Reynolds v. Comm'r

T.C. Summary Opinion 2010-157

UNITED STATES TAX COURT

ROSEMARIE T. REYNOLDS, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 16554-08S. Filed October 25, 2010.

Elan R. Kaney, for petitioner.

James R. Bamberg, for respondent.

KROUPA, Judge: This case was heard pursuant to the

provisions of section 74631 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,

1
All section references are to the Internal Revenue Code,
and all Rule references are to the Tax Court Rules of Practice
and Procedure, unless otherwise indicated.
 - 2 -

and this opinion shall not be treated as precedent for any other

case.

Respondent determined an $8,250 deficiency in petitioner’s

Federal income tax for 2005. The sole issue for decision is

whether the $30,000 petitioner received from her ex-husband is

alimony and therefore includable in gross income.2 We hold the

payments are not alimony and therefore not includable in gross

income.

Background

This case was submitted fully stipulated pursuant to Rule

122, and the facts are so found. The stipulation of facts and

the accompanying exhibits are incorporated by this reference.

Petitioner resided in Holly Hill, Florida at the time she filed

the petition.

Petitioner and her ex-husband divorced after an 11-year

marriage and signed a marital settlement agreement (the marital

settlement) in August 1998. Petitioner was college educated, and

her ex-husband was an educated businessman who earned $350,000

annually from several business interests he owned. They intended

the marital settlement to fully settle their rights and

obligations relative to one another and with respect to their

2
Petitioner’s marital settlement agreement labels the
payments as rehabilitative alimony. Accordingly, we will refer
to them as such.
 - 3 -

son, WAC, who was ten at the time.3 The marital settlement

required petitioner’s ex-husband to make payments for

distribution of their marital assets, monthly child support and

rehabilitative alimony. Petitioner’s ex-husband was to make

fixed payments at specified times in equitable distribution of

the marital assets, which were listed in the relevant section of

the agreement. He also was obligated to pay monthly child

support. Child support would terminate in specified

circumstances, including upon the noncustodial parent’s death.

Petitioner’s ex-husband agreed to make specified monthly

payments of rehabilitative alimony to petitioner for eight years

and one month pursuant to the terms of the marital settlement.

He agreed to pay $2,250 per month during 2005. He also agreed to

maintain a life insurance policy, designating petitioner as

beneficiary, with a death benefit sufficient to cover the total

amount of rehabilitative alimony due to petitioner.4 The marital

settlement did not require specific use of the funds but did note

petitioner’s enrollment in a PhD program in 1998, the time of

execution. The parties included language specifying that the

payments of rehabilitative alimony could not be modified or

3
The Court uses the initials of minor children. See Rule
27(a)(3).
4
The marital settlement quantifies the total rehabilitative
alimony payments as $306,000, failing to account for an
additional $2,250 mandated payment.
 - 4 -

terminated, regardless of whether circumstances changed. The

marital settlement also bound petitioner’s and her ex-husband’s

successors, heirs and assigns. A Florida circuit court granted a

final judgment of dissolution of marriage that incorporated by

reference the marital settlement and increased the amount of

rehabilitative alimony due in 2005 to $2,500 per month, totaling

$30,000 for the year.

Petitioner received the $30,000 from her ex-husband in 2005

as prescribed in the marital settlement. Petitioner and her ex-

husband were not members of the same household during 2005.

Petitioner did not report any alimony income on her Federal

income tax return for 2005. Her ex-husband, however, claimed

alimony deductions for the $30,000 he paid to petitioner in 2005.

Respondent issued the deficiency notice to petitioner

determining that petitioner failed to report the alimony she

received in 2005. Respondent already resolved this issue in

petitioner’s favor for the 2002 taxable year but raised it again

for 2005. Petitioner timely filed a petition.

Discussion

We must decide whether the $30,000 petitioner received in

2005 is alimony and therefore includable in her gross income.

Petitioner claims it is a property settlement or a lump-sum

payment, not alimony, and therefore not taxable to her.

Respondent argues that the $30,000 is includable as alimony.
 - 5 -

We begin with the burden of proof. Where, as here, the key

facts are fully stipulated and we are faced with a question of

law, our holding does not depend on the burden of proof we impose

or the standard of review we apply. Instead, we must reject

erroneous views of the law. See Kendricks v. Commissioner, 124

T.C. 69, 75 (2005) (and the cases cited thereat); McCorkle v.

Commissioner, 124 T.C. 56, 63 (2005).

We now review the Federal income tax law regarding alimony.5

Property settlements incident to a divorce generally are not

taxable and do not give rise to income. Sec. 1041; Estate of

Goldman v. Commissioner, 112 T.C. 317, 322 (1999), affd. without

published opinion sub nom. Schutter v. Commissioner, 242 F.3d 390

(10th Cir. 2000). Conversely, alimony payments generally are

taxable to the recipient and deductible by the payor in the year

paid. Secs. 61(a)(8), 71(a), 215(a). The label assigned to a

payment by the parties or the divorce court is not dispositive

for Federal income tax purposes. See, e.g., Beard v.

Commissioner, 77 T.C. 1275, 1283-1284 (1981); Sroufe v.

Commissioner, T.C. Memo. 1995-256. Instead, alimony is defined

as a cash payment received by or on behalf of a spouse meeting

specified requirements. Sec. 71(b)(1). The parties agree that

5
Property interests of divorcing parties are determined by
State law, yet Federal law governs the Federal income tax
treatment of that property. Green v. Commissioner, 855 F.2d 289,
292 (6th Cir. 1988), revg. on other grounds T.C. Memo. 1986-269.
 - 6 -

petitioner satisfies all of the conditions except the requirement

that the payor not be obligated to make any payments for any

period after the death of the payee spouse. Sec. 71(b)(1)(D).

The language of the marital settlement does not specifically

provide that petitioner’s ex-husband would be obligated to make

payments after petitioner died. The Court must look to State

law, in the absence of specific agreement language, to determine

whether petitioner’s estate would have a right to payments of

rehabilitative alimony. See Kean v. Commissioner, T.C. Memo.

2003-163, affd. 407 F.3d 186 (3d Cir. 2005); Notice 87-9, 1987-1

C.B. 421, 422. We therefore look to Florida law to determine

whether it would terminate the rehabilitative alimony payments at

petitioner’s death.

Florida family law provides that the characterization of

alimony and other payments is determined by their function, not

their title. Boyd v. Boyd, 478 So. 2d 356, 357 (Fla. Dist. Ct.

App. 1985) (citing Underwood v. Underwood, 64 So. 2d 281 (Fla.

1953)); Karch v. Karch, 445 So. 2d 1077, 1078 (Fla. Dist. Ct.

App. 1984); Zuccarello v. Zuccarello, 429 So. 2d 68, 69 (Fla.

Dist. Ct. App. 1983). Alimony may be either periodic or lump

sum. Fla. Stat. Ann. sec. 61.08(1) (West 2006); Canakaris v.

Canakaris, 382 So. 2d 1197, 1200 (Fla. 1980); Borchard v.

Borchard, 730 So. 2d 748, 751 (Fla. Dist. Ct. App. 1999). Lump-

sum alimony is a fixed, non-modifiable monetary obligation that
 - 7 -

is immediately vested and therefore does not terminate upon the

death of the payor or the payee. Boyd v. Boyd, supra at 357; see

also Canakaris v. Canakaris, supra at 1201; Borchard v. Borchard,

supra at 751. Lump-sum alimony, despite its name, may be paid in

installments. See Borchard v. Borchard, supra at 751.

Respondent argues that the $30,000 paid in 2005 was

rehabilitative in nature, as it was intended to pay for

petitioner’s PhD program and other rehabilitation. Respondent

concludes, therefore, that this amount would not have been

payable to petitioner’s estate had she died during 2005 because

the rehabilitative purpose of the funds would have lapsed. We

disagree.

Florida law provides that the rehabilitative intent of the

funds is not dispositive. Id. Similarly, lump-sum alimony may

be rehabilitative in nature under Florida law. Id.

The marital settlement obligations due to petitioner as

rehabilitative alimony were fixed and certain in the number of

payments and the amount of each payment. They were not subject

to modification and termination by their terms. This certainty

was further clarified with language specifying that

rehabilitative alimony could not be modified or terminated

regardless of whether circumstances changed. These payments met

the requirements for lump-sum alimony in Florida and therefore

would remain payable to petitioner’s estate if she were to die.
 - 8 -

See Human v. Commissioner, T.C. Memo. 1998-106; Stokes v.

Commissioner, T.C. Memo. 1994-456.

We find further support for our holding by looking to

language in the marital settlement.6 Nothing in the marital

settlement indicated that the rehabilitative alimony payments

would terminate on petitioner’s death. Indeed, the marital

settlement language emphasized that the obligation could not be

modified or terminated under any circumstances. This language is

in stark contrast to the language requiring child support

payments and specifying that the child support obligation would

end upon the death of the noncustodial parent. The ex-husband’s

obligation to pay rehabilitative alimony was not contingent on

any factor or event, such as petitioner’s attending school.

Indeed, petitioner is the irrevocable beneficiary of her ex-

husband’s life insurance policy, required by the marital

settlement to ensure payment of the total sum of the

rehabilitative alimony. Petitioner and her ex-husband also bound

6
When State family law is ambiguous regarding termination of
payments upon payee’s death, a Federal court will base its
decision on the divorce instrument’s language, rather than engage
in complex State law inquiries. Hoover v. Commissioner, 102 F.3d
842, 846 (6th Cir. 1996), affg. T.C. Memo. 1995-183; see also
Webb v. Commissioner, T.C. Memo. 1990-540. But see Cunningham v.
Commissioner, T.C. Memo. 1994-474 (considering State contract law
and extrinsic evidence to determine the parties’ intent where
State family law did not terminate husband’s liability to make
payments after wife’s death); Berry v. Commissioner, T.C. Memo.
2005-91 (considering extrinsic evidence of parties’ intent
regarding post-death liability to the extent permitted under
State law principles).
 - 9 -

their successors, heirs and assigns to the terms of the marital

settlement. We have no reason to conclude that rehabilitative

alimony payments, as described in the marital settlement, would

terminate upon petitioner’s death. See Hoover v. Commissioner,

102 F.3d 842, 848 (6th Cir. 1996), affg. T.C. Memo. 1995-183;

Webb v. Commissioner, T.C. Memo. 1990-540. Accordingly, we hold

that the rehabilitative alimony payments are not alimony for

Federal income tax purposes and therefore not includable in gross

income.

We note that respondent is not bound by his previous

resolution of this issue in petitioner’s favor for the 2002

taxable year. See 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).

We have considered all arguments made in reaching our

decision and, to the extent not mentioned, we conclude that they

are moot, irrelevant, or without merit.

To reflect the foregoing,

Decision will be entered

for petitioner.