T.C. Memo. 1998-2
UNITED STATES TAX COURT
WILLIAM J. WELLS, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 5458-94. Filed January 5, 1998.
Joyce J. Pearson, for petitioner.
Linas N. Udrys, for respondent.
MEMORANDUM OPINION
NAMEROFF, Special Trial Judge: This case was heard pursuant
to the provisions of section 7443A(b)(3)1 and Rules 180, 181, and
182. Respondent determined deficiencies in petitioner’s 1990 and
1991 Federal income tax in the amounts of $6,513 and $8,043,
1
All section references are to the Internal Revenue Code
in effect for the years at issue. All Rule references are to the
Tax Court Rules of Practice and Procedure.
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respectively. The sole issue for decision is whether amounts
paid as “family support” pursuant to a State court decree were
alimony payments and therefore deductible by petitioner under
section 215.
Background
Some of the facts have been stipulated, and they are so
found. The stipulation of facts and the attached exhibits are
incorporated herein by this reference. At the time he filed his
petition, petitioner resided in Irvine, California.
Petitioner and his former wife, Karen Wells (Ms. Wells),
were married on August 2, 1980. They have two children from the
marriage: Christopher, born July 24, 1982, and Lindsey, born
August 28, 1985. On June 1, 1990, the Superior Court of
California, Orange County (Superior Court), entered a Judgment of
dissolution of marriage effective August 15, 1990. Christopher
and Lindsey resided with Ms. Wells during the years at issue.
As part of their divorce, petitioner and Ms. Wells entered
into a Marital Termination Agreement (MTA) on February 5, 1990.
They retained Attorney Richard E. Young (Mr. Young) to draft and
effectuate the MTA without contest. Although Ms. Wells initially
approached Mr. Young for assistance with the divorce, Mr. Young
served as an impartial mediator in negotiating and drafting the
MTA for both petitioner and Ms. Wells. Petitioner and Ms. Wells
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understood that payments to be made under the MTA were to provide
financial support for Ms. Wells and the children.
The Superior Court approved the MTA and made it an Order of
the Court. The relevant portions of the Superior Court’s order
are recited below:2
14. CHILD CUSTODY AND SUPPORT:
A. SPOUSAL SUPPORT Neither party shall pay the
other any amount for support, however, the Court will
reserve jurisdiction over the right to award spousal
support until December 26, 1995, at which time the
right to grant spousal support for either party shall
terminate without further order of the court. If you
fail to pay any court ordered child support, an
assignment of your wages will be obtained without
further notice to you.
* * *
C. FAMILY SUPPORT ORDER:
* * * [Petitioner] shall pay to * * * [Ms. Wells]
as and for the FAMILY SUPPORT ORDER sum of $2,000.00
per month, until the sale of their house, one and a
half (1 1/2) months after the sale of the house, the
FAMILY SUPPORT ORDER shall increase to the sum of
$3,238.00 per month, payable one-half on the first and
one-half of [sic] the fifteenth day of each month,
commencing March 1, 1990, and continuing thereafter
until further Order of the Court or until the child
marries, dies, is emancipated, reaches 19 or reaches 18
and is not a full-time high school student residing
with a parent, whichever first occurs. * * * [Ms.
Wells] shall immediately report to * * * [petitioner]
the name, address and phone number of her Employer and
2
California recognizes three forms of support: Child,
spousal, and family. See Cal. Fam. Code sec. 150 (West 1994).
We note that the Cal. Fam. Code, enacted in 1992 and operative
from Jan. 1, 1994, was derived from the family law provisions of
the Cal. Civ. Code, Code of Civ. Proc., Evid. Code, and Prob.
Code. The relevant portions of the sections cited herein were
adopted as the Cal. Fam. Code without substantial changes.
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her monthly income. Any increase in income shall be
grounds for a reevaluation of * * * [petitioner’s]
obligation for support. Further, the termination of
the mutual obligation of spousal support, shall be
further grounds for reevaluation of the support orders.
On September 19, 1990, petitioner and Ms. Wells, through a
Memorandum of Agreement, modified the MTA. The relevant portions
of that agreement (Modified MTA) are set out below:
NOW, THEREFORE, * * * [Ms. Wells and petitioner] do
hereby agree to modify the Marital Termination
Agreement of February 5, 1990, to the extent and only
to the extent as herein detailed. Said order shall be
modified with respect to paragraph numbered (14)
subsection (c) thereof, as follows:
a. * * * [Petitioner] shall pay to * * * [Ms. Wells]
as and for family support order the sum of $2,600.00
per month, payable in the sum of $1,300.00 on the 15th
day of each month and $1,300.00 on the 1st day of each
month, commencing October 15, 1990.
b. That portion of paragraph numbered (14) subsection
(c) of the Marital Termination Agreement above referred
to and which reflects that “one and a half (1 1/2)
months after the sale of the house, the family support
order shall increase to the sum of $3,238.00 per
month.” is hereby, by agreement of the parties,
declared of no force and effect.
* * *
e. * * * [Ms. Wells] agrees to notify * * *
[petitioner] at the commencement of full-time
employment by * * * [Ms. Wells] and to notify * * *
[petitioner] of the name and address of her employer
and her salary structure all at such time as * * * [Ms.
Wells] commences full-time employment.
Petitioner and respondent have stipulated that petitioner
had made the payments at issue pursuant to this Modified MTA.
They also have stipulated these additional facts:
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During the taxable year 1990, commencing January 1,
1990, through October 15, 1990, petitioner paid Karen
Wells $2,000.00 per month as “family support” pursuant
to the MTA as modified.
Commencing October 15, 1990, and continuing through all
of the taxable year 1991, petitioner paid Karen Wells
$2,600.00 per month as “family support” pursuant to the
MTA as modified. For the month of October, 1990,
petitioner made one payment in the amount of $1,000.00
and one payment in the amount of $1,300.00.
On July 11, 1995, petitioner filed a motion in the Superior
Court seeking to reform the Modified MTA. Through this motion,
petitioner moved for that court “to properly interpret the
meaning and intent of the family support, child support and
spousal support paragraphs in the parties [sic] judgment of
dissolution filed June 1, 1990.” On August 16, 1996, the
Superior Court, by way of an order, made a factual finding that
the payments “were intended to be as separate allocated sums of
child support and spousal support.” The Superior Court, however,
did not specifically delineate the amounts for alimony and child
support.
During the calendar years 1990 and 1991, petitioner paid Ms.
Wells family support of $25,500 and $31,200, respectively. On
his 1990 and 1991 Federal income tax returns, petitioner claimed
alimony deductions of $22,452 and $27,468, respectively, which
represented approximately 88 percent of petitioner’s total family
support payments during each year. Petitioner derived the above
ratio using figures that were reflected in a “Dissomaster”
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report.3 The “Dissomaster” report indicated that petitioner was
to pay family support of $3,238 per month, of which $2,857 was to
be for spousal support and $381 was to be for child support.4
Mr. Young, allegedly, relied upon this report when drafting the
MTA. Petitioner also claimed dependency exemption deductions for
Christopher and Lindsey on his 1990 and 1991 tax returns. In the
notice of deficiency, respondent disallowed petitioner’s alimony
deductions.
Discussion
Section 215(a) allows a deduction for the payment of alimony
during a taxable year. Section 215(b) defines alimony as payment
that is includable in the gross income of the recipient under
section 71. Section 71(b) provides a four-step inquiry for
determining whether a cash payment is alimony. Section 71(b)
provides:
(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 includable in gross income under this section
3
A “Dissomaster” is a commercially available computer
program used by family law practitioners to compute support
payment amounts based on income and other factors.
4
$2,857 divided by $3,238 equals approximately 88 percent.
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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.
If any portion of the payments made by petitioner fails to meet
any one of the four enumerated criteria, that portion is not
alimony and thus is not deductible by petitioner.
Moreover, payments made for child support are not
deductible under section 215. Sec. 71(c). Child support is that
part of the payment which the terms of the divorce instrument
fixed as payable for the support of the children of the payor
spouse. Sec. 71(c)(1). An amount is treated as fixed under
section 71(c)(1) if it will be reduced on the happening of a
contingency specified in the divorce instrument relating to a
child (such as attaining a specified age, marrying, dying,
leaving school, or a similar contingency) or at a time which can
clearly be associated with a contingency related to the child.
Sec. 71(c)(2).
Respondent argues that the family support payments made by
petitioner fail to qualify as deductible alimony. In making that
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determination, respondent focuses on when the payments at issue
were scheduled to terminate. First, respondent contends that the
payments made by petitioner fail to qualify as alimony because
the family support payments were not set to terminate upon the
death of Ms. Wells, as required by section 71(b)(1)(D). In
addition, respondent, relying on section 71(c)(2), asserts that
the payments were nondeductible child support payments, because
the Modified MTA made the “cessation of the payments contingent
upon events which are associated with petitioner's children.”
Petitioner, on the other hand, argues that the payments at
issue were deductible alimony. Petitioner asserts that his
payments satisfied section 71(b)(1)(D) because, under California
law, the obligation for support terminates automatically upon the
death of either party or the remarriage of the recipient.
Moreover, petitioner contends that his payments met the
definition of alimony because the Modified MTA failed to fix any
amount as child support, as required by section 71(c)(2) and
Commissioner v. Lester, 366 U.S. 299 (1961).
Evidentiary Matters
As a preliminary matter, we must make rulings on evidentiary
matters. Respondent moved, pursuant to Rule 50, for the Court to
“exclude all extrinsic evidence, including, but not limited to,
the testimony of petitioner and the testimony of * * * [Mr.
Young] which pertains to the intended character and/or amount of
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support payments made by petitioner, from evidence”. Respondent
also moved to exclude from evidence: (1) The August 16, 1996,
order of the Superior Court, in which the court attempted to
clarify the character of the family support payments; and (2) the
“Dissomaster” report.
Petitioner introduced the above evidence to establish that
88 percent of the family support payments represented alimony.
Respondent objects to the introduction of the evidence, relying
upon the parol evidence rule and the Supreme Court's holding in
Commissioner v. Lester, supra.5 In essence, respondent asserts
that since the MTA clearly characterizes the full amount of the
family support payments as child support pursuant to section
71(c)(2), the introduction of extrinsic evidence is
inappropriate. We reserved a final ruling as to the
admissibility of the evidence and tentatively received the
evidence offered. Respondent renewed the objection at trial and
again on brief.
This Court has held, relying on the holding in Lester, that
parol and other extrinsic evidence is inadmissible to explain the
intent, motives, and conduct of parties where a clear and
5
Respondent also objects to the “Dissomaster” report on
the basis of relevance, asserting that at no time during the
relevant period did petitioner pay Ms. Wells $3,238 per month,
the amount indicated in the report. While it is true that
petitioner paid less than $3,238 per month, the objection is
overruled, as it goes to the weight of the evidence rather than
to its admissibility.
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unambiguous written separation agreement specifically and
unequivocally fixes periodic payments as child support. Estate
of Craft v. Commissioner, 68 T.C. 249, 263-264 (1977), affd. 608
F.2d 240 (5th Cir. 1979); Grummer v. Commissioner, 46 T.C. 674,
680 (1966). Conversely, the introduction of extrinsic evidence
is permitted in cases where documents contain inconsistencies
and/or ambiguities.
The documents before us are riddled with inconsistency and
ambiguity. For example, paragraph 14C. lists several
contingencies relating to “the child”. This singular reference
is perplexing as petitioner and Ms. Wells have two children from
their marriage, and the document does not reveal whether these
contingencies related to one or both of the children.
The fact that petitioner and Ms. Wells modified the MTA adds
complexity to our analysis. The Modified MTA states that the MTA
is modified “to the extent and only to the extent as herein
detailed.” In modifying the first sentence of paragraph 14C.,
the Modified MTA changes the monthly amount of family support and
specifically eliminates the portion of the sentence relating to
the sale of the house. The Modified MTA, however, is silent as
to the contingencies relating to “the child”, and there appears
to be uncertainty as to whether the contingencies were intended
to have survived the modification.
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Respondent asserts that Grummer v. Commissioner, supra, is
indistinguishable from this case. We disagree. In Grummer, this
Court, in excluding extrinsic evidence, found that there was no
ambiguity in the language of the agreement and that “The parties
stated with clarity that the periodic payments were to be treated
solely as support for the children.” Id. at 679. No such
clarity, however, is present in the documents before us.
Accordingly, we deny respondent’s motion in limine and overrule
all related subsequent objections.
Petitioner, on the other hand, raises a relevancy objection
to the introduction of a Minute Order of the Superior Court filed
May 17, 1995. The order required petitioner to pay Ms. Wells
$2,222 per month as “child support” and $275 per month as
alimony, “COMMENCING FORTHWITH” from the date the Minute Order
was filed. We sustain petitioner’s objection. This order
modified petitioner’s payments beginning with June 1, 1995, and
thereafter and has no bearing on petitioner’s payments made
during taxable years 1990 and 1991. The order, in stating the
“COURT RESERVES ISSUE OF RETROACTIVITY AS TO COMMENCEMENT OF
SUPPORT ORDERS”, implies that its effectiveness is limited to
modifying petitioner’s future support obligations only.
Divorce or Separation Instrument
While respondent does not question whether, under section
71(b)(1)(A), petitioner had made payments pursuant to a divorce
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or separation instrument, we believe that this issue deserves our
consideration. Section 71(b)(2) defines the term “divorce or
separation instrument” as follows:
(A) a decree of divorce or separate maintenance or
a written instrument incident to such a decree,
(B) a written separation agreement, or
(C) a decree (not described in subparagraph (A))
requiring a spouse to make payments for the support or
maintenance of the other spouse.
The term “written separation agreement” is not comprehensively
defined by the Code, the legislative history, or applicable
regulations. Bogard v. Commissioner, 59 T.C. 97, 100 (1972). We
have held, however, that the existence of a clear, written
statement of the terms of support for separated parties is
sufficient to satisfy section 71(b)(2)(B). Id. at 101.
The parties have stipulated that petitioner had made the
payments at issue pursuant to the Modified MTA. Ordinarily, a
stipulation of fact is binding on the parties, and we are
constrained to enforce it. Rule 91. We may, however, modify or
set aside a stipulation that is clearly contrary to the facts
revealed on the record. Cal-Maine Foods, Inc. v. Commissioner,
93 T.C. 181, 195 (1989). The record plainly demonstrates that
the January 1 through October 14, 1990, payments, were not made
pursuant to the Modified MTA. We, therefore, shall set aside the
above stipulation pertaining to those payments. The stipulation
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relating to the October 15, 1990, through December 31, 1991,
payments, however, shall not be disturbed.
In determining whether petitioner’s payments were made
pursuant to a “written separation instrument”, we need only look
to when the payments were made. We consider those payments made
pursuant to the MTA (whether made before or after the Superior
Court adopted the MTA as an Order of the Court) and Modified MTA
as having been made pursuant to written separation instruments,
because those instruments satisfy the requirements stated in
section 71(b)(2). On the other hand, those payments for the
January 1 through February 4, 1990, period (about $2,000) were
not made pursuant to any instrument and, therefore, do not
satisfy the section 71(b)(1)(A) requirement.
Termination Upon Death
Keeping in mind that petitioner made payments pursuant to
two separate instruments (i.e., those made pursuant to the MTA
and those made pursuant to the Modified MTA),6 we now must decide
whether, under section 71(b)(1)(D), petitioner’s payments were
set to terminate upon the death of Ms. Wells. Neither the MTA
nor the Modified MTA specifically states whether the above was to
occur. We, therefore, must look to California law to determine
whether a postdeath legal obligation existed, as State law
6
The following discussion pertains only to those payments
made for the period beginning with Feb. 5, 1990.
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determines various rights of the parties. Sampson v.
Commissioner, 81 T.C. 614, 618 (1983), affd. without published
opinion 829 F.2d 39 (6th Cir. 1987).
California Family Code section 4337 (West 1994) provides
that, “Except as otherwise agreed by the parties in writing, the
obligation of a party under an order for the support of the other
party terminates upon the death of either party or the remarriage
of the other party.” (Emphasis added.) Under California law, an
order for “spousal support” means an order for the support of the
spouse based upon the standard of living established during
marriage. On the other hand, “child support”, once ordered by a
court, survives the death of the payee custodial parent and
continues as an obligation of the payor noncustodial parent. In
re Marriage of McCann, 32 Cal. Rptr. 2d 639 (Ct. App. 1994); In
re Marriage of Gregory, 281 Cal. Rptr. 188 (Ct. App. 1991). The
third category, “family support”, is an unallocated combination
of “child support” and “spousal support”. Cal. Fam. Code secs.
92, 4330 (West 1994).
Petitioner argues that because family support is an
unallocated combination of child support and spousal support, he
must prevail since spousal support terminates at the death of the
payee. We believe the converse argument is equally persuasive
(i.e., that the payments are not alimony because child support
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survives the death of the custodial parent), and we refuse to
accept his conclusion.
Upon reviewing the relevant evidence before us, we hold that
petitioner’s payments, under both instruments, do not meet the
section 71(b)(1)(D) requirement. Contrary to petitioner’s
contention, California Family Code section 4337 (West 1994) does
not assist him in satisfying that provision.
While the MTA is not a model of clarity, we are convinced
that the parties intended the payments to terminate, on a pro
rata basis, as each child “marries, dies, is emancipated, reaches
19 or reaches 18 and is not a full-time high school student
residing with a parent”. The reference to “the child” was merely
a scrivener’s error that was not caught by Mr. Young or his
clients. Thus, both petitioner and Ms. Wells had “otherwise
agreed in writing” to terminate the family support payments at
some point other than the death of the payee spouse. In effect,
they had agreed that the payments were to continue until one or
more of the specified events occurred with respect to the
children, even if Ms. Wells were to die beforehand. Thus, the
payments would not terminate on her death.
Turning now to the Modified MTA, it does not make any
difference whether we accept respondent’s interpretation of that
document (i.e., that paragraph 14C. required payment of $2,600
per month, terminating pro rata as each child marries, dies,
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etc.) or petitioner’s (i.e., that paragraph 14C. required family
support payments that were not subject to any of the above
events). If we concur with respondent, then both petitioner and
Ms. Wells had, once again, “otherwise agreed in writing” and the
result would mirror the above.7
On the other hand, even if we were to concur with
petitioner’s interpretation of the Modified MTA, he still would
not prevail. We are unaware of any California statute that
terminates family support obligations upon the death of the payee
spouse. California Family Code section 4337 pertains only to
spousal support orders and, in our estimation, does not address
family support payments. Assuming a “worst case scenario” (i.e.,
custodial parent dies and custody is awarded to someone other
than the surviving spouse), we cannot believe that California law
would permit the surviving parent to avoid any further support
obligations. See Murphy v. Commissioner, T.C. Memo. 1996-258.
Accordingly, respondent’s determination shall be sustained.
To reflect the foregoing,
Respondent’s motion in limine
will be denied and decision will
be entered for respondent.
7
A holding in accordance with respondent’s interpretation,
however, would require us to find that petitioner and Ms. Wells
continued to ignore the patent ambiguity of the one-child
provision.
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