T.C. Memo. 2001-125

UNITED STATES TAX COURT

DORIS NEILL MOZLEY, Petitioner v

. COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 4865-00. Filed May 30, 2001.

Doris Neill Mozley, pro se.

Timothy B. Heavner , for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

JACOBS, Judge : Respondent determined deficiencies in

petitioner’s Federal income taxes of $964 for 1995 and $3,442 for

1996.

The issue for decisio n is whether petitioner’s receipt of a

portion of military retirement pay to which petitione r’s former

husband otherwise was entitled constitutes receipt of taxable: (1)- 2 -

Alimony pursuant to sections 61(a)(8) and 71; or, in the

alternative, (2) pension income pursuant to section 61(a)(11).

Unless otherwise indicated, all section references are to the

Internal Revenue Code in effect for the years in issue.

FINDINGS OF FACT

Some of the facts have b een stipulated and are found

accordingly. The stipulation of facts and the attached exhibits

are incorporated herein by this reference.

Background

Petitioner resided in Richmond, Virginia, a t the time she

filed her petition. She timely filed Federal income tax returns

for 1995 and 1996.

On June 15, 1952, petitioner married Paul David Mozley. Mr.

Mozley served in the U.S. Navy Medical Corps f or 20 years and

retired in 1975. Upon his retirement, Mr. Mozley began receiving

military retirement payments.

The Agreement

In April 1983, petitione r and Mr. Mozley divorced. They

reac hed an agreement (the agreement) concerning the division of

their property as well as the amount of alimony petitioner was to

receive. Pursuant to the agreement, petitioner was to receive onehalf of Mr. Mozley’s disposable military retirement pay until her- 3 -

death, regardless of her marital status. Both petitioner and Mr.

Mozley were represented by counsel during the course of their

divorce proceedings.

The District Court of Pitt County, North Carolina (the

district court), adopted the agreement as part of its April 19,

1983, Judgment and Order (the April 1983 Judgment). The portions

of the April 1983 Judgment, as relevant to the issue be fore us,

provide as follows:

8. I n full and final settlement of all claims

existing between the parties, and in particular, in full

and final settlement of any claims that the plaintiff

[petitioner] may have against the defendant [Mr. Mozley]

for alimony pendente lite

, alimony, and attorney’s fees,

and as a full and final property and marital settlement

resolving all issues between the parties including

equitable distribution of marital property, the parties

do hereby stipulate, agree, contract, and pray that the

court order and enter as its mandate, the following:

* * * * * * *

(i) The defendant shall pay to the plaintiff as

alimony a sum equal to 22 percent of his salary that he

actually receives other than the retired/retainer pay

that he receives by virtue of his retirement from the

United States Navy. * * *

* * * * * * *

(l) * * * As additional alimony, the plaintiff

shall receive a portion of the defendant’s

retired/retainer pay that he receives b y virtue of his

previous military service. * * * The remaining pay * *

* shall be divided equally between the parties. The

portion of this pay allotted to the plaintiff * * * shall- 4 -

be considered as alimony by the plaintiff and included by

her in her taxable income. * * * [These payments] shall

continue on the 10th day of each month thereafter until

the death o f the plaintiff regardless of her marital

status * * *

* * * * * * *

(n) All payments required to be made by the

defendant to the plaintiff are intended to be payments of

alimony and said payments of alimony shall be deductible

by the defendant and taxable to the plaintiff on their

federal and state in come tax returns. The plaintiff

s hall declare said payments received as alimony and

income to her on her tax returns.

(o) This agreement has been negotiated and executed

on the assumption that the payments made by the defendant

to the plaintiff or made on his behalf will be deductible

by the defendant and taxable to the plaintiff. If, as a

result of a final and binding judicial determination, or

because of the subsequent change in the governing law or

its authorizative [sic] interpretation, it is established

that any or all of said payments will no longer be

taxable to the plaintiff or deductible to the defendant,

the provisions regarding alimony shall be subject to

re negotiation. If the defendant and the plaintiff are

unable to arrive at a mutually satisfactory readjustment

of these provisions to take account of the changed tax

impact, then the matter shall be submitted to a court for

final and binding determination. Such renegotiatibility

[sic] shall in no event effect [sic] the validity of the

remaining provisions of this consent order and property

settlement.

In August 1996, petitioner and Mr. Mozley amended the

agreement (the amended agreement), and the district court entered

a Memorandum of Order, incorporating the amended agreem ent. In

relevant part, this order stated:

10.(b) [The payment to petitioner of half of

her former spouse’s mili tary retirement pay should

continue as a greed] except that the plaintiff shall

receive the payment directly from the Navy in the- 5 -

m anner presently being paid by the Navy and th e

parties agree that this arrangement shall con tinue

without protest by the partie s regarding the method

u sed by the Navy to compute the amount paid to the

plai ntiff, subject to the 15% limitation for

disability portion of the Navy retirement.

From August 1983 through the date of trial (January 8, 2001),

petitioner received a portion of Mr. Mozley’s military retirement

pay from the Navy Finance Center in Cleveland, Ohio.

During the years in issue, petitioner receiv e d a total of

$14,588 for 1995 and $13,880 for 1996, as her share of Mr. Mozley’s

military retirement pay.

Petitioner’s Returns

Petitioner reported her share of Mr. Mozley’s military

retirement pay as income on her Federal income tax returns for 1983

through 1990; she did not do so for 1991 through 1999.

Notice of Deficiency

In the notice of d e ficiency, respondent determined that the

military retirement paymen ts petitioner received in 1995 and 1996

constituted taxable alimony to her.

OPINION

We first decide whether the military retirement payments

petitioner received during the years in issue constituted ta xable

alimony, as resp o ndent contends, or a nontaxable division of

property, as petitioner maintains.

Gross income includes amounts received as alimony or separate- 6 -

maintena nce payments. See secs. 61(a)(8), 71(a). At the time of

petitioner’s divorce in 1983, section 71 provided:

If a wife is divorced or legally separated from her

husband under a decree of divorce * * *, the wife’s

gross income includes periodic payme nts * * *

received after such decree in discharge of * * * a

legal obligation which, be cause of the marital or

family relationship, is impose d on or incurred by

th e husband under the decree or under a written

instrument incident to such divorce or separation.

Section 71 was amended by the Deficit Reduction Act of 1984

(DEFRA 1984), Pub. L. 98-369, sec. 422(a), 98 Stat. 494, 795.

However, DEFRA 1984 is applicable only to divorce instruments

ex ecuted after December 31, 1984, or modified after December 31,

1984, where the modified instrument states that the amended version

of section 71 will apply. See DEFRA 1984, s upra at 798. Here, the

agreement was entered in April 1983 and the modified agreement was

entered in August 1996. The amended agreement neither modified the

description or terms (i.e., the amount and frequency) of the alimony

paymen ts nor expressly provided that amended section 71 was

applicable. Thus, we apply former section 71 to determine whether

the military retirement payments petitioner received const i tute

alimony.

Pursuant to former section 71, only payments in the nature of

maintenance or support (as opposed to a transfer of property between

spouses) are treated as alimony for Federal income tax pur poses.

See, e.g., Hoover v. Commissioner

, 102 F.3d 842, 844-845 (6th Cir.- 7 -

1996), affg. T.C. Memo. 1995-183. In determining whether payments

constitute alimony or a division of property, we are not bound by

t he labels assigned to the payments by the parties in their

agreement. See Hesse v. Commissioner , 60 T.C. 685, 691 (1973),

affd. without published opinion 511 F.2d 1 393 (3d Cir. 1975). On

the other hand, in deciding the character of an award in a divorce

or separation decree, we give great weight to the language and

structure of the decree. See, e.g., G riffith v. Commissioner

, 749

F.2d 11, 13 (6th Cir. 1984), affg. T.C. Memo. 1983-278. Whether

payments represent support or a property settlement is a question

of the parties’ intent. See H oover v. Commissioner

, supra at 845.

We ascertain this intent not only from the underlying agreement but

from the particular facts and circumstances i n volved. See, e.g.,

Boucher v. Commission er , 710 F.2d 507, 509 (9th Cir. 1983), affg.

T.C. Memo. 1981-258.

This Court has frequently looked to State law in considering

whether paymen ts between spouses constitute alimony or a property

settlement. See Y oakum v. Commissioner

, 82 T.C. 128, 1 40 (1984).

Here, t he applicable State law is that of North Carolina, and we

therefore look to the law of that State. Under North Carolina law

(as existing at the tim e of petitioner’s divorce), military

retirement pay was the separate pro perty of the spouse who had

served in the military (here, Mr. Mozley) and w as not subject to- 8 -

1 After the entry of petitioner’s divorce, North Carolina

amended its law, effective Aug. 1, 1983, to treat military

retirement pension as marital property, thus subjecting military

retirement to a Court’s equitable distribution authority. See

N.C. Gen. Stat. sec. 50-20 (1999); Morris v. Morris , 339 S.E.2d

424 (N.C. Ct. App. 1986).

2 We are mindful that par. 8(l), which refers to the

payment of one-half of Mr. Mozley’s military retirement payments

as “additional alimony” to petitioner, closely followed par.

8(i), which discusses “alimony”. Reading these paragraphs in

tandem supports our conclusion that the payments at issue

constitute alimony. division or distribution by a court. 1 See N.C. Gen. Stat. secs. 50-

20(b)(2), 50-20(a) (198 1 ). Thus, as applicable to the instant

situation, even though the district court lacked authority to order

a division of Mr. Mozley’s military retirement pay, Mr. Mozley had

the ability to divide his retirement payments with petitioner; and

in fact, he agreed to do so pursu ant to paragraph 8(l) of the

agreement.

On the basis of the clear and unambiguou s language of the

agreement a n d amended agreement, we conclude that the payments to

petitioner should be character ized as alimony. We reach this

conclusion based on the following. First, the agreement

characterizes the payments in que s tion as “alimony” and contains

other provi sions that specifically relate to the division of the

parties’ property. 2 Second, the agreement specifically provides

that the pa yments in question are “intended to be payments of

alimony”. Third, the agreement specifically states that the- 9 -

payments are to be taxable to petitioner and deductible by Mr.

Mozley. Fourth, the agreement states that if the intended tax

consequ ences of the payments (i.e., taxable to petitioner;

deductible by Mr. Mozley) were judicially altered, the amount to be

paid to petitioner would become subject to renegotiation.

The language of the agreement is unambiguous; it contains

express direction that the military retirement payments petitioner

is to receive constitute alimony. These payments were (1) periodic;

(2) received after a decree in discharge of a legal obligation; and

(3) because o f the marital or family relationship, imposed on or

incurred by t he husband under the decree or under a written

inst r ument incident to such divorce or separation. See B rodersen

v. Commissioner , 57 T.C. 412, 415-416 (1971).

Both petitioner and Mr. Mozley were represented by counsel.

There is nothing in the record to indicate that the agreement was

negotiated other than at arm’s length. We therefore assume that the

parties considered their respective tax obligations.

To conclude, considering all of the facts and c i rcumstances

herein, we hold that the military retirement payments petitioner

received during the years in issue were in the nature of alimony and

thus constitute taxable income to her.

In light of this holding, we need not address the issue of

whether the retirement payments constitute pension income.- 10 -

We have considered all arguments raised by petitioner and find

them to be without merit. Moreover, we have reviewed all cases

cited by petitioner and find them either distinguishable or in

accord with the conclusion reached herein.

To reflect the foregoing,

Decision will be entered

for respondent

.