Human v. Commissioner

T.C. Memo. 1998-106

UNITED STATES TAX COURT

LARRY WADE HUMAN, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 25675-96. Filed March 16, 1998.

In 1992, P deducted payments in the amount of
$971,684 made to or on behalf of his former spouse
pursuant to a final judgment and decree of divorce as
alimony under sec. 215(a), I.R.C. R disallowed the
alimony deduction completely, determining that the
payments failed to satisfy all the requirements for
treatment as alimony. R further determined that P was
liable for the accuracy-related penalty for negligence
or disregard of rules or regulations pursuant to sec.
6662(a), I.R.C.

1. Held: The obligation to make the lump-sum payments
at issue would survive the death of P's former spouse
under State law, and therefore such payments are not
deductible to P as alimony. Secs. 71(b), 215(a),
I.R.C.

2. Held, further, P is not liable for the accuracy-
related penalty for negligence pursuant to sec.
 - 2 -

6662(a), I.R.C. Sec. 6664(c)(1), I.R.C.; sec. 1.6664-
4(b)(1), Income Tax Regs.

Larry Wade Human, pro se.

Clinton M. Fried, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

NIMS, Judge: Respondent determined a deficiency in

petitioner Larry Wade Human's Federal income tax for his 1992

taxable year in the amount of $272,222. Respondent further

determined that petitioner is liable for an accuracy-related

penalty for negligence or disregard of rules or regulations

pursuant to section 6662(a) in the amount of $54,444 for that

year.

Unless otherwise indicated, all section references are to

sections of the Internal Revenue Code in effect for the year at

issue. All Rule references are to the Tax Court Rules of

Practice and Procedure.

The issues for decision are as follows: (1) Whether the

payments of $971,684 made to or on behalf of petitioner's former

spouse, Anita C. Human (Anita), constitute alimony within the

meaning of section 71 so as to be deductible by petitioner

pursuant to section 215(a); and (2) whether petitioner is liable

for the section 6662(a) accuracy-related penalty.
 - 3 -

Petitioner resided in Dunwoody, Georgia, at the time he

filed his petition.

FINDINGS OF FACT

Petitioner married Anita on February 16, 1979. They had two

children together.

A jury verdict in an action for divorce brought by Anita was

rendered on November 17, 1989. Paragraph 5 of the form verdict

provides: "Alimony is awarded as follows: Two lump sum

payments. $24,000 immediately, $750,000 on or before May 17th

1990." A "Final Judgement and Decree" of divorce (Judgment) was

entered by the Superior Court of DeKalb County, Georgia (Superior

Court), on January 2, 1990. The Judgment incorporated the jury

verdict and in paragraph 3 ordered as follows:

3. The Defendant Husband shall pay to the
Plaintiff Wife lump sum alimony payments in the amounts
of:
a. Twenty-Four Thousand Dollars ($24,000.00)
instanter; and,
b. Seven Hundred Fifty Thousand Dollars
($750,000.00) on or before May 17, 1990.

On June 25, 1992, the Superior Court heard Anita's contempt

action against petitioner for his failure to pay the amount

required under the Judgment. In late 1992, pursuant to the

Judgment and a November 13, 1992, order of the Superior Court,

the clerk disbursed funds to Anita out of the Registry of the

court in the amount of $750,000, plus interest thereon in the

amount of $221,684, less attorney's fees payable to Butler and

Seigal, P.C., of $57,726.80. (Such funds stemmed from an earlier
 - 4 -

condemnation action brought by DeKalb County involving the

marital residence of petitioner and Anita.)

Petitioner timely filed a Form 1040, U.S. Individual Income

Tax Return, for taxable year 1992. On line 29, "Alimony paid",

of his return, petitioner claimed a deduction of $971,684, which

amount represents the sum of $913,957.60 paid to Anita, as well

as attorney's fees of $57,726.80 paid on her behalf. (The amount

of $971,684 deducted by petitioner on his return appears to have

been rounded to the nearest dollar.)

Petitioner's accountant for 16 years, Clark Tomlin (Tomlin),

prepared and signed petitioner's 1992 return. Petitioner

discussed the deductibility of the payments to Anita with Tomlin

"several times" before the return was prepared. Petitioner

stated that "after 16 years, if * * * [Tomlin] didn't think he

was correct, * * * [Tomlin] wouldn't have signed * * * [the

return]". Petitioner also spoke with an attorney and former

employee of the IRS, Bill Indictor (Indictor), "a bunch of times"

about this issue in 1992. Tomlin talked with Indictor as well.

Petitioner presented to Tomlin "everything" related to the

alimony issue, including the Judgment, in order for Tomlin to

accurately prepare petitioner's 1992 return.

On August 30, 1996, respondent issued a notice of deficiency

to petitioner for taxable year 1992. Respondent disallowed

petitioner's alimony deduction in its entirety. In Workpaper

Comments attached to the notice, respondent stated that the
 - 5 -

payments failed to satisfy all of the requirements for treatment

as alimony. Other adjustments to income were computational in

nature. Respondent further determined that petitioner was liable

for the accuracy-related penalty for negligence or disregard of

rules or regulations pursuant to section 6662(a).

OPINION

I. Whether Petitioner Is Entitled to an Alimony Deduction
Pursuant to Section 215(a)

Section 215(a) allows as a deduction to the payor an amount

equal to the alimony or separate maintenance payments made during

the payor's taxable year. Whether a payment constitutes alimony

or separate maintenance within the meaning of section 215(a) is

determined by reference to section 71(b).

Section 71(b) provides in pertinent part as follows:

SEC. 71(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--

* * * * * * *

(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.

Respondent argues that the contested payments in the amount

of $971,684 are not alimony, and are therefore not deductible by

petitioner, as they do not meet the requirements of section

71(b)(1)(D). Petitioner, on the other hand, asserts that the
 - 6 -

requirements set forth in section 71(b)(1)(D) have been

satisfied. In that connection, petitioner maintains that "even

though there is no stipulation that the * * * [payments]

terminate upon the death of Mrs. Human * * *, this is implied."

For reasons which follow, we agree with respondent.

Pursuant to the Tax Reform Act of 1986, Pub. L. 99-514, sec.

1843(b), 100 Stat. 2853, a divorce or separation instrument

executed after December 31, 1984, need not expressly provide for

the termination of payments upon the death of the payee spouse in

order for such payments to be treated as alimony, provided that

such termination is implied under State law. Notice 87-9, 1987-1

C.B. 421, 422. Thus, we must turn to Georgia law for guidance as

to whether an obligation to make the contested payments remained

on the part of petitioner in the event of Anita's death. See

Sampson v. Commissioner, 81 T.C. 614, 618-619 (1983), affd.

without published opinion 829 F.2d 39 (6th Cir. 1987).

Georgia law recognizes alimony as either periodic or lump

sum. Winokur v. Winokur, 365 S.E.2d 94, 95 (Ga. 1988). "Lump

sum alimony" may be payable in specified installments or at once.

Stone v. Stone, 330 S.E.2d 887, 889 (Ga. 1985). In Winokur v.

Winokur, supra at 96, the Georgia Supreme Court defined lump-sum

alimony as follows:

If the words of the documents creating the obligation
state the exact amount of each payment and the exact
number of payments to be made without other
limitations, conditions or statements of intent, the
 - 7 -

obligation is one for lump sum alimony payable in
installments.

See also Stone v. Stone, supra at 889. That court noted that the

distinction between lump sum and periodic alimony is important

inasmuch as "the obligation to pay periodic alimony terminates at

the death of either party while the obligation to pay lump sum

alimony in installments over a period of time does not." Winokur

v. Winokur, supra at 95 (emphasis added).

In the present case, the Judgment incorporating the jury

verdict required petitioner to pay two installments of $24,000

and $750,000. Thus, the number of payments and the amount of

each payment were specified. Moreover, no other limitations,

conditions, or statements of intent are present in the words of

the documents creating the obligation. Cf. Dillard v. Dillard,

458 S.E.2d 102, 103 (Ga. 1995). Since the payments in 1992 meet

the definition for lump-sum alimony set forth in Winokur v.

Winokur, supra, it follows that they would have remained payable

to Anita's estate in the event of her death. Id. at 95.

In view of the above discussion, we hold that the lump-sum

payments in the amount of $971,684 made to Anita and on her

behalf are not alimony within the meaning of section 71. See

Stokes v. Commissioner, T.C. Memo. 1994-456. Consequently, they

are not deductible to petitioner pursuant to section 215(a).

II. Whether Petitioner Is Liable for the Section 6662(a)
Accuracy-Related Penalty
 - 8 -

Section 6662(a) and (b)(1) impose a penalty equal to 20

percent of any portion of an underpayment attributable to

negligence or disregard of rules or regulations. Petitioner

bears the burden of proving that he is not liable for this

penalty. Rule 142(a); Luman v. Commissioner, 79 T.C. 846, 860-

861 (1982).

Negligence is defined as the lack of due care or failure to

do what a reasonable and prudent person would do under the

circumstances. Neely v. Commissioner, 85 T.C. 934, 947 (1985).

The term "disregard" includes any careless, reckless, or

intentional disregard. Sec. 6662(c). Section 6664(c)(1)

provides that no penalty shall be imposed under section 6662(a)

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

that there was a reasonable cause for such portion and the

taxpayer acted in good faith with respect thereto. Whether the

taxpayer acted with reasonable cause and in good faith is

determined on a case-by-case basis taking into account all of the

pertinent facts and circumstances. Holowinski v. Commissioner,

T.C. Memo. 1997-168; Remy v. Commissioner, T.C. Memo. 1997-72;

sec. 1.6664-4(b)(1), Income Tax Regs.

If a taxpayer reasonably relies in good faith upon the

advice of a competent and experienced accountant in the

preparation of the taxpayer's return, the penalty for negligence

or disregard of rules or regulations is not applicable. Weis v.

Commissioner, 94 T.C. 473, 487 (1990); Conlorez Corp. v.
 - 9 -

Commissioner, 51 T.C. 467, 475 (1968); sec. 1.6664-4(b)(1) and

(2), Example (1), Income Tax Regs. To show good faith reliance,

the taxpayer must show that the return preparer was supplied with

all the necessary information and the incorrect return was the

result of the preparer's mistakes. Pessin v. Commissioner, 59

T.C. 473, 489 (1972); Enoch v. Commissioner, 57 T.C. 781, 803

(1972).

Petitioner retained a certified public accountant to prepare

his 1992 return and advise him as to the deductibility of the

payments made to or on behalf of his former spouse pursuant to

the Judgment. Tomlin had been petitioner's accountant for 16

years, and petitioner relied on him to complete the return

accurately. Petitioner supplied Tomlin with all of the records

in his possession pertaining to the payments to his former

spouse, including the Judgment. In addition, petitioner spoke

with Indictor, an attorney and former employee of the IRS, about

the deductibility of the payments several times before completing

his 1992 return. Based on this record, even though we have found

that petitioner's reliance on Tomlin and Indictor was misplaced,

we find that petitioner acted with reasonable cause and good

faith in attempting to comply with the provisions of the Internal

Revenue Code. We hold, therefore, that petitioner is not liable

for the section 6662(a) accuracy-related penalty determined by

respondent. See Rosenthal v. Commissioner, T.C. Memo. 1995-603;

Conway v. Commissioner, T.C. Memo. 1994-405.
 - 10 -

We have considered the remaining arguments of the parties,

and to the extent they are not discussed herein, find them to be

either irrelevant or without merit.

To reflect the foregoing,

Decision will be

entered under Rule 155.