T.C. Summary Opinion 2011-11
UNITED STATES TAX COURT
JAMES DAVID SHILEY, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 13418-09S. Filed February 7, 2011.
James David Shiley, pro se.
Emly B. Berndt, for respondent.
DEAN, 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. Pursuant to section
7463(b), the decision to be entered is not reviewable by any
other court, and this opinion shall not be treated as precedent
for any other case. Unless otherwise indicated, subsequent
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section references are to the Internal Revenue Code in effect for
the year in issue, and all Rule references are to the Tax Court
Rules of Practice and Procedure.
For 2007 respondent determined a deficiency of $1,708 in
petitioner’s Federal income tax. The sole issue for decision is
whether payments petitioner made in 2007 to his former wife are
deductible as alimony.
Background
Some of the facts have been stipulated and are so found.
The stipulation of facts and the attached exhibits are
incorporated herein by reference. When petitioner filed his
petition, he resided in Ohio.
Petitioner was married on November 10, 1989. Approximately
10 years later, he and his former wife separated, and on July 19,
1999, they entered into a separation agreement (agreement).1 The
agreement provided that neither party would be entitled to
receive spousal support and both parties waived any future claim
thereto.
The agreement also included several provisions regarding the
division of property, providing in pertinent part:
5. As a further division of property, Husband shall
pay to Wife, the sum of Sixty-five Thousand Dollars
($65,000), plus the marital portion of COLA as detailed
below, as follows: Five Thousand Dollars ($5,000) upon the
1
The divorce decree, signed July 27, 1999, fully
incorporated the terms of the separation agreement.
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granting of a Decree of Divorce or July 17, 1999 whichever
occurs first, and the balance as follows:
A) Five Hundred Dollars ($500.00) per month
commencing July 10, 1999 and due and payable on the
10th day of each month thereafter for 120 months,
ending June 30, 2009. Said monthly payments shall be
increased by the marital portion of COLA compounded,
commencing July 10, 2000, and each July 10th thereafter
until the obligation has been satisfied in full.
B) Rights of Survivorship. During the term of
this obligation and until this obligation is satisfied
in full, Husband covenants that he shall submit to
all physicals and sign all documents required for Wife
to purchase a life insurance policy on his life in
the amount of Fifty Thousand Dollars ($50,000) to
secure this obligation, at Wife’s cost.
C) Nature of Obligation. The parties agree that
the payments hereunder are a division of property.
Husband agrees that he will pay, and save Wife harmless
from any liability on, any and all taxes attributable
to this obligation and the payments hereunder. Except,
however, in the event Husband attempts to discharge
this obligation through bankruptcy, or other means, he
shall continue all such payments as spousal support,
increased by Wife’s tax obligations thereon. Husband
agrees that his obligation hereunder is binding upon
his heirs, executors, administrators and assigns and
shall become an obligation of his estate.
* * * * * * *
13. It is agreed that this Agreement shall be binding
upon the heirs, executors, administrators, next of kin and
assigns of each party thereto.
With respect to his obligation pursuant to the agreement, in
2007 petitioner paid his former wife $6,000 which he deducted on
his Federal income tax return as alimony.
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On March 13, 2009, respondent issued to petitioner a
statutory notice of deficiency disallowing petitioner’s alimony
deduction.
Discussion
I. Burden of Proof
Generally, the Commissioner’s determinations are presumed
correct, and the taxpayer bears the burden of proving that those
determinations are erroneous.2 Rule 142(a); see INDOPCO, Inc. v.
Commissioner, 503 U.S. 79, 84 (1992); Welch v. Helvering, 290
U.S. 111, 115 (1933).
II. Alimony Payments
Section 215(a) allows a deduction for alimony paid
during the payor’s taxable year. Section 215(b) defines alimony
or separate maintenance as any “payment (as defined in section
71(b)) which is includible in the gross income of the recipient
under section 71.”
Section 71(b) provides a four-step inquiry for determining
whether a cash payment is alimony:
SEC. 71(b). Alimony or Separate Maintenance
Payments Defined.--For purposes of this section--
(1) In general.--The term “alimony or
separate maintenance payment” means any payment in
cash if--
2
Petitioner has not claimed or shown that he meets the
requirements under sec. 7491(a) to shift the burden of proof to
respondent as to any factual issue relating to his liability for
tax.
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(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 includible in gross income * * *
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.
Payments are deductible as alimony only if all four
requirements of section 71(b)(1) are met. Respondent agrees that
petitioner satisfies subparagraphs (A) and (C) of section
71(b)(1). The parties disagree, however, as to whether
petitioner’s payment was designated a payment not includable in
gross income and whether petitioner’s payment obligation would
terminate upon the death of his former wife. See sec.
71(b)(1)(B), (D).
We first address the requirement of section 71(b)(1)(B),
which provides that a payment will not be alimony if the
governing divorce or separation instrument designates the payment
not includable in gross income under section 71 and not allowable
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as an alimony deduction under section 215. A divorce or
separation instrument “contains a nonalimony designation if the
substance of such a designation is reflected in the instrument.”
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). Generally the
divorce or separation agreement must provide 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, but the designation “need not
mimic the statutory language of * * * sections 71 and 215”,
Estate of Goldman v. Commissioner, supra at 323. A nonalimony
designation will be found if the substance of such a designation
is reflected in the instrument. Estate of Goldman v.
Commissioner, supra.
Petitioner’s separation agreement unambiguously provides
that he shall pay his former wife “As a further division of
property” $65,000. The agreement characterizes petitioner’s
obligation as a division of property. Part and parcel of
petitioner’s payment liability was his further agreement that “he
will pay, and save Wife harmless from any liability on, any and
all taxes attributable to this obligation and the payments
hereunder.” The agreement, in addition, sets forth as a separate
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general provision that neither party shall be entitled to receive
spousal support from the other.
While petitioner did not focus on any particular provision
in the agreement, there is a colorable argument that the payment
obligation satisfies section 71(b)(1)(B) because of the provision
that in the event of an attempt to discharge the obligation in
bankruptcy, the obligation shall continue as “spousal support,
increased by Wife’s tax obligations thereon.”3 Notwithstanding
the foregoing language, the Court concludes that when the
agreement is read as a whole, it reflects an intent and agreement
of the parties that the payments are pursuant to a division of
property, as opposed to spousal support, and are not to be
includable in the gross income of petitioner’s former wife. See
Fields v. Commissioner, T.C. Memo. 2008-207; see also Hoover v.
Commissioner, T.C. Memo. 1995-183 (where payments of sum certain
are made over a definite period regardless of contingencies, it
is as a matter of law a division of property), affd. 102 F.3d 842
(6th Cir. 1996).
Petitioner’s payments were made to his former wife as part
of a division of property,4 his former wife was not liable for
3
Petitioner has not alleged that the payment obligation was
actually converted to spousal support.
4
Ohio Rev. Code Ann. sec. 3105.18 (LexisNexis 2008) also
provides that “Spousal support” does not include any payment made
to a spouse that is made as part of a division or distribution of
property.
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any taxes attributable to those funds, and neither party was
entitled to spousal support pursuant to the agreement. Upon
consideration of the agreement, the Court concludes that
petitioner’s payments made to his former wife pursuant to a
division of property are not deductible as alimony. Respondent’s
determination is sustained.
The Court notes that even if petitioner’s payments satisfied
section 71(b)(1)(B), they do not satisfy section 71(b)(1)(D)
because the payments do not terminate upon the death of
petitioner’s former wife.5
The Court finds that the agreement contains a nonalimony
designation within the meaning of section 71(b)(1)(B) and a
liability for payment that survives the death of the payee spouse
as described in subparagraph (D) of section 71(b)(1). Thus
petitioner’s payment of $6,000 in 2007 to his former wife was not
deductible alimony.
5
The agreement provides that the obligations of the parties
shall be binding upon the heirs, executors, administrators, next
of kin and assigns of each party hereto. See Hoover v.
Commissioner, T.C. Memo. 1995-183, affd. 102 F.3d 842 (6th Cir.
1996); Cunningham v. Commissioner, T.C. Memo. 1994-474. Pursuant
to the agreement, petitioner is obligated to fulfill his payment
liability, an obligation which does not terminate at the death of
either party.
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Other arguments made by the parties and not discussed herein
were considered and rejected as irrelevant, without merit, or
moot.
To reflect the foregoing,
Decision will be entered
for respondent.