## Facts

- Hazel Eileen Balding and Joe M. Balding married in 1962; Joe later retired from the military.
- They divorced in California in December 1981; the divorce judgment divided community property and treated Joe’s military retirement pay as his separate property.
- After a 1984 change in California law regarding the community-property treatment of military retirement pay, Hazel sought to reopen the divorce judgment to claim a community-property share of Joe’s military retirement pay.
- Before the court ruled, the parties entered a settlement that was incorporated into a court order.
- Under the settlement, Hazel relinquished any claim to Joe’s military retirement pay and agreed not to assert further marital property claims; Joe similarly agreed not to assert further property claims.
- Joe agreed to make fixed payments to Hazel of $15,000 (1986), $14,000 (1987), and $13,000 (1988).
- Hazel did not report the payments as gross income for those years.
- The IRS determined income tax deficiencies for 1986–1988 on the theory that the payments were taxable to Hazel.
- The case was submitted on stipulated facts under Tax Court Rule 122.

## Issues

1. Whether cash payments received by a former spouse in settlement of a claim to a community-property share of the other spouse’s military retirement pay are includable in the recipient’s gross income.
2. Whether such payments are treated as nonrecognition transfers of property incident to divorce under I.R.C. § 1041, notwithstanding an assignment-of-income theory.

## Decision

- The Tax Court held that Hazel did not recognize income upon receipt of the settlement payments.
- The court treated the payments as consideration for the release of marital/community-property rights and related property claims, rather than as ordinary income.
- The court applied I.R.C. § 1041 to the transaction as a transfer incident to divorce.
- The court rejected the Commissioner’s assignment-of-income argument in this context.
- The deficiencies were not sustained to the extent they were based on including the principal settlement payments in Hazel’s gross income.

## Legal Principles

- I.R.C. § 1041 generally provides nonrecognition treatment for transfers of property between former spouses if the transfer is incident to divorce.
- A divorce-related settlement that exchanges cash payments for the release of marital or community-property rights may be characterized as a property transfer governed by § 1041, rather than taxable income to the recipient.
- In applying § 1041, the Tax Court may decline to treat divorce-related payments as taxable to the recipient under assignment-of-income concepts when the payments function as consideration for marital property rights.

## Conclusion

The Tax Court concluded that fixed cash payments made to an ex-spouse to settle and extinguish community-property claims to military retirement benefits were nonrecognition property transfers incident to divorce under I.R.C. § 1041 and therefore were not includable in the recipient’s gross income.


Balding v. Commissioner, 98 T.C. 368 (1992)