Section of Taxation Publications

VOL. 61
NO. 4

Contents | TTL Home


Note: The following is an excerpt from the introduction to the article as published in The Tax Lawyer. Author citations have been omitted for brevity. Tax Section members may read the article in its entirety in Adobe Acrobat format.


Commissioner v. Dunkin: The Ninth Circuit’s Novel Tax Treatment of Deferred Compensation of Divorced Spouses

Matthew Harris

In Commissioner v. Dunkin, the Ninth Circuit took a novel approach to the tax treatment of “pension payments” made by the taxpayer to a former spouse pursuant to a California divorce court’s order. In California, after a divorce or as part of divorce proceedings, if an employee is entitled to a vested pension but continues to work, thus deferring the receipt of pension payments, then the employee’s former spouse has the right to receive a community interest in the pension payments (Gillmore Rights). Since the pension plan administrator in Dunkin could not begin making pension distributions to the taxpayer’s former spouse because the taxpayer had not actually retired, the taxpayer used a portion of his wages earned while continuing to work to make periodic payments (the Payments) that satisfied his former spouse’s Gillmore Rights. The Ninth Circuit held that the taxpayer was not entitled to reduce his taxable income, and thus his income tax liability, by the Payments.

Part I of this Note provides an overview of California’s community property system and case law analyzing the division of pension payments upon divorce. Part I also discusses decisions by the U.S. Supreme Court and the California Supreme Court relating to the taxation of community property and double taxation. Part II discusses the facts at issue in Dunkin, the Tax Court’s decision in favor of the taxpayer, and the Ninth Circuit’s reversal of that decision based on its conclusion that the funds used to make the Payments constituted taxable wage income to the taxpayer rather than community property income of the taxpayer and the former spouse. Part III analyzes the Ninth Circuit’s opinion in Dunkin and recommends a more equitable result.

As this Note will explain, the result of the Ninth Circuit’s decision is that the taxpayer and others similarly situated will in effect be taxed twice on pension payments: (1) tax on the wage income the taxpayer receives and uses to make the Payments to the former spouse and (2) tax on the pension distributions that the taxpayer receives upon actual retirement. The same result is not obtained when the taxpayer is retired at the time of divorce and thus receiving pension distributions that are also given to the former spouse. In that instance, any payments under the pension are considered community property pension distributions to the former spouse and are taxable to the former spouse in proportion to the former spouse’s community property share. To address this disparity, this Note maintains that the question of how to treat the Payments under California law—as community property income or separate property—should be certified to the California Supreme Court. As the dissent in Dunkin suggests, it is reasonable to believe that the California Supreme Court would not agree with the majority decision of the Ninth Circuit. In the alternative, the taxpayer should be able to treat the Payments as costs of added pension rights, which he could recover from the pension distributions once they begin, to eliminate the potential for double taxation.


Published by the
American Bar Association Section of Taxation
in Collaboration with the
Georgetown University Law Center


If you are an ABA member, you can receive The Tax Lawyer and the Section NewsQuarterly, both quarterly publications, when you join the Section of Taxation. Anyone can subscribe to The Tax Lawyer by contacting the ABA Service Center.