Denbow v. Commissioner
| Decision Date | 09 March 1989 |
| Docket Number | Docket No. 9812-87. |
| Parties | Ann L. Denbow v. Commissioner. |
| Court | U.S. Tax Court |
Donald T. Smith, 3100 Continental Plaza, Fort Worth, Tex., for the petitioner. John S. Repsis, for the respondent.
Memorandum Findings of Fact and Opinion
By statutory notice dated January 27, 1987, respondent determined a deficiency in petitioner's 1983 Federal income taxes in the amount of $4,776. Respondent also determined that petitioner was liable for an addition to tax pursuant to section 6653(a)(1)1 in the amount of $238.80, and an addition to tax pursuant to section 6653(a)(2) of 50 percent of the interest due on $4,776. The only issue presented, aside from petitioner's liability for these additions, is whether $21,055 which petitioner received from her former husband during 1983 pursuant to their decree of divorce is includable in petitioner's income.
Some of the facts have been stipulated and are so found. The stipulation and attached exhibits are incorporated herein by this reference. Petitioner was a resident of Fort Worth, Texas, at the time she filed her petition. The parties have agreed that both petitioner and her husband, David E. Denbow (Denbow), were residents of Texas at all times relevant to this case, and that the law of Texas, a community property state, is determinative of their property rights.
Petitioner and Denbow were married on September 7, 1954. Denbow was on active duty in the United States Air Force from the time he and petitioner were married until his retirement in 1974. Denbow's position with the Air Force required that he and petitioner move every few years, thus making it impossible for petitioner to maintain steady full-time employment. Petitioner therefore depended upon Denbow for support during their marriage.
Petitioner and Denbow were divorced by decree dated December 10, 1980. That decree memorialized a property settlement agreement which awarded Denbow:
Any and all sums of cash in possession of or subject to the control of Denbow, including money on account in banks, savings institutions, or other financial institutions, which accounts stand in his name or from which he has the right to withdraw funds or which are subject to his control.
The decree contained identical provisions with respect to petitioner. The decree also gave Denbow "the land and house located in Corsicana, Texas," which was actually owned by his father. Petitioner remained in possession of the family home, and was to be responsible for the mortgage thereon until she moved or remarried, in which case the home was to be sold and the proceeds divided into equal shares. By an undated affidavit, Denbow later relinquished his right to share in the proceeds of the sale of the family home.
The decree stated that Denbow As petitioner was not employed at the time the divorce became final, Denbow intended that these payments be used to finance the education of their two children who were still in college, and to make the mortgage and utility payments on the family home. Petitioner became employed on a full-time basis in May 1981.
Denbow's retirement checks were sent directly to petitioner's address. Denbow requested that his employer also send his paycheck directly to petitioner unless he directed otherwise. However, because Denbow often directed otherwise, petitioner on many occasions did not receive the entire sum to which she was entitled under the decree.2
OpinionOrdinarily, gross income includes alimony or separate maintenance payments, sections 61(a)(8) and 71,3 and pensions, section 61(a)(11). This dispute concerns whether the payments received by petitioner pursuant to the December 10, 1980, divorce decree fall into either of these categories of income, or constitute periodic payments with respect to petitioner's interest in community property. See sec. 1.71-1(c)(4), Income Tax Regs. For convenience, we address the issue of Air Force retirement pay separately.
Although the taxation of property interests is determined under Federal law, it is local law that determines the nature of the property interests created. United States v. Mitchell 71-1 USTC ¶ 9451, 403 U.S. 190 (1971); Morgan v. Commissioner 40-1 USTC ¶ 9210, 309 U.S. 78 (1940). Under Texas law, military retirement benefits earned during marriage are community property, and benefits not divided upon divorce are owned by the parties as tenants-in-common. Forsman v. Forsman, 694 S.W.2d 112 (Tex. Civ. App. 1985). See Cearley v. Cearley, 544 S.W.2d 661 (Tex. 1976); Busby v. Busby, 457 S.W.2d 551 (Tex. 1970). Texas law characterizes military retirement benefits as compensation for services which are earned over the course of employment, and not as a gift or gratuity. Marks v. Marks, 470 S.W.2d 83 (Tex. Civ. App. 1971). Petitioner argues that all of Denbow's retirement benefits passed to him under the clause in the decree awarding him cash in his possession or control and accounts from which he has the right to withdraw. Petitioner further argues that Respondent cites Lowe v. Commissioner Dec. 38,044(M), T.C. Memo. 1981-350, in support of his position that at least one-half of Denbow's retirement benefits constituted petitioner's interest in community property.4
Petitioner's argument that the retirement benefits became Denbow's separate property upon divorce, taxable solely to him, is untenable, and not only because it is clearly contrary to the language of the divorce decree. The property interests which Texas law created in Denbow's retirement benefits were not created by that decree, but rather by virtue of the services rendered by Denbow during his years in the Air Force. Under Texas law, a civilian spouse's rights in her spouse's military retirement benefits become vested at the time they are earned, even if such rights are subject to divestment under certain conditions, such as dishonorable discharge or the failure of the military spouse to complete a required term of military service. Cearley v. Cearley, supra. "If the petitioner had a vested interest in the community income, she must report and pay a tax on one-half of such income." Bagur v. Commissioner Dec. 33,951, 66 T.C. 817, 820 (1976), remanded on another issue 79-2 USTC ¶ 9607 603 F.2d 491 (5th Cir. 1979). Therefore, one-half of Denbow's retirement benefits are includable in petitioner's income as her share of those benefits. Lowe v. Commissioner, supra.5
Although Texas nominally does not permit court-ordered alimony, see Benedict v. Commissioner Dec. 41,114, 82 T.C. 573, 576 (1984); McElreath v. McElreath, 345 S.W.2d 722 (Tex. 1961);6 "the labels attached to payments mandated by a decree of divorce or marriage settlement agreement are not controlling," and we will look to the facts and circumstances surrounding the divorce to determine what the payments represent. Benedict v. Commissioner, supra at 577. Section 71(a)(1) provides the general rule that upon divorce, a wife's income includes "periodic payments (whether or not made at regular intervals) received after the divorce decree in discharge of * * * a legal obligation which, because of the marital or family relationship, is imposed on or incurred by the husband under the decree * * *." Section 71(c)(1) provides an exception to this rule,7 stating that such periodic payments do not include "installment payments discharging a part of an obligation the principal sum of which is * * * specified in the decree * * *." While a principal sum must be specified, it may be determined indirectly, such as in the case where it is necessary only "to multiply the payments by a period certain in order to determine the principal sum specified." Kent v. Commissioner Dec. 32,203, 61 T.C. 133, 136 (1973). However, the exception does not apply "If, by the terms of the decree, * * * the principal sum * * * is to be paid or may be paid over a period ending more than 10 years from the date of such decree." Sec. 71(c)(2). In that case, the installment payments shall be treated as periodic payments for purposes of subsection 71(a) to the extent of 10 percent of the principal sum in any one taxable year.
The decree does not specify a sum certain to be paid in installments; it does not state the period of time over which such payments may be made, nor does it provide for continued installments notwithstanding such contingencies as Denbow's death or petitioner's death or remarriage. The decree is silent as to whether payments are to continue in the event of the death of either petitioner or Denbow. Petitioner has not shown or even argued that the payments would not cease upon her death, or that they would continue after Denbow's death. The general rule appears to be that in the absence of contrary provisions in the decree, periodic payments which are not clearly in the nature of a property settlement cease upon the death of either spouse or the remarriage of the recipient spouse.8 These infirmities are fatal to petitioner's argument that the payments are in respect of a division of community property for Federal income tax purposes. Even if we were to calculate a principal sum and period of payment actuarially, section 1.71-1(d)(3), Income Tax Regs., states that even when payments are to be made over a period of less than 10 years, they are still considered periodic...
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