Sugarman v. Commissioner

T.C. Memo. 1996-410

UNITED STATES TAX COURT

ROBERT J. SUGARMAN, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 22440-94. Filed September 11, 1996.

Robert R. Elliott, for petitioner.

Linda Ann Love and Joseph M. Abele, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

VASQUEZ, Judge: Respondent determined deficiencies in

petitioner's Federal income tax, an addition to tax, and an

accuracy-related penalty as follows:

Addition to Tax Penalty
Year Deficiency Sec. 6651(a)(1) Sec. 6662(a)

1989 $9,259 $926 $877
1990 2,428 --- ---
 - 2 -

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.

The issues for consideration are: (1) Whether amounts paid

by petitioner to his former wife in 1989 and 1990 were alimony;1

(2) whether petitioner was entitled to a deduction for Schedule C

interest expense for his 1989 taxable year in excess of that

allowed by respondent; (3) whether petitioner is liable for an

addition to tax under section 6651(a)(1) for the taxable year

1989; and (4) whether petitioner is liable for the accuracy-

related penalty under section 6662 with respect to the

underpayment of tax resulting from deducting interest expense in

excess of that allowed by respondent.

FINDINGS OF FACT

Some of the facts have been stipulated and are so found.

The stipulation of facts and attached exhibits are incorporated

herein by this reference. Petitioner resided in Pineville,

Pennsylvania, at the time the petition was filed in this case.

Petitioner Robert J. Sugarman is an attorney. Petitioner

and M. Colleen Sugarman (Colleen) were married on April 30, 1983.

Subsequent to their marriage, petitioner and Colleen purchased

1
All references to alimony mean alimony as defined by sec.
71(b) of the Internal Revenue Code unless otherwise indicated.
 - 3 -

property in Pineville, Pennsylvania (Pineville property), which

they owned jointly. At some point in the relationship, marital

difficulties arose. In January 1989, petitioner and Colleen

entered into a separation agreement (the agreement). The

agreement includes, inter alia, custody provisions, support and

alimony provisions, and property distribution provisions. The

property distribution provisions provide, in part, for the sale

of the Pineville property. Those provisions also provide for

Colleen to receive specified amounts from the sale and contingent

possibilities if no sale is completed. The agreement further

states that it "shall be binding and shall inure to the benefit

of the parties hereto and their respective heirs, executors,

administrators, successors and assigns." Pursuant to its terms

and the subsequent divorce decree, the agreement was incorporated

into, but not merged with, the divorce decree. Approximately 1

month later, petitioner and Colleen were divorced pursuant to a

decree dated February 10, 1989.

On May 11, 1989, petitioner offered to pay Colleen, in

return for her interest in the Pineville property, a lump sum of

$20,000, and $20,000 over 2 years in equal monthly installments

of $833.33. In July 1989, petitioner and Colleen entered into an

agreement entitled "Addendum to Property Settlement Dated January

11, 1989 Between Robert J. Sugarman and M. Colleen Sugarman" (the

addendum), which modified the agreement. The addendum was

written expressly to replace the provisions of the agreement
 - 4 -

which appear as paragraph A under the heading "Property

Distribution Provisions." Pursuant to the addendum, Colleen

agreed to convey all of her right, title, and interest in the

Pineville property to petitioner and petitioner agreed to pay

Colleen $40,000, paid in a lump sum of $20,000 with the balance

payable in 24 equal monthly installments without interest. In

order to secure these payments, petitioner was required to, and

did, execute a mortgage in favor of Colleen on the Pineville

property.

On his Federal income tax returns for the years 1989 and

1990, petitioner deducted the payments made pursuant to the

addendum, along with other payments, as alimony. None of the

claimed alimony deductions except those pursuant to the addendum

are at issue in this case. Respondent determined that the

amounts paid pursuant to the addendum were part of a property

settlement and not alimony payments.2

Further, petitioner deducted $28,245.71 as interest expense

on Schedule C of his Federal income tax return for the taxable

year 1989. Respondent disallowed $15,646 of the claimed interest

expense. Petitioner admitted at trial that he could not

substantiate that his business interest expense exceeded the

amount allowed by respondent.

2
Respondent has not questioned whether the amounts
deducted as alimony were actually paid.
 - 5 -

OPINION

Section 215(a) permits a deduction for the payment of

alimony during a taxable year. Section 215(b) defines alimony as

alimony which is includable in the gross income of the recipient

under section 71. Section 71(b)(1)3 defines alimony or separate

maintenance as any cash payment meeting the four criteria

provided in subparagraphs (A) through (D) of that section.

Accordingly, if any portion of the payments made by petitioner

3
Sec. 71(b)(1) provides:

(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 under a decree of
divorce or of separate 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 after the death of the
payee spouse and there is no liability to make any
payment (in cash or property) as a substitute for
such payments after the death of the payee spouse.
 - 6 -

fails to meet the four enumerated criteria, that portion is not

alimony and is not deductible by petitioner.

Neither of the parties argues that the requirements of

subparagraphs (A), (B), and (C) of section 71(b)(1) have not been

satisfied. Their disagreement focuses on the provisions of

subparagraph (D). Petitioner contends that had Colleen died

before the end of the stream of payments, under Pennsylvania law

the liability to make the payments would have terminated.

Respondent contends that if Colleen had died prior to the end of

the payment stream, her estate would have had a valid claim to

the continued payments under Pennsylvania law. Therefore, we

must look to Pennsylvania law to determine whether petitioner's

liability for the payments called for under the addendum

terminates at the death of the payee spouse. Sampson v.

Commissioner, 81 T.C. 614, 618 (1983), affd. without published

opinion 829 F.2d 39 (6th Cir. 1987).

Pennsylvania Family Law

Section 71(b)(1)(D) requires that the payor spouse must not

be liable for any payments under the divorce or separation

instrument after the death of the payee spouse. Under Div. Pa.

Code sec. 508 (1989), the right to receive alimony pursuant to

the alimony and support provisions of the Divorce Code shall

cease upon the death of the payee party. Thus, if any of the

disputed payments are alimony under Pennsylvania law, that
 - 7 -

portion would satisfy the section 71(b)(1)(D) requirement that

the payment obligations terminate on the death of the payee

spouse.

Div. Pa. Code sec. 104 (1989) defines alimony as "An order

for support granted by this or any other state to a spouse or

former spouse in conjunction with a decree granting a divorce or

annulment." In the instant case, the agreement and subsequent

divorce decree provide that the agreement is incorporated, not

merged into the decree. Therefore, the agreement retains its

identity as a contract and does not become a court order. D'Huy

v. D'Huy, 568 A.2d 1289, 1292 (Pa. Super. Ct. 1990); Sonder v.

Sonder, 549 A.2d 155, 165 (Pa. Super. Ct. 1988). Additionally,

there was no alimony order by the Pennsylvania court that granted

the divorce. Because neither the agreement nor the addendum is

an "order for support", the payments made pursuant to them are

not alimony under Pennsylvania divorce law. Thus, Pennsylvania

divorce law does not provide that these payments will terminate

on the death of the payee spouse; instead, Pennsylvania law

requires that these payments are enforceable as a contract.

D'Huy v. D'Huy, supra at 1293 ("The property settlement agreement

remains an enforceable contract, not subject to unilateral

modification as a court order."). Additionally, Div. Pa. Code

sec. 401.1(C) (1989) specifically states:

In the absence of a specific provision to the
contrary appearing in the agreement, a provision
 - 8 -

regarding the disposition of existing property rights
and interests between the parties, alimony, alimony
pendente lite, counsel fees or expenses shall not be
subject to modification by the court.

Therefore, in order for the payments to qualify as alimony within

the requirements of section 71(b)(1)(D), Pennsylvania contract

law must provide that the payments to be made under the addendum

would terminate upon Colleen's death.

Pennsylvania Contract Law and Liability Under the Addendum

"It is settled that, if a property settlement agreement

containing support provisions survives as an enforceable

contract, it is governed by the law of contracts." Ballestrino

v. Ballestrino, 583 A.2d 474, 476 (Pa. Super. Ct. 1990)

(citations omitted). The addendum does not explicitly state

whether the payments therein described are for 24 months absolute

or for 24 months only if Colleen survives. The addendum reads:

Wife will convey all of her right, title and
interest in and to the real estate situate [sic] and
known as 4532 Smith Road, Pineville, Pennsylvania to
Husband for the sum of Forty Thousand Dollars
($40,000.00).

* * * Simultaneously with the delivery of the deed
to Husband or his counsel, Husband shall pay wife the
sum of Twenty Thousand Dollars ($20,000.00).

The balance of Twenty Thousand Dollars
($20,000.00) shall be paid to Wife in twenty-four (24)
equal installments * * *.

The above-quoted section is clear on its face; Colleen is

required to perform, and petitioner is required to perform.

There are no ambiguities or conditions. This is in contrast to
 - 9 -

Cunningham v. Commissioner, T.C. Memo. 1994-474, where the Court

found a provision to be ambiguous on the issue of terminability.

That provision read as follows:

"Husband shall pay to Wife for her support and
maintenance the sum of $2,500.00 per month on the tenth
day of each month, for 142 months". [Id.; fn. ref.
omitted.]

The Court found that the provision was ambiguous because it

was unclear whether Husband's liability to pay was for 142 months

absolute or whether it was contingent on Wife's need for support

and maintenance, and therefore the Court looked to extrinsic

evidence to determine intent. In the instant case, we are faced

with no such ambiguity. To the contrary, the payments were

specifically required to be secured by petitioner.4 Furthermore,

while petitioner contends that the payments were intended to

"prop up Colleen", neither the agreement nor the addendum provide

for modification of the payments if she should become self-

sufficient before the end of 24 months. Similarly, they did not

provide for modification if Colleen's needs remained unchanged at

the end of 24 months. When the terms of the writing are clear

4
The addendum contains a provision which reads:

To secure payment of the Twenty Thousand
Dollars ($20,000.00) to Wife, Husband shall
execute a mortgage on said premises in Wife's
favor which shall be delivered to Wife
simultaneously with her delivery of the deed
to Husband. Said mortgage shall provide for
a 30 day written notice of default prior to
foreclosure.
 - 10 -

and unambiguous, the Court "need only examine the writing."

McMahon v. McMahon, 612 A.2d 1360, 1364 (Pa. Super. Ct. 1992).

Further proof that the payments were intended to be made for

24 months absolute is at page eight of the agreement which

contains a clause labeled "AGREEMENT BINDING ON HEIRS" (binding

on heirs clause) that provides:

This Agreement shall be binding and shall inure to the
benefit of the parties hereto and their respective
heirs, executors, administrators, successors and
assigns.

Respondent argues that this provision (which also applies to the

addendum) provides that if Colleen died before the payments were

completed, her estate would have a claim upon the remaining

payments. Petitioner contends that this clause only provides

that the contract does not terminate upon death, but only the

rights that were intended to survive the death of one of the

parties would inure to the benefit of the other's estate. If

petitioner's position was correct, and the binding on heirs

clause did not address the payments due under the addendum, the

usefulness of such a clause would be eliminated. Petitioner's

argument would lead to the proposition that if a given provision

is not explicitly referred to in a binding on heirs clause or

expressly written to continue after the death of one of the

parties, then an intent inquiry must be made. However, the

contract provides that the benefits will inure to the parties'

respective heirs, executors, administrators, successors, and
 - 11 -

assigns; we see no reason to hold that this provision is without

force. Colleen relinquished a valuable property interest in the

Pineville property and in return took back an interest in a

stream of payments secured by a mortgage. The contract provides

for this new interest to inure to the benefit of Colleen's heirs.

As we have already stated, there is no ambiguity in the

agreement or addendum as to the payments in dispute, and

therefore there is no need to look to extrinsic evidence in

interpreting the contract.5 Even if there was an ambiguity in

the agreement or addendum, the extrinsic evidence that is in the

record before this Court would favor a finding that the parties

intended a property settlement that would require payments to

continue beyond Colleen's death.

Based upon our analysis of Pennsylvania law and the relevant

provisions of the agreement and addendum, we conclude that the

payments at issue would not have terminated at Colleen's death.

Instead, we find that, had Colleen died prior to the end of the

payment stream, her estate would have had a valid claim for the

remainder of the payments. Accordingly, we find that

thesepayments in the nature of a property settlement are not

alimony, and therefore are not deductible.6

5
See Kohn v. Kohn, 364 A.2d 350, 353 (Pa. Super. Ct. 1976)
("parol evidence is admissible to resolve the ambiguity, but not
to alter the terms of the contract.").
6
Respondent also argues that petitioner's execution of a
(continued...)
 - 12 -

Interest Deduction

Petitioner admitted at trial that, to the extent that his

interest deduction exceeded that allowed by respondent, it could

only be substantiated by a schedule of expenses. Petitioner

bears the burden of proof. Rule 142(a); Welch v. Helvering, 290

U.S. 111, 115 (1933). The schedule of expenses, if it had been

admitted at trial, is not sufficient to meet this burden, and

therefore we find for respondent on this issue. Cluck v.

Commissioner, 105 T.C. 324, 338 (1995)(summary schedules did not

demonstrate taxpayer's entitlement to claimed deductions).

Addition to Tax Under Section 6651(a)(1)

Section 6651(a)(1) imposes an addition to tax for failure to

file a return on the date prescribed (determined with regard to

any extension of time for filing), unless it is shown that such

failure is due to reasonable cause and not due to willful

neglect. The taxpayer has the burden of proof to show the

addition is improper. United States v. Boyle, 469 U.S. 241, 245

(1985).

Respondent determined that petitioner's 1989 Federal income

tax return was due, after extension, on August 15, 1990.

Petitioner has stipulated that he filed his Federal income tax

6
(...continued)
debt instrument (i.e., the mortgage) is not a payment in cash as
required under sec. 71(b)(1). Because of our finding in the
previous sections that the payments would not have terminated
upon Colleen's death and are therefore not alimony, this argument
is now moot.
 - 13 -

return for 1989 on September 19, 1990. Petitioner did not offer

any evidence on the issue at trial nor address it in his briefs.

Therefore, we consider him to have conceded his liability for the

delinquency addition.

Penalty Under Section 6662(a)

Section 6662(a) imposes a penalty in an amount equal to 20

percent of the portion of the underpayment of tax attributable to

one or more of the items set forth in section 6662(b), including

negligence or disregard of the rules or regulations. Respondent

determined that a portion of the underpayment of petitioner's tax

was due to negligence or intentional disregard of rules and

regulations. Sec. 6662(b)(1). Petitioner bears the burden of

proof on the penalty issue. Rule 142(a); Neely v. Commissioner,

85 T.C. 934, 947 (1985).

The accuracy-related penalties of section 6662 do not apply

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

that there was reasonable cause for such portion and the taxpayer

acted in good faith with respect to such portion. Sec.

6664(c)(1).

Petitioner conceded at trial that he could not substantiate

his interest deduction beyond what had already been allowed by

respondent. Petitioner has offered no evidence that he was not

negligent in deducting the excess amount or that he had

reasonable cause to do so. In fact, petitioner's briefs fail to

address the negligence issue at all. We cannot be sure that
 - 14 -

petitioner intended to abandon the issue, but in any case

respondent's determination of the applicable penalty must be

sustained with respect to the underpayment for the improper

interest deduction as petitioner has not met his burden of proof

on this matter.

To reflect the foregoing,

Decision will be entered

for respondent.