Muniz v. Comm'r

T.C. Memo. 2015-125

UNITED STATES TAX COURT

H. MICHAEL MUNIZ, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 5704-14. Filed July 9, 2015.

H. Michael Muniz, pro se.

Brandon S. Cline and Kenneth Allan Hochman, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

NEGA, Judge: Respondent determined a deficiency in petitioner’s Federal

income tax for tax year 2011 of $10,952 and an accuracy-related penalty pursuant

to section 6662(a) of $2,190.1 The issues for decision are whether petitioner is

1
Unless otherwise indicated, all section references are to the Internal
(continued...)
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[*2] (1) entitled to an alimony deduction for a lump sum paid to his former wife in

2011, and (2) liable for an accuracy-related penalty pursuant to section 6662(a).

FINDINGS OF FACT

Some of the facts have been stipulated and are so found. We incorporate by

reference the parties’ stipulation of facts and accompanying exhibits. Petitioner

resided in the State of Florida when the petition was filed. Petitioner has been an

attorney licensed in the State of Florida since 1999. Additionally, petitioner

obtained a certified public accountant (C.P.A.) license in 1996 which he has since

placed on inactive status.

Petitioner and his former wife, Annette Filippini, were married on June 20,

2004. On October 12, 2009, Ms. Filippini filed an amended petition for

dissolution of marriage and other relief in the Circuit Court of the Fifteenth

Judicial Circuit in and for Palm Beach County, Florida.

Petitioner and Ms. Filippini executed a partial mediated marital settlement

agreement (MSA) on December 8, 2009. Paragraph 7 of the MSA sets out the

terms of alimony between petitioner and Ms. Filippini. Under the terms of this

1
(...continued)
Revenue Code (Code) in effect for the year at issue, and all Rule references are to
the Tax Court Rules of Practice and Procedure. All monetary amounts are
rounded to the nearest dollar.
 -3-

[*3] paragraph, petitioner was obligated to pay nonmodifiable bridge-the-gap

alimony2 to Ms. Filippini of $1,000 per month, subject to certain requirements

based on his income. Additionally, petitioner was obligated to pay $409 for health

insurance for Ms. Filippini and her son for three months, followed by the lesser of

$500 per month or the actual cost of health insurance for nine months. Apart from

the terms set out regarding nonmodifiable bridge-the-gap alimony, Ms. Filippini

waived all other claims to “permanent and periodic alimony, lump-sum alimony

and/or rehabilitative alimony”.

Petitioner and Ms. Filippini entered into an agreed order on payment of

wife’s alimony by husband (first order) on November 8, 2010. The first order

required petitioner to pay Ms. Filippini $6,000 in satisfaction of the alimony

ordered under the MSA. Petitioner satisfied his alimony obligations under the

MSA and the first order in November 2010. Circuit Judge Charles Burton

reserved ruling on Ms. Filippini’s request for attorney’s fees and costs.

Petitioner and Ms. Filippini subsequently entered into an agreed order

(second order) on May 6, 2011, resolving all remaining issues in their divorce

2
Under Florida law, bridge-the-gap alimony is intended to assist a former
spouse with short-term needs and may not exceed two years in duration. Fla. Stat.
Ann. sec. 61.08(5) (West 2006 & Supp. 2015). Bridge-the-gap alimony terminates
upon the death of either party or upon the remarriage of the recipient. Id.
 -4-

[*4] proceeding. The second order obligated petitioner to pay $45,000 to Ms.

Filippini. Ms. Filippini testified at trial that the $45,000 payment was a settlement

for attorney’s fees and the division of marital assets and was not intended to be

alimony. Ms. Filippini did not claim the $45,000 as alimony on her 2011 Federal

income tax return. Judge Burton entered a final judgment of dissolution of

marriage (final judgment) on May 31, 2011. The MSA and the second order were

incorporated into, but not merged into, the final judgment. The final judgment

stated that the MSA and the second order “shall in all respects survive the Final

Judgment and be forever binding and conclusive upon the parties.”

Through Ms. Filippini’s attorney, petitioner paid $45,000 in satisfaction of

the second order on July 5, 2011. On July 13, 2011, Ms. Filippini served upon

petitioner Former Wife’s Notice of Former Husband’s Compliance With Final

Judgment and Order Dated May 6, 2011.

Respondent mailed the notice of deficiency to petitioner on February 5,

2014. The notice of deficiency determined that the $45,000 payment to Ms.

Filippini did not constitute alimony under section 71 and was therefore not

deductible by petitioner. Petitioner timely petitioned the Court for review on

March 13, 2014.
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[*5] OPINION

I. Burden of Proof

The Commissioner’s determination as to a taxpayer’s tax liability is

generally presumed correct, and the taxpayer bears the burden of proving

otherwise. See Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933).

Deductions are a matter of legislative grace. Deputy v. du Pont, 308 U.S. 488, 493

(1940); New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934). Taxpayers

must comply with specific requirements for any deductions claimed. See

INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992); New Colonial Ice Co.

v. Helvering, 292 U.S. at 440. Taxpayers must also maintain adequate records to

substantiate the amounts of any credits and deductions. See sec. 6001; sec.

1.6001-1(a), Income Tax Regs.

II. Alimony Deduction

Section 215(a) allows as a deduction an amount equal to the alimony or

separate maintenance payments paid by an individual during such individual’s tax

year. Section 71(b)(1) defines an alimony or separate maintenance payment to be

any payment made in cash that satisfies the following conditions: (1) the payment

is received by (or on behalf of) a spouse under a divorce or separation agreement;

(2) the divorce or separation agreement does not designate the payment as a
 -6-

[*6] payment which is not includible in gross income under section 71 and not

allowable as a deduction under section 215; (3) in the case of an individual who is

legally separated from his spouse under a decree of divorce or separate

maintenance, the payee spouse and the payor spouse are not members of the same

household at the time the payment is made; and (4) there is no liability to make a

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. A divorce or separation agreement executed after

December 31, 1984, does not need to expressly state that payments cease upon the

death of the payee spouse as long as State law provides for automatic termination

of payments upon the death of the payee spouse. See Tax Reform Act of 1986,

Pub. L. No. 99-514, sec. 1843(b), 100 Stat. at 2853.

Respondent argues that petitioner’s payment of $45,000 to Ms. Filippini

does not meet the requirements of section 71(b) and therefore he cannot deduct it

as alimony. In the notice of deficiency respondent noted that a lump-sum payment

under Florida law creates a vested right in the payee which would not end upon

the payee’s death. Petitioner filed a motion for summary judgment on October 8,

2014, which the Court denied on November 12, 2014. In respondent’s response to

petitioner’s motion for summary judgment (response) on October 31, 2014,
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[*7] respondent raised, for the first time, doubt as to whether the $45,000 payment

was “for support or for a property settlement”. At trial respondent again argued

that the payment was not alimony, pointing to the provision for alimony in the

MSA and the incorporation of the MSA into the final judgment as well as

petitioner’s satisfaction of the first order in November 2010.

Petitioner argues that respondent “waived any challenge” to the nature of

the $45,000 payment when he did not dispute the nature of the payment in the

notice of deficiency. We interpret petitioner’s argument to mean that the

alternative rationale that respondent raised in his response is a “new matter”

within the meaning of Rule 142(a), and therefore respondent bears the burden of

proof with regard to this argument. We do not agree that respondent raised a new

matter by arguing that the $45,000 payment was not alimony. The notice of

deficiency informed petitioner that the payment was not deductible because it did

not meet the requirements for a deductible alimony payment. A new position

taken by the Commissioner is not necessarily a new matter if it merely clarifies or

develops the original determination and is consistent with or does not increase the

amount of deficiency. Estate of Jayne v. Commissioner, 61 T.C. 744, 748-749

(1974) (citing McSpadden v. Commissioner, 50 T.C. 478, 492-493 (1968)).

Respondent’s argument advanced in his response involves the same Code section,
 -8-

[*8] does not affect the amount of the deficiency, and is consistent with his

original determination that the $45,000 payment was not deductible. See id.

Examination of the various documents related to petitioner’s divorce from

Ms. Filippini indicates that the $45,000 payment does not appear to be an alimony

payment. First, the MSA ordered petitioner to pay nonmodifiable, bridge-the-gap

alimony to Ms. Filippini in monthly amounts that, when totaled, do not add up to

$45,000, and Ms. Filippini waived her rights to all other forms of alimony from

petitioner. Second, petitioner satisfied his alimony obligations under the MSA and

the first order in 2010. Thus, the $45,000 payment appears to be a property

settlement, which is not deductible under section 215, rather than a deductible

alimony payment. See sec. 1041(c).

However, the $45,000 payment satisfies the first three requirements of

section 71(b)(1). The payment was made to Ms. Filippini under a divorce or

separation agreement that did not designate the payment as a payment which is not

includible in gross income under section 71 and not allowable as a deduction

under section 215. See sec. 71(b)(1)(A) and (B). Further, petitioner and Ms.

Filippini were not members of the same household at the time the payment was

made. See sec. 71(b)(1)(C). That leads us to the fourth requirement of section

71(b), that the obligation to make the $45,000 payment terminate in the event of
 -9-

[*9] Ms. Filippini’s death. See sec. 71(b)(1)(D). If it did terminate, and we

conclude that the payment is alimony and not a property settlement, the payment is

deductible under section 215(a). The second order does not specify whether

petitioner would have been liable to make the $45,000 payment if Ms. Filippini

had died before the payment was made. We must look to Florida law to determine

petitioner’s liability in this regard. See Sampson v. Commissioner, 81 T.C. 614,

618 (1983), aff’d without published opinion, 829 F.2d 39 (6th Cir. 1987).

Petitioner argues that the payment was lump-sum alimony. Florida law

recognizes lump-sum alimony. Fla. Stat. Ann. sec. 61.08(1) (West 2006 & Supp.

2015); Canakaris v. Canakaris, 382 So. 2d 1197, 1200 (Fla. 1980). Lump-sum

alimony under Florida law creates a vested right in the payee spouse which does

not terminate upon the payee spouse’s death. Canakaris, 382 So. 2d at 1201

(“[T]here does arise upon the entry of a final judgment of a lump sum award a

vested right which is neither terminable upon a spouse’s remarriage or death nor

subject to modification.”); Boyd v. Boyd, 478 So. 2d 356, 357 (Fla. Dist. Ct. App.

1985) (“By definition, ‘lump-sum alimony’ is a fixed and certain amount, the right

to which is vested in the recipient and which is not therefore subject to increase,

reduction, or termination in the event of any contingency, specifically including

those of death or remarriage.”). Lump-sum alimony under Florida law creates a
 - 10 -

[*10] vested right in the payee spouse which survives the payee spouse’s death

and therefore fails to satisfy the condition set out in section 71(b)(1)(D). Thus,

under Florida law, lump-sum alimony constitutes a property settlement for Federal

income tax purposes. See Rood v. Commissioner, T.C. Memo. 2012-122 (“[W]e

find that the payments were for a definite sum and in the nature of a final property

settlement[.]”); Filipov v. Filipov, 717 So. 2d 1082, 1084 (Fla. Dist. Ct. App.

1998) (“Lump-sum alimony is essentially payment of a definite sum and is in the

nature of a final property settlement[.]”). Accordingly, assuming petitioner’s

$45,000 payment was intended by petitioner and Ms. Filippini to be lump-sum

alimony, that payment is nevertheless a property settlement under Florida law and

is not deductible for purposes of section 215(a).

Petitioner urges us to consider that his liability to make further payments to

Ms. Filippini was extinguished as soon as he rendered payment to her.

Unfortunately for petitioner, that is not the test mandated by the Code or the laws

of the State of Florida. Petitioner’s $45,000 payment to Ms. Filippini fails to

satisfy the requirements for alimony under section 71(b)(1) and is not deductible

under section 215(a).
 - 11 -

[*11] III. Section 6662(a) Accuracy-Related Penalty

Section 6662(a) and (b)(1) and (2) imposes a penalty equal to 20% of any

portion of an underpayment that is attributable to negligence or disregard of rules

or regulations, or any substantial understatement of income tax. Section

6662(d)(1)(A) defines a substantial understatement as an understatement that

exceeds the greater of 10% of the tax required to be shown on the return for the

taxable year or $5,000. Section 6662(d)(2)(A) defines “understatement” as the

excess of the amount of tax required to be shown on the return for the taxable year

over the amount of tax imposed which is shown on the return, reduced by any

rebate.

Generally, the Commissioner bears the burden of production with respect to

any penalty, including the accuracy-related penalty. Sec. 7491(c); Higbee v.

Commissioner, 116 T.C. 438, 446 (2001). To meet that burden, the Commissioner

must come forward with sufficient evidence indicating that it is appropriate to

impose the relevant penalty. Higbee v. Commissioner, 116 T.C. at 446. However,

once the Commissioner has met the burden of production, the taxpayer has the

burden of proof, including the burden of proving that the penalty is inappropriate

because of substantial authority or reasonable cause under section 6664. See Rule

142(a); Higbee v. Commissioner, 116 T.C. at 446-449.
 - 12 -

[*12] The understatement of income tax is $10,952, which is greater than $5,000,

which is in turn greater than 10% of the tax required to be shown on the return.

Thus, the understatement is substantial for purposes of the section 6662(a)

accuracy-related penalty. We conclude that respondent met his burden of

production in showing that petitioner substantially understated his income tax for

tax year 2011.

Pursuant to section 6664(c)(1), no penalty shall be imposed under section

6662 with regard to any portion of an underpayment if it can be shown that there

was reasonable cause for such portion and that the taxpayer acted in good faith

with respect to such portion. The decision as to 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. Factors to be considered include the taxpayer’s efforts to assess the proper

tax liability; the taxpayer’s knowledge, education, and experience; and reliance on

the advice of a tax professional. Id.

Petitioner did not address the section 6662(a) penalty in his pretrial

memorandum, but at trial he stated that he claimed the alimony deduction in good

faith after he “thought about [it] deliberately”. Petitioner did not elaborate on

what sources he used to determine his proper tax liability, nor did he consult a tax
 - 13 -

[*13] professional for advice on the issue. Petitioner is a licensed attorney who at

one point held an active C.P.A. license. His education and experience should have

alerted him to the fact that alimony is not deductible under section 215(a) unless it

satisfies the requirements of section 71(b). See, e.g., Reynolds v. Commissioner,

296 F.3d 607, 618 (7th Cir. 2002) (upholding the section 6662(a) penalty against a

taxpayer who was a licensed attorney and C.P.A.), aff’g T.C. Memo. 2000-20;

Argyle v. Commissioner, T.C. Memo. 2009-218, 98 T.C.M. (CCH) 259, 263-264

(2009), aff’d, 397 Fed. Appx. 823 (3d Cir. 2010) (upholding the section 6662(a)

penalty against a C.P.A. taxpayer). Petitioner has not met his burden of proving

that he acted in good faith and with reasonable cause, and we sustain the section

6662(a) accuracy-related penalty.

In reaching our holding, we have considered all arguments made, and, to the

extent not mentioned above, we conclude they are moot, irrelevant, or without

merit.

To reflect the foregoing,

Decision will be entered

for respondent.