T.C. Memo. 1999-190
UNITED STATES TAX COURT
LINDA J. BAXTER, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
JIMMY R. BAXTER AND JANET S. BAXTER, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket Nos. 18403-97, 18749-97. Filed June 10, 1999.
James Allen Brown, for petitioner in docket No. 18403-97.
James W. Smith, for petitioners in docket No. 18749-97.
Donald E. Edwards, for respondent.
MEMORANDUM OPINION
CARLUZZO, Special Trial Judge: These consolidated cases
were heard pursuant to the provisions of section 7443A(b)(3) of
the Internal Revenue Code of 1986, as amended and in effect at
the time that the petitions were filed, and Rules 180, 181, and
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182 of the Tax Court Rules of Practice and Procedure. Unless
otherwise indicated, subsequent section references are to the
Internal Revenue Code in effect for the years 1993 and 1994.
Respondent determined deficiencies in petitioners' Federal
income taxes as follows:
Petitioner(s) Year Amount
Linda J. Baxter 1993 $4,800
Linda J. Baxter 1994 2,055
Jimmy R. & Janet S. Baxter 1993 9,922
Jimmy R. & Janet S. Baxter 1994 4,450
The issue for decision is whether during each year in issue
certain payments made by Jimmy R. Baxter to or on behalf of Linda
J. Baxter must be included in her income as alimony and may be
deducted by him as such. The resolution of this issue depends
upon whether the liability of Jimmy R. Baxter to make the
payments terminates upon the death of Linda J. Baxter.
Background
Some of the facts have been stipulated and are so found.
Petitioners resided in Benton, Arkansas, at the time the
petitions were filed in these consolidated cases.
Linda J. Baxter (Linda) and Jimmy R. Baxter (Ray), were
divorced from each other on May 16, 1991. The divorce decree
incorporated by reference the terms of a "Child Custody, Support
& Property Settlement Agreement" entered into by Linda and Ray,
dated April 17, 1991 (the agreement). The agreement is
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characterized as a property settlement agreement in paragraph 6
of the divorce decree.
Relevant for our purposes, paragraph 5 of the agreement
provides as follows:
[Ray] will quitclaim to * * * [Linda] any and all
interests that he may have in the parties' marital home
and the contents therein, with the exception of his
personal effects * * *. Additionally, * * * [Ray] will
pay the remaining indebtedness on this home at Benton
Savings and Loan Association, provided that * * *
[Linda] and the parties' children continue to live
therein. This obligation to continue making these
house payments would terminate should * * * [Linda] and
the parties' children move from this residence or
should * * * [Linda] remarry. Additionally, * * *
[Ray] shall pay the costs of necessary and reasonable
yard maintenance on this dwelling during the next three
years or until such time as * * * [Linda] should move
therefrom with the parties' children or remarry,
whichever is shorter.
In accordance with the above provisions, Ray conveyed his
interest in the marital home to Linda. The references to
"children" in paragraph 5 of the agreement are to the son and
daughter (who were minors during all relevant periods) of Ray and
Linda.
As a result of a custody dispute, in 1994 the children moved
from the marital home; Linda continued to live there throughout
the years in issue.
Subsequent to the divorce decree, Linda and Ray were
involved in several disputes with respect to support (spousal and
child) and custody. The local court that had jurisdiction over
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these disputes construed Ray's obligations under paragraph 5 of
the agreement to continue as long as Linda did not remarry or
move from the marital home, even though the children had moved
(the consequence of Linda's death was not addressed).
During the years in issue Ray made the following payments to
or on behalf of Linda pursuant to paragraph 5 of the agreement:
1993 1994
Home mortgage $23,384 $13,691
Yard maint. 940 -0-
Total payments 24,324 13,691
Ray deducted as alimony the total payments (the payments)
for each year on the joint Federal income tax return that he
filed for those years with Janet S. Baxter (Janet). Linda did
not include these amounts as alimony income on her Federal income
tax returns for those years.
Respondent took inconsistent positions in the notices of
deficiency upon which these consolidated cases are based. In the
notice of deficiency sent to Ray and Janet, respondent disallowed
the alimony deductions attributable to the payments upon the
ground that the payments did not constitute alimony within the
meaning of section 71(b), and, therefore, could not be deducted
under section 215. In the notice of deficiency issued to Linda,
respondent determined that the payments must be included in her
income for the appropriate year as alimony under section 71.
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Discussion
Gross income includes amounts received as alimony. See
secs. 71(a), 61(a)(8). Amounts includable as alimony in a payee
spouse's gross income are deductible to the payor spouse. See
secs. 71, 215. There is no dispute among the parties on these
points. Linda and Ray, of course, disagree as to the
characterization of the payments for Federal income tax purposes.
Respondent now takes the position that the payments fit within
the definition of alimony.
The definition of alimony for Federal income tax purposes is
contained in section 71(b)(1). A payment constitutes alimony
within the meaning of that section if the payment is made in cash
(including checks and money orders payable on demand, see sec.
1.71-1T(a), Temporary Income Tax Regs., 49 Fed. Reg. 34455 (Aug.
31, 1984)), and (1) such payment is received by (or on behalf of)
a spouse under a divorce or separation instrument; (2) the
divorce or separation instrument does not designate such payment
as a payment that is not includable in the payee's gross income
under section 71 and is not allowable as a deduction to the payor
under section 215; (3) if the individual and the spouse are
legally separated, they are not members of the same household;
and (4) the payor has no liability to make any such payment for
any period after the death of the payee. See secs. 71(b),
215(b). The parties agree that the payments satisfy all but the
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last requirement, that is, whether Ray would be liable to make
the payments for any period after Linda's death.
Ray and Linda could have expressly provided for the effect
of her death upon his liability to make the payments otherwise
provided for in paragraph 5 of the agreement, but for whatever
reason, they did not. They now disagree as to what was intended
by that paragraph.
According to Linda, as long as the children resided in the
marital home, Ray would be required to make the payments
regardless of whether she was dead or alive. Linda further
argues that Ray's obligation to make the payments was part and
parcel of the property settlement between them and on that ground
should not be considered alimony.
Ray and respondent disagree with Linda on both points. They
argue that if Linda died, Ray's obligation to make the payments
would terminate because, obviously, she would no longer be living
in the marital home. They further contend that the payments were
not part of the property settlement but for the support of Linda.
The language of paragraph 5 of the agreement is susceptible
to different interpretations because of the use of the word "and"
both in the sentence that establishes Ray's obligation to make
the payments ("[Ray] will pay the remaining indebtedness on [the
marital home]* * * provided that * * * Linda and the * * *
children continue to live therein"), as well as in the sentence
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that terminates that obligation ("This obligation to continue
making these house payments would terminate should * * * [Linda]
and the * * * children move from * * * [the marital home]").
(Emphasis added.) Furthermore, Ray was obligated to pay for
reasonable yard maintenance for the marital home "during * * * [a
specified period] or until such time as * * * [Linda] should move
therefrom with the * * * children or remarry, whichever is
shorter." (Emphasis added.)
As long as the children resided in the marital home, one
construction of the above language would require Ray to make the
payments regardless of whether Linda continued to live there.
Under this construction, Linda's death would be of no
significance. On the other hand, if the children moved from the
marital home, which they did in 1994, Ray's obligation to make
the payments would only continue as long as Linda continued to
live there, which, obviously, she could not do after her death.
Because paragraph 5 of the agreement does not expressly
address Ray's liability to make the payments in the event of
Linda's death, we look to Arkansas law in order to determine his
liability in that regard. See Sampson v. Commissioner, 81 T.C.
614, 618 (1983), affd. per curiam without published opinion 829
F.2d 39 (6th Cir. 1987).
In Arkansas, "Questions relating to the construction,
operation, and effect of separation agreements between husband
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and wife are governed, in general, by the rules and provisions
applicable in the case of other contracts". Sutton v. Sutton,
771 S.W.2d 791, 792 (Ark. Ct. App. 1989). "[D]ifferent clauses
of a contract must be read together and construed so that all of
its parts harmonize if that is possible." Dodson v. Dodson, 825
S.W.2d 608, 611 (Ark. Ct. App. 1992); see also Floyd v. Otter
Creek Homeowners Association, 742 S.W.2d 120 (Ark. Ct. App.
1988). Furthermore, where there is some ambiguity in the
provisions of a separation agreement, it is the court's duty to
determine the intent of the parties. Sutton v. Sutton, supra at
792.
An Arkansas court has never addressed what Ray and Linda
intended by the above cited portion of paragraph 5 of the
agreement with respect to Ray's liability to make the payments
for any period after Linda's death. We are bound, nevertheless,
to reach a result that would be consistent with that of
Arkansas's highest court if the issue were presented to that
court for resolution. See Commissioner v. Estate of Bosch, 387
U.S. 456, 465 (1967); Boyter v. Commissioner, 74 T.C. 989, 995
(1980), remanded on another issue 668 F.2d 1382 (4th Cir. 1981).
In so doing, for the following reasons, we find that Ray's
liability to make the payments terminates upon the death of
Linda.
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Ignoring irrelevant contingencies, reading paragraph 5 of
the agreement as a whole makes it apparent that Linda and Ray
intended for him to make the payments only while she lived there.
Because the agreement provided that the payments would terminate
upon the occurrence of contingencies other than Linda's death
(e.g., remarriage or relocation), a reasonable interpretation of
the provisions would lead to the conclusion that the payments
were for her support. Obviously, at the time that the agreement
was entered into, Ray and Linda anticipated that the children
would reside with her at the marital home, but Ray's liability
was not dependent upon it. Even after the children moved from
the house, Ray was required by local court order to continue the
payments. We think it unreasonable to construe the agreement in
such a manner as to require that the payments continue in a
situation in which Linda would move from the marital home, but
the children would remain. Such a construction would be
necessary to support Linda's position in this case.
As we would expect the highest court of Arkansas would do,
we find that the most reasonable construction of the relevant
portion of paragraph 5 of the agreement leads to the conclusion
that the Linda and Ray did not intend for him to make the
payments after her death. That being so, Ray's liability to make
the payments pursuant to the relevant portion of paragraph 5 of
the agreement would not continue for any period after Linda's
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death. It follows and we hold that the payments constitute
alimony within the meaning of sections 71 and 215 that for the
years in issue must be included in Linda's income and are
deductible by Ray.
To reflect the foregoing,
Decisions will be entered
for petitioners in docket No.
18749-97 and for respondent in
docket No. 18403-97.