Opinions of the United
2004 Decisions States Court of Appeals
for the Third Circuit
4-16-2004
Hawley v. Commissioner IRS
Precedential or Non-Precedential: Non-Precedential
Docket No. 03-2663
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"Hawley v. Commissioner IRS" (2004). 2004 Decisions. Paper 821.
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NOT PRECEDENTIAL
IN THE UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
Docket No. 03-2663
RICHARD C. HAW LEY,
Appellant
v.
COMMISSIONER OF INTERNAL REVENUE
_________
On Appeal from the United States Tax Court
Tax Court Judge: The Honorable Thomas B. Wells
(No. 01-4178)
_________
Docket No. 03-3349
JANE GILBERT
v.
COMM ISSIONER OF INTERNAL REVENUE,
Appellant
_________
On Appeal from the United States Tax Court
Tax Court Judge: The Honorable Thomas B. Wells
(No. 01-1592)
___________
Argued March 25, 2004
Before: FUENTES, SMITH and GIBSON, Circuit Judges*
(Filed April 16, 2004)
Charles F. Blumenstock, Jr. (argued)
Mark N. Raezer
Blumenstock & Blumenstock
255 Butler Avenue
Suite 103
Lancaster, PA 17601
Attorney for Appellant in 03-2663
Teresa E. M cLaughlin
Bethany B. Hauser (argued)
United States Department of Justice
Tax Division
P.O. Box 502
Washington, D.C. 20044
Attorney for Appellee in 03-2663/Appellant in 03-3349
John W. Schmehl (argued)
Dilworth Paxson
1735 Market Street
3200 The Mellon Bank Center
Philadelphia, PA 19103
Attorney for Appellee in 03-3349
_____________________
OPINION OF THE COURT
_____________________
SMITH, Circuit Judge.
* The Honorable John R. Gibson, Senior Circuit Judge for the United States Court of
Appeals for the Eighth Circuit, sitting by designation.
2
These consolidated tax appeals require a determination of whether payments made
pursuant to an unallocated support order constitute alimony for purposes of the Internal
Revenue Code (“I.R.C.”). Because we conclude that the Tax Court was correct in its
determination that the payments should not have been treated as alimony, we will affirm its
decision.
I.
Richard Hawley and Jane Gilbert entered into an Agreement and Order of Support on
February 4, 1992, which required Hawley to pay “the sum of $2,077.00 bi-weekly for and
toward the support of wife and three (3) minor children,” but which did not allocate the
amount of that payment between alimony to Gilbert and child support to the children.
Hawley made 26 payments pursuant to that agreement and deducted these payments on his
individual tax returns for 1993, 1994 and 1995.1 Gilbert did not include the payments in her
income for those years.
The Commissioner adopted inconsistent positions on this discrepancy by assessing
both Hawley and Gilbert with deficiencies,2 i.e., that Hawley could not deduct the payments
and that Gilbert must include them in her income. Hawley and Gilbert then filed petitions
in the Tax Court challenging the Commissioner’s assessments.
1
Hawley deducted $54,100 in 1993, $54,100 in 1994 and $51,565 in 1995.
2
The taking of inconsistent positions by the Commissioner to prevent against a
“whipsaw” is an accepted practice in this and other circuits. Gerardo v. Comm’r, 552
F.2d 549 (3d Cir. 1977). See also Preston v. Comm’r, 209 F.3d 1281 (11th Cir. 2000);
Centel Commun. Co. v. Comm’r, 920 F.2d 1335 (7th Cir. 1990).
3
The Tax Court consolidated the petitions and issued an opinion, Gilbert v.
Comm issioner, 85 T.C.M. (CCH) 1087 (2003), which held that the unallocated support
payments were not alimony. Consequently, Hawley’s payments to Gilbert were not
deductible, and did not have to be included as income by Gilbert. Hawley appeals, and the
Commissioner, in order to avoid a “whipsaw” situation, also appeals the Tax Court’s decision
with respect to Gilbert.
II.
The Tax Court had jurisdiction pursuant to I.R.C. §§ 6213(a), 6214 and 7442. This
Court has jurisdiction pursuant to I.R.C. § 7482(a)(1). The facts of these two cases are not
in dispute. This Court exercises plenary review over matters of law. Lazore v. Comm’r, 11
F.3d 1180, 1182 (3d Cir. 1993).
III.
I.R.C. § 215(a) instructs that alimony payments are deductible to the payor and
includible in the gross income of the recipient. Payments are considered alimony only if they
satisfy all four specific requirements set out in Code § 71(b)(1):
(A) the payments must be made pursuant to a divorce agreement;
(B) the divorce agreement must not specify different tax treatment;
(C) the spouses must not be members of the same household; and
(D) the payor must not have any liability to make any additional or substitute
payment after the payee spouse dies.
The Tax Court noted, and the parties agree, that the only requirement in dispute is
subsection (D), that there must be no obligation to make any additional or substitute
payments after the death of the payee spouse. Because the 1992 Support Order did not
4
address the effect of Gilbert’s death on Hawley’s obligation to make the payments, the Tax
Court looked to Pennsylvania law to determine whether the requirement was met. The Tax
Court concluded that the “Pennsylvania Supreme Court has not decided the narrow legal
issue of whether an unallocated support order covering spousal support and child support
terminates upon the death of the custodial spouse.”
Hawley argues that the Tax Court erred because the Pennsylvania Supreme Court
decided that the unallocated support order terminates upon the death of the ex-spouse by
promulgating Pennsylvania Rule of Civil Procedure 1910.16-4(f)(3). Subsection (f)(3) was
added in 2000 and Hawley’s theory therefore depends upon the retroactive application of the
amendment as support for the deductions he took for the unallocated payments. Hawley was
unable, however, to furnish a single authority which would have supported retroactive
application of this particular provision.
In Dombrowski v. Philadelphia, the Supreme Court of Pennsylvania stated in a
footnote that, “[o]ur rules of civil procedure, promulgated under the Act of June 21, 1937,
P.L. 1982, § 1, as amended, 17 P.S. § 61, have the force of a statute.” 245 A.2d 238, 241 n.4
(Pa. 1968). The Superior Court of Pennsylvania, applying Dombrowski, has subsequently
noted that there is a presumption against retroactive application of rules in the absence of an
express statement in the rule that it may be applied retroactively. Maddas v. Dehaas, 816
A.2d 234, 241 (Pa. Super. 2003).
Hawley argues that the use of the word “insure” in an explanatory comment to the
rule, as opposed to “change,” or other similar words, demonstrates the intent of the
5
Pennsylvania Supreme Court for the provision to be applied retroactively. 3 The Pennsylvania
Supreme Court made clear in Commonwealth v. Rockwell Manufacturing, however, that such
strained attempts to key in on a particular term in arguing for retroactive application will not
succeed. 140 A.2d 854, 857-58 (Pa. 1958) (comparing Speck v. Philips, 51 A.2d 399 (Pa.
Super. 1947), which included a discrete clause addressing retroactive application). If the
Pennsylvania Supreme Court, in promulgating this rule of civil procedure, had intended
retroactive application it would have clearly indicated as much through a separate clause or
other clear statement of that desire. Id.
Because Rule 1910.16-4(f)(3) does not support Hawley’s argument that his obligation
to make the payments would have terminated upon Gilbert’s death, Pennsylvania’s
longstanding public policy which favors a continuing obligation to provide support for
unemancipated children poses an insurmountable hurdle to his appeal. 4 Cf. Ritter v. Ritter, 518
A.2d 319, 322 (Pa. Super. 1986); Bowen v. Commonwealth, Dep’t of Public Welfare, 343 A.2d 690,
691 (Pa. Commw. 1975).
It is true that death abates a divorce action and the obligation to pay alimony. See
Drumheller v. Marcello, 516 Pa. 428, 432 (1987)); 23 Pa. Cons. Stat. Ann. § 3707 (the right
3
That comment states, “The new language is intended to insure alimony tax treatment
of unallocated orders pursuant to § 71 of the Internal Revenue Code.”
4
Hawley argues that the Tax Court erred in failing to reconcile its decision in this case
with the Tax Court opinions in Lawton v. Commissioner, 78 T.C.M. (CCH) 153 (1999),
and Simpson v. Commissioner, 78 T.C.M. (CCH) 191 (1999), which held that unallocated
payments are considered alimony. We agree with the Tax Court’s distinguishing
treatment of those cases, however, in that neither case considered the application of
subparagraph (D) of Code § 71(b)(1).
6
to receive alimony terminates automatically at the death of the payee). Yet the obligation to
pay child support remains. Courts are bound to promote the best interests of the children. See
Oeler v. Oeler, 594 A.2d 649, 651 (Pa. 1991). Even if the technical obligation to make
payments under the order to Gilbert would have ended upon her death, the obligation to make
substitute payments would have continued because Hawley would still have been required
to support his children. 23 Pa. Cons. Stat. Ann. § 4321(2) (“Parents are liable for the support
of their children who are unemancipated and 18 years of age or younger.”).
Hawley has not provided, nor have we found, any authority to support his position that
he properly took deductions in 1993, 1994 and 1995 for the payments made pursuant to the
unallocated support order.5 We will therefore affirm the decision of the Tax Court with
respect to Hawley. Consistent with that conclusion, we also affirm the court’s decision as
to Gilbert.
5
The Tax Court cited the Tenth Circuit’s decision in Lovejoy v. Commissioner, 293
F.3d 1208 (10th Cir. 2002), for its conclusion in this case. In that opinion, addressing the
treatment of payments made pursuant to an unallocated support order under substantially
similar laws as those in Pennsylvania, the Court predicted that the Colorado Supreme
Court would hold that the payments would not automatically terminate on the death of the
payee spouse, and that the payments were not therefore deductible by the payor. We
reach the same conclusion with respect to Pennsylvania law in this case and reject
Hawley’s argument for retroactive application of Pennsylvania Rule of Civil Procedure
1910.16-4(f)(3).
7