T.C. Summary Opinion 2007-28
UNITED STATES TAX COURT
NADA NAHHAS, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 3235-05S. Filed February 27, 2007.
Glenn Seiden, for petitioner.
Thomas D. Yang, 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
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effect for the year in issue, and all Rule references are to the
Tax Court Rules of Practice and Procedure.
Respondent determined a $23,860 deficiency in petitioner’s
2002 Federal income tax. Respondent also determined an addition
to tax under section 6651(a)(1) and an accuracy-related penalty
under section 6662 in the amounts of $2,386 and $4,772,
respectively.
The issues before the Court are: (1) Whether $122,200 is
includable in petitioner’s income as alimony; (2) whether
petitioner failed to report $2,317 in interest income; (3)
whether petitioner is liable for the alternative minimum tax;1
(4) whether petitioner is liable for the addition to tax under
section 6651(a)(1) for failure to timely file; and (5) whether
petitioner is liable for the accuracy-related penalty.
Background
Some of the facts are stipulated and are so found. At the
time the petition in this case was filed, petitioner resided in
Orland Park, Illinois.
Petitioner and Mohammed M. Nahhas (Mr. Nahhas) were married
on July 31, 1980. Three children were born in the marriage, NN,
1
Respondent has determined that petitioner is liable for
alternative minimum tax for her 2002 taxable year. This issue is
computational in nature and will be addressed in a Rule 155
computation.
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MN, and MN.2 On or about December 29, 2001, Mr. Nahhas moved out
of the marital residence. In early 2002, petitioner filed a
petition with the Circuit Court of Cook County, Illinois,
Domestic Relations Division (circuit court) to commence divorce
proceedings against Mr. Nahhas.
On April 10, 2002, the circuit court entered a temporary
order for maintenance and support. The order provides, in
pertinent part:
Without prejudice, Mohammed shall pay to Nada as and
for unallocated maintenance & support the amount of
$13200NN/month, payable on 15th and 30th each month,
1st payment 6600 due 4-15-02.
On May 29, 2002, the circuit court entered an agreed order
and stated that the temporary order would remain in effect until
further order of the Court.
On December 24, 2002, the court entered an order amending
the temporary order by reducing the “unallocated maintenance and
support” obligation of Mr. Nahhas from $13,200 per month to
$9,700 per month effective January 1, 2003. The reduction was
based on changes in an affidavit of expenses provided by
petitioner and an affidavit of monthly income provided by Mr.
Nahhas.
On December 15, 2003, the circuit court entered a judgment
for dissolution of marriage between petitioner and Mr. Nahhas.
2
The Court uses only the initials of the minor children.
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The judgment provided, in the findings section:
11. The Court finds this is a case that utilizing the
factors in Section 504 for an award of permanent
maintenance is warranted. The Court ordered
unallocated support shall be in the amount of $7,500.00
per month. The payment of unallocated maintenance and
support from the Husband to the wife shall be reviewed
when the youngest child attains the age of 18 years
old. The maintenance portion of unallocated
maintenance and support shall be permanent.
* * * * * * *
Further, the ordered, adjudged, and decreed part of the
order provided:
C. That [Mr. Nahhas] shall pay to [petitioner] the sum
of $7,500.00 per month as and for the unallocated
support of his family. It is the intention of the
Court that such sum shall be taxable to [petitioner]
and deductible by [Mr. Nahhas]. Further the duration
of such award shall be until the minor child reaches 18
years of age. That [Mr. Nahhas] is barred from any
claim for maintenance from [petitioner].
On Line 11 of her Federal income tax return, petitioner
reported income of $105,600 as alimony received but lined out
this figure and reported only $13,715 of Schedule C, Profit or
Loss from Business income.3
Discussion
The Commissioner’s determinations are presumed correct, and
taxpayers generally bear the burden of proving otherwise. Welch
3
Apparently the $105,600 amount represents 8 monthly
payments of $13,200 or 16 bi-monthly payments of $6,600. However
if one uses the Apr. 15, 2002, effective payment date, as
provided by the temporary order, 9 monthly or 18 bimonthly
payments were made in 2002 totaling $118,800.
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v. Helvering, 290 U.S. 111, 115 (1933). Petitioner did not
argue that section 7491 is applicable in this case, nor did he
establish that the burden of proof should shift to the
respondent. Moreover, the issues involved in this case (alimony
and the alternative minimum tax) are legal issues and should be
decided on the record without regard to the burden of proof.
Petitioner, however, 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.
An individual may deduct from his or her gross 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
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(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.
The test under section 71(b)(1) is conjunctive; a payment is
deductible as alimony only if all four requirements of section
71(b)(1) are present. See Jaffe v. Commissioner, T.C. Memo.
1999-196.
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 a subparagraph (A))
requiring a spouse to make payments for the support or
maintenance of the other spouse.
Section 71(c)(1) provides that the general inclusion rule of
section 71(a) for alimony and separate maintenance payments in
gross income does not apply to “any payment which the terms of
the divorce or separation instrument fix (in terms of an amount
of money or a part of the payment) as a sum which is payable for
the support of the children of the payor spouse.”
I. Characterization of Monthly Payments
Petitioner argues that none of the monthly payments she
received in 2002 as “unallocated maintenance and support” from
Mr. Nahhas should be included in her gross income since the
amounts are properly characterized as nontaxable child support.
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Respondent disagrees and contends that the payments made in
2002 to petitioner qualified as alimony taxable to petitioner as
the recipient under section 71(b). In particular, respondent
notes that the temporary order did not expressly provide that the
payments were not includable in petitioner’s gross income and not
allowable as a deduction by Mr. Nahhas under section 71(b)(1)(B).
Moreover, respondent points out that the temporary order did not
“fix” any portion of the payment as payable for the support of
the children as required by section 71(c)(1) for child support.
We agree with respondent.
It is clear from the record that the 2002 payments satisfy
the requirements of subparagraphs (A) and (C) of section 71(b).
Petitioner received the payments under the terms of the temporary
order, and petitioner and Mr. Nahhas were not members of the same
household in 2002.
The Court now considers section 71(b)(1)(B), which provides
that a payment will not be alimony if the divorce or separation
instrument designates the payment as not includable in gross
income and not allowable as an alimony deduction. The
designation in the divorce or separation instrument does not need
to specifically refer to section 71 or 215. Estate of Goldman v.
Commissioner, 112 T.C. 317, 323 (1999), affd. without published
opinion sub nom. Schutter v. Commissioner, 242 F.3d 390 (10th
Cir. 2000). The divorce or separation instrument, however, “must
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contain a clear, explicit and express direction” that the
payments are not to be treated as alimony. Richardson v.
Commissioner, 125 F.3d 551, 556 (7th Cir. 1997), affg. T.C. Memo.
1995-554.
The Court declines petitioner’s invitation to go beyond the
language of the temporary order. The plain language of section
71(b)(1)(B) provides that when, under the divorce or separation
instrument, the payment by one spouse to the other spouse is not
includable in the gross income of the receiving spouse and is not
allowable as a deduction to the payor spouse, the payments do not
constitute alimony. In this case, the language contained in the
temporary order does not expressly state that the payments are
not includable in petitioner’s gross income and not deductible to
Mr. Nahhas, and section 71(b)(1)(B), therefore, is satisfied.4
Next, the Court considers the requirements of section
71(b)(1)(D), which requires, as a condition to qualify as
alimony, that the obligation to make payments must terminate upon
the death of the former spouse. If the payor 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
4
The Court observes that, unlike the temporary order, the
final judgment of dissolution contains express language providing
that the payments would be taxable to petitioner and deductible
by Mr. Nahhas.
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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); Kean v.
Commissioner, T.C. Memo. 2003-163, affd. 407 f.3d 186 (3d Cir.
2005); Gilbert v. Commissioner, T.C. Memo. 2003-92, affd. sub
nom. Hawley v. Commissioner, 94 Fed. Appx. 126 (3d Cir. 2004).
Thus, to qualify as alimony, the obligation of Mr. Nahhas to make
the payments must terminate at the death of petitioner.
In deciding whether the 2002 payments were alimony, the
Court looks to the language of the temporary order to ascertain
whether it contains a termination upon death condition, and, if
it does not, whether State law supplies such a condition. Hoover
v. Commissioner, 102 F.3d 842, 847 (6th Cir. 1996), affg. T.C.
Memo. 1995-183; see Gonzales v. Commissioner, T.C. Memo. 1999-
332; see also Cunningham v. Commissioner, T.C. Memo. 1994-474.
State law determines certain rights of the parties, and Federal
law determines the Federal income tax consequences of those
rights. Morgan v. Commissioner, supra at 80; Lucas v. Earl, 281
U.S. 111 (1930).
In this instance, the temporary order does not explicitly
order that the payments terminate upon petitioner’s death, and,
thus, the Court looks to Illinois law to determine whether the
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payments would terminate by operation of Illinois law. Hoover v.
Commissioner, supra at 847.
Neither party has addressed the application of section
71(b)(1)(D). Further, neither party cites, nor are we aware of,
any Illinois cases addressing the issue of whether, absent an
agreement of the parties or a directive in the divorce decree, an
obligation to pay unallocated maintenance and support terminates
upon the death of the payee spouse.
The Court concludes that the payments qualify as alimony
under section 71(b)(1)(D). Section 510(c) of the Illinois
Dissolution of Marriage Act provides “the obligation to pay
future maintenance is terminated” upon the death, remarriage, or
cohabitation of the recipient “Unless otherwise agreed by the
parties in a written agreement set forth in the judgment or
otherwise approved by the court.” 750 Ill. Comp. Stat. Ann.
5/10(c) (West 1999). Thus, under Illinois law, there is an
automatic termination of the unallocated maintenance portion of
the payments. See id.
Contrary to petitioner’s argument that the payments are
nontaxable child support, the temporary order provided for
monthly or bimonthly payments in the total amount of $13,200 per
month for “unallocated maintenance and support.” The temporary
order does not “contain a clear, explicit and express direction”
that the payments are not includable in petitioner’s gross income
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and are not allowable as a deduction to Mr. Nahhas. Richardson
v. Commissioner, supra at 556.
Petitioner argues that the payments were always intended to
be nontaxable child support. To support her contention,
petitioner presented testimony at trial that the dollar amounts
provided for in the temporary order were based on guidelines set
forth under State law for child support. In addition,
petitioner’s attorney during the marital dissolution proceedings
testified at length that he intended that the payments under the
temporary order to be for child support and, hence, nontaxable to
petitioner.5
The Court concludes that the payments do not qualify as
child support under section 71(c)(1).
Thus, petitioner received alimony under the temporary order
in 2002 in the amount of $118,800. ($13,200 per month x 9
months).
II. Interest Income
Generally, gross income means all income from whatever
source derived, including interest income. Sec. 61(a)(4).
During 2002, respondent received information from third-party
payers that petitioner received interest income from three
5
Petitioner’s attorney evidently drafted the temporary
order after a hearing and at the direction of the circuit court.
Upon review, the circuit court adopted the temporary order.
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separate bank accounts. The bank accounts and interest income
were:
Harris Bank ARGO $1,201.00
Heritage Community Bank 1,086.00
Citibank F.S.B. 30.00
At trial, petitioner’s attorney during the marital
dissolution proceedings credibly testified that an escrow account
was opened that contained funds from both petitioner and Mr.
Nahhas. Ownership of the funds in the escrow account was
transferred to petitioner in 2003 under the December 15, 2003,
judgment for final dissolution. Petitioner confirmed that the
escrow account was located at the Harris Community Bank.
Petitioner, however, did not address the ownership of either the
Heritage or Citibank bank accounts in 2002.
It is a general rule of taxation that income is not
constructively received if a taxpayer’s control of its receipt is
subject to substantial limitations or restrictions. See sec.
1.451-2(a), Income Tax Regs. Moreover, it is well established
that “gross income” generally refers to assets over which the
taxpayer can exercise “dominion and control.” Ianniello v.
Commissioner, 98 T.C. 165, 173 (1992). Thus, when amounts are
deposited in an escrow account beyond that taxpayer’s reach, they
generally are not includable in his gross income. See, e.g.,
Reed v. Commissioner, 723 F.2d 138 (1st Cir. 1983) (no receipt
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where escrow arrangement was bona fide deferred payment agreement
between buyer and seller), revg. T.C. Memo. 1982-734
Based on the record, the Court finds that petitioner
retained an interest in the Heritage and Citibank bank accounts
in 2002, and therefore such income is includable in her gross
income. The Court further finds that the interest income from
the escrow account at the Harris Community Bank is not includable
in petitioner’s gross income for 2002.
III. Section 6651(a)(1) Addition to Tax
Section 6651(a)(1) imposes an addition to tax equal to 5
percent of the amount required to be shown as tax on a return for
each month or fraction thereof past the prescribed due date in
which the return is not filed, not to exceed a total of 25
percent. Generally, the amount of the addition to tax under
section 6651(a)(1) is reduced by the amount of any addition to
tax imposed under section 6651(a)(2) (which relates to failure to
pay the tax shown on a return by the prescribed date) with
respect to each month in which both are otherwise applicable.
Sec. 6651(c)(1).
A taxpayer may avoid the addition to tax under section
6651(a)(1) if he establishes that the failure to file is due to
reasonable cause and not due to willful neglect. “Reasonable
cause” requires the taxpayer to demonstrate that he exercised
ordinary business care and prudence and was nonetheless unable to
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file a return within the prescribed time. United States v.
Boyle, 469 U.S. 241, 246 (1985). “[W]illful neglect” means a
conscious, intentional failure or reckless indifference. Id. at
245.
Although respondent bears the burden of production with
respect to this addition to tax, petitioner ultimately bears the
burden of proof. Sec. 7491(c); Rule 142(a); Higbee v.
Commissioner, 116 T.C. 438 (2001).
In the absence of an extension, the last date for petitioner
to file her Federal income tax return for taxable year 2002 was
April 15, 2003. Instead, petitioner filed her 2002 return on May
27, 2003.
Petitioner did not attempt to explain the failure to file
and provided no indication that she had reasonable cause
therefor. Respondent has therefore satisfied his burden of
production by establishing that petitioner filed her return late.
We sustain respondent’s determination that petitioner is liable
for the addition to tax under section 6651(a)(1).
IV. Accuracy-Related Penalty
The last issue for decision is whether petitioner is liable
for an accuracy-related penalty pursuant to section 6662(a) for
the 2002 taxable year. A taxpayer is liable for an accuracy-
related penalty of 20 percent of any part of an underpayment
attributable to negligence or disregard of rules or regulations.
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Sec. 6662(a) and (b)(1). The term “negligence” includes any
failure to make a reasonable attempt to comply with the
provisions of the internal revenue laws or to exercise ordinary
and reasonable care in the preparation of a tax return. Sec.
6662(c); Gowni v. Commissioner, T.C. Memo. 2004-154. The term
“disregard” includes any careless, reckless, or intentional
disregard. Sec. 6662(c); sec. 1.6662-3(b)(2), Income Tax Regs.
The accuracy-related penalty does not apply to any part of
an underpayment for which there was reasonable cause and with
respect to which the taxpayer acted in good faith. Sec.
6664(c)(1); sec. 1.6664-4(a), Income Tax Regs. 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
pertinent facts and circumstances. Sec. 1.6664-4(b)(1), Income
Tax Regs. Generally, the most important factor is the extent of
the taxpayer’s effort to assess the taxpayer’s proper tax
liability. Id. Here, the income tax return in question was
prepared by someone from Abbasi Accounting and Tax Services. We
note that on line 11 of the income tax return for reporting
“Alimony received” the amount of $105,600 originally reported was
lined-out. As previously noted this amount represents $13,200
received for 8 months in 2002. Petitioner reported only $13,915
of Schedule C income. Evidently, either the tax return preparer
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or petitioner recognized that the payments petitioner received
could be alimony.
Section 7491(c) places on the Commissioner the burden of
producing evidence showing that it is appropriate to impose any
penalty or addition to tax. Once the Commissioner meets that
burden, the taxpayer must produce evidence sufficient to show
that Commissioner’s determination is incorrect. Higbee v.
Commissioner, supra at 447. The Commissioner need not produce
evidence relating to defenses such as reasonable cause. Id. at
446.
Petitioner does not contest receiving the 2002 payments from
Mr. Nahhas. Petitioner’s position that the amounts were
nontaxable child support clearly conflicts with the designation
of the payments as “unallocated maintenance and support” in the
temporary order. Petitioner also did not report interest income
received from the Heritage and Citibank bank accounts.
Accordingly, we conclude that respondent has met his burden of
production for the ground of negligence by showing that
petitioner failed to exercise ordinary and reasonable care in
preparing her 2002 tax return. See sec. 6662(c); Gowni v.
Commissioner, supra.
With respect to the inclusion of the 2002 payments in her
gross income, petitioner testified that she relied on the
representation made by the attorney who represented her in the
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marital dissolution proceeding that the amounts were not taxable.
Reliance on an attorney may relieve a taxpayer from the accuracy-
related penalty where the taxpayer’s reliance is reasonable.
Stolz v. Commissioner, T.C. Memo. 1999-404. However, in this
case, petitioner’s attorney did not draft the temporary order to
provide that the amount for support or temporary maintenance was
not includable in her income, and therefore, these facts do not
support reasonable cause. Petitioner’s reliance on the divorce
attorney also does not constitute reasonable cause, as she failed
to show that the attorney was skilled or knowledgeable in the tax
consequences of the divorce proceeding. Therefore, we sustain
respondent’s determination of the penalty under section 6662(a)
and (b)(1) for taxable year 2002.
Reviewed and adopted as the report of the Small Tax Case
Division.
Decision will be entered
under Rule 155.