T.C. Summary Opinion 2010-163
UNITED STATES TAX COURT
WILLARD R. RANDALL, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 13261-09S. Filed October 28, 2010.
Alfred D. Mathewson, Eric Ortiz (student), and Joseph
Gonzales (student), for petitioner.
Jay A. Roberts, for respondent.
HALPERN, Judge: This case was heard pursuant to the
provisions of section 7463 of the Internal Revenue Code in effect
when the petition was filed. Pursuant to section 7463(b), the
decision to be entered is not reviewable by any other court, and
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this opinion shall not be treated as precedent for any other
case.1
By notice of deficiency, respondent determined a deficiency
of $12,540 and an accuracy-related penalty of $2,508 with respect
to petitioner’s 2007 Federal income tax. Taking into account
respondent’s concessions, the only issue for decision is whether
petitioner is entitled to an alimony deduction of $69,000.
Background
Some facts are stipulated and are so found. The stipulation
of facts, with accompanying exhibits, is incorporated herein by
this reference. We round all amounts to the nearest dollar.
Petitioner bears the burden of proof. See Rule 142(a)(1).2 At
the time he filed the petition, petitioner lived in New Mexico.
Petitioner and his ex-wife divorced in 2007. In its final
order, the divorce court found that petitioner was due a $69,000
property equalization payment from his ex-wife but awarded her a
like amount as spousal support. The court immediately offset the
amounts, ordering that spousal support be “considered paid in
full by forgiveness of $69,000 equalization payment due to * * *
1
Hereafter, unless otherwise stated, section references are
to the Internal Revenue Code in effect for 2007, and Rule
references are to the Tax Court Rules of Practice and Procedure.
2
Petitioner has not raised the issue of sec. 7491(a), which
shifts the burden of proof to the Commissioner in certain
situations. We conclude that sec. 7491(a) does not apply here
because petitioner has not produced any evidence that he has
satisfied the preconditions for its application.
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[petitioner] by * * * [ex-wife].” On his 2007 Form 1040, U.S.
Individual Income Tax Return, petitioner claimed a deduction of
$69,000 for alimony paid. Respondent examined that return and
disallowed the alimony deduction.
Discussion
Introduction
Section 215(a) allows a taxpayer to deduct alimony paid
during the taxable year. The term “alimony” is defined in
section 71(b) as, in part, “any payment in cash”, and the issue
is whether, during 2007, petitioner made a $69,000 cash payment
of alimony.3
Arguments
Respondent argues that petitioner is not entitled to an
alimony deduction because, rather than remit a cash payment, “his
obligation to pay this amount was offset against the $69,000
equalization payment”. Respondent argues that waiver of the
equalization payment is not an accepted section 71(b) cash
equivalent because section 1.71-1T(b), Q&A-5, Temporary Income
Tax Regs., 49 Fed. Reg. 34455 (Aug. 31, 1984), the regulation
interpreting section 71(b), limits the term’s meaning to two
specifically identified equivalents: checks and money orders
3
There are four additional definitional requirements, none
of which is in issue. See sec. 71(b)(1). The definition of
alimony found in sec. 71(b) is made applicable for purposes of
sec. 215(a) by sec. 215(b).
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payable upon demand. Respondent concludes that petitioner’s
failure either to make a cash payment or to use an identified
cash equivalent precludes any alimony deduction.
Petitioner argues that the transaction’s economic structure
renders his forgiveness of the equalization payment a section
71(b) cash equivalent. He argues that the regulation does not
foreclose such treatment as it provides an inexhaustive list of
accepted cash equivalents. Petitioner asserts that if he and his
ex-wife had adhered to the statute’s literal language by
exchanging written checks, he would be entitled to an alimony
deduction despite being “in the same economic condition, less the
transaction costs”. He concludes that since the payments’
immediate offset did not alter his or his ex-wife’s economic
conditions, the economic “reality of the transaction” is that
petitioner satisfied his alimony obligation with a section 71(b)
cash equivalent.
Analysis
The facts before us demonstrate that petitioner satisfied
his spousal support obligation with a cash payment. Section
71(b) requires that alimony be a payment in cash but does not
limit the term to bills and notes. Rather, section 1.71-1T(b),
Q&A-5, Temporary Income Tax Regs., supra, provides a nonexclusive
list of accepted cash equivalents, stating that cash payments
“including checks and money orders payable on demand” qualify as
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alimony. See sec. 7701(c) (stating that the terms “includes” and
“including”, when used in the Internal Revenue Code, “shall not
be deemed to exclude other things otherwise within the meaning of
the term defined”).
A check is defined as “[a] written order to a bank to pay
the amount specified from funds on deposit”. The American
Heritage Dictionary of the English Language (4th ed. 2000).
Conceptually, petitioner’s spousal support payment is an oral
version of this accepted cash equivalent. The divorce court
denominated petitioner’s and his ex-wife’s mutual obligations in
equal dollar amounts, and, with respect to her, the effect of its
order offsetting those obligations was the same as if it had
ordered her to pay herself $69,000 of his money on deposit with
her in discharge of his obligation to her in that sum (and
likewise with respect to him). Thus, in addition to payee,
petitioner’s ex-wife assumed the role of bank, since she held
petitioner’s money, not having yet satisfied her equivalent
obligation. This view complies with the legislative history of
section 71(b) because there is no threat of petitioner’s
deducting a disguised property transfer as alimony; the parties
agreed at trial that the spousal support payment was not a
property settlement. See H. Rept. 98-432 (Part 2), at 1495
(1984). To that extent, mere formalism need not prevail.
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Further, this Court does not require taxpayers to follow
literally all transactional steps when to do so would result in
the “utilization of fruitless steps”. See, e.g., Ruckriegel v.
Commissioner, T.C. Memo. 2006-78; Gilday v. Commissioner, T.C.
Memo. 1982-242 n.8. Although petitioner did not satisfy all the
steps of section 71(b) by paying in a manner specifically
mentioned in the regulation, he used a conceptually similar form
of payment that did not alter the transaction’s substance. Cf.
Spencer v. Commissioner, 110 T.C. 62, 82 (1998) (finding that
defects in the transaction’s form were not “merely ‘fruitless
steps’” (quoting Gilday v. Commissioner, supra)), affd. without
published opinion 194 F.3d 1324 (11th Cir. 1999). Requiring the
parties to ask the divorce court to alter the instantaneous
transaction in order to adhere to the statute’s exact language in
this case would have been meaningless and the “utilization of
fruitless steps”.4
Decision will be entered
for petitioner.
4
In LaBozetta v. Commissioner, T.C. Summary Opinion 2006-
122, we disallowed an alimony deduction where the divorcing
spouses had expressly waived alimony and the claimed alimony
payment was made by way of offset against one spouse’s monetary
obligation to the other. Because of the absence of an obligation
to pay alimony, our analysis of the cash payment terms of sec.
71(b) appears to constitute dictum. In any event, LaBozetta is
not precedent. See sec. 7463(b).