T.C. Summary Opinion 2001-72
UNITED STATES TAX COURT
CARRIE A. LESNIK, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 12201-99S. Filed May 17, 2001.
Carrie A. Lesnik, pro se.
Michael J. Calabrese, for respondent.
DINAN, Special Trial Judge: This case was heard pursuant to
the provisions of section 7463 of the Internal Revenue Code in
effect at the time the petition was filed. The decision to be
entered is not reviewable by any other court, and this opinion
should not be cited as authority. Unless otherwise indicated,
subsequent section references are to the Internal Revenue Code in
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effect for the years in issue, and all Rule references are to the
Tax Court Rules of Practice and Procedure.
For taxable years 1995, 1996, and 1997 respondent determined
deficiencies in petitioners’ Federal income taxes of $4,757,
$3,512, and $2,506 and accuracy-related penalties of $951.40,
$702.40, and $501.20.
The issues for decision are: (1) Whether amounts received
by petitioner pursuant to a judgment of divorce are includable in
her income under section 71; and (2) whether petitioner is liable
for accuracy-related penalties under section 6662(a) for
negligence or disregard of rules or regulations.
Some of the facts have been stipulated and are so found.
The stipulations of fact and the attached exhibits are
incorporated herein by this reference. Petitioner resided in
Milwaukee, Wisconsin, on the date the petition was filed in this
case.
Petitioner and her former husband, David G. Lesnik, were
divorced pursuant to a judgment entered by the Circuit Court,
Family Court Branch of the State of Wisconsin, Milwaukee County
on July 9, 1984. The findings of fact accompanying the judgment
provided in relevant part:
12. FAMILY SUPPORT. That family support shall be set
at the sum of $750.00 per month. Due to possible
fluctuation in the income of the petitioner [Mr.
Lesnik] the petitioner shall furnish to the respondent
[petitioner] or her attorney quarterly a record of all
his income. Using 29% of said income, plus $150.00 per
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month, if the figure exceeds $750.00 per month, the
petitioner shall pay to the respondent a sum equal to
said difference. If said figure equals or is less than
$750.00 p/mo, there will be no adjustment for support
for that quarter.
The support payments were to commence June 7, 1984, and be made
at the office of (or through assignment to) the clerk of the
court.
Petitioner filed Federal income tax returns for taxable
years 1995 through 1997 on Forms 1040A, U.S. Individual Income
Tax Return. No line on the forms was dedicated to “alimony
received”, and no income reported by petitioner was designated as
alimony. Petitioner reported the following amounts and types of
income in each year:
1995 1996 1997
Form W-2 $14,709.75 -0- $20,856.27
Form 1099-R 979.55 -0- -0-
Unspecified -0- 22,097.00 3,022.73
Total income 15,689.30 22,097.00 23,879.00
Respondent issued petitioner a statutory notice of deficiency
reflecting his determination that petitioner received alimony
income of $16,889, $14,380, and $14,715 in each respective year.1
The first issue for decision is whether the amounts received
by petitioner pursuant to the judgment of divorce are includable
in her income under section 71. Petitioner concedes that $150 of
1
Respondent also disallowed the earned income credit claimed
by petitioner in each year. This adjustment is computational and
will be resolved by the Court’s holding on the issues in this
case.
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the monthly family support payments is alimony and therefore
includable in her income. She argues, however, that the
remaining $600 was in actuality for child support, and therefore
not includable in her income.2
We accept petitioner’s testimony that she believed that the
bulk of the monthly family support payments was intended to be
child support in the traditional sense of the term. In fact, the
record shows that that was most likely the case. For example,
the transcript of a divorce court hearing regarding petitioner
and her former spouse indicates the court intended that, for
nontax purposes, $150 of the payments was to be alimony and the
remaining $600 child support. Responding to the question by
counsel for petitioner: “What’s the $150?”, the court replied
“That’s a figure I’m placing on support for the wife. I don’t
want to say that because I get involved in the federal tax people
because that is child support. * * * I’m trying to protect him
from saying that the $150 is maintenance and the 29 percent is
support.” In addition, the payments were referred to as child
support in a court record; the record reflects the reduction of
the payments upon the emancipation of one of petitioner’s
children and the apparent termination of the payments upon the
emancipation of her other child. However, as discussed below,
2
Petitioner does not challenge the specific dollar amounts
of alimony determined by respondent, for which there is a lack of
supporting evidence in the record.
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whether or not the payments were intended to be support earmarked
for the petitioner’s children does not alter the Federal income
tax consequences of the express terms of the divorce judgment.
Section 71(a)3 lists several requirements which must be met
in order to characterize payments made pursuant to a divorce
decree as alimony payments for purposes of Federal tax law. If
the requirements of section 71(a) are met, the payments generally
must be included in the payee spouse’s income, whether or not the
payments are “alimony” for purposes other than Federal tax law.
However, section 71(b) provides an exception to the general rule
for certain child support payments. It provides:
SEC. 71(b). Payments to Support Minor Children.--
Subsection (a) shall not apply to that part of any payment
which the terms of the decree, instrument, or agreement fix,
in terms of an amount of money or a part of the payment, as
a sum which is payable for the support of minor children of
the husband. * * *
The statute clearly requires that the divorce instrument
expressly fix the amount of child support; in the absence of such
an express provision, the exception under section 71(b) does not
3
Because the divorce judgement in this case was entered
prior to 1985, we apply the provisions of sec. 71 which were
applicable before the changes made by the Deficit Reduction Act
of 1984 (DEFRA), Pub. L. 98-369, sec. 422(e), 98 Stat. 798. We
note that the amount of the family support payments required by
the judgment in this case was modified at least once after 1984.
However, a post-1984 modification of a pre-1985 judgment does not
cause the DEFRA changes to apply unless the modification
expressly so provides. See id. at sec. 422(e)(2); see also
Libman v. Commissioner, T.C. Memo. 1990-629. Nothing in the
record indicates such a provision existed in this case.
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apply and the payments must be included in the payee’s income if
they otherwise meet the requirements of section 71(a). See
Commissioner v. Lester, 366 U.S. 299, 303 (1961). Any indication
of an intent to allocate a portion of a payment as child support
which is not an express provision of the instrument fixing it as
such is insufficient to cause the section 71(b) exception to
apply. See id.
It is clear in this case that the divorce instrument did not
fix any portion of the family support payments as child support.
Consequently, despite the evidence that the payments under the
instrument were in fact primarily for support of the children,
they do not meet the requirements for the exception under section
71(b). We therefore sustain respondent’s determination that
payments received by petitioner under the judgment of divorce
must be included in her income.
The second issue for decision is whether petitioner is
liable for accuracy-related penalties under section 6662(a).
Respondent determined that petitioner is liable for an accuracy-
related penalty imposed by section 6662(a) for the entire
underpayment of tax in each of the years in issue because these
underpayments were due to negligence or disregard of rules or
regulations.
Section 6662(a) imposes a 20-percent penalty on the portion
of an underpayment attributable to any one of various factors,
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one of which is negligence or disregard of rules or regulations.
See sec. 6662(b)(1). “Negligence” includes any failure to make a
reasonable attempt to comply with the provisions of the Internal
Revenue Code and also includes any failure to keep adequate books
and records or to substantiate items properly. Sec. 6662(c);
sec. 1.6662-3(b)(1), Income Tax Regs. Section 6664(c)(1)
provides that the penalty under section 6662(a) shall not apply
to any portion of an underpayment if it is shown that there was
reasonable cause for the taxpayer’s position and that the
taxpayer acted in good faith with respect to that portion. The
determination of whether a taxpayer acted with reasonable cause
and in good faith is made on a case-by-case basis, taking into
account all the pertinent facts and circumstances. See sec.
1.6664-4(b)(1), Income Tax Regs. The most important factor is
the extent of the taxpayer’s effort to assess his proper tax
liability for the year. See id. Reasonable cause and good faith
may be indicated by an honest and reasonable misunderstanding of
fact or law. See id.
Petitioner asserts that she includes the amount which she
believes to be alimony, $150 per month, in her taxable income
each year. The record does not support this assertion. In 1997,
petitioner reported $3,022.73 in excess of her wage income. This
amount was far in excess of a $150 monthly payment, which would
equal $1,800. Petitioner did not explain the discrepancy. We
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find there to be no indication that petitioner reported any
alimony income in 1997. In 1996, none of the sources of
petitioner’s income were shown. In 1995, petitioner reported no
income in excess of the income reported on her Form W-2, Wage and
Tax Statement, and her Form 1099-R, Distributions From Pensions,
Annuities, Retirement Plans, IRAs, Insurance Contracts, etc. It
is therefore clear that no part of her reported income in that
year could have been from alimony, which was to be paid by Mr.
Lesnik through the county court. Finally, petitioner did not
dispute the statement in the notice of deficiency that she
reported no alimony income in each of the years in issue.
We uphold respondent’s determination that petitioner is
liable for the accuracy-related penalties, but only as to that
portion of the penalties which is attributable to her failure to
report what she has conceded to be alimony--$150 per month.
Petitioner’s statements in the record indicate she knew the
amounts to be taxable and yet failed to report them.
On the other hand, we find that petitioner had reasonable
cause in maintaining her position that the remainder of the
payments were not alimony, and therefore should not be includable
in her income. This position was a reasonable and honest
misunderstanding of fact and law, and we accept it as
petitioner’s honest belief. See sec. 1.6664-4(b)(1), Income Tax
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Regs. We therefore hold that petitioner is not liable for
negligence in failing to report these amounts as income.
Reviewed and adopted as the report of the Small Tax Case
Division.
To reflect the foregoing,
Decision will be entered
under Rule 155.