C.I.R. v. Dunkin

• Decision Date: 31 August 2007
• Docket Number: No. 05-76004.,05-76004.
• Citation: 500 F.3d 1065
• Parties: COMMISSIONER OF INTERNAL REVENUE, Petitioner-Appellant, v. John Michael DUNKIN, Respondent-Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

500 F.3d 1065

COMMISSIONER OF INTERNAL REVENUE, Petitioner-Appellant, v. John Michael DUNKIN, Respondent-Appellee.

No. 05-76004.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted June 13, 2007.

Filed August 31, 2007.

Deborah K. Snyder and Richard Farber, United States Department of Justice, Tax Division, Washington D.C., for the appellant.

John M. Dunkin, Ladera Ranch, CA, pro se.

Appeal from a Decision of the United States Tax Court. Tax Ct. No. 4448-03.

Before: D.W. NELSON, STEPHEN REINHARDT, and PAMELA ANN RYMER, Circuit Judges.

Opinion by Judge D.W. NELSON; Dissent by Judge REINHARDT.

D.W. NELSON, Senior Circuit Judge:

The Commissioner of Internal Revenue ("Commissioner") appeals from a decision of the United States Tax Court allowing John Michael Dunkin ("John" or "appellant") to reduce his taxable income for the 2000 tax year by $25,511—the amount he paid his former spouse Julie Green ("Julie") incident to a division of community property assets upon marital dissolution. In 1997, a California Superior Court ("divorce court") awarded Julie one half of the marital community's interest in pension benefits provided by John's employer. However, because John chose to continue working and did not terminate his participation in the plan following divorce, the pension administrator did not begin making distributions straight away. California courts have recognized that an employee spouse like John might attempt to defeat a non-employee spouse's community interest in a pension by continuing to work. As a result, under California law, Julie was not required to await John's actual retirement and instead demanded monthly payments in lieu of her community pension interest pursuant to In re Marriage of Gillmore, 29 Cal.3d 418, 174 Cal.Rptr. 493, 629 P.2d 1 (1981). In 2000, John used $25,511 of the wages he earned by continuing to work to satisfy Julie's "Gillmore rights." We must decide whether John was entitled to reduce his taxable income by the amount paid over to Julie in 2000.¹ We conclude that he was not and reverse the Tax Court's contrary holding.

BACKGROUND

John Dunkin and his former wife Julie married on August 26, 1967, separated on February 19, 1996, and were divorced on August 19, 1997. For most of this period and continuing until his retirement in 2002, John was employed by the Los Angeles Police Department ("L.A.P.D."). As part of his L.A.P.D. compensation package, John participated in a defined benefit plan administered by the Los Angeles Board of Pension Commissioners ("pension board"). Under the plan, upon retirement, John was entitled to receive monthly payments for life, based on the length of his service, his rank, and his monthly salary. As of May 19, 1989, John's pension rights were fully vested and mature.² The pension benefits earned during marriage were community property. Gillmore, 174 Cal. Rptr. 493, 629 P.2d at 3; In re Marriage of Benson, 36 Cal.4th 1096, 32 Cal.Rptr.3d 471, 116 P.3d 1152, 1156 (2005) (explaining that pension benefits represent "deferred compensation for work . . . performed during the marriage").

Under California law, upon the dissolution of a marriage, a divorce court is required to divide the community estate equally. Cal. Fam.Code § 2550. In addition, the court may order spousal support, commonly referred to as "alimony." Cal. Fam.Code § 4330(a). In this case, the divorce court explicitly declined to order spousal support.

As part of the division of community property, the divorce court awarded one half of the community's interest in the pension to each spouse. A California court may value and distribute a community's interest in a pension in a number of different ways. A court may, for example, award the employee spouse the full pension and award an offsetting lump-sum representing one half of the present value of the pension to the non-employee spouse (usually out of other community assets if the estate is sufficiently large). Gillmore, 174 Cal.Rptr. 493, 629 P.2d at 7; In re Marriage of Skaden, 19 Cal.3d 679, 139 Cal.Rptr. 615, 566 P.2d 249, 253-54 (1977); Bergman, 214 Cal.Rptr. at 664-65; In re Marriage of Shattuck, 134 Cal.App.3d 683, 184 Cal.Rptr. 698, 699 (1982) (noting that this represents the "preferable mode of division" (internal citation omitted)). Alternatively, a court may decline to calculate the present value of the pension and simply order a division of each payment as it comes due. Gillmore, 174 Cal.Rptr. 493, 629 P.2d at 7; In re Marriage of Stenquist, 21 Cal.3d 779, 148 Cal.Rptr. 9, 582 P.2d 96, 105 (1978).

Of course, pension payments typically do not come due until the employee spouse has retired. Further, the employee spouse alone may decide whether and when to retire. In Gillmore, the California Supreme Court recognized that an employee's ability to unilaterally delay retirement, and thereby deprive the non-employee of his or her interest in a pension, presented an opportunity for abuse. 174 Cal.Rptr. 493, 629 P.2d at 4. As a result, in California, if an employee spouse chooses to continue to work following divorce, the non-employee spouse may demand reimbursement for his or her share of the benefits that would have been forthcoming if the employee spouse had retired. Id. at 6-7, 174 Cal.Rptr. 493.

In this case, the divorce court did not calculate the present value of the pension and, instead, awarded an in-kind division of benefits. The court calculated the community's interest as $4,123.43 per month — the benefit that would have been forthcoming had John retired on the date of trial — and Julie's share as $2,072. Julie exercised her rights under Gillmore, and John was ordered to reimburse his ex-spouse for the amounts she lost as a result of his decision to continue working. The court also ordered the pension board to make similar payments to Julie following John's retirement. Because these payments were related to Julie's community property interests and were not alimony, there was no provision for their cessation upon her death or remarriage. Instead, John was required to make payments until he retired, and the pension board was ordered to make payments for as long as benefits were payable, even if Julie died in the interim, in which case benefits would flow to her designated beneficiaries.

In 2000, John paid $25,511 to Julie pursuant to the divorce court's order. While he was free to use any property at his disposal, he funded the payments out of the wages he earned in exchange for his continued employment with the L.A.P.D. John claimed this amount as deductible alimony on his federal income tax return and the IRS disallowed the deduction. He then sought and was granted relief by the United States Tax Court which allowed him to "reduce" his income by $25,511 without specifying whether appellant was entitled to exclude a portion of his wages from gross income or deduct, as alimony or otherwise, the payments made to his ex-spouse. Dunkin v. Comm'r, 124 T.C. 180, 2005 WL 730076 (T.C.2005).

DISCUSSION

I. Jurisdiction and Standard of Review

We have jurisdiction over the final judgment of the United States Tax Court under I.R.C. § 7482(a). We review decisions of the tax court on the same basis as we would any decision rendered by a district court in a civil bench trial. Condor Intern., Inc. v. Comm'r, 78 F.3d 1355, 1358 (9th Cir.1996). Therefore, we review the court's factual findings for clear error, its discretionary rulings for abuse of discretion, and its conclusions of law de novo. Id.

Under the Internal Revenue Code, income taxes are assessed based on a person's "taxable income," defined as gross income less deductions allowed by the Code. I.R.C. §§ 1, 63(a). Broadly speaking, the question in this case is whether John was entitled to exclude from gross income the $25,511 in wages that he paid over to Julie in 2000 or, if not, whether he was entitled to deduct the payments as alimony.

II. Appellant's Gross Income for 2000 Included the Wages that were Paid Over to his Ex-Spouse

A. General Principles

The first step in arriving at taxable income is to determine an individual's "gross income." Although the term is defined broadly (and somewhat circularly) to include "all income from whatever source derived," I.R.C. § 61(a), certain accessions to wealth that would ordinarily constitute income may be excluded by statute or other operation of law. See I.R.C. §§ 101-140 (listing items specifically excluded from gross income). However, given the clear Congressional intent to "exert . . . the full measure of its taxing power," Comm'r v. Glenshaw Glass Co., 348 U.S. 426, 430, 75 S.Ct. 473, 99 L.Ed. 483 (1955) (internal citations and quotation marks omitted), exclusions from gross income are construed narrowly in favor of taxation. Merkel v. Comm'r, 192 F.3d 844, 848 (9th Cir.1999).

There is no statutory provision that could plausibly be said to exclude from gross income the accessions to wealth at issue in this case, i.e., the wages paid by the L.A.P.D. to John during the year 2000. Indeed, wages received in exchange for labor are the very paradigm of income. I.R.C. § 61(a)(1). Although John owed a debt to Julie which he satisfied out of his monthly wages, standing alone, this is not a reason to exclude the wages from his gross income. Alex v. Comm'r, 628 F.2d 1222, 1224 (9th Cir.1980) ("It is not true that one's paycheck is . . . excludable from gross income whenever it is `spoken for' by creditors.").

B. Attribution of Income in the Marital Context

Although the mere fact that John used a portion of his wages to satisfy a debt does not justify any exclusions from his income, the fact that the payments were made to his ex-spouse under the direction of a divorce court makes this case seem difficult. Federal tax is imposed on the income "of" individuals. I.R.C. § 1. In Poe v. Seaborn, the Supreme Court, noting that "`of denotes ownership," 282 U.S. 101, 109, 51 S.Ct. 58, 75 L.Ed. 239 (1930), held that where...