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Tuesday, January 14, 2003

 


Earl R. and Mary A. Palmer tried to exclude from income Mary's half the retirement pension she received from the U.S. military pursuant to the divorce decree from her previous husband. At an appeal from an audit of prior year taxes, the IRS had allowed the exclusion, and the Palmers argued that the IRS was now estopped from claiming that the income could be taxable. Tax Court said that the IRS is not bound or estopped by prior errors. "Prior administrative determinations that involve the same or related taxpayers do not preclude the Internal Revenue Service from making a contrary determination for a different year." This seems inherently unfair because, once again, citizens can not rely on what the IRS tells them about taxes, but it is probably a good idea. Otherwise it would give the IRS even more of a reason to constantly rule against the taxpayer, for fear of making an erroneous determination that could not be corrected later.

The Palmers then argue that if the income is includible, they should be credited with half of the withheld taxes. Tax Court said no, Mary is entitled to half the net pension after deductions which include withheld taxes, and therefor that is her income to be included in her tax return. This is unfair. The net pension is by definition after-tax. The amount of the pension Mary received was included in calculations to determine how much taxes were to be withheld, and now she must pay tax on that income again, without being credited for the prior taxes withheld. Thus this amount is being taxed twice. A note indicates that the ex-husband included the entire amount of the pension in his income, and then took an adjustment of half the pension as alimony. This was originally denied by the IRS (who apparently wanted both ex-spouses to pay taxes on that half of the pension!), but was later allowed by stipulation. There is no indication whether or not he took credit for the total withheld taxes. If so, it would mean that Mary's half was not double-taxed, but that the credit she deserved for taxes withheld on her income was given by the IRS to someone without a right to the income. Tax Court does not comment on the unfairness of this result, but does note that the law has been changed for divorces effective on or after February 3, 1991. Federal, state, and local taxes are no longer excluded from the total monthly retired pay when determining the disposable retired pay.



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