Ex-wife's share of military retirement payments is subject to tax.

• Author: Beavers, James

The Tax Court held that a taxpayer's share of her ex-husband's military retirement payments was subject to tax despite the fact that a domestic relations order specified that taxes were to be withheld from the payments before the taxpayer's share of the payments was determined.

Background

Maria Mitchell was formerly married to Bobble Walton, a member of the U.S. Air Force (USAF). Walton and Mitchell divorced in California, a community property state. Under a qualified domestic relations order (QDRO) issued after Walton's retirement from the USAF, Mitchell was awarded one-half of the community property interest in Walton's net disposable military retirement pay. The QDRO defined net disposable military retirement pay as gross retirement pay less a variety of deductions, including withholding for income taxes.

After Walton's retirement in 1991, Mitchell began receiving payments from the Defense Finance and Accounting Service (DFAS) for her share of Walton's retirement pay. Mitchell did not include the payments that she received in income in any year. In 2003, the IRS sent Mitchell a notice of deficiency for tax on the payments she received in 2001. Mitchell filed a petition with the Tax Court challenging the notice of deficiency.

Mitchell argued that the payments she received for her interest in Walton's militar/retirement pay were not subject to income tax because the QDRO specified that the DFAS should have withheld all taxes from Walton's military retirement pay before it divided and distributed the pay. Therefore, according to Mitchell, the DFAS should have withheld taxes on the full amount of Walton's retirement pay before it paid Mitchell her share. Because the DFAS did not do this, Mitchell contended that if she were required to pay tax on her share, then Walton's retirement pay would be subject to double taxation, having been taxed once when distributed to Walton and again when Mitchell received her share. The IRS countered that although the DFAS withheld tax on Walton's retirement pay, it only withheld tax on his share of it.

Tax Court's Decision

In a decision reviewed by the full court, the Tax Court held that Mitchell's arguments were without merit and that the retirement pay she received was taxable. The Tax Court found that the method of calculating the portion of Walton's retirement pay to which Mitchell was entitled had no bearing on whether the payments she received were taxable, nor did it mean the payments were exempt from...