T.C. Summary Opinion 2003-167
UNITED STATES TAX COURT
CHARLES W. AND NANCY T. SMITH, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 15754-02S. Filed December 17, 2003.
Charles W. and Nancy T. Smith, pro se.
Susan Smith Canavello, for respondent.
COUVILLION, Special Trial Judge: This case was heard
pursuant to section 7463 in effect at the time the petition was
filed.1 The decision to be entered is not reviewable by any
other court, and this opinion should not be cited as authority.
Respondent determined a deficiency of $7,146 in petitioners'
Federal income tax for 2000.
1
Unless otherwise indicated, subsequent section
references are to the Internal Revenue Code in effect for the
year at issue.
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The sole issue for decision is whether a payment of $32,000
by Charles W. Smith (petitioner) to his former wife during 2000
constitutes alimony or a separate maintenance payment deductible
as an adjustment to gross income under section 215(a). That
issue is resolved by whether the $32,000 payment satisfies the
definition of "alimony or separate maintenance payment" under
section 71(b)(1)(D).2
Some of the facts were stipulated. Those facts, with the
annexed exhibits, are so found and are incorporated herein by
reference. At the time the petition was filed, petitioners were
legal residents of Auburndale, Florida.
Petitioner was formerly married to Sheila Doreen Wells from
May 20, 1978, until their divorce on April 25, 2000. They had
two children of their marriage: Dawn Majetta Smith and Jeremy
Wiley Smith.
At the time of their divorce, petitioner and his former wife
entered into a marital settlement agreement dated April 25, 2000.
That agreement was incorporated into the divorce decree of the
same date, entitled Final Judgment of Dissolution of Marriage
(the divorce decree). Petitioner and his former wife were
residents of Florida and were divorced by a Florida State court.
2
Other adjustments in the notice of deficiency, the
disallowance of a child care credit and a decrease in itemized
deductions are computational and will be resolved by the Court's
holding on the principal issue.
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The settlement agreement and the divorce decree contained
numerous provisions wherein petitioner and his former wife agreed
to the custody and sharing of parental responsibility of their
two children; however, no child support was required of either
party. The agreement and the divorce decree also contained
several provisions with respect to the division of their property
and liability for marital debts. None of those provisions,
however, affect the issue in this case. At issue are two
provisions in the settlement agreement and the divorce decree
relating to a $32,000 payment by petitioner to his former spouse
that petitioners contend constituted alimony and, therefore, is a
deductible adjustment to their gross income. The two provisions
(in both the marital settlement agreement and the divorce decree)
are as follows:
16. PENSION/RETIREMENT. Both parties agree that the
Husband shall pay to the Wife one-half (½) of the Husband's
current 401K Plan which as of October 1, 1999, had a balance
of $150,000.00. Accordingly, the Wife shall receive
$75,000.00, plus an additional $32,000.00 representing lump-
sum alimony, for a total amount due the Wife from the
Husband's 401K of $107,000.00. The Husband shall retain the
remainder of his 401K account.
* * * * * * *
19. ALIMONY. The Husband agrees to pay the Wife as
lump-sum alimony, the amount of $32,000.00 payable from his
401K as delineated above in paragraph 16.
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Petitioner paid the $32,000 to his former spouse during
2000. On their joint Federal income tax return for 2000,
petitioners claimed a deduction for the $32,000 lump-sum alimony
payment. In the notice of deficiency, respondent disallowed the
deduction on the ground that the $32,000 payment was not alimony
under section 71(b)(1)(D).
For tax purposes, the term "alimony or separate maintenance
payment" is defined in section 71(b)(1) as any payment in cash
meeting the following four criteria:
(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.
Petitioner's deduction for alimony is allowable only if the four
criteria of section 71(b)(1) are met. Jaffe v. Commissioner,
T.C. Memo. 1999-196. Respondent agrees that the requisites of
section 71(b)(1)(A), (B), and (C) have been met, but argues that
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the requirement of section 71(b)(1)(D) has not been satisfied
because the settlement agreement and the divorce decree are
silent with respect to the obligation of petitioner to pay the
$32,000 in the event of the prior death of his former spouse.
Respondent further argues that, under Florida law, petitioner's
obligation to make the $32,000 payment would have continued in
the event of the prior death of petitioner's former spouse;
therefore, under the facts and the State law of Florida, the
payment does not satisfy section 71(b)(1)(D). Petitioners
contend that, under Florida law, the prior death of the former
spouse would have terminated petitioner's obligation to pay the
$32,000; therefore, section 71(b)(1)(D) was satisfied.3
As noted above, the settlement agreement and the divorce
decree are silent with respect to petitioner's obligation to pay
the $32,000 in the event his former spouse died before the
payment was made. Section 71(b)(1)(D) requires, as a condition
to qualify as alimony, that the obligation to pay terminates upon
the death of the former spouse. If the payer is liable for even
one otherwise qualifying payment after the recipient's death,
none of the related payments required before death will be
alimony. Sec. 1.71-1T(b), Q&A-13, Temporary Income Tax Regs., 49
3
Respondent does not contend that the $32,000
represented a division of property between petitioner and his
former spouse, in which event, the payment would not constitute
alimony.
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Fed. Reg. 34456 (Aug. 31, 1984). Whether such obligation exists
may be determined by the terms of the applicable instrument, or
if the instrument is silent on the matter, by looking to State
law. Morgan v. Commissioner, 309 U.S. 78, 80 (1940); Gilbert v.
Commissioner, T.C. Memo. 2003-92; Kean v. Commissioner, T.C.
Memo. 2003-163.
The Court agrees with respondent that the $32,000 payment at
issue is not alimony under section 71(b)(1)(D) because, under
Florida law, petitioner's obligation to make the payment would
have continued if his former spouse died prior to payment of the
$32,000. In Canakaris v. Canakaris, 382 So.2d 1197, 1200 (Fla.
1980), the Florida Supreme Court stated:
Although the award of lump sum alimony is not dependent
upon a finding of a prior vested right, there does arise
upon the entry of a final judgment of a lump sum award a
vested right which is neither terminable upon a spouse's
remarriage or death nor subject to modification. It may
consist of real or personal property, or may be a monetary
award payable in installments. Jurisdiction may be
expressly retained, however, to terminate lump sum alimony
installment payments upon a spouse's remarriage or death
when the parties agree to such a provision in a property
settlement agreement. Further, jurisdiction may be retained
to enter periodic alimony if found necessary after such
termination of lump sum alimony installment payments. * * *
Not only did the separation agreement and the divorce decree fail
to provide that petitioner's obligation for payment of the
$32,000 would cease upon the prior death of his former wife,
there were also no reservations in either of the documents that
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would have allowed the parties thereafter to incorporate such a
condition upon petitioner's liability for the $32,000. The fact
that the $32,000 payment is described in the agreements between
petitioner and his former spouse as "alimony" is not controlling
for Federal income tax purposes as this Court has held in
Benedict v. Commissioner, 82 T.C. 573, 577 (1984), that labels
used by taxpayers in an instrument are not controlling.
At trial, petitioner acknowledged that, in negotiations with
his former wife leading up to the separation agreement, his
former wife sought alimony of $500 per month "until she died".
Petitioner rejected that offer and instead offered to pay her the
lump sum of $32,000. His offer was accepted, and that obligation
was incorporated in the settlement agreement. The Court is
satisfied from this testimony that it was not intended that, upon
the death of the former spouse, petitioner would have been
relieved of the obligation of paying the $32,000. Since payment
of the $32,000 was an enforceable obligation upon petitioner, and
that obligation would not have been extinguished by the prior
death of petitioner's former spouse, it follows that the $32,000
obligation is not alimony under section 71(b)(1)(D). Respondent
is sustained on this issue.
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Reviewed and adopted as the report of the Small Tax Case
Division.
Decision will be entered
for respondent.