Rosenthal v. Commissioner

T.C. Memo. 1995-603

UNITED STATES TAX COURT

RAYMOND N. ROSENTHAL and PEGGY S. ROSENTHAL, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 2677-94. Filed December 26, 1995.

Raymond N. Rosenthal and Peggy S. Rosenthal, pro sese.

Steven M. Roth, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

SCOTT, Judge: Respondent determined deficiencies in

petitioners' Federal income taxes and accuracy-related penalties

for the calendar years 1990 and 1991 as follows:
 Penalty
Year Deficiency Sec. 66621
1990 $6,300 $1,260
1991 8,668 1,734

The issues for decision are whether petitioners are entitled

to deductions for alimony pursuant to sections 71 and 215 in the

amounts of $30,000 in 1990 and $10,000 in 1991,2 and whether

petitioners are liable for the accuracy-related penalty under

section 6662(a).

FINDINGS OF FACT

Some of the facts have been stipulated and are found

accordingly.

At the time of the filing of the petition in this case,

petitioners had a legal residence in Encino, California.

Petitioners filed joint Federal income tax returns for the

taxable years 1990 and 1991.

On June 19, 1987, Mr. Raymond Rosenthal (petitioner) and his

ex-wife, Ruth Rosenthal, executed a marital settlement agreement

in connection with the dissolution of their marriage (the

settlement agreement). Section 8 of the settlement agreement

provided in part as follows:

Husband shall pay to Wife, as and for spousal
support, commencing May 1, 1987, and continuing on the

1
All section references are to the Internal Revenue Code in effect for
the years in issue, and all Rule references are to the Tax Court Rules of
Practice and Procedure, unless otherwise indicated.
2
Petitioners concede that $25,000 of the $35,000 claimed as an alimony
deduction for 1991 is not alimony, but is a payment in connection with a
property settlement.
 -3 -

first day of each month thereafter the sum of Twenty-
Five Hundred ($2500.00) Dollars per month to and
including April 1, 1991. Said spousal support shall
terminate following the forty-eight (48) payments to be
covered for the period May 1, 1987, to and including
April 1, 1991.

Said spousal support shall be non-modifiable as to
term, that is the forty-eight (48) months, and the
amount of Twenty-Five Hundred ($2500.00) Dollars per
month, or the total sum of One Hundred and Twenty
Thousand ($120,000.00) Dollars. The marriage of Wife
or death of Husband, or Wife shall not terminate the
Respondent's obligation to pay support. No Court shall
retain jurisdiction to modify any term pertaining to
spousal support, including but not limited to amount,
term, duration or termination or any matter pertaining
thereto.

Exhibit "A" attached to the settlement agreement

incorporated into the agreement additional terms and provisions,

including the following:

The payments to be made by Husband to Wife are
intended to be made by Husband to Wife tax-free to Wife
and non tax reportable since the payments are as and
for the equal division of community property, except
for spousal support payments which shall be reportable
by Wife and deductible by Husband.

Petitioners deducted as alimony $30,000 and $35,000 for the

taxable years 1990 and 1991, respectively. Respondent determined

in her notice of deficiency that the amounts petitioners deducted

were not alimony, because they did not terminate on the death of

the recipient. Petitioners contend that the amounts were

properly deductible because of the language in the settlement

agreement that the payments were reportable by wife and

deductible by husband.
 -4 -

OPINION

Section 215 allows a deduction for alimony payments which

meet the definition of section 71(b).3 Yoakum v. Commissioner,

82 T.C. 128, 134 (1984). The parties do not dispute that the

requirements under section 71(b)(1)(A) through (C) have been met.

The issue, therefore, is whether under the settlement agreement

the payments meet the requirement of section 71(b)(1)(D).

Section 71(b)(1)(D) provides that, for payments to be

considered alimony, there must be no liability to make any

payment for any period after the death of the payee spouse and no

liability to make any payment (in cash or property) as a

substitute for such payments after the death of the payee spouse.

Section 8 of the settlement agreement provides that

3
SEC. 71. ALIMONY AND SEPARATE MAINTENANCE PAYMENTS.

* * * * * * *

(b) Alimony or Separate Maintenance Payments Defined.-- For
purposes of this section--

(1) In General.--The term "alimony or separate
maintenance payment" means any payment in cash if--

(A) such payment is received by (or on behalf of) a
spouse under a divorce or separation instrument,

(B) the divorce or separation instrument does not
designate such payment as a payment which is not includible in
gross income under this section and not allowable as a deduction
under section 215,

(C) in the case of an individual legally separated from his spouse
maintenance, the payee spouse and the payor spouse are not members of the same
household at the time such payment is made, and

(D) there is no liability to make any such payment for any period a
liability to make any payment (in cash or property) as a substitute for such
payments after the death of the payee spouse.
 -5 -

petitioner is to pay a certain number of payments for a specific

length of time. It is clear that section 8 imposes liability on

petitioner for a period after the death of the payee spouse.

Petitioner contends that the language in Exhibit "A" of the

settlement agreement, which states the payments are reportable by

petitioner's former wife and deductible by petitioner, makes the

settlement agreement ambiguous, and, thus, parol evidence should

be examined to determine the intent of the parties. We are not

persuaded by petitioner's argument. It is clear that the

requirement under section 71(b)(1)(D) was not satisfied in this

case. Whether or not the parties intended for the payments to be

deductible to petitioner, we must focus on the legal effect of

the agreement in determining whether the payments meet the

criteria under section 71. Since section 71(b)(1)(D) is not met,

the payments are not considered alimony for Federal income tax

purposes.

As we stated in Webb v. Commissioner, T.C. Memo. 1990-540,

the current section 71 was enacted to prevent the type of

litigation now before us. The House committee stated the purpose

of the current section 71 as follows:

The committee believes that a uniform Federal standard
should be set forth to determine what constitutes
alimony for Federal tax purposes. This will make it
easier for the Internal Revenue Service, the parties to
a divorce, and the courts to apply the rules to the
facts in any particular case and should lead to less
litigation. The committee bill attempts to define
alimony in a way that would conform to general notions
of what type of payments constitute alimony as
 -6 -

distinguished from property settlements and to prevent
the deduction of large, one-time lump-sum property
settlements.

* * * * * * *

In order to prevent the deduction of amounts which
are in effect transfers of property unrelated to the
support needs of the recipient, the bill provides that
a payment qualifies as alimony only if the payor (or
any person making a payment on behalf of the payor) has
no liability to make any such payment for any period
following the death of the payee spouse. * * *

H. Rept. 98-432, Part 2, 1495-1496 (1984); see Webb v.

Commissioner, supra.

The same conclusion reached in Webb v. Commissioner, supra,

has been reached in Sroufe v. Commissioner, T.C. Memo. 1995-256,

Heffron v. Commissioner, T.C. Memo. 1995-253, and Hoover v.

Commissioner, T.C. Memo. 1995-183.

Here, the agreement is clear that the payments to

petitioner's former wife would continue after the death of either

party to the settlement agreement. In fact, petitioner's

testimony shows that he understood that the payments were to

continue beyond the death of the payee spouse. Petitioner

testified:

THE COURT: Well, you read [the settlement agreement],
didn't you?

THE WITNESS: I read it, but I don't--didn't know what it
meant. They told me--my lawyers said, "This is what
we've agreed to; sign it," so I signed it.

THE COURT: So--

THE WITNESS: I was more concerned with the numbers than the
fine print.
 -7 -

THE COURT: Well, but you must have had some understanding
of whether--if she remarried or if she died, you would
still have to pay this for a full forty-eight months.

THE WITNESS: I had that under--we never discussed
remarriage at all, but they said I'm going to have to pay this
for forty-eight months.

THE COURT: Whether she lived or died?

THE WITNESS: Yes.

The provision in the settlement agreement that the spousal

support was reportable by wife and deductible by husband is

merely an attempt to agree to a legal conclusion that is contrary

to the necessary legal conclusion following from the provision

for the payments to continue after petitioner's former wife's

death. An incorrect understanding of the law by the parties to

that agreement does not change the law applicable to petitioner's

case.

Also at issue is whether petitioners are liable for the

accuracy-related penalties under section 6662(a). Under section

6662, a 20-percent addition to tax is imposed on the portion of

the underpayment that is attributable to one or more of the

following: (1) Negligence or disregard of the rules or

regulations; (2) substantial understatement of tax; (3) valuation

overstatement; (4) overstatement of pension liabilities; and (5)

estate or gift tax valuation understatements. Respondent

concedes that only negligence and substantial understatement of

tax would have application to the facts in this case.
 -8 -

Negligence includes any careless, reckless, or intentional

disregard of rules or regulations, any failure to make a

reasonable attempt to comply with the provisions of the law, and

any failure to exercise ordinary and reasonable care in the

preparation of a tax return. Neely v. Commissioner, 85 T.C. 934

(1985).

Under section 6662(a), an understatement is "substantial" if

the understatement exceeds the greater of 10 percent of the tax

required to be shown on the return for the taxable year, or

$5,000 ($10,000 in the case of a corporation other than an S

corporation or a personal holding company). An understatement of

tax is the excess of the amount required to be shown on the

return over the amount shown on the return, reduced by any

rebates.

Section 6664(c)(1) provides that no penalty shall be imposed

with respect to any portion of an underpayment if it is shown

that there was a reasonable cause for such portion, and that the

taxpayer acted in good faith with respect to such portion. The

record here shows that at the time the divorce agreement was

signed petitioner had two attorneys. He asked one of these

attorneys in the presence of the other whether, under the

agreement, he would be entitled to deduct the payments made to

his ex-wife as alimony, stating that he would sign the agreement

if the alimony was deductible by him. His attorney assured him

that the payments would be deductible by him under the agreement,
 -9 -

and his other attorney and the attorney representing petitioner's

ex-wife agreed that he was entitled to deduct the payments to his

ex-wife as alimony, and that the payments would be taxable to his

ex-wife. Petitioner testified that one of his attorneys had been

a judge, and he considered him very knowledgeable with respect to

interpreting the agreement for him. Under these circumstances,

it appears to us that petitioner had reasonable cause for

deducting the $30,000 he paid to his ex-wife in 1990 and $10,000

of the amount of the alimony deduction claimed in 1991. Even

though the advice petitioner received was incorrect, considering

all the circumstances of this case, we conclude that petitioner

has shown reasonable cause for the deduction claimed as alimony

in 1990 and for $10,000 of the deduction claimed as alimony in

1991. There has been no reasonable cause shown for the claim as

an alimony deduction of the other $25,000 claimed in 1991 and the

claiming of that deduction was negligent.

We, therefore, hold that petitioner is not liable for the

accuracy-related penalty under section 6662(a) for the year 1990

and is only liable for the accuracy-related penalty on $25,000 of

the amount deducted as alimony for the year 1991. Petitioner has

failed to show that he had any reasonable cause for taking this

$25,000 alimony deduction.

Decision will be entered

under Rule 155.