                                           SHANNON L. FERNANDEZ, PETITIONER v. COMMISSIONER                                            OF
                                                     INTERNAL REVENUE, RESPONDENT
                                                        Docket No. 3143–10.                            Filed May 14, 2012.

                                                   R determined that for 2007 P failed to report income of
                                                $11,691 from the Los Angeles County Employees Retirement
                                                Association received on account of a divorce agreement,
                                                treated like a qualified domestic relations order, awarding her
                                                a portion of her former husband’s disability pay. P argues that
                                                either: (1) the $11,691 is excluded from her income under
                                                I.R.C. sec. 104(a)(1) because I.R.C. sec. 402(e)(1)(A) provides
                                                that an alternate payee, pursuant to I.R.C. sec. 414(p), who
                                                is the former spouse of the participant shall be treated as the
                                                distributee of any distribution or payment made to the alter-
                                                nate payee under a qualified domestic relations order, or (2)
                                                she steps into the shoes of her former spouse and therefore
                                                should receive the same tax treatment on the payments. Held:
                                                P may not exclude the $11,691 from income under I.R.C. sec.
                                                104(a)(1).

                                           J. Christopher Toews, for petitioner.
                                           Kris H. An and Laura Beth Salant, for respondent.

                                                                                   OPINION

                                        WHERRY, Judge: This case is before the Court on a petition
                                      for redetermination of a deficiency. Respondent determined
                                      that petitioner had unreported income of $11,691, resulting
                                      in an income tax deficiency of $3,587 for the 2007 tax year.
                                        This case stems from petitioner’s receipt of $11,691 from
                                      the Los Angeles County Employees Retirement Association
                                      (LACERA) pursuant to a divorce agreement awarding her a
                                      portion of her former husband’s disability pay. The issue for
                                      decision is whether petitioner may exclude the $11,691 from
                                      income under section 104. 1

                                        1 Unless otherwise indicated, all section references are to the Internal Revenue Code of 1986

                                      (Code), as amended and in effect for the taxable year at issue. The Rule references are to the
                                      Tax Court Rules of Practice and Procedure.


                                      378




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                                      (378)                         FERNANDEZ v. COMMISSIONER                                         379


                                                                                 Background
                                         This case was submitted at the scheduled trial session
                                      fully stipulated pursuant to Rule 122. The parties’ stipula-
                                      tion of facts, with accompanying exhibits, is incorporated
                                      herein by this reference. At the time the petition was filed,
                                      petitioner resided in California.
                                         On October 1, 1974, Mr. Fernandez, whom petitioner mar-
                                      ried on November 6, 1976, began working for the Los Angeles
                                      County Sheriff’s Department. While working for the Los
                                      Angeles County Sheriff’s Department, Mr. Fernandez became
                                      disabled and retired on March 31, 1993. At the time of his
                                      retirement, Mr. Fernandez did not qualify for normal retire-
                                      ment under the LACERA plan on the basis of his age and
                                      years of service because he did not meet the 20-year service
                                      requirement. Therefore, Mr. Fernandez opted for a ‘‘service-
                                      connected disability’’ retirement and began receiving service-
                                      connected disability retirement benefits from LACERA effec-
                                      tive March 31, 1993.
                                         Petitioner and Mr. Fernandez were legally separated on
                                      March 24, 1995, and then filed for divorce. The divorce
                                      became final before the 2007 year at issue in this case. On
                                      May 5, 1997, the California Superior Court entered an order
                                      and stipulated division of retirement benefits that awarded
                                      petitioner a percentage of Mr. Fernandez’ retirement benefits
                                      from LACERA. It stated that petitioner’s percentage would be
                                      computed as ‘‘Number of months of LACERA service between
                                      date of marriage (November 6, 1976) and date of separation
                                      (March 24, 1995) divided by months of service in LACERA
                                      SYSTEM at time of retirement of Member times 50% times
                                      Retirement allowance payable to Member.’’ Petitioner is enti-
                                      tled to receive monthly retirement benefit distributions from
                                      LACERA until Mr. Fernandez’ death.
                                         During the 2007 tax year petitioner received $11,850 in
                                      distributions from LACERA. For the 2007 tax year LACERA
                                      issued petitioner a Form 1099–R, Distribution From Pen-
                                      sions, Annuities, Retirement or Profit-Sharing Plans, IRAs,
                                      Insurance Contracts, etc., treating $11,691 as taxable and
                                      $159 as nontaxable. 2 Petitioner did not include any of the

                                           2 Nothing   in the record explains why the $159 was treated as nontaxable.




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                                      380                 138 UNITED STATES TAX COURT REPORTS                                        (378)


                                      amount received from LACERA in her 2007 Federal income
                                      tax return.
                                        On December 28, 2009, respondent sent to petitioner a
                                      notice of deficiency determining a $3,587 deficiency in income
                                      tax. On February 2, 2010, petitioner timely petitioned the
                                      Court for redetermination of the deficiency.

                                                                                 Discussion
                                        As a general rule, the Commissioner’s determination of a
                                      taxpayer’s liability in the notice of deficiency is presumed
                                      correct, and the taxpayer bears the burden of proving that
                                      the determination is improper. See Rule 142(a); Welch v.
                                      Helvering, 290 U.S. 111, 115 (1933).
                                        Section 61(a) defines gross income as ‘‘all income from
                                      whatever source derived, including * * * (11) Pensions’’,
                                      unless otherwise provided. Section 104 provides otherwise by
                                      authorizing an exclusion with respect to compensation for
                                      injuries or sickness. Such exclusions from gross income are
                                      construed narrowly. See Commissioner v. Schleier, 515 U.S.
                                      323, 328 (1995). Section 104 provides in pertinent part as fol-
                                      lows:
                                      SEC. 104. COMPENSATION FOR INJURIES OR SICKNESS.
                                        (a) IN GENERAL.—Except in the case of amounts attributable to (and not
                                      in excess of) deductions allowed under section 213 (relating to medical,
                                      etc., expenses) for any prior taxable year, gross income does not include—
                                           (1) amounts received under workmen’s compensation acts as com-
                                        pensation for personal injuries or sickness;

                                      Regulations promulgated under section 104 further explain
                                      the exclusion:
                                      Section 104(a)(1) excludes from gross income amounts which are received
                                      by an employee under a workmen’s compensation act (such as the Long-
                                      shoremen’s and Harbor Workers’ Compensation Act, 33 U.S.C., c. 18), or
                                      under a statute in the nature of a workmen’s compensation act which pro-
                                      vides compensation to employees for personal injuries or sickness incurred
                                      in the course of employment. Section 104(a)(1) also applies to compensa-
                                      tion which is paid under a workmen’s compensation act to the survivor or
                                      survivors of a deceased employee. * * * [Sec. 1.104–1(b), Income Tax
                                      Regs.]

                                      The parties do not dispute that section 104(a)(1) excludes
                                      from Mr. Fernandez’ income the amounts he received from
                                      LACERA. The question is whether the same section excludes




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                                      (378)                        FERNANDEZ v. COMMISSIONER                                         381


                                      the amounts petitioner received attributable to Mr.
                                      Fernandez’ benefits under the stipulated division of retire-
                                      ment benefits.
                                         Petitioner argues that the $11,691 is excluded from her
                                      income because section 402(e)(1)(A) provides that an alter-
                                      nate payee pursuant to section 414(p) who is the former
                                      spouse of the participant shall be treated as the distributee
                                      of any distribution of payment made to the alternate payee
                                      under a qualified domestic relations order (QDRO). 3
                                         Section 402(a) provides that amounts distributed from
                                      employee trusts are taxable to the distributee ‘‘Except as
                                      otherwise provided in this section’’, and section 72 provides
                                      that ‘‘Except as otherwise provided in this chapter gross
                                      income includes any amount received as an annuity * * *
                                      under an * * * endowment, or life insurance contract.’’ 4
                                      Nowhere in section 402(a) or section 72 is section 104(a)
                                      mentioned. Section 402(e)(1)(A) explicitly provides: ‘‘For pur-
                                      poses of subsection (a) [of section 402] and section 72, an
                                      alternate payee who is the spouse or former spouse of the
                                      participant shall be treated as the distributee of any distribu-
                                      tion or payment made to the alternate payee under a quali-
                                      fied domestic relations order’’. If Congress had included sec-
                                      tion 104 in this portion of the statute, the result in this case
                                      might be different. However, without congressional approval
                                      we decline to expand the reach of section 402(e)(1)(A) beyond
                                      the sections specifically referred to in its text.
                                         In the alternative petitioner argues that because she steps
                                      into the shoes of her former husband and he was injured at
                                      the time of his early retirement, she should be taxed in the
                                      same manner as her former husband. A version of section
                                      104(a)(1) allowing an injured person to exclude disability
                                      income from his or her taxable income has been in the Code
                                      since the Revenue Act of 1918 when it was added because
                                      ‘‘Under the present law it is doubtful whether amounts
                                        3 As petitioner points out, the order entered in her divorce case is not technically a QDRO

                                      because it relates to a distribution from a government plan. However, under sec. 414(p)(11) the
                                      distribution is treated in the same manner as one made pursuant to a QDRO.
                                        4 We note that generally tax-qualified plans are subject to sec. 401(a)(13), which prohibits any

                                      assignment or alienation of the benefits of the plan and that sec. 402 was added to the Code
                                      in order to create ‘‘an exception to the ERISA preemption provision with respect to these
                                      [QDRO] orders’’. S. Rept. No. 98–575, at 19 (1984), 1984–2 C.B. 447, 456. Sec. 402, under very
                                      explicit circumstances, protects the rights of former spouses by allowing for the assignment of
                                      benefits pursuant to a QDRO. Although part of that protection, the purpose of sec. 402 was not,
                                      as petitioner argues, to prevent the taxation of benefits assigned from a former spouse.




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                                      382                 138 UNITED STATES TAX COURT REPORTS                                        (378)


                                      received * * * as compensation for personal injury or sick-
                                      ness * * * are required to be included in gross income.’’ H.R.
                                      Rept. No. 65–767 (1918), 1939–1 C.B. (Part 2) 86, 92. In all
                                      of the years since, to our knowledge, petitioner’s particular
                                      issue has not been before the Court. We note that petitioner
                                      did not suffer an injury, and the Senate explicitly stated ‘‘as
                                      compensation for personal injury’’. In the case at hand the
                                      compensation was not for petitioner’s personal injury, but
                                      that of her former husband.
                                         Petitioner does not cite any relevant law to establish her
                                      position. We similarly find none; and in the absence of
                                      congressional intent we note that we have strictly construed
                                      section 104(a)(1) to conform to the general purview of section
                                      61, that all income is taxable unless explicitly excluded. See
                                      Baldwin v. Commissioner, T.C. Memo. 2000–306 (citing Kane
                                      v. United States, 43 F.3d 1446, 1449 (Fed. Cir. 1994)). 5
                                      Accordingly, we find that the $11,691 is taxable income to
                                      petitioner and she is liable for the deficiency.
                                         The Court has considered all of petitioner’s contentions,
                                      arguments, requests, and statements. To the extent not dis-
                                      cussed herein, we conclude that they are meritless, moot, or
                                      irrelevant.
                                         To reflect the foregoing,
                                                                           Decision will be entered for respondent.

                                                                               f




                                         5 This outcome should come as no surprise to petitioner. Although not controlling on this

                                      Court, we note that the order and stipulated division of retirement benefits stated that
                                      ‘‘[d]istribution under this Order shall be taxable to the Non-member [petitioner] and not the
                                      Member [her former spouse].’’ We further note that the State court did not decrease petitioner’s
                                      share of the disability payments because it believed that she would receive the money tax free.




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