Academic journal article Journal of Accountancy

Divorce, Pensions and Community Property

Academic journal article Journal of Accountancy

Divorce, Pensions and Community Property

Article excerpt

The Internal Revenue Code has relatively clear rules detailing the taxation of normal payments made on account of divorce. How these rules apply to pension plan distributions has been explained in several court cases. Recently, the Tax Court had to determine the taxation of a payment in divorce that was related to a pension plan in a community property state.

John Michael Dunkin was employed by the city of Los Angeles. On May 19, 1989, he became eligible to receive a pension, but decided not to retire. He was divorced on August 19, 1997. The divorce decree said John's former spouse was entitled to half of his earned pension--at that point, $2,072. Since John did not retire on that date, the decree required him to pay his former spouse $2,072 monthly until he did retire. In 2000, he made the payments which totaled $25,511 and deducted this amount as alimony on his 2000 tax return. The IRS objected to the deduction.

Result. For the taxpayer. It has been long established that state law determines a person's right to income and property and federal law determines the taxation of those rights. California law determined the $25,511 payment had to be made. The question, therefore, was the appropriate taxation of that payment.

In prior cases the Tax Court had ruled a former spouse was liable for the taxes due on her receipt of pension funds resulting from community property law. Likewise, she was liable if she received a lump-sum distribution from a pension plan. The IRS argued that these cases did not apply in this case because Dunkin had not started to receive his pension. The Tax Court rejected this argument. Prior cases had held the taxation of a former spouse was not determined based on the form of the payments. …

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