J. Drew Koester v. Commissioner ( 2017 )

T.C. Summary Opinion 2017-88
UNITED STATES TAX COURT
J. DREW KOESTER, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 31028-14S. Filed December 4, 2017.
J. Drew Koester, pro se.
Martha Jane Weber, for respondent.
SUMMARY OPINION
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.1
1
Hereinafter, unless otherwise stated, all section references are to the
Internal Revenue Code of 1986, as amended.
-2-
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.
Respondent determined a deficiency of $4,041 in petitioner's 2012 Federal
income tax. Petitioner had reported his 2012 Federal income tax on Form 1040,
U.S. Individual Income Tax Return. Respondent examined the return and made an
adjustment reducing petitioner's deduction for alimony paid from $51,147 to
$39,600, an adjustment of $11,547. Respondent made the adjustment because he
did not believe that a payment of that amount--equal to a portion of the
employment-related bonus that petitioner received in 2012--constituted deductible
alimony. Petitioner assigned error to the adjustment. The only question for
decision is whether the $11,547 payment is deductible as alimony.
Background
The parties have stipulated certain facts and the authenticity of certain
documents. The facts stipulated are so found, and documents stipulated are
accepted as authentic. Petitioner bears the burden of proof. See Rule 142(a)(1),
-3-
Tax Court Rules of Practice and Procedure.2 Petitioner resided in Tennessee when
he filed the petition.
Petitioner's ex-wife filed for divorce with the Chancery Court for the 30th
Judicial District of Memphis (chancery court), Shelby County, Tennessee,
sometime before the year at issue. After the filing, petitioner and his ex-wife
executed a Marital Dissolution Agreement on January 4, 2010 (MDA), providing,
among other things, for the distribution of property and for support. Petitioner's
ex-wife was represented by counsel during the divorce proceedings, but petitioner
was not. Counsel for petitioner's ex-wife drafted the MDA.
The MDA provides the following:
Incorporation, Permanent and Pendente Lite
All such parts of this Agreement as might be material, except
those that might be lessened or destroyed, shall be incorporated in the
Final Decree. Pending the entry of the Final Decree, the parties agree
to the filing of this Agreement and, by said filing, specifically consent
to and authorize the entry of a Consent Order binding them to the
terms of this Agreement. By the signing of this Agreement, the
parties stipulate to these terms being enforceable as if they were, at
the moment of signing, an Order of this Court.
2
Petitioner has not raised the applicability 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.
-4-
The record does not contain a final decree of divorce from the Chancery
Court. The parties have not argued that the MDA was ineffective for 2012 and
have proceeded on the premise that it was both binding and enforceable in 2012.
The MDA contains specific provisions regarding the division of the
following property: (1) real estate, (2) personalty, (3) automobiles, (4) section
401(k) plan benefits, (5) brokerage accounts, (6) stocks/profit interest units, and
(7) bank accounts. Petitioner conveyed his interest in the couple's real estate,
which was subject to debt, to his ex-wife. In turn, petitioner's ex-wife was to
refinance the debt on the real estate to remove petitioner from the debt and, within
30 days of doing so, had to pay petitioner $35,000 for his marital interest in the
real estate. Petitioner received 43.9% and his ex-wife received 56.1% of the
aggregate value of the section 401(k) plan benefits, brokerage accounts,
stocks/profit interest units, and bank accounts.
The MDA also contains specific provisions awarding petitioner's ex-wife
two forms of support. Petitioner was required to pay, and hold his ex-wife
harmless for, three unsecured debts "as non-deductible, non-dischargeable
alimony in solido" because payment of the debts was necessary for his ex-wife's
support. The MDA also contains the following provision regarding petitioner's
obligation to pay what it describes as "transitional alimony" (alimony provision):
-5-
Alimony
Husband shall pay to Wife as transitional alimony in the
amount of Three Thousand Three Hundred Dollars ($3,300.00) per
month on or before the fifth day of each month. Husband agrees to
pay the transitional alimony beginning the first month immediately
preceding the entry of the Final Decree of Divorce and each and
every month thereafter through August 31, 2015.
Lastly, the MDA contains a specific provision for the division of petitioner's
bonus income (bonus provision):
Husband's Bonus Income
Wife shall be entitled to a portion of Husband's bonus income
beginning the month immediately preceding the entry of the Final
Decree of Divorce through August 31, 2015, as a division of marital
property. The parties agree that fifty (50%) percent [sic] of each
bonus during said time frame will be applied to the parties' minor
son's college education fund, and the remainder of each bonus will
then be split equally between the parties.
At the time petitioner and his ex-wife executed the MDA, his monthly gross
income was $17,226 and her monthly gross monthly income was zero. Petitioner
agreed to pay his ex-wife monthly child support of $1,547 and to pay for his son's
private school tuition through grade 12. Petitioner and his ex-wife agreed to
divide equally the expense of an automobile for their son and the balance of any
college tuition expenses for their son not covered by an education savings account
established for his benefit.
-6-
In 2012 petitioner received from his employer a bonus payment, net of taxes
and deductions, of $46,190, and, in that year, in accordance with the bonus
provision, he paid his ex-wife $11,547 (bonus payment). Respondent denied
petitioner the deduction for alimony paid that he claimed on account of the bonus
payment.
Discussion
Section 215(a) allows a taxpayer a deduction for alimony payments made
during the taxable year. The term "alimony" is defined for purposes of section
215(a) as any payment of alimony that is includible in the income of the recipient
under section 71. See sec. 215(b). In pertinent part, section 71(b)(1) defines an
alimony payment as any payment in cash that satisfies the following four
requirements:
(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
under this section 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
-7-
(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.
The bonus payment was made pursuant to the bonus provision. Respondent
concedes that the bonus payment satisfied the requirements of section 71(b)(1)(A),
(B), and (C). That leaves the question of whether petitioner's obligation to make
payments under the bonus provision would have continued if his ex-wife had died
before August 31, 2015, the scheduled end of petitioner's obligation to make the
payments. If his obligation would have continued, then the bonus provision failed
to satisfy the requirement of section 71(b)(1)(D) that there be no liability to make
a payment for any period after the death of the payee ex-spouse. And if it failed to
satisfy that requirement, then the bonus payment would not qualify as the payment
of alimony within the meaning of section 71.
On the face of it, the bonus provision is absolute as to the term of the ex-
spouse's entitlement to a share of petitioner's bonus income, viz, "through August
31, 2015," and it does not provide for the earlier termination of petitioner's
obligation to make the payments if the ex-wife should die. Nevertheless, to
determine whether petitioner's obligation to make payments under the bonus
provision would survive the death of petitioner's ex-wife, we must look beyond the
-8-
terms of the bonus provision to the law of the State of Tennessee. See Morgan v.
Commissioner, 309 U.S. 78, 80 (1940) ("State law creates legal interests and
rights. The federal revenue acts designate what interests or rights, so created, shall
be taxed."); Megibow v. Commissioner, T.C. Memo. 1998-455, 98 WL 901532, at
*2.3 Payments that cease upon the payee's death by operation of State law can still
qualify under section 71 for special tax treatment under section 215 "despite the
parties' failure to specify in the divorce instrument that the payments terminate
upon the payee's death." Hoover v. Commissioner, 102 F.3d 842, 846 (6th Cir.
1996), aff'g T.C. Memo. 1995-183.
The Supreme Court of Tennessee has characterized a marital dissolution
agreement as "a contract entered into by a husband and wife in contemplation of
3
The Court noted in Rogers v. Commissioner, T.C. Memo. 2005-50, 2005
Tax Ct. Memo LEXIS 49, at *4-*5:
Limiting deductibility to obligations that end with the death of
the payee stops taxpayers from disguising property settlements as
alimony. But one recurring problem has been how to tell whether a
particular obligation to pay alimony really would stop at death. For a
time, the Code had a strict bright-line test: deductibility was denied
unless there was an express provision in the divorce decree or
separation instrument itself ending payments upon the death of the
payee spouse. 26 U.S.C. sec. 71(b)(1)(D) (1984). In 1986, though,
Congress softened section 71(b) to allow deductibility without such
an express provision, but only if state law would end the obligation at
death anyway.
-9-
divorce." E.g., Eberbach v. Eberbach, __ S.W.3d __, 2017 WL 2255582, at *3
(Tenn. May 23, 2017). As such, it "provide[s] a vehicle for divorcing parties to,
among other things, provide 'for the equitable settlement of any property rights
between the parties.'" Altman v. Altman, 181 S.W.3d 676, 680 (Tenn. Ct. App.
2005) (quoting Tenn. Code Ann. sec. 364-103(b) (2001)).
As a contract, a MDA generally is subject to the rules
governing construction of contracts. * * * If approved by the trial
court, the MDA is incorporated into the decree of divorce * * * .
Once incorporated, issues in the MDA that are governed by statutes,
such as * * * alimony, lose their contractual nature and become a
judgment of the court. * * * The trial court retains the power and
discretion to modify terms contained in the MDA relating to these
statutory issues upon sufficient changes in the parties' factual
circumstances. * * *
Eberbach, 2017 WL 2255582, at *3. "However, it is still construed in the same
manner as a contract." In re Estate of Steil, No. M2011-00701-COA-R3-CV, 2012
WL 1794979, at *2 (Tenn. Ct. App. May 16, 2012). And while the domestic
relations law of Tennessee provides for the award of alimony, see Tenn. Code
Ann. sec. 36-5-121, subsection (m) of that section provides that nothing in the
section "shall be construed to prevent the affirmation, ratification and
incorporation in a decree of an agreement between the parties as to support and
maintenance of a party." The Court of Appeals of Tennessee has held: "The
alimony statutes are not applicable where the parties agree in a marital dissolution
- 10 -
agreement to terms different from those set out in the statutes." Vick v. Hicks, No.
W2013-02672-COA-R3-CV, 2014 WL 6333965, at *4 (Tenn. Ct. App. Nov. 17,
2014).
We assume that the MDA was approved by the chancery court and was
incorporated into petitioner and his ex-wife's divorce decree. There is no evidence
that the MDA has in any way been modified by the chancery court. Nevertheless,
petitioner argues that, as shown by "the nature and intent of the MDA", the bonus
provision obligates him to pay what, had the chancery court made the an award on
the same terms, would have been transitional alimony.
"Transitional alimony" is a class of alimony that a Tennessee court may
award. See Tenn. Code Ann. sec. 36-5-121(d)(1) through (g)(1). It terminates on
the death of he recipient. Id. sec. 36-5-121(g)(3). It is described as a sum of
money payable by a spouse for a determinate period and awarded "when the court
finds that rehabilitation is not necessary, but the economically disadvantaged
spouse needs assistance to adjust to the economic consequences of a divorce". Id.
sec. 36-5-121(g)(1).
Petitioner has failed to persuade us that the bonus payment pursuant to the
bonus provision was made to assist his ex-wife to adjust to the economic
consequences of divorce or that such payments were to terminate on her death
- 11 -
before August 31, 2015. We start with the fact that the MDA does, in the alimony
provision, specify monthly payments of $3,300 through August 31, 2015,
described as "transitional alimony". Petitioner and his ex-wife (or, at least, her
attorney) thus apparently knew how to describe a stream of payments for a
determinable period as being unnecessary for her rehabilitation but necessary to
assist her--she being economically disadvantaged--to adjust to the economic
consequences of divorce.4
Moreover, petitioner has not provided any evidence of his ex-wife's
expected expenses to allow us to find that the stated transitional alimony (under
the alimony provision) was not sufficient for her to adjust to the economic
consequences of her divorce from petitioner. Additionally, other provisions in the
MDA limit any economic disadvantage to her resulting from her divorce from
petitioner. She received more than 50% of the division of the liquid assets--
section 401(k) plan benefits, brokerage accounts, stock/profits interest units, and
bank accounts. Petitioner also paid child support and was obligated to pay certain
unsecured debts.
4
Respondent has accepted petitioner's payment in 2012 of $39,600 ($39,600
' $3,300 × 12) to his ex-wife as a payment of alimony deductible under sec.
215(a).
- 12 -
Petitioner and his ex-wife were in the best position to specify how they
wanted the payment at issue to be classified for Federal income tax purposes. As
the Supreme Court of Tennessee noted in Self v. Self, 861 S.W.2d 360, 364 (Tenn.
1993):
In addition to the rights and obligations of the parties with
respect to each other, the liability for taxes, the rights of creditors, and
other significant consequences may depend upon the preciseness of
the language employed in the decree. Construction by the courts of
uncertain and ambiguous language is a poor substitute for careful
articulation.
Moreover, the bonus provision is without condition as to the ex-wife's
entitlement to payments through August 31, 2015. Petitioner has not convinced us
that, even were we to find that payments made pursuant to the bonus provision
were made to assist his ex-wife to adjust to the economic consequences of divorce,
a Tennessee court would, on his ex-wife's death before August 31, 2015, allow
petitioner to cease making payments to her estate. See Vick, 2014 WL 6333965,
at *4 (parties may agree in a marital dissolution agreement that a transitional
alimony obligation shall not be modifiable and courts should hold the parties to
their agreement).
Petitioner has failed to persuade us that his obligation to make payments
under the bonus provision would have ceased if his ex-wife had died before
- 13 -
August 31, 2015, the scheduled end of his obligation to make those payments.
Therefore, the bonus provision fails to satisfy the requirement of section
71(b)(1)(D) that there be no liability to make such payments for any period after
her death. And because it fails to satisfy that requirement, the bonus payment did
not qualify as the payment of alimony within the meaning of section 71.
Therefore, we sustain respondent's adjustment disallowing petitioner's deduction
of $11,547 as alimony. We sustain in full respondent's determination of a
deficiency in tax for 2012.
Decision will be entered
for respondent.