T.C. Memo. 2000-174
UNITED STATES TAX COURT
CATHLEEN C. SHEPHERD, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 18560-98. Filed May 25, 2000.
Cathleen C. Shepherd, pro se.
Eric B. Jorgensen, for respondent.
MEMORANDUM OPINION
DEAN, Special Trial Judge: Respondent determined
deficiencies in petitioner’s Federal income taxes of $6,727,
$6,420, and $8,106 for taxable years 1993, 1994, and 1995,
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respectively. Respondent also determined accuracy-related
penalties under section 6662(a) for taxable years 1993 and 1994.1
At trial, respondent conceded that petitioner is not liable
for penalties under section 6662(a). The sole issue remaining
for decision is whether payments totaling $28,800 in each of the
years at issue made by petitioner’s ex-husband to petitioner are
alimony or nontaxable child support.
Some of the facts have been stipulated and are so found.
The stipulation of facts and the attached exhibits are
incorporated herein by reference. Petitioner resided in Atlanta,
Georgia, at the time her petition was filed.
Background
Petitioner was married to James H. Shepherd, Jr. (Mr.
Shepherd) from 1977 until she obtained a divorce on April 18,
1989. Two children were born of the marriage: James H. Shepherd
III, born on December 23, 1979, and Julie H. Shepherd, born on
September 5, 1981. Petitioner filed for divorce on January 27,
1988. A temporary order was entered by agreement of the parties
on May 11, 1988, providing for payment to petitioner of temporary
alimony of $3,000 per month.
Petitioner and Mr. Shepherd thereafter engaged in settlement
negotiations through their attorneys to arrive at an agreement
regarding the equitable division of their marital property,
1
Unless otherwise indicated, section references are to the
Internal Revenue Code in effect for the years in issue.
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payment of alimony and child support, and custody of the
children. At least two written offers in settlement, the first
dated September 16, 1988, and the second dated January 13, 1989,
were proposed by petitioner’s divorce counsel. In proposing
alimony terms, the offers make no reference to the parties’
children. The first offer proposes a 10-year term for alimony
payments, and the second offer proposes a reduced amount to be
paid as alimony but is silent as to the period of time over which
payments are to be made. The settlement negotiations eventually
resulted in a settlement agreement between the parties which was
signed on April 17, 1989, and entered as part of the Final
Judgment and Decree of Divorce on April 18, 1989.
The settlement agreement required Mr. Shepherd to make
monthly payments, characterized as “alimony for the support and
maintenance of Wife”, in the amount of $2,400 to petitioner for
10 years beginning May 1, 1989, and ending April 30, 1999. Under
the agreement, the payments terminate immediately upon the death
of Mr. Shepherd or petitioner, or upon petitioner’s remarriage or
her engaging in “a meretricious relationship as defined by
O.C.G.A. §19-6-19”. The agreement also states that Mr. Shepherd
was under no obligation to make substitute payments following the
death of petitioner. The end of the 10-year period in which
petitioner was to receive the payments was within 6 months of
September 5, 1999-–Julie Shepard’s (Julie) 18th birthday.
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The settlement agreement further provided that petitioner
would have custody of the children and receive monthly “child
support for the benefit of the minor children” in the amount of
$650 per child from Mr. Shepherd with annual increases
commensurate with increases in the consumer price index. Under
the terms of the agreement, child support payments were to
continue for each child as long as petitioner had custody of that
minor child or until the child died, married, or reached the age
of 18, whichever occurred first. In addition, if the alimony
payments were to cease due to petitioner’s remarriage or because
she engaged in a meretricious relationship, the child support
payments would immediately increase to $1,200 per month per
child.
Petitioner filed U.S. individual income tax returns for
1993, 1994, and 1995, and treated the $28,800 in “alimony”
received each year from Mr. Shepherd under the terms of the
settlement agreement as nontaxable child support. Respondent
maintains that the payments were in fact alimony and thus should
be included in petitioner’s taxable income.
Discussion
Alimony is taxable to the recipient and is deductible by the
payor. See secs. 71(a), 215(a). Child support payments, on the
other hand, are neither includable in income under section 71 nor
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deductible under section 215. See sec. 71(c). Alimony is 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. [Sec. 71(b)(1).]
Child support is that part of a payment which the divorce or
separation instrument fixes as payable for the support of the
children of the payor spouse. See sec. 71(c)(1). An amount is
treated as fixed under section 71(c)(1) and thus treated as child
support if it will be reduced “on the happening of a contingency
specified in the instrument relating to a child (such as
attaining a specified age, marrying, dying, leaving school, or a
similar contingency),” sec. 71(c)(2)(A), or “at a time which can
clearly be associated with [such] a contingency.” Sec.
71(c)(2)(B).
Temporary regulations promulgated under section 71 provide
that payments which would otherwise qualify as alimony are
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presumed to be child support if they are reduced within 6 months
of the date the payor’s child turns 18, 21, or the local age of
majority. See sec. 1.71-1T(c), Q&A-18, Temporary Income Tax
Regs., 49 Fed. Reg. 34451, 34457 (Aug. 31, 1984). This
presumption can be overcome if the facts indicate that the time
of the reduction in payments “was determined independently of any
contingencies relating to the children of the payor.” Id.; see
Hill v. Commissioner, T.C. Memo. 1996-179. The time is selected
independently of any contingencies relating to the children if it
is merely a coincidence that the date payments are reduced falls
near a child’s birthday. See Hill v. Commissioner, supra.
Petitioner contends that the payments at issue are child
support even though the settlement agreement labels them alimony
because she accepted the settlement agreement based on the fact
that the payments would terminate within 6 months of her
daughter’s 18th birthday and based on her understanding that this
fact would cause the payments to be deemed child support for
purposes of Federal income tax treatment. Petitioner does not
dispute that the payments otherwise would constitute alimony.
Respondent concedes that the payments are presumed to be
child support under the temporary regulations because they
terminate within 6 months of Julie’s 18th birthday. Respondent,
however, maintains that the presumption is overcome by the facts
surrounding petitioner’s settlement negotiations with her ex-
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husband which indicate that it was merely a coincidence that the
alimony payments terminated within 6 months of Julie’s 18th
birthday.
We agree with respondent that the presumption that the
payments are child support is overcome by evidence that the
termination of the payments to petitioner was determined
independently of any contingency relating to petitioner and
Mr. Shepherd’s children.
The settlement agreement provides for alimony payments for a
term of 10 years and makes no reference to Julie’s 18th birthday
in its alimony provision. Likewise, the proposed offers in
settlement from petitioner’s attorney, which preceded the final
settlement agreement, make no reference to the parties’ two
children in their proposed alimony provisions. The settlement
offers suggest that the only disputed term of the alimony
payments was their amount and not the period of time over which
the payments would occur.
Moreover, there is no evidence of any discussion between the
parties of Julie’s 18th birthday in conjunction with the
negotiation of alimony payments. Mr. Shepherd’s divorce counsel
testified that he was “absolutely positive” there was never any
discussion that alimony would terminate on the 18th birthday of
either of the parties’ two children. He further testified that
the 10-year term of alimony was requested when negotiations first
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began and that the only point of contention regarding alimony was
the amount that would be paid.
The record does indicate that Julie’s 18th birthday and
petitioner’s understanding of the Federal tax implications of the
termination date of the alimony payments factored into
petitioner’s decision to consent to the terms of the settlement
agreement. Petitioner’s lead divorce counsel testified that
petitioner was concerned with having the alimony payments
continue until her children were finished with school. He
further testified that he had discussed with petitioner the
presumption arising under the temporary regulations that payments
coinciding with a child’s 18th birthday would be considered to be
child support, and he indicated that petitioner’s willingness to
enter into the settlement agreement was based on her
understanding of this presumption. Neither petitioner nor her
lead divorce counsel, however, indicated that this issue was
discussed with Mr. Shepherd or with his attorney.
Petitioner’s consideration of Julie’s 18th birthday without
any discussion of its significance with Mr. Shepherd or with his
attorney is not enough under the facts of this case for us to
conclude that it was anything more than a coincidence that the
10-year term of the alimony payments ended within 6 months of
September 5, 1999. See Hill v. Commissioner, supra. If Mr.
Shepherd had accepted petitioner’s September 16, 1988, offer in
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settlement, a final settlement agreement would have been reached
before April 17, 1989, and the 10-year term of the “alimony”
payments would not have expired within 6 months of Julie’s 18th
birthday. We thus conclude that the payments at issue are
alimony and includable in petitioner’s income.
To reflect the foregoing,
Decision will be entered for
respondent for the deficiencies in tax
and for petitioner for the penalties
under section 6662(a).