T.C. Memo. 2004-284
UNITED STATES TAX COURT
MUMTAZ A. ALI, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 3064-03. Filed December 27, 2004.
Dennis G. Harkavy, for petitioner.
Elaine T. Fuller, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
COLVIN, Judge: Respondent determined a deficiency in
petitioner’s 2000 Federal income tax of $34,262.
Petitioner and his former spouse, Shagufta Lisa Ali (Ali),
had two children and owned a community interest in the Spearmint
Rhino Clubs (SRC), a corporation. Petitioner and Ali separated
in 1999. SRC paid Ali $24,000 per month from June to December
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2000 (a total of $168,000). There was no court order, judgment,
or written agreement requiring petitioner to pay child, spousal,
or family support to Ali when Ali received those payments. On
June 25, 2001, a State court filed a stipulation between Ali and
petitioner that retroactively (1) deemed petitioner to have paid
one-half of the distributions from SRC to Ali, and (2) deemed
those payments from June 1 to December 31, 2000, to have been
made by petitioner to Ali as unallocated family support in
satisfaction of petitioner’s obligation to provide support during
that period.
The issues for decision are:
1. Whether payments made to Ali before the existence of a
written divorce or separation agreement that were retroactively
deemed to be unallocated family support payments by State court
order are alimony for purposes of section 71(b)(1).1 We hold
that they are not.
2. Whether petitioner may exclude from income the $84,000
that SRC paid on his behalf to Ali in 2000. We hold that he may
not.
1
Section references are to the Internal Revenue Code in
effect for 2000. Rule references are to the Tax Court Rules of
Practice and Procedure.
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FINDINGS OF FACT
Some of the facts have been stipulated and are so found.
A. Petitioner and His Former Spouse, Shagufta Lisa Ali
Petitioner resided in California when he filed his petition.
Petitioner and Ali separated on July 14, 1999. Petitioner and
Ali have two children.
B. Petitioner’s Divorce
On May 10, 2000, Ali filed an order to show cause with the
Superior Court of California for the County of Orange (State
court), the court with jurisdiction over the dissolution of the
marriage of petitioner and Ali, in which Ali sought, inter alia,
family support payments from petitioner.
In 2000, petitioner and Ali each owned an undivided one-half
community property interest in SRC. Ali received monthly
distributions of $24,000 from SRC from June to December 2000
(totaling $168,000) in 2000. Petitioner and Ali had not divided
their community property interest in SRC in 2000. There was no
court order or judgment or other written agreement requiring
petitioner to pay child, spousal, or family support in 2000.
On February 5, 2001, the State court filed a partial
stipulation between petitioner and Ali which provided in part
that Ali would continue to receive distributions from SRC of
$24,000 per month as unallocated family support from petitioner
commencing February 1, 2001. The State court reserved
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jurisdiction, retroactive to June 1, 2000, over the character and
any allocation of the payments. On May 25, 2001, the State court
filed a second stipulation between petitioner and Ali which
provided in part that the community interests in SRC of
petitioner and Ali would be divided equally.
On June 25, 2001, the State court filed a stipulation
between petitioner and Ali which provided that the $24,000
monthly distributions from SRC were allocated one-half each to
petitioner and Ali. The June 25, 2001, stipulation also deemed
that the distributions allocated to petitioner and received by
Ali were paid by petitioner to Ali as unallocated family support
from June 1, 2000, to March 31, 2001, in satisfaction of his
obligation to provide support.
C. Petitioner’s Tax Return for 2000
Petitioner deducted $84,000 as alimony on his 2000 income
tax return for payments made by SRC on his behalf to Ali.
OPINION
A. Background and Petitioner’s Contentions
A taxpayer may deduct payments which qualify as alimony and
separate maintenance payments. Sec. 215(a). To qualify as
alimony, a payment must, among other requirements, be received by
or on behalf of a spouse under a divorce or separation
instrument. Secs. 71(b)(1)(A) and (2), 215(b). A divorce or
separation instrument is: (1) A decree of divorce or separate
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maintenance or a written instrument incident to the decree, (2) a
written separation agreement, or (3) a decree requiring a spouse
to pay for the support or maintenance of the other spouse. Sec.
71(b)(2); sec. 1.71-1(b)(1), (2), and (3), Income Tax Regs.
Petitioner acknowledges that no written divorce or
separation instrument existed in 2000 when SRC made the payments
at issue to Ali. Petitioner contends that the section
71(b)(1)(A) requirement that the payments at issue be received
under a divorce or separation instrument is met by the State
court’s retroactive approval of the stipulation that petitioner’s
one-half ($12,000) of each monthly payment (totaling $84,000) in
2000 was paid by him to Ali as family support. Petitioner points
out that, under California law, the State court may retroactively
modify an agreement. See In re Marriage of Skelley, 556 P.2d
297, 300 (Cal. 1976)
B. Whether Retroactive Treatment by the State Court of Payments
as Unallocated Family Support Meets the Requirement of
Section 71(b)(1)(A) That the Payments Be Received Under a
Divorce or Separation Instrument
Petitioner contends that, because of the retroactive action
by the State court, the payments from SRC to Ali in 2000 were
payments under a divorce or separation instrument.
We disagree for two reasons. First, payments made before
the existence of a written divorce or separation instrument are
not deductible by the payor spouse under section 215 or its
predecessor. Healey v. Commissioner, 54 T.C. 1702, 1705-1706
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(1970), affd. without published opinion 28 AFTR 2d 71-5217, 71-2
USTC par. 9536 (4th Cir. 1971); Alleva v. Dept. of Treasury,
2002-1 USTC par. 50,188 (E.D.N.Y. 2001); Ewell v. Commissioner,
T.C. Memo. 1996-253; Jachym v. Commissioner, T.C. Memo. 1984-181;
White v. Commissioner, T.C. Memo. 1984-65. Petitioner’s payments
were not made under a qualifying divorce or separation instrument
when they were made. Second, retroactive imposition of support
by a State court does not have retroactive effect for Federal tax
purposes. Turkoglu v. Commissioner, 36 T.C. 552, 555 (1961);
Segal v. Commissioner, 36 T.C. 148, 153-154 (1961); Van
Vlaanderen v. Commissioner, 10 T.C. 706, 707-708 (1948), affd.
175 F.2d 389 (3d Cir. 1949); Daine v. Commissioner, 9 T.C. 47,
51-52 (1947), affd. 168 F.2d 449 (2d Cir. 1948); see also
Ianniello v. Commissioner, 98 T.C. 165, 175 n.5 (1992) (State
court adjudications retroactively changing the rights of parties
are generally disregarded for Federal income tax purposes).2
Thus, SRC’s payments to Ali in 2000 were not alimony, even though
the State court made the June 25, 2001, instrument, which
2
An exception to the general rule exists when the nunc
pro tunc order retroactively corrects an order which failed to
reflect the true intention of the court at the time it was
rendered. Gordon v. Commissioner, 70 T.C. 525, 530 (1978);
Johnson v. Commissioner, 45 T.C. 530, 532 (1966). There is no
evidence that the State court’s retroactive order in this case
corrects an order which failed to reflect the true intention of
the court at the time it was rendered.
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provided that SRC’s payments were unallocated family support,
retroactive to the date of those payments.
Petitioner contends that Healey v. Commissioner, supra,
supports his position. We disagree. In Healey, a State court
gave retroactive effect to its nunc pro tunc order. We said in
Healey that payments were not made deductible by means of a
retroactive court order. Id. at 1706. Healey does not support
petitioner’s contention that retroactive State court actions are
recognized for purposes of the section 71(b)(1)(A) requirement
that payments be received under a divorce or separation
instrument.
We do not recognize the retroactive nature of the State
court instrument in deciding whether, for purposes of section
71(b)(1)(A), the payments made by SRC were made under a written
divorce or separation agreement. Thus, petitioner may not deduct
any of the $84,000 that SRC paid to Ali in 2000 as alimony.
C. Whether Petitioner May Exclude From Income the $84,000 That
SRC Paid to Ali in 2000
Petitioner’s community property share of income from SRC for
2000 is $84,000. Petitioner contends that he may exclude that
amount from his income because SRC made the payments directly to
Ali. We disagree.
Petitioner has offered no authority for his position.
Petitioner is taxed on his share of SRC community income even
though he chose to have it paid directly to Ali because income
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from property is taxed to the owner of the property at the time
the income is earned. Helvering v. Horst, 311 U.S. 112, 116-117
(1940); Lucas v. Earl, 281 U.S. 111, 114 (1930); see United
States v. Malcolm, 282 U.S. 792, 793-794 (1931). Tax cannot be
avoided through an anticipatory assignment of income. Lucas v.
Earl, supra.
A shareholder receives a constructive dividend to the extent
of the corporation's earnings and profits if the corporation pays
a personal expense of its shareholder or the shareholder uses
corporate property for a personal purpose. Secs. 301(c), 316(a);
Falsetti v. Commissioner, 85 T.C. 332, 356-357 (1985); Henry
Schwartz Corp. v. Commissioner, 60 T.C. 728, 743-744 (1973).
Petitioner does not contend that SRC’s earnings and profits were
less than $84,000, and there is no evidence to suggest that the
earnings and profits requirement is not met. A payment is a
constructive dividend if the corporation has conferred an
economic benefit on the shareholder without expectation of
repayment. United States v. Smith, 418 F.2d 589, 593 (5th Cir.
1969); Truesdell v. Commissioner, 89 T.C. 1280, 1295 (1987).
Petitioner economically benefited from SRC’s payment to Ali
because those payments relieved him of the obligation to make
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cash payments to her. Thus, the $84,000 that SRC paid to Ali in
2000 is a constructive dividend to petitioner in that amount and
is not excluded from his income.
Decision will be
entered for respondent.