T.C. Summary Opinion 2006-130
UNITED STATES TAX COURT
PAMELA L. LIGHT, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 22909-04S. Filed August 28, 2006.
Pamela L. Light, pro se.
Jack T. Anagnostis, for respondent.
GOLDBERG, 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
effect for the year at issue, and Rule references are to the Tax
Court Rules of Practice and Procedure.
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Respondent determined a deficiency of $1,599 in petitioner’s
2002 Federal income tax. The sole issue for this Court to decide
is whether petitioner must include in her gross income alimony
payments she received in 2002.
Background
Some of the facts have been stipulated and are so found. At
the time the petition in this case was filed, petitioner resided
in Bethel, Pennsylvania.
Petitioner and Kent R. Gutzler (Mr. Gutzler) were married on
September 12, 1998. There were no children born of the marriage.
After petitioner and Mr. Gutzler separated, a final order (order)
was issued by the Court of Common Pleas of Berks County,
Pennsylvania, Domestic Relations Section on January 22, 2002,
which directed that Mr. Gutzler pay $1,400 monthly for
petitioner’s support, effective January 1, 2002. These monthly
payments were to end in the event of either party’s death. The
order included a handwritten notation that read: “Plaintiff
agrees to be responsible for the monthly payment of the Jeep
vehicle in her possession and the insurance thereon.”
The parties entered into a postnuptial agreement (agreement)
on October 11, 2002. Under the agreement, Mr. Gutzler was
ordered to pay petitioner alimony of $1,400 a month. These
monthly payments were to end in the event of either party’s
death. The agreement also provided for the tax treatment of the
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payments. The payments were to be alimony, included in
petitioner’s gross income and deductible by Mr. Gutzler from his
gross income. Moreover, in the event that petitioner challenged
Mr. Gutzler’s rights to deduct any portion of the monthly
payments from his income, she would remain liable to him for the
full amount of any increase in his Federal income tax liability.
Finally, both parties specifically acknowledged that certain tax
consequences might result from the agreement, and that they had
been advised to seek independent tax advice regarding these
possible tax consequences.
On or about April 15, 2003, petitioner filed Form 1040, U.S.
Individual Income Tax Return, for 2002, on which she reported
both adjusted gross and taxable income of $2,392. On August 16,
2004, respondent issued a notice of deficiency. Respondent’s
examination increased petitioner’s reported gross income by
$16,800 representing the alimony payments petitioner received
from Mr. Gutzler in 2002. Additionally, respondent disallowed
petitioner’s previously claimed earned income tax credit of $178.
As a result of these changes, respondent calculated a deficiency
of $1,599 for petitioner’s 2002 Federal income tax.
Discussion
The Commissioner’s determinations are presumed correct, and
taxpayers generally bear the burden of proving otherwise. Welch
v. Helvering, 290 U.S. 111, 115 (1933). Accordingly, petitioner
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bears the burden of proving that respondent’s determination in
the notice of deficiency is erroneous. See Rule 142(a); Welch v.
Helvering, supra at 115.
Taxation of Alimony
An individual may deduct from his or her taxable income the
payments he or she made during a taxable year for alimony or
separate maintenance. Sec. 215(a). Conversely, the recipient of
alimony or separate maintenance payments must include those
payments when calculating his or her gross income. Sec.
61(a)(8).
Section 71(b)(1) defines “alimony or separate maintenance
payment” as 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 includable
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.
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Section 71(b)(2) defines a “divorce or separation
instrument” as:
(A) a decree of divorce or separate maintenance or a
written instrument incident to such a decree,
(B) a written separation agreement, or
(C) a decree (not described in subparagraph (A))
requiring a spouse to make payments for the support or
maintenance of the other spouse.
Characterization of Monthly Payments
Petitioner argued that none of the $1,400 monthly payments
she received in 2002 should be included in her gross income under
section 71(a) because she and Mr. Gutzler had a “handshake
understanding” that the payments were not alimony. Petitioner
testified to an oral agreement between Mr. Gutzler and her that
purportedly took place concurrent with the order. It provided
that Mr. Gutzler would not deduct the payments, nor would
petitioner include the payments as income, if she used the
payments solely for her attorney’s fees, payment of Mr. Gutzler’s
automobile insurance, and payments on an automobile in Mr.
Gutzler’s possession. Petitioner now asks this Court to reject
the underlying order and agreement and, in the alternative,
consider evidence: (1) Of a “handshake” agreement, and (2) that
the terms of the “handshake” agreement should supplant the
meaning of alimony pendente lite and alimony as used in the order
and the agreement. Since petitioner disputes the legal effects
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of the order and the agreement as written, we must first examine
the terms and tenor of those contracts.
1. Order
Among the relevant provisions of the order, paragraph 3 of
the “Legal Notice” (p. 4) states:
All charging orders for spousal support and alimony
pendente lite, including unallocated orders for child
and spousal support or child support and alimony
pendente lite, shall terminate upon death of the payee.
2. Agreement
Among the relevant provisions of the agreement, paragraph 10
(“Waiver Or Modification To Be In Writing”) states:
No modification or waiver of any of the terms hereof shall
be valid unless in writing and signed by both parties and no
waiver or any breach hereof or default hereunder shall be
deemed a waiver of any subsequent default of the same
similar nature.
Moreover, paragraph 13 (“Integration”) reads:
This agreement constitutes the entire understanding of the
parties and supercedes any and all prior agreements and
negotiations between them. There are no representations or
warranties other than those expressly set forth herein.
Section B (“Support, Alimony, and Alimony Pendente Lite
Provisions”) states:
Husband shall pay alimony pendente lite to Wife in the
sum of One Thousand Four Hundred Dollars ($1,400) per
month until entry of the decree in divorce between the
parties or for a period of four (4) months after the
execution date of this agreement. Such payments shall
terminate in the event of Husband’s death of Wife’s
prior death. The alimony pendente lite order for
support shall remain in full force and effect until the
divorce decree is entered.
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Lastly, section G (“Tax Provisions”), paragraph 2 (“Payments
To Be Alimony”) reads:
It is the intention of the parties that all payments
made to Wife by Husband pursuant to the provisions of
Paragraph B 2 hereof while the parties are living apart
are intended to be alimony payments, taxable as income
to Wife and deductible from income by Husband for
income tax purposes, and that no other payments made
under this agreement are to be deemed or treated as
alimony. In the event of any action taken by Wife
which affects Husband’s rights to deduct any portion or
all of the alimony payments from Husband’s income, Wife
will be liable to Husband for the full amount of the
increase in Husband’s tax liability resulting from the
loss of the deduction. * * * All alimony payments
shall terminate as set forth in Paragraph C 2 or upon
the prior death of Wife.
We are satisfied that payments made pursuant to both the
order and the agreement meet the requirements of section 71(b)(1)
and (2). The order is a decree requiring payments for
maintenance or support within the purview of section 71(b)(2)(C),
and it does not contain any provision that the payments not be
includable in the payee’s gross income. Furthermore, the order
specifically provides that payments are to cease upon the death
of the payee spouse.
The agreement, entered incident to the decree of divorce,
also specifies that the payments are to cease on the payee
spouse’s death. The agreement provides that the monthly payments
are to be included in the gross income of the payee spouse.
Notably, the agreement specifically supersedes any prior
agreements between the parties, constitutes the full
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understanding of the parties, and provides that the payments are
includable in the gross income of the payee spouse. Therefore,
we find both the order and the agreement clear and unambiguous
that the payments made pursuant to both are to be alimony as
defined under section 71(b).
3. Evidence of Oral Contract
Petitioner argued that despite plain language in the order
and agreement to the contrary, this Court should consider
evidence of an oral contract, made concurrently with the order,
that the payments were not to be considered alimony includable in
her gross income, nor would Mr. Gutzler claim a deduction on the
payments, in exchange for certain obligations otherwise assumed
by petitioner, as well as in consideration for her abandoning
their marital home. Petitioner claimed that these obligations
included her assumption of Mr. Gutzler’s automobile insurance
payments, payments on an automobile in Mr. Gutzler’s possession,
and payment of her attorney’s fees. Our determination that the
order and the agreement are clear, enforceable contracts
obligating Mr. Gutzler to make payments to petitioner
notwithstanding, we next address petitioner’s argument that we
should consider extrinsic evidence of a side agreement as to the
parties’ intentions regarding the monthly payments.
Agreements incident to a divorce are contracts that must be
construed in accordance with the rules of law generally
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applicable to contract construction. D’Huy v. D’Huy, 568 A.2d
1289, 1293 (Pa. Super Ct. 1990) (citing Trumpp v. Trumpp, 505
A.2d 601 (Pa. Super Ct. 1985)). These rules require that
contractual terms that are otherwise clear and unambiguous be
given effect without reference to or reliance upon matters that
may have occurred outside of the contract. Id. Equally true, of
course, is that where the terms of a contract are ambiguous,
parol (i.e., oral) evidence may be received for the limited
purpose of resolving these ambiguities. Id. (citing In re Estate
of Breyer, 379 A.2d 1305, 1309-1310 (Pa. 1977)). Accordingly,
the question remaining is not petitioner’s intent as to the
purported oral agreement but rather whether the terms “alimony
pendente lite” and “alimony” as used in the order and the
agreement are ambiguous.
The terms of the order and the agreement are otherwise clear
and unambiguous. In the order, the parties expressly agreed that
Mr. Gutzler would pay petitioner monthly alimony pendente lite of
$1,400 based upon the disparity in their respective incomes.
Petitioner may not argue that these payments are excludable from
her gross income simply because she earmarked them for other
obligations; namely, her own attorney’s fees and payment on a
vehicle which, at trial, she testified had been in her possession
since February 2002. The notation on the order that petitioner
was to remain responsible for payments on the Jeep vehicle in her
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possession as of February 2002 does not imply that the monthly
payments were expressly and only for this purpose. Additionally,
there was no evidence presented of petitioner’s obligation to pay
Mr. Gutzler’s automobile insurance out of the monthly payments.
Petitioner also maintained an erroneous belief that because
she was using part of the payments to satisfy her attorney’s fees
in the underlying divorce action, these payments would not be
includable in her gross income. As previously discussed, section
71(b) provides that if a spouse receives alimony pendente lite,
the amount received must be included in the gross income of the
payee. Secs. 71(b)(1), (2)(C). Moreover, because petitioner had
unfettered discretion and control over the payments, she may not
exclude from her gross income amounts which she alone designated
for her own attorney’s fees.
Finally, while we are sympathetic to petitioner’s argument
that she would not have signed the order were it not for her
understanding that she would not have to include payments
received in her gross income, her misunderstanding is an error of
law. See secs. 61(a)(8), 71(b)(1). Accordingly, because we find
the underlying order and agreement clear, controlling, and the
exclusive statement of all of the terms of the parties’
settlement, we sustain respondent’s deficiency determination.
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Reviewed and adopted as the report of the Small Tax Case
Division.
Decision will be entered
for the respondent.