                     T.C. Summary Opinion 2004-164



                        UNITED STATES TAX COURT



         DEANNA S. DOTSON AND ROBERT L. DOTSON, Petitioners v.
              COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 5321-03S.              Filed December 1, 2004.


     DeAnna S. Dotson and Robert L. Dotson, pro sese.

     Peter R. Hochman, for respondent.




     THORNTON, Judge:     This case was heard pursuant to section

7463 of the Internal Revenue Code as in effect when the petition

was filed.1    The decision to be entered is not reviewable by any

other court, and this opinion should not be cited as authority.



     1
       Unless otherwise indicated, subsequent section references
are to the Internal Revenue Code in effect for the year at issue.
All Rule references are to the Tax Court Rules of Practice and
Procedure.
                                 - 2 -

     Respondent determined a $1,950 deficiency in petitioners’

2000 Federal income tax.   The issue for decision is whether

petitioners must include in gross income payments that Deanna S.

Dotson (hereinafter petitioner) received with respect to her ex-

husband’s military pension.

                               Background

     The parties submitted this case fully stipulated pursuant to

Rule 122.   The stipulated facts are so found.

     On July 5, 1963, petitioner married Chris L. Jefferies (Mr.

Jefferies).   For some unspecified number of years during the

marriage, Mr. Jefferies served in the U.S. Air Force.

     In 1980 petitioner filed for a divorce.          She and Mr.

Jefferies entered into a separation agreement (the separation

agreement) to settle their affairs.          Paragraph 3 of the

separation agreement states in pertinent part:

          The parties make the following disposition and
     settlement in regard to the real and personal property
     accumulated by them during the course of their
     marriage:

                *    *     *     *       *      *    *

               b) Petitioner shall have and retain one-half
     of the stocks and bonds currently owned by the parties,
     the Plymouth van and one-half of Respondent’s [Mr.
     Jefferies’] military retirement income upon his
     retirement from the military based on 20 years service
     and at the grade of Lt. Colonel.

                *    *     *     *       *      *    *
                              - 3 -


               f) Respondent shall have and retain one-half of
     the stocks and bonds currently owned by the parties and the
     Peugeot.

               *    *    *    *       *   *   *

               h) Other than hereinafter provided, the parties
     acknowledge that they have equitably divided the real and
     personal property between them so that the personal property
     in each party’s possession may remain and be owned by that
     party free and clear of any claim of the other.

     On July 2, 1980, the District Court of El Paso County,

Colorado (the divorce court), entered a decree dissolving the

marriage between petitioner and Mr. Jefferies.    The divorce

decree incorporates by reference the provisions of the separation

agreement.

     In 1992, Mr. Jefferies retired from the military.

Petitioner mailed an Application For Former Spouse Payments From

Retired Pay, DD Form 2293, FEB 91, to the Defense Finance and

Accounting Service (DFAS) in Denver, Colorado.    In the

application, she requested direct payment from DFAS of 50 percent

of disposable retired pay per month based on 20 years of service

at the rank of lieutenant colonel and attached a copy of the

divorce decree as per the instructions on the application.

Starting in January of 1993 and continuing for all relevant

periods, petitioner received directly from DFAS monthly payments

of $1,080.23 (the military retirement payments).    The parties

have stipulated that during 2000 petitioner’s military retirement

payments totaled (ostensibly after rounding) $12,962.
                                - 4 -

     On their 2000 joint Federal income tax return, petitioners

included none of the military retirement payments in their gross

income.    By notice of deficiency dated February 10, 2003,

respondent determined that $12,962 of military retirement

payments was includable in petitioners’ 2000 gross income.2

                             Discussion

     Gross income generally includes income from pensions,

including military retirement benefits.    Sec. 61(a)(11); secs.

1.61-2(a)(1), 1.61-11(a), Income Tax Regs.    Such pension income

is generally taxed to the owner of the pension (and not

necessarily to the recipient), in accordance with the well-

established principle that income from property is taxed to the

owner of the property.    Eatinger v. Commissioner, T.C. Memo.

1990-310 (citing Helvering v. Clifford, 309 U.S. 331 (1940); Poe

v. Seaborn, 282 U.S. 101 (1930); Lucas v. Earl, 281 U.S. 111

(1930)).


     2
       Petitioner alleges, and respondent does not dispute, that
each year since 1995 petitioner has disclosed on her Federal
income tax returns her receipt of the military pension payments
and included a notation stating her reasons for excluding them
from gross income. Petitioner alleges, and respondent does not
dispute, that after respondent initially questioned her exclusion
of the military pension payments for 1998 and petitioner sent
respondent a letter explaining her reasons for claiming the
exclusion, petitioner received a “Closing Letter” from respondent
dated Nov. 2, 2000, wherein respondent accepted petitioner’s
explanation and allowed the exclusion of the military pension
payments from gross income for 1998. Petitioner alleges, and
respondent does not dispute, that a copy of this “Closing Letter”
was attached to petitioners’ 2000 joint Federal income tax
return.
                                   - 5 -

       Respondent argues that the military retirement payments are

taxable to petitioner because, pursuant to the terms of the

separation agreement as incorporated in the divorce decree, she

holds an ownership interest in them.       For the reasons explained

below, we disagree.

       Whereas Federal law controls the taxation of the military

retirement payments, State law controls in deciding what property

interests were created.      See United States v. Mitchell, 403 U.S.

190, 196 (1971).       Under applicable Colorado law as existent when

petitioner’s divorce decree was entered, future retired pay to be

received under a military retirement pension did not constitute

“property” subject to division in a divorce proceeding.       Ellis v.

Ellis, 552 P.2d 506 (Colo. 1976).3

       Respondent seems to acknowledge that the holding in Ellis v.

Ellis, supra, prevented the divorce court from exercising its

equitable powers to divide Mr. Jefferies’ future retired military

pay.       Respondent suggests, however, that through their separation

agreement petitioner and Mr. Jefferies accomplished what the

divorce court lacked authority to do on its own; namely, give



       3
       In 1988, the Colorado Supreme Court overturned Ellis v.
Ellis, 552 P.2d 506 (Colo. 1976), because of changes in State and
Federal law, notably the enactment of the Uniformed Services
Former Spouses’ Protection Act (USFSPA), 10 U.S.C. sec. 1408
(1982). In re Marriage of Gallo, 752 P.2d 47 (Colo. 1988). The
holding in Gallo was prospective in nature only, see In re
Marriage of Booker, 833 P.2d 734, 740 (Colo. 1992), and
consequently does not affect our analysis.
                                - 6 -

petitioner an ownership interest in Mr. Jefferies’ future retired

military pay.

     We have no reason to question the validity of petitioner’s

and Mr. Jefferies’ agreement to divide Mr. Jefferies’ future

“military retirement income”.   In Colorado, as elsewhere, parties

to a divorce generally “are at liberty mutually to agree upon

provisions * * * which the court could not impose upon them.”      In

re Marriage of Lamm, 682 P.2d 67, 68 (Colo. Ct. App. 1984)

(upholding validity of separation agreement requiring automatic

increases in child support payments according to cost of living

increases, despite Colorado courts’ lack of authority to impose

such an arrangement).   That said, however, we are not persuaded

that the separation agreement gave petitioner any ownership

interest in Mr. Jefferies’ future military retirement pay.    To

the contrary, we believe that under Ellis v. Ellis, supra, at the

time of petitioner’s separation agreement and divorce decree the

future military retirement pay was not “property” in which

petitioner could acquire an ownership interest.

     As the Colorado Supreme Court explained in In re Marriage of

Balanson, 25 P.3d 28, 35 (Colo. 2001), a determination as to

property division in a Colorado divorce proceeding “requires two

steps:   first, a court must determine whether an interest

constitutes ‘property’; if so, the court must then determine

whether the property is marital or separate.”   The lower court’s
                              - 7 -

ruling in In re Marriage of Ellis, 538 P.2d 1347, 1350 (Colo. Ct.

App. 1975), affd. 552 P.2d 506 (Colo. 1976), clearly turned on

the first step of this two-step analysis.   After noting that the

relevant dissolution of marriage statute did not define

“property”, the lower court stated:

          We hold that husband’s army retirement pension and
     the future retired pay to be received thereunder do not
     constitute ‘property’ and are, therefore, not subject
     to division as such * * * . It is a resource of the
     husband in the nature of income to be received in the
     future * * * to be considered also as any other
     ‘economic circumstance’ of the husband in determining a
     just division of the marital property * * *. [Id.]

Affirming this ruling and approving the lower court’s reasoning,

the Colorado Supreme Court stated:

     We hold, as did the court of appeals, that military
     retirement pay is not ‘property’ under the dissolution
     of marriage act. Our reason is that it does not have
     any of the following elements: cash surrender value;
     loan value; redemption value; lump sum value; and value
     realizable after death. [Ellis v. Ellis, 552 P.2d at
     507.]

See also In re Marriage of Booker, 833 P.2d 734, 735 (Colo. 1992)

(a divorce court order stating that the wife “‘shall remain

entitled to any and all military benefits’” was construed merely

to ensure that the wife continued to receive benefits to which

she was entitled as a military spouse rather than as treating the

military pension as divisible marital property); In re Marriage

of Graham, 574 P.2d 75, 76-77 (Colo. 1978) (citing Ellis v.

Ellis, 552 P.2d at 506, as well as a dictionary definition of
                                - 8 -

“property”, in holding that an educational degree was not

“property” subject to division in a divorce proceeding).     But cf.

Pfister v. Commissioner, T.C. Memo. 2002-198, affd. 359 F.3d 352

(4th Cir. 2004); Witcher v. Commissioner, T.C. Memo. 2002-292,

wherein the relevant State statutes (of Virginia and

Pennsylvania, respectively) specifically provided that military

pension benefits qualified as marital property subject to

equitable division.

     The mere fact that DFAS made the military retirement

payments directly to petitioner, in amounts specified by the

divorce court decree, does not mean that petitioner had any

ownership interest in the payments.     Pursuant to the Uniformed

Services Former Spouses’ Protection Act (USFSPA), 10 U.S.C. sec.

1408 (1982), DFAS is generally required to make direct payments

of military retired pay to a former spouse as specified in a

court order.4    Nothing in the USFSPA, however, creates a property

interest where none otherwise exists under applicable State law.



     4
         Specifically, 10 U.S.C. sec. 1408(d)(1) provides:

          After effective service on the Secretary concerned
     of a court order providing for the payment of child
     support or alimony or, with respect to a division of
     property, specifically providing for the payment of an
     amount of the disposable retired pay from a member to
     the spouse or a former spouse of the member, the
     Secretary shall make payments * * * from the disposable
     retired pay of the member to the spouse or former
     spouse * * * as directed by court order * * *
                               - 9 -

See 10 U.S.C. sec. 1408(c)(2) (the USFSPA “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”); Pfister v. Commissioner, supra

(“The USFSPA did not create any right or entitlement to military

retired pay”).

     In conclusion, under applicable Colorado law at the time of

the separation agreement and divorce decree, Mr. Jefferies’

future retired military pay did not constitute property.

Consequently, we are unpersuaded that the separation agreement

gave (or could have given) petitioner any ownership interest in

any such “property”.   Rather, consistent with the lower court’s

reasoning in In re Marriage of Ellis, supra, we conclude that the

military retirement payments are most reasonably regarded as

periodic payments in satisfaction of petitioner’s marital

property rights.   Accordingly, the military retirement payments

are not includable in petitioners’ gross income.   Cf. Mivec v.

Commissioner, T.C. Memo. 1981-695 (“[I]t is well settled that

where, upon divorce, a husband makes payments in satisfaction of

the property rights of his wife, the amounts received by the

wife, even though periodic and incident to a divorce, are capital
                             - 10 -

in nature and, therefore, are not includable in her gross income

under section 71.”).


                                        Decision will be entered

                                   for petitioners.
