W.F. v. Comm'r of Internal Revenue
| Decision Date | 11 December 1968 |
| Docket Number | Docket No. 2916-66. |
| Parties | W. F. AND EDNA M. WILLIAMS, PETITIONERS V. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
W. F. Williams, pro se.
Sheldon M. Sisson, for the respondent.
Petitioner, who spent roughly 20 percent of his more than 30 years of Federal service, married and domiciled in community property States and the balance in noncommunity property States, started to receive his civil service retirement annuity, to which he had made contribution throughout his career, while domiciled in Arizona. Held, under these facts, the retirement income is ‘acquired’ over a period of time, therefore, it is community property in the proportion that the domicile of the community in a community property State bears to petitioner's entire period of Federal service. This apportionment of retirement income credits for petitioner and his wife.
Respondent determined a deficiency in the petitioners' income tax for 1964 in the amount of $91.23.
The issue here involves the proper apportionment of retirement income credit and the community property consequences with respect to that credit and civil service retirement annuity income.
All of the facts have been stipulated and they are so found.
Walter F. and Edna M. Williams, husband and wife, had their legal residence in Yuma, Ariz., at the time they filed their petition herein. They filed a joint income tax return for 1964 with the district director of internal revenue at Phoenix, Ariz. Walter will hereinafter be called the petitioner.
Petitioner, a retired civil service employee, was approximately 55 years of age at the time of retirement on October 31, 1960. At that time he had 30 years and 9 months of Federal service. Out of this total time of Federal service petitioner lived with his wife and performed his official duties in community property States for 65 months. They were domiciled in Arizona at the time of his retirement.
Petitioner reported retirement pay in the amount of $4,572 in the joint income tax return for 1964 filed by him and his wife. In computing the retirement income credit, petitioner attributed one-half of the retirement pay or $2,286, to his wife, which resulted in a credit of $168.96 attributed to the Wife's portion of the retirement pay and a credit of $168.96 attributed to the petitioner's portion, or a total retirement income credit of $337.92 for 1964.
Section 37 of the Internal Revenue Code of 19541 allows a limited credit against income tax in the case of an individual who receives retirement income as defined in subsection (c) and who meets the eligibility requirements of subsection (b). Subsection (d) limits the amount of the retirement income of an individual that can be used in computing the credit to ‘$1,524 less' certain other payments. When a joint return is filed, the retirement income credit of each spouse eligible for such credit is separately computed. Sec. 1.37-1(d), Income Tax Regs. The regulations further provide that ‘If retirement income constitutes a community income under community property laws applicable to such income, the retirement income credit of each spouse shall be separately computed by taking into account one-half of such amounts.’ Sec. 1.37-1(e), Income Tax Regs.
Petitioner argues the separate or community property character of the civil service retirement income is determined by the marital status and domicile at the time he receives the income itself. It is his contention that all of the retirement income is community property because he acquired or earned it on his last working day when he was married and domiciled in Arizona, a community property State. He therefore contends the wife's retirement income credit was correctly computed on one-half of the retirement annuity income.
Respondent determined that only about 20 percent of the retirement annuity was community income and only one-half of that portion can be considered earned by the wife in computing her retirement income credit. Respondent's basic argument is that civil service retirement income is acquired over a period of time which represents service, therefore, it is the marital status and domicile of the petitioner during that period that determined whether the retirement pay is separate or community income. Thus it is his position that the civil service annuity contains separate and community property portions based on an allocation of his Government services on a time basis between services while domiciled and working in community and separate property States. This would mean that in the instant case where it is stipulated the married employee was domiciled in a community property State for roughly 20 percent of his more than 30 years of Federal service the annuity income would be divided into approximately 20-percent community property and the balance separate property of the employee.
Section 72(a) provides that ‘gross income includes any amount received as an annuity * * * under an annuity, endowment, or life insurance contract.’ We must determine what portion of the retirement income is community property and what portion is separate property in order to determine the retirement income credit of each. Since there are no specific Federal statutes in this area, the classification of property as separate or community is to be determined under the laws of the local jurisdiction. Buchaser v. Buchaser, 321 U.S. 157 (1913). The question is a little more graphically stated if we ask: What portion of the retirement annuity would, under general community property law, be includable in the wife's gross income if she filed an individual tax return?
Under the Arizona community property law ‘All property acquired by either husband or wife during the marriage, except that which is acquired by gift, devise or descent, or earned by the wife and her minor children while she lives separate and apart from her husband, is the community property of the husband and wife.’ Ariz.Rev.Stat.Ann.sec. 25-211A.
Arizona community property law is much like that law of the State of Washington which, in turn, borrowed its community property law from the State of California. Goodell v. Koch, 282 U.S. 118 (1930), Porter v. Porter, 67 Ariz. 273, 195 P.2d 132 (1948); and 1 de Funiak, Principles of Community Property 101 (1943).
An analysis of cases involving community property law clearly shows that marital status and domicile in community and non-community property States are the factors which determine whether the income is community property or not.
Under California law separate property acquired by a husband while domiciled in a noncommunity property State retains its character as separate property when he and his wife move to a community property State. In Re Bruggemeyer's Estate, 115 Cal.App. 525, 2 P.2d 534 (1931).
Also, the earnings of a husband who is domiciled in California are community income even though the services for which such earnings are received were performed in a noncommunity property State. Gallagher v. United States, 66 F.Supp. 743 (N.D.Cal. 1946). In contrast, the earnings of a husband who is domiciled in a non-community property State are separate income of the husband even though they are derived from the performance of services in a community property State. Shilkret v. Helvering, 138 F.2d 925 (C.A.D.C. 1943).
Generally it can be said that each spouse's interest in a pension or a retirement annuity is treated as ‘property’ within the meaning of that term in community property statutes. Crossan v. Crossan, 35 Cal.App.2d 39, 94 P.2d 609 (1939). Indeed, petitioner's treatment of the retirement annuity concedes it is subject to community ownership. The only issue is the extent of each spouse's interest in the retirement annuity.
Petitioner is wrong in his argument that merely because the annuity became payable when the community was domiciled in a community property State each spouse has a half interest in the retirement annuity. The retirement annuity is in the nature of deferred or added compensation for services performed. It results from services performed and contributions made over a period of years. If the services were all performed while the community was domiciled in a community property State and the contributions were made from community income then all of the retirement income would be community property. Herring v. Blakely, 385 S.W.2d 843 (Tex. 1965). So, too, if all of the services were performed and contributions made while the community was not domiciled in a community property State, the retirement annuity would be the separate property of the employee.
This is also the result when the services were all performed and contributions made before marriage.2
The fact that a fund exists to which petitioner made contributions throughout his entire Federal service and that certain rights in respect to that fund accrued to him during that same period, illustrates that petitioner was acquiring and, in fact, ‘acquired’ an interest throughout his entire period of service and not after it. But for his contributions and service there would be no retirement income. Any income he receives is in recognition of service and contributions he made to the fund over a period of time and represents ‘earnings.'3
It is obvious that under general principles of community property there...
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