T.C. Memo. 2009-238
UNITED STATES TAX COURT
JOSEPH F. RODKEY, JR., Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 7422-08. Filed October 20, 2009.
Joseph F. Rodkey, Jr., pro se.
Julia L. Wahl, for respondent.
MEMORANDUM OPINION
COHEN, Judge: Respondent determined a deficiency of $11,009
in petitioner’s Federal income tax for 2006 and an accuracy-
related penalty of $2,201.80 pursuant to section 6662(a).
Unless otherwise indicated, all section references are to
the Internal Revenue Code for the year in issue, and all Rule
references are to the Tax Court Rules of Practice and Procedure.
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After concessions, the issues for decision are:
(1) Whether respondent is estopped from challenging the
amount of alimony deducted by petitioner;
(2) whether petitioner may deduct more than $18,000 as
alimony; and
(3) whether petitioner is liable for the section 6662(a)
accuracy-related penalty for the year in issue.
Background
This case was submitted fully stipulated under Rule 122, and
the stipulated facts are incorporated as our findings by this
reference. Petitioner resided in Pennsylvania at the time the
petition was filed. Petitioner is a practicing attorney.
Petitioner was previously married to JoAnn C. Rodkey, but
since 2000 they have continually lived apart from each other, and
in 2004 they divorced. In August 2004, petitioner, with the
advice of his attorney, entered into a property settlement
agreement (PSA) with his former wife which was incorporated into
their divorce decree. The PSA originally terminated in August
2006 but was extended until the end of 2006. The PSA stated in
part:
9. Alimony and Child Support
a. Commencing on March 1, 2004, Husband shall pay
to Wife the sum of $3,200.00 per month through June
2006 as non-modifiable alimony and child support. The
aforementioned alimony portion of said payment shall
terminate upon parties’ death, Wife’s cohabitation or
remarriage.
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b. It is the understanding of the parties that the
monthly payments paid by Husband to Wife for her
support and maintenance, as set forth in subparagraph
a. hereof, will be fully deductible by Husband for
federal income tax purposes and declared as income by
Wife for Federal Income Tax purposes.
c. Although the entire amount of $3,200.00 shall
be tax deductible to Husband and tax includable to
Wife, the parties agree that the allocation, based on
Husband’s net monthly income and Wife’s earning
capacity; of the $3,200.00 payment is $1,700.00 child
support and $1,500.00 alimony. If Wife proceeds to
file a child support modification action prior to the
termination of the alimony obligation in June of 2006,
or should either of the parties die, the entire
$3,200.00 payment shall be deemed allocated ($1,700.00
child support/$1,500.00 alimony or upon Wife’s death,
cohabitation or remarriage, alimony shall terminate)
and should Wife receive child support in excess of
$1,700.00 per month Husband shall receive a dollar for
dollar reduction in his alimony obligation, i.e., if
Husband’s child support obligation increases by $500.00
per month, his alimony obligation shall decrease by
$500.00 per month. If Wife does not receive child
support in excess of $1,700.00 per month, the $3,200.00
payment shall remain unallocated.
In accordance with the PSA, petitioner paid $38,400 (PSA payment)
to his former wife in both 2005 and 2006, and he deducted the
payment as alimony on both his 2005 and 2006 Federal income tax
returns.
On October 25, 2007, the Internal Revenue Service (IRS) sent
petitioner a notice of deficiency for 2005 determining a
deficiency as a result of disallowing petitioner’s $38,400
alimony deduction. Petitioner timely filed a petition with this
Court challenging the notice of deficiency. On February 4, 2008,
the IRS sent petitioner a no-change letter, which, without
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discussing any of the issues, conceded that petitioner owed no
additional taxes. On March 19, 2008, this Court entered a
stipulated decision in docket No. 211-08 (Rodkey I), which
stated: “Pursuant to the agreement of the parties in this case
it is ORDERED and DECIDED: That there is no deficiency in income
tax due from, nor overpayment due to, the petitioner for the
taxable year 2005.” Three months later, on June 16, 2008, the
IRS sent petitioner’s former wife a notice of deficiency
determining a Federal income tax deficiency as a result of her
failure to include the $38,400 PSA payment in her income in 2005.
On March 21, 2008, the IRS sent petitioner a notice of
deficiency for 2006, again determining a Federal income tax
deficiency and a penalty as a result of disallowing petitioner’s
$38,400 alimony deduction.
Discussion
Respondent has conceded that petitioner properly deducted
$18,000 of the PSA payment. The controversy concerns the
remaining $20,400 that petitioner deducted as alimony.
Petitioner argues that respondent is collaterally estopped from
challenging the deduction because it was allowed in Rodkey I.
Alternatively, petitioner claims that the entire PSA payment is
alimony and deductible. Respondent asserts that the deduction
may be challenged because the issue was not fully litigated in
Rodkey I and that only $18,000 of the PSA payment is alimony.
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Petitioner also challenges the section 6662(a) accuracy-related
penalty determined by respondent.
Estoppel
Generally, the Commissioner may challenge in a succeeding
year what was condoned in a previous year. Auto. Club of Mich.
v. Commissioner, 353 U.S. 180, 183-184 (1957); Demirjian v.
Commissioner, 457 F.2d 1, 6-7 (3d Cir. 1972), affg. 54 T.C. 1691
(1970). Under certain circumstances, however, equitable estoppel
will bar the Government where there has been affirmative
misconduct resulting in a misrepresentation to the taxpayer which
the taxpayer relied upon to the taxpayer’s detriment. United
States v. Asmar, 827 F.2d 907, 912 (3d Cir. 1987); Wilkins v.
Commissioner, 120 T.C. 109, 112-113 (2003). The burden of proof
is on the party claiming estoppel. United States v. Asmar, supra
at 912.
Petitioner has not argued that there was affirmative
misconduct by respondent. Furthermore, petitioner has not argued
that he relied on respondent’s no-change letter for 2005.
Petitioner cannot show reliance, because the no-change letter was
sent in February 2008, 3 months after petitioner was notified
that his 2006 Federal income tax return was being examined.
Once an issue has been litigated, collateral estoppel may
apply. In Monahan v. Commissioner, 109 T.C. 235, 240 (1997), we
stated:
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The doctrine of issue preclusion, or collateral
estoppel, provides that, once an issue of fact or law
is “actually and necessarily determined by a court of
competent jurisdiction, that determination is
conclusive in subsequent suits based on a different
cause of action involving a party to the prior
litigation.” Montana v. United States, 440 U.S. 147,
153 (1979) (citing Parklane Hosiery Co. v. Shore, 439
U.S. 322, 326 n.5 (1979)). * * *
Under the doctrine of collateral estoppel, (1) the issue to
be decided in the second case must be identical in all respects
to the issue decided in the first case; (2) a court of competent
jurisdiction must have rendered a final judgment in the first
case; (3) a party may invoke the doctrine only against parties to
the first case or those in privity with them; (4) the parties
must have actually litigated the issue and the resolution of the
issue must have been essential to the prior decision; and (5) the
controlling facts and legal principles must remain unchanged.
See Jean Alexander Cosmetics, Inc. v. L’Oreal USA, Inc., 458 F.3d
244, 249 (3d Cir. 2006); see also Hi-Q Pers., Inc. v.
Commissioner, 132 T.C. __, __ (2009) (slip op. at 16).
Petitioner argues that respondent should be collaterally
estopped from challenging the deduction of the PSA payment in
2006 because the stipulated decision in Rodkey I already
adjudicated the issue for 2005. Respondent contends that the
issue was never actually litigated. Respondent relies on the
discussion in United States v. Intl. Bldg. Co., 345 U.S. 502
(1953), where the Supreme Court held that the Government was not
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collaterally estopped from rearguing a position it had conceded
in a previous year, even if the concession was the basis of a
court order. The Supreme Court concluded that the Government’s
position had not been fully litigated in the earlier proceeding
and that the prior decision of this Court based on the
Government’s concession was “only a pro forma acceptance by the
Tax Court of an agreement between the parties to settle their
controversy for reasons undisclosed.” Id. at 505. The Supreme
Court’s rationale and holding apply equally to this case. See
Frank Sawyer Trust v. Commissioner, 133 T.C. __, __ (2009) (slip
op. at 34-36); Green v. Commissioner, T.C. Memo. 2008-130, affd.
per curiam without published opinion 322 Fed. Appx. 412 (5th Cir.
2009).
Petitioner also argues that respondent’s notice of
deficiency mailed to petitioner’s former wife based on her
failure to include the PSA payment in taxable income in 2005
provides further evidence of respondent’s concession that the
payment should be deductible to petitioner in 2006. But the
Commissioner may take inconsistent positions to protect the
public fisc. Kean v. Commissioner, 407 F.3d 186, 189 (3d Cir.
2005), affg. T.C. Memo. 2003-163. Moreover, the correct tax
treatment of the payments includes the alimony portion in the
payee’s taxable income, so a notice of deficiency is
appropriately sent to her as well as to him.
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Alimony Deduction
Petitioner contends that he is entitled to deduct in full
the $38,400 he paid to his former wife in 2006 pursuant to the
PSA because those payments were alimony, and alimony is a
deductible expense. Section 215 permits taxpayers to deduct
alimony or separate maintenance payments includable in the gross
income of the recipient under section 71. Section 71(b)(1)
defines alimony or separate maintenance payment as a payment in
cash if: (1) The payment is received by a spouse under a divorce
or separation instrument; (2) the divorce or separation
instrument does not designate the payment as nondeductible for
the paying spouse and not includable in the gross income of the
payee spouse; (3) in the case of an individual legally separated
from his spouse under a decree of divorce or of separate
maintenance, the spouses are not members of the same household
when the payment is made; and (4) there is no liability to make
any payment for any period after the death of the payee spouse.
A divorce or separation instrument is either a decree of divorce
or separate maintenance, or a written instrument incident to such
a decree; a written separation agreement; or a decree requiring a
spouse to make payments for the support or maintenance of the
other spouse. Sec. 71(b)(2). Use of the word “alimony” in the
decree of divorce or separate maintenance, or in the written
separation agreement, will not necessarily result in a payment’s
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being characterized as alimony for Federal income tax purposes.
Kean v. Commissioner, supra at 189-190; Okerson v. Commissioner,
123 T.C. 258, 264 (2004).
The first three requirements of the section 71(b)(1) alimony
definition are satisfied. First, the PSA payment was made under
a divorce or separation instrument because the payment was made
pursuant to the PSA, and the PSA was incorporated into the
divorce decree. Second, the PSA does not designate the PSA
payment as nondeductible for petitioner nor as not includable in
the gross income of his former wife. Third, petitioner and
petitioner’s former wife were not members of the same household
during the year in issue.
The only remaining issue is whether petitioner is liable to
make any payment for any period after the death of his former
wife. The first sentence of section 9.c. of the PSA states
unconditionally that “the parties agree that the allocation,
* * * is $1,700.00 child support and $1,500.00 alimony.” But the
second sentence says that “If Wife proceeds to file a child
support modification action prior to the termination of the
alimony obligation in June of 2006, or should either of the
parties die, the entire $3,200.00 payment shall be deemed
allocated”, implying that if the condition is not met, the
payment will not be deemed allocated. The third sentence
supports that interpretation, stating that “If Wife does not
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receive child support in excess of $1,700.00 per month, the
$3,200.00 payment shall remain unallocated.” The second and
third sentences of the section seem to contradict the first
sentence.
Ultimately it is not necessary to determine whether the
payments are currently allocated. It is necessary to determine
only which payments would continue upon petitioner’s former
wife’s death and which would terminate. See sec. 71(b)(1)(D).
According to the second sentence of section 9.c. of the PSA, upon
the death of petitioner’s former wife the payment is allocated
$1,700 per month to child support and $1,500 per month to alimony
and the alimony portion terminates. Thus, we conclude that the
payment of up to $18,000 a year is alimony and anything greater
does not satisfy the requirement of section 71(b)(1)(D), and is
therefore not deductible.
Respondent alternatively argues that part of the PSA payment
should be excluded under section 71(c), which provides that “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 children of the payor
spouse” is not alimony includable to the payee spouse under
section 71(a). Thus it is not deductible to the payor under
section 215.
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It appears that the parties to petitioner’s divorce created
a deliberate ambiguity in order to achieve two purposes, one
relating to child support and one relating to tax treatment. It
has long been the rule, however, that the labels attached by the
parties to a marital settlement agreement or decree are not
controlling for Federal tax purposes. See, e.g., Benedict v.
Commissioner, 82 T.C. 573, 577 (1984). Even if the language
categorizing child support payments as alimony taxable to
petitioner’s former wife had been unambiguous, the $1,700 per
month portion would fail the test for deductibility under section
71(b). As the Court said in Okerson v. Commissioner, supra at
264-265:
Here, the applicable Federal law is set forth in
section 71, which, in its present form, provides the
exclusive means by which a taxpayer may deduct a
payment as alimony for Federal income tax purposes.
* * * [Hoover v. Commissioner, 102 F.3d 842, 844-845
(6th Cir. 1996), affg. T.C. Memo. 1995-183]. Through
that section, Congress eliminated any consideration of
intent in determining the deductibility of a payment as
alimony in favor of a more straightforward, objective
test that rests entirely on the fulfillment of explicit
requirements set forth in section 71. Id.; see also
Rosenthal v. Commissioner, T.C. Memo. 1995-603
(“Whether or not the parties intended for the payments
to be deductible to petitioner, we must focus on the
legal effect of the agreement in determining whether
the payments meet the criteria under section 71.”). As
the House Committee on Ways and Means articulated in
its report on section 71 in discussing the need for
such an objective test:
“The committee believes that a uniform Federal
standard should be set forth to determine what
constitutes alimony for Federal tax purposes. This
will make it easier for the Internal Revenue Service,
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the parties to a divorce, and the courts to apply the
rules to the facts in any particular case and should
lead to less litigation. The committee bill attempts
to define alimony in a way that would conform to
general notions of what type of payments constitute
alimony as distinguished from property settlements and
to prevent the deduction of large, one-time lump-sum
property settlements. [H. Rept. 98-432 (Pt. 2), at
1495-1496 (1984).]” [alteration in original.]
Although the parties to a divorce proceeding may
intend that certain payments be considered alimony for
Federal income tax purposes, and a court overseeing
that proceeding may intend the same, Congress has
mandated through section 71(b)(1)(D) that payments
qualify as alimony for Federal income tax purposes only
when the payor’s liability for those payments, or for
any payments which may be made in substitute thereof,
terminates upon the payee spouse’s death. * * *
We need not decide, therefore, whether the terms of the agreement
fixed a portion of the payments as child support nondeductible
under section 71(a) and (c).
Section 6662 Accuracy-Related Penalty
Petitioner contests the imposition of an accuracy-related
penalty for the tax year in issue. Section 6662(a) and (b)(1)
and (2) imposes a 20-percent accuracy-related penalty on any
underpayment of Federal income tax attributable to a taxpayer’s
negligence or disregard of rules or regulations, or substantial
understatement of income tax. Section 6662(c) defines negligence
as including any failure to make a reasonable attempt to comply
with the provisions of the Internal Revenue Code and defines
disregard as any careless, reckless, or intentional disregard.
Disregard of rules or regulations is careless if the taxpayer
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does not exercise reasonable diligence to determine the
correctness of a return position that is contrary to the rule or
regulation. Sec. 1.6662-3(b)(2), Income Tax Regs. Disregard of
rules or regulations is reckless if the taxpayer makes little or
no effort to determine whether a rule or regulation exists. Id.
Under section 7491(c), the Commissioner bears the burden of
production with regard to penalties and must come forward with
sufficient evidence indicating that it is appropriate to impose
penalties. See Higbee v. Commissioner, 116 T.C. 438, 446 (2001).
However, once the Commissioner has met the burden of production,
the burden of proof remains with the taxpayer, including the
burden of proving that the penalties are inappropriate because of
reasonable cause or substantial authority. See Rule 142(a);
Higbee v. Commissioner, supra at 446-447.
Respondent has satisfied the burden of production by showing
that petitioner deducted the entire PSA payment in disregard of
the plain language of section 71. See, e.g., Stedman v.
Commissioner, T.C. Memo. 2008-239; Tiley v. Commissioner, T.C.
Memo. 2003-132.
The accuracy-related penalty under section 6662(a) is not
imposed with respect to any portion of the underpayment as to
which the taxpayer acted with reasonable cause and in good faith.
Sec. 6664(c)(1); Higbee v. Commissioner, supra at 448. The
decision as to whether a taxpayer acted with reasonable cause and
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in good faith is made on a case-by-case basis, taking into
account all of the pertinent facts and circumstances. See sec.
1.6664-4(b)(1), Income Tax Regs. “Circumstances that may
indicate reasonable cause and good faith include an honest
misunderstanding of fact or law that is reasonable in light of
all of the facts and circumstances, including the experience,
knowledge, and education of the taxpayer.” Id.
Petitioner asserts that he acted with reasonable cause and
in good faith. He argues that in deducting the entire PSA
payment in 2006 he was just repeating what was ultimately
determined by respondent to be permitted in 2005. Furthermore,
petitioner points out that although he is an attorney, his
practice does not include tax law.
We are not persuaded by petitioner’s arguments. What
respondent did in 2008 regarding the deduction in 2005 has no
bearing on whether petitioner acted with reasonable cause and in
good faith in 2006. The statute forbidding a deduction for
payments where, as in this case, there is no liability after the
death of the payee spouse, is clear. Petitioner’s explanations
do not demonstrate an honest misunderstanding of fact or law that
is reasonable in light of his experience, knowledge, and
education.
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In reaching our decision, we have considered all arguments
made by the parties. To the extent not mentioned or addressed,
they are irrelevant or without merit.
For the reasons explained above,
Decision will be entered
under Rule 155.