John Michael Dunkin v. Commissioner, 124 T.C. No. 10

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U.S. Tax Court

John Michael Dunkin v. Commissioner

124 T.C. No. 10 · Docket 4448-03 · Decided Mar 31, 2005 · John O. Colvin · T.C. Opinion

Source ↗

Addresses I.R.C. § 402

124 T.C. No. 10 UNITED STATES TAX COURT JOHN MICHAEL DUNKIN, Petitioner v .

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 4448-03. Filed March 31, 2005.

Petitioner (P), who was divorced, was entitled to retire and receive pension payments. If P had retired, his former spouse would have been entitled under California community property law to receive an amount from P equal to one-half of his pension. However, P continued working, delaying his receipt of pension benefits. During the years P continued working, P’s former spouse was entitled under California community property law to receive a monthly payment from P equal to one-half of the pension benefit which P had earned during their marriage and which P would have received if he had retired on the date of their divorce.

Held

, P’s gross income from his continued employment, which he received in lieu of retirement benefits, does not include the amount of payments to which his former spouse was entitled under California community property law on the basis of the pension earned by P.

John Michael Dunkin, pro se.

Vicken Abajian

, for respondent.

COLVIN, Judge

: Respondent determined a deficiency of $8,222 in petitioner’s Federal income tax for 2000. The sole issue for decision is whether petitioner may reduce his gross income by the $25,511 that he was required by California community property law to pay to his former spouse in 2000. We hold that he may. Unless otherwise stated, section references are to the Internal Revenue Code as amended and in effect for 2000. FINDINGS OF FACT Some of the facts have been stipulated and are so found. Petitioner Petitioner resided in Long Beach, California, when the petition was filed.

The Superior Court for the County of Los Angeles, California, entered a judgment of divorce for petitioner and his former spouse on August 19, 1997. As of 1997, petitioner had been employed by the City of Los Angeles for 27 years. Petitioner participated in a defined benefit pension plan (the pension plan) administered by the Board of Pension Commissioners (the pension board). He became eligible to receive benefits under the pension plan on May 19, 1989. The divorce judgment provided in pertinent part as follows:

2. IDENTIFICATION, VALUATION AND DIVISION OF

COMMUNITY PROPERTY

(a) * * * [Petitioner’s former spouse] is awarded the following as her sole and separate property and shall assume and pay any encumbrances thereon and hold * * * [petitioner] indemnified therefrom:

* * * * * * * (8) THE DEFINED BENEFIT PLAN:

(a) One Half of the community interest in all benefits (including but not limited to service or disability pension, conditional survivorship rights, refundable contributions, cost-of-living adjustments) of * * * [petitioner’s] L.A. City Article XVIII/LAPD Defined Benefit Pension Plan * * * (b) The community interest shall be calculated per Brown Formula (marital period divided by employment period multiplied by * * * [petitioner’s] service entitlement).

If petitioner had retired on August 19, 1997, his former spouse would have been entitled to receive, and the pension board would have paid to her as her community property interest in the pension plan, $2,072 per month, representing one-half of his monthly benefit. Petitioner had not retired as of that date.

the superior court ordered petitioner to pay his former spouse $2,072 per month until he retired. The Court ordered as follows: (9) * * * [PETITIONER’S FORMER SPOUSE’S] EXERCISE OF “GILLMORE PENSION RIGHTS”:

(a) The court finds, upon the stipulation of the parties, that the * * * [petitioner] has been eligible to retire and collect the pension under the DEFINED BENEFIT PLAN described herein above since May 19, 1989 but he has not retired to date; and (b) That were he to retire as of date of trial, he would have accrued 27.7899 service years and would receive a starting pension benefit of $4,311.30 monthly * * * and * * * [petitioner’s former spouse] would be entitled to one half or $2,072 monthly; and (c) That * * * [petitioner’s former spouse] has exercised her “Gillmore Rights” to be paid her said monthly pension interest and therefore is awarded the same and * * * [petitioner] is ordered to pay directly to her $2,072 monthly * * * beginning as of April 1, 1997 and continuing until he retires and the Plan begins direct payment to her pursuant to the award and order made in Par. 2(A)(8) herein. * * * .

contrary to the assignment of income doctrine; and (c) the result in this case is determined by section 402 and the QDRO rules. B. Whether the Fact That Petitioner Was Not Yet Receiving Pension Benefits Means He Is Taxable on Payments He Made to His Former Spouse on Account of Her Community Property Rights in His Pension Respondent contends that the fact that petitioner was not yet receiving pension benefits means he is taxable on payments he made to his former spouse on account of her community property rights in his pension.

The employee spouse in Eatinger v. Commissioner

, supra , was ordered to pay to his former spouse an amount equal to one-half of his pension payments because his pension was community property. See In re Marriage of Brown , 544 P.2d 561 (Cal. 1976).

That was also why petitioner was ordered to pay an amount equal to one-half of the pension he would have received if he had not elected to continue working past the date of his divorce. See In re Marriage of Gillmore , supra at 6.

Respondent contends that cases relating to the taxation of community property, such as Poe v. Seaborn and Eatinger , do not apply here because petitioner’s postdivorce wages are not community property. We disagree. Respondent’s argument overlooks the fact that California community property rights do not depend on the form of the payments received by the employee spouse or the source of the payments to the former, nonemployee spouse. In re Marriage of Gillmore , supra ; In re Marriage of Stenquist , supra . Just as the rights of divorced spouses under California law do not depend on the form of the payments to the employee spouse, neither should the Federal taxation of those rights. Generally speaking, money is fungible. See United States v. Sperry Corp.

, 493 U.S. 52, 62 n.9 (1989); Berry Petroleum Co. v. Commissioner , 104 T.C. 584, 643 n.37 (1995), affd. without published opinion 142 F.3d 442 (9th Cir. 1998). Because of the fungibility of money, we did not know whether the employee spouse in Eatinger paid the nonemployee spouse from his retirement benefits or from other funds. Similarly, whether petitioner paid his former spouse from current wages or retirement benefits is not determinative here. See Taylor v. Campbell , 335 F.2d 841, 844-845 (5th Cir. 1964) (the source of an otherwise deductible payment will not affect its deductibility when proceeds from a property division in a divorce are used to pay alimony); Benedict v. Commissioner , 82 T.C. 573, 579 (1984)

(quoting and applying Taylor v. Campbell , supra ).

C. Whether Petitioner’s Position Violates Assignment of Income Principles Respondent contends that the $25,511 petitioner paid to his former spouse was an assignment of income that was taxable to petitioner under Lucas v. Earl , supra . In Lucas v. Earl , supra at 114-115, the U.S. Supreme Court disregarded for Federal income tax purposes an agreement between a husband and wife to share equally in the income each received. A holding for the taxpayers We did not discuss section 402 in Eatinger v. Commissioner , T.C. Memo. 1990-310, when we held that the nonemployee spouse was

Footnotes

² Petitioner deducted $26,604 as alimony on his 2000 Federal income tax return.

³ Petitioner retired on September 22, 2002. After petitioner retired, the pension board separately paid petitioner and his former spouse.

⁴

⁵ (...continued) Petitioner’s retirement plan at issue in this case is a defined benefit plan. The record contains no evidence that petitioner, his former spouse, or the superior court sought to determine the present value of the former spouse’s interest in petitioner’s retirement plan. See Projector, “Valuation of Retirement Benefits in Marriage Dissolutions”, 50 L.A. Bar Bull. No. 6, at 229 (1975) (valuation of a defined benefit plan includes an estimate of the value of the pension measured at the future retirement date, discounting for the time value of money, mortality, and vesting) (cited in In re Marriage of Gillmore , supra at 4 n.4). Marriage of Gillmore , supra at 8; In re Marriage of Brown , supra at 567. If pension benefits are distributed through periodic payments, the nonemployee spouse may be entitled to up to onehalf of each payment; the allocation depends on the percentage of the employee spouse’s working years that the parties were married. In re Marriage of Gillmore , supra at 6; In re Marriage of Brown , supra at 562-563 . In some situations, people may choose not to begin receiving retirement benefits when they are first eligible to do so. Postdivorce earnings are separate property, not community property. Cal. Fam. Code sec. 771 (West 2004) (earnings and accumulations of each spouse following date of separation are that spouse’s separate property). Nonetheless, in these situations under California law, a formerly married person is entitled to payments based on the amount of pension benefits to which the employee spouse would have been entitled if the employee spouse had retired when first eligible. In re Marriage

⁶ Thus, California law protects the substance of the former spouse’s community property rights even though the employee spouse chooses to receive payments which are not community property, such as income earned after the divorce, instead of retirement benefits. See In re Marriage of Gillmore , supra at 6.

⁷ (...continued) working. For example, in the matured pension situation, if the employee can receive retirement pay in the amount of X dollars without working, then his actual compensation for services rendered is not the amount of his paycheck, Y dollars, but Y minus X dollars. This is nothing more than a reapplication of the ‘benefits foregone’ formula of Stenquist (21 Cal.3d. 779, 148 Cal.Rptr. 9, 582 P.2d 96). [Fn. omitted.] Therefore, rather than penalizing the spouse for not retiring, the contrary is true--the community is being penalized because it is forced to subsidize the employee spouse’s salary, which becomes his separate property.” * * *

⁸ (...continued) authorized married taxpayers to file joint Federal income tax returns. Revenue Act of 1948, ch. 168, 62 Stat. 110, 115. However, Poe v. Seaborn has not been overturned by Congress or overruled by the U.S. Supreme Court. We followed Poe v. Seaborn in Eatinger v. Commissioner , T.C. Memo. 1990-310. The taxpayer in Eatinger was the nonemployee former spouse. The employee spouse retired in 1972 and was receiving monthly pension payments which were community property. The Eatingers divorced in 1977. The divorce court ordered the employee spouse to pay his former spouse an amount equal to her community property share of his monthly pension benefits. We held that the payments that a former spouse was entitled to receive because of her rights under community property law were taxable to the former spouse. Similarly, the nonemployee former spouse is liable for tax on his or her community property share of a lump-sum distribution from a qualified pension plan. Powell v. Commissioner , 101 T.C. 489, 498 (1993). 3. Respondent’s Contentions Respondent contends: (a) Petitioner is taxable on the payments he made to his former spouse on account of her community property rights in his pension because, unlike the spouse in Eatinger , petitioner was not yet receiving pension benefits; (b) not taxing petitioner on payments he was required by California community property law to make to his former spouse would be

⁹ That issue was decided in Poe v. Seaborn , 282 U.S. 101 (1930), in which, as stated above, under community property law in the State of Washington, each spouse was taxed on one-half of his or her own income and one-half of the income of the other spouse. In Poe v. Seaborn , the U.S. Supreme Court distinguished Lucas v. Earl on grounds that the earnings of a taxpayer in a community property State were the property of the community and not of the taxpayer providing services to earn income. Because the nonemployee spouse was entitled to the payments at issue here under community

¹⁰ (and, we assume, contends inferentially that they are taxable to petitioner) because the payments were not distributions from her former husband’s pension plan.

¹¹ Section 402(a) provides how distributions made from a qualified trust under a qualified pension plan are taxed. No distributions from a qualified trust were made in this case. Thus, contrary to respondent’s argument, by its terms section 402 does not apply to this case.

¹²

¹³ Instead, we based our decision on the former spouse’s ownership of retirement rights under California community property law and the principle that property is taxed to its owner. See Poe v. Seaborn , supra . We believe the same approach is appropriate here. An order to a retirement plan to pay an early retirement benefit (i.e., a retirement benefit payable to the nonemployee spouse before the employee spouse retires) can be a QDRO. Sec. 414(p)(4). Respondent contends that petitioner could have obtained a QDRO providing an early retirement benefit to his former spouse under which she would have been taxable on the payments at issue. Because domestic relations are preeminently matters of State law, Congress rarely intends to displace State authority in this area. Mansell v. Mansell , 490 U.S. 581, 587 (1989). Even if petitioner could have obtained an early retirement QDRO, respondent does not contend that Federal law prohibits the arrangement under California community property law that was made in this case; i.e., petitioner paid his former spouse the benefit

¹⁴ Since use of an early retirement QDRO was not required here, we see no “clear and unequivocal” congressional intent for Federal law to supplant State law, see Mansell v. Mansell , supra , and no reason to avoid taxation of petitioner according to his rights and obligations under California community property law. E. Conclusion We conclude that petitioner may reduce his gross income by $25,511 for 2000. Decision will be entered for petitioner .

Sections addressed

I.R.C. § 402 Taxability of beneficiary of employees' trust
(a)