant moves the Court to direct that the
     aforesaid $1,017.00 monthly payments to her pursuant to
     Section 20-107.3, Code of Virginia, be made direct from the
     United States Navy Finance Center or other appropriate U.S.
     Government activity, it is, therefore, ADJUDGED, ORDERED,
     and DECREED that pursuant to Title 10, United States Code,
     Section 1408, the United States Navy Finance Center (or
     other appropriate U.S. Government activity) shall pay the
     sum of $1,017.00 to the complainant direct from the monthly
     retired or retainer pay to which defendant is entitled until
     death of one of the parties.

The decree was modified on more than one occasion by courts in

Virginia and Wisconsin.   These modifications affected only the

amount of spousal support being paid to petitioner; none altered

the $1,017 monthly payments being made with funds from the

military retirement pension.

     Since the divorce, Mr. Newell has received periodic cost of

living increases in his military retirement payments, while the

payments petitioner receives in connection therewith have never
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increased.    Prior to 1995, Mr. Newell was issued an annual Form

1099-R, Distributions From Pensions, Annuities, Retirement or

Profit-Sharing Plans, IRAs, Insurance Contracts, etc., reflecting

the entire amount of the benefits received by both Mr. Newell and

petitioner.   From 1995 forward, however, petitioner annually has

been issued a separate Form 1099-R reflecting the portion of the

benefits paid directly to her.

     During 1999, petitioner received $2,450 in spousal support

payments from Mr. Newell.   In addition, she received $12,204 in

the form of twelve payments of $1,017 from the Defense Finance

and Accounting Service.    On petitioner’s 1999 Federal income tax

return, she reported $2,450 in alimony income.     Although she

reported pension distributions of $12,204, she reported that no

portion of this amount was taxable.      In the statutory notice of

deficiency, respondent determined that the pension distributions

totaling $12,204 were includable in petitioner’s gross income.

     We first address briefly an argument by respondent that

certain provisions of the Internal Revenue Code relating to

section 401(a) qualified plans are applicable to the case at

hand.1   Although both parties discuss the qualified plan

     1
      Specifically, respondent’s argument implies that the
military retirement plan is a governmental plan under sec.
414(d), that petitioner received the payments in issue pursuant
to a sec. 414(p) qualified domestic relations order, and that
petitioner is therefore a sec. 402(a) distributee pursuant to
                                                   (continued...)
                                - 5 -

provisions, neither party cites any authority for the underlying

proposition that military retirement payments are subject to

section 402(a).    That section provides:

          SEC. 402(a). Taxability of Beneficiary of Exempt
     Trust.--Except as otherwise provided in this section, any
     amount actually distributed to any distributee by any
     employees’ trust described in section 401(a) which is exempt
     from tax under section 501(a) shall be taxable to the
     distributee, in the taxable year of the distributee in which
     distributed, under section 72 (relating to annuities).

The fund used for the payment of military retirement benefits,

known as the Department of Defense Military Retirement Fund, is

one which has been established “on the books” of the Department

of the Treasury.    10 U.S.C. sec. 1461(a) (2000).   Thus, the

military retirement pension payments at issue are not

distributions from a section 401(a) qualified trust, and section

402(a) is not applicable.2

     It is clear that gross income generally includes income from

pensions, including military retirement benefits.     Sec.

61(a)(11); secs. 1.61-2(a)(1) and 1.61-11(a), Income Tax Regs.

However, income from property is taxed to the owner of the


     1
      (...continued)
sec. 402(e)(1)(A).
     2
      Compare the Department of Defense Military Retirement Fund
with another Federal employee retirement fund, the Thrift Savings
Fund. The latter fund, created pursuant to 5 U.S.C. sec. 8437
(2000), is also a fund established within the Treasury. Unlike
the military fund, however, this fund is treated as a sec. 401(a)
qualified trust for purposes of the Internal Revenue Code. Sec.
7701(j); 5 U.S.C. sec. 8440 (2000).
                               - 6 -

property, not necessarily the recipient of the income.     Eatinger

v. Commissioner, T.C. Memo. 1990-310.     Accordingly, military

pension payments are includable in the gross income of the party

or parties who have an ownership interest in the pension itself:

A taxpayer who has a community property interest in a spouse’s

military pension must, after divorce, include in her gross income

the portion of the benefits paid which represents her interest in

the pension, whether or not she directly receives such benefits,

Id.; Weir v. Commissioner, T.C. Memo. 2001-184, and a taxpayer

who is awarded an ownership interest in a military pension as a

division of marital property or pursuant to a divorce settlement

must include her proportionate share of the benefits in her gross

income.   Witcher v. Commissioner, T.C. Memo. 2002-292; Pfister v.

Commissioner, T.C. Memo. 2002-198.

     In the case at hand, there is nothing on the face of the

divorce decree to indicate that petitioner was awarded an

ownership interest in the pension.     To the contrary, the court

granted petitioner a monetary award in the amount of $1,017 per

month, payable until the death of either petitioner or Mr.

Newell.   The court then ordered that this monetary award be

satisfied through monthly payments to be paid directly by the

government to petitioner, on behalf of Mr. Newell.

     Virginia law supports our conclusion that petitioner did not

have an ownership interest in the pension.     While Federal law
                                 - 7 -

controls how income from property interests are taxed, State law

controls how property interests are created.       United States v.

Mitchell, 403 U.S. 190 (1971).    It is clear that, at the time

petitioner’s divorce decree was entered, the State court did not

have the power to order a transfer of an ownership interest in

Mr. Newell’s military retirement benefits to petitioner.       Va.

Code Ann. sec. 20-107.3(B) and (C) (Michie 1983); Lowe v. Lowe,

357 S.E.2d 31 (Va. 1987).   Rather, the court merely had the

authority to grant petitioner a monetary award; any transfer of

an ownership interest in the pension only could have been

effected by Mr. Newell with permission from the court.       Va. Code

Ann. sec. 20-107.3(D) (Michie 1983); Lowe v. Lowe, supra.3      There

has been no suggestion of such a transfer in this case.

     We note that, at the time of petitioner’s divorce, Federal

law had been revised to allow States to treat military pensions

of married individuals as property held either jointly or

separately by one or both spouses.       Uniformed Services Former




     3
      Cf. Pfister v. Commissioner, supra, in which we found that
a Virginia divorce decree did transfer an ownership interest in a
military retirement pension. In that case, we relied upon Va.
Code sec. 20-107.3(H), which allowed a court to ratify and
incorporate an agreement between the parties into the divorce
decree. The ownership interest in Pfister was transferred
pursuant to such an agreement between the parties--incorporated
into the divorce decree--which provided that the spouse receiving
the interest would “be owner of, and receive, one-half of
husband’s disposable retired or retainer pay.” Id.
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Spouses’ Protection Act, Pub. L. 97-252, 96 Stat. 730 (1982).4

However, there is nothing in this statute that would have

afforded petitioner an ownership interest in the pension.

Rather, the statute merely provides that State courts are free to

treat the pension as separately held or jointly held property, as

the relevant State law provides.   Pfister v. Commissioner, supra.

Furthermore, the authority found in the statute for the payment

of a portion of a retiree’s benefits to a spouse as the result of

a property settlement does not require a spouse to own an

interest in the pension before receiving such payments.

     Petitioner did not have an ownership interest in the

military pension from which she received the benefits in issue.

Consequently, the benefits are properly includable in the gross

income of Mr. Newell, who initially earned the pension and who

alone had an ownership interest in the pension after the divorce.

Sec. 61(a)(11); Eatinger v. Commissioner, supra.

     Respondent argues alternatively that the benefits are

includable in petitioner’s gross income as alimony pursuant to

section 71.5

     4
      The relevant provision is codified, as amended, at 10
U.S.C. sec. 1408 (2000).
     5
      Because the divorce decree in this case was entered prior
to 1985, we apply the provisions of sec. 71 which were applicable
before the changes made by the Deficit Reduction Act of 1984
(DEFRA), Pub. L. 98-369, sec. 422(e), 98 Stat. 798. We note that
the amount of the spousal support payments required by the
                                                   (continued...)
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     Section 71 lists several requirements which must be met in

order to characterize payments made pursuant to a divorce decree

as alimony payments for purposes of Federal tax law.   If the

requirements of section 71 are met, the payments are includable

in the payee spouse’s income under section 71, and are deductible

by the payor spouse under section 215.   One such requirement is

that the payments be made in discharge of a legal obligation

imposed “because of the marital or family relationship.”   Sec.

71(a)(1).   This requirement has been interpreted to require that

the payments be in the nature of support, rather than a property

settlement.   Beard v. Commissioner, 77 T.C. 1275, 1283 (1981).

Payments which are part of a property settlement are capital in

nature and, therefore, are not subject to the provisions of

section 71.   Gammill v. Commissioner, 73 T.C. 921, 926 (1980),

affd. 710 F.2d 607 (10th Cir. 1982).

     The determination of whether payments are in the nature of

support or part of a property settlement does not turn on labels

assigned by the court or the parties; rather, the issue is a

factual one and requires an examination of all the facts and

circumstances.   Beard v. Commissioner, supra at 1283-1284.


     5
      (...continued)
judgment in this case was modified after 1984. However, a post-
1984 modification of a pre-1985 judgment does not cause the DEFRA
changes to apply unless the modification expressly so provides.
Id. at sec. 422(e)(2); Libman v. Commissioner, T.C. Memo. 1990-
629. Nothing in the record indicates such a provision existed in
this case.
                              - 10 -

Factors which indicate that the payments are in the nature of a

property settlement rather than support are:   (1) That the

parties in their agreement (or the court in its decree) intended

the payments to effect a division of their assets, (2) that the

recipient surrendered valuable property rights in exchange for

the payments, (3) that the payments are fixed in amount and not

subject to contingencies, such as the death or remarriage of the

recipient, (4) that the payments are secured, (5) that the amount

of the payments plus the other property awarded to the recipient

equals approximately one-half of the property accumulated by the

parties during marriage, (6) that the need of the recipient was

not taken into consideration in determining the amount of the

payments, and (7) that a separate provision for support was

provided elsewhere in the decree or agreement.   Beard v.

Commissioner, supra at 1284-1285.

     In the case at hand, the State court stated specifically in

the divorce decree that the payments at issue were to be made to

petitioner for her interest in the marital property.

Furthermore, there was a separate provision for support distinct

from the property settlement provisions.   The property settlement

payments are fixed in amount and the only contingencies applied

to the payments are their termination upon the death of

petitioner or Mr. Newell.   Finally, there is no indication that

petitioner’s needs were taken into account in the initial award
                              - 11 -

of the payments.   In fact, the amount of the payments remained

fixed while later modifications made to the divorce decree

altered the amount of the monthly spousal support payments.

     We find that the payments at issue in this case are in the

nature of a property settlement rather than support.    Thus, these

payments are not includable in petitioner’s gross income under

section 71.

     Reviewed and adopted as the report of the Small Tax Case

Division.

     To reflect the foregoing,

                                      Decision will be entered

                                 for petitioner.
