                    T.C. Summary Opinion 2009-103



                       UNITED STATES TAX COURT



                 GLENDA J. STRAND, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos. 5814-07S, 24963-07S.     Filed July 9, 2009.



     Robert E. Bergman, for petitioner.

     Brenda M. Fitzgerald, for respondent.



     RUWE, Judge:   These consolidated cases were heard pursuant

to the provisions of section 74631 of the Internal Revenue Code

in effect when the petitions were filed.    Pursuant to section

7463(b), the decisions to be entered are not reviewable by any



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

other court, and this opinion shall not be treated as precedent

for any other case.

     Respondent determined $2,300 and $1,943 deficiencies in

petitioner’s 2004 and 2005 Federal income taxes, respectively.

The issue for decision is whether the $12,621 petitioner received

in 2004 and the $12,952 petitioner received in 2005 for her

interest in her former husband’s military retirement pension are

includable in her gross income.

                             Background

     These cases were submitted fully stipulated in accordance

with Rule 122.    The stipulations of fact and the attached

exhibits are incorporated herein by this reference.    At the time

the petitions were filed, petitioner resided in Georgia.

Petitioner married Douglas H. Strand (Mr. Strand) on October 15,

1960.    Nearly 20 years later petitioner and Mr. Strand separated

and declared their marriage irretrievably broken.    On May 8,

1980, petitioner and Mr. Strand entered into a Property

Settlement Agreement (agreement) filed in the Superior Court,

State of Washington, County of Spokane (superior court).2     In

pertinent part, the agreement states:




     2
         Washington is a community property State.
                                - 3 -

     It is understood that the Husband is receiving from the
     Federal Government a monthly retirement payment. This
     monthly payment arises from the military service of the
     Husband. Husband expressly promises and agrees that he
     will instruct the appropriate branch or department of
     the U. S. Army to pay to Wife one-half of 75% of the
     monthly amount received or to be received by Husband.
     [T]his amount to Wife will increase as there is any
     increase made in payments to Husband and similarly if
     Husband’s payment should be reduced for any reason,
     then the one-half of 75% would be reduced accordingly.
     Husband agrees that the assignment to Wife of the one-
     half of 75% of all future payments shall be irrevocable
     until the death of Wife or upon the Wife becoming
     remarried. * * *

The couple divorced on August 28, 1980.     The superior court

Decree of Dissolution of Marriage (decree) ratified, confirmed

and approved the agreement in all respects.

     A year after their divorce, the Supreme Court held that

military retirement pay was not property subject to division upon

marital dissolution under community property laws.     McCarty v.

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

Court’s decision in McCarty, Mr. Strand sought modification of

the agreement in superior court.     On June 2, 1982, the superior

court determined that “the criteria for retroactive application

of McCarty v. McCarty are not applicable in this case” and not

only found that the decree should be kept in full force but also

emphasized that “The military pension payments to petitioner are

property and not maintenance.”3


     3
       In September 1982, in response to McCarty, Congress
enacted the Uniformed Services Former Spouses’ Protection Act
                                                   (continued...)
                               - 4 -

     In September 1986 the Department of the Army, per

petitioner’s request, determined that petitioner was entitled to

begin receiving direct payments “for division of property from

the U. S. Army retired pay of Douglas H. Strand”.   The direct

payments were to begin on or about August 1986.

     For taxable years 2004 and 2005 petitioner received payments

from the Defense Finance and Accounting Service (DFAS) of $12,621

and $12,952, respectively, for her interest in Mr. Strand’s

military retirement pension.   DFAS issued to petitioner Forms

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

Profit-Sharing Plans, IRAs, Insurance Contracts, etc., for 2004

and 2005 which indicated that the $12,621 and $12,952 payments

were both the gross distributions and taxable amounts for 2004

and 2005, respectively.

     On petitioner’s timely filed Forms 1040, U.S. Individual

Income Tax Return, for both 2004 and 2005, she did not report the

payments received from DFAS.   On January 16 and August 20, 2007,

respondent issued to petitioner notices of deficiency for 2004

and 2005, respectively.   Respondent determined that petitioner



     3
      (...continued)
(USFSPA) as part of the Dept. of Defense Authorization Act, 1983,
Pub. L. 97-252, sec. 1002, 96 Stat. 730-738 (1982), which
authorized State courts to treat military retirement pay in
accordance with State law, thereby allowing State courts to
consider military pensions as community assets for distribution
in divorce proceedings. USFSPA was made retroactive to the day
before McCarty was decided (i.e., June 25, 1981). Id.
                                 - 5 -

failed to report the $12,621 and $12,952 payments in her gross

income for 2004 and 2005, respectively.4

     Petitioner timely filed petitions contesting the notices of

deficiency.   The cases were consolidated for trial, briefing and

opinion on September 10, 2008.

                              Discussion

     Gross income is defined as “all income from whatever source

derived” unless otherwise specifically excluded.     Sec. 61(a).

Specifically included in gross income are amounts derived from

pensions.   Sec. 61(a)(11).   “A military retirement pension, like

other pensions, is simply a right to receive a future income

stream from the retiree’s employer.”       Eatinger v. Commissioner,

T.C. Memo. 1990-310; see also Mitchell v. Commissioner, 131 T.C.

___, ___ (2008) (slip op. at 7) (“Military retired pay

constitutes a pension within the meaning of * * * [section

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

     Although State law determines the nature of a property

interest, Federal law determines the Federal taxation of that

property interest.    Mitchell v. Commissioner, supra at ___ (slip

op. at 7) (citing United States v. Mitchell, 403 U.S. 190, 197

(1971)).    Tax liability for income from property attaches to the


     4
       In the notice of deficiency for tax year 2004, respondent
also disallowed petitioner’s claimed $12 medical expense
deduction. Petitioner, however, has not contested this
adjustment, and consequently we deem it conceded. See Rule
34(b)(4).
                               - 6 -

owner of the property.   Blair v. Commissioner, 300 U.S. 5, 12

(1937).

     Petitioner argues that the payments made to her from Mr.

Strand’s military retirement pension are not includable in her

gross income because the payments were received as a division of

property, rather than as alimony, and therefore are not taxable

to her under section 1041.   Petitioner further asserts that

because taxes were withheld from the total gross distribution

from DFAS before her separate share was calculated, any tax she

is required to pay amounts to double taxation.5

     In 1980, the year of petitioner and Mr. Strand’s divorce,

the law of the State of Washington was that a military pension

was community property to the extent that community funds had

been invested in it and it was before the court for consideration

in a dissolution proceeding.   Wilder v. Wilder, 534 P.2d 1355,


     5
       Petitioner also theorizes that since she “has not been
required before now, 2004 and 2005, to pay any Federal Income Tax
on the monies received by her pursuant to * * * [the agreement]”,
she should not now be treated any differently. However, each tax
year stands on its own and must be separately considered. Haeder
v. Commissioner, T.C. Memo. 2001-7 (citing United States v.
Skelly Oil Co., 394 U.S. 678, 684 (1969)).

     Petitioner’s position is in the nature of an argument for
equitable estoppel. It is well settled, however, that the
Commissioner cannot be estopped from correcting a mistake of law,
even where a taxpayer may have relied to his detriment on that
mistake. Dixon v. United States, 381 U.S. 68, 72-73 (1965); Auto
Club of Mich. v. Commissioner, 353 U.S. 180, 183-184 (1957); see
also Massaglia v. Commissioner, 286 F.2d 258, 262 (10th Cir.
1961), affg. 33 T.C. 379 (1959); Zuanich v. Commissioner, 77 T.C.
428, 432-433 (1981).
                               - 7 -

1357 (Wash. 1975); see also In re Marriage of Giroux, 704 P.2d

160, 161 (Wash. Ct. App. 1985) (“Before 1981, the Washington

Supreme Court recognized that a military pension was community

property to the extent that community funds or community labor

have been invested and, as such, could be divided.”).   In

accordance with the agreement and incident to the divorce, we

find that petitioner received, as her separate property, rights

to and an interest in Mr. Strand’s military retirement pension.

     Generally, no gain or loss is recognized on a transfer of

property from an individual to a former spouse, but only if the

transfer is incident to the divorce.   Sec. 1041(a).   However, “It

is arguable that section 1041 has no application to an equal-in-

value division of the property of a marital community, since

there is no transfer of property but only a partition of the

community.”   Weir v. Commissioner, T.C. Memo. 2001-184 (citing

Commissioner v. Mills, 183 F.2d 32, 34 (9th Cir. 1950), affg. 12

T.C. 468 (1949), and Walz v. Commissioner, 32 B.T.A. 718, 720

(1935)).   In any event, section 1041 is inapplicable to any

transfer in 1980 incident to either the agreement or the decree,

since any such transfer would be pursuant to an instrument that

predates the effective date of section 1041.   See Deficit

Reduction Act of 1984, Pub. L. 98-369, sec. 421, 98 Stat. 793

(adding section 1041, generally effective for transfers after
                               - 8 -

July 18, 1984, but in some cases effective for transfers after

December 31, 1983).

     In Weir v. Commissioner, supra, discussing the division of

community property incident to divorce that occurred before the

enactment of section 1041, we stated:

          Law predating section 1041 establishes that, in
     the case of an approximately equal division of
     community property on divorce, no gain is recognized on
     the theory that no sale or exchange has occurred but
     only a nontaxable partition, and the basis of the
     property set aside for each spouse is its basis to the
     community prior to the divorce. * * *

Petitioner is correct when she asserts that the actual transfer

of the property right is not a taxable event.    Thus, in 1980

petitioner recognized no gain (or loss) on receipt of her

separate property rights in Mr. Strand’s military retirement

pension.   But because the community, and therefore petitioner,

has no basis in the military retirement pension, the income from

the property transferred is a taxable distribution, on which

petitioner is responsible to pay income taxes.    Accordingly, the

military retirement pension payments she received are includable

in gross income.   Sec. 61(a)(11); sec. 1.61-11(a), Income Tax

Regs.

     With respect to petitioner’s alternative assertion that her

paying tax on the military retirement pension payments would

amount to double taxation, the record is devoid of any evidence
                                 - 9 -

that double taxation would occur.6       Petitioner has not offered

any evidence to establish what amount, if any, of the pension

payments was included in Mr. Strand’s taxable income.

Consequently, we find her assertion to be without merit.

     In conclusion, we hold that the $12,621 and $12,952 pension

payments made directly to petitioner in 2004 and 2005,

respectively, were made in accordance with her separate property

interest in Mr. Strand’s military retirement pension and are

includable in petitioner’s gross income for the year in which

they were received.

     We have considered all of the parties’ arguments; and to the

extent we have not specifically addressed them, we conclude them

to be moot, irrelevant, or without merit.

     To reflect the foregoing,

                                              Decisions will be entered

                                         for respondent.




     6
       We note that “Congress amended the definition of
‘disposable retired pay’ such that the disposable retired pay is
not reduced by income taxes withheld.” Mitchell v. Commissioner,
131 T.C. ___, ___ (2008) (slip op. at 10) (citing 10 U.S.C. sec.
1408(a)(4) (Supp. III 1991), and the National Defense
Authorization Act for Fiscal Year 1991, Pub. L. 101-510, sec.
555(b)(3), (e)(2), 104 stat. 1569, 1570 (1990)). This amendment,
however, is effective only for divorces entered into on or after
Feb. 3, 1991. Id.
