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ESTATE OF MONTE H. GOLDMAN, DECEASED, CAROLE SCHUTTER, F.K.A CAROLE GOLDMAN, PERSONAL REPRESENTATIVE, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentEstate of Goldman v. CommissionerNo. 183-97June 1, 1999, Filed
United States Tax Court *24 Decision will be entered under Rule 155.
On Nov. 12, 1985, H and W executed a Property Settlement
Agreement (the agreement) in connection with their divorce; the
agreement was approved by the divorce court. Par. 2 of the
agreement provides for a division of marital property. Par.
2.2.9 of the agreement provides that "In furtherance of the
equitable division of property" H shall pay W $ 20,000 a month
for 240 months. The monthly payments terminate at W's death.
Par. 6.5 of the agreement provides that all transfers of
property are to be subject to the provisions of
sec. 1041 ,I.R.C., and shall be reported on H and W's income tax returns
"as a non-taxable event". The agreement further provides that
both W and H waive spousal support.
H received an opinion letter from a law firm that the
$ 20,000 monthly payments were deductible as alimony. On H's
1992, 1993, and 1994 Federal income tax returns, the payments
(totaling $ 240,000 per year) were characterized and deducted as
alimony. R determined the $ 240,000 payments H made to W in 1992,
1993, and 1994 were not alimony and therefore not deductible. *25 R
further determined that H's estate (H died in January 1995) is
liable for an accuracy-related penalty under
sec. 6662(a) ,I.R.C., for 1992, 1993, and 1994.
HELD: In ascertaining the applicability of subpar. (B) of
sec. 71(b)(1), I.R.C. , the divorce or separation instrument neednot mimic the statutory language of the subparagraph. The
agreement reflects the substance of a nonalimony designation.
Consequently, the $ 20,000 monthly payments H made to W in 1992,
1993, and 1994 are not deductible as alimony.
HELD FURTHER: Because H reasonably and in good faith relied
on the advice of an experienced, competent tax counsel, R's
determination imposing the
sec. 6662(a), I.R.C. , accuracy-related penalties is not sustained.
Dan A. Sciullo andDaniel S. Duggan , for petitioner.Michael W. Lloyd, for respondent.Jacobs, Julian I.JACOBS*318 JACOBS, JUDGE: In the notice of deficiency respondent determined the following income tax deficiencies and accuracy- related penalties:
Penalty
_______
Year *28 Deficiency
Sec. 6662(a) ____ __________ ____________
1992 $ 141,645 $ 27,779
1993 97,891 19,578
1994 57,226 11,445
_____________________________________________________________________
After resolving a protective adjustment for the year 1992 (involving the deduction of expenses of an S corporation which passed through to Monte H. Goldman), the parties agree that the amounts of deficiencies and accuracy-related penalties now at issue are:
Penalty
_______
Year Deficiency
Sec. 6662(a) ____ __________ ____________
1992 $ 75,707 $ 15,141
1993 97,891 19,578
1994 54,793 10,959
_____________________________________________________________________
*319 The issues remaining for decision are: (1) Whether payments of $ 240,000 Monte H. Goldman made to Sally Parker during*29 each year in issue were properly deductible as alimony, and (2) whether a
section 6662(a) accuracy-related penalty is applicable to each year in issue.All section references are to the Internal Revenue Code, and all Rule references are to the Tax Court Rules of Practice and Procedure.
FINDINGS OF FACT
Some of the facts have been stipulated, and the stipulation of facts is incorporated in our findings by this reference.
Monte H. Goldman resided in Colorado on January 10, 1995, the date of his death. Carole Schutter (formerly Carole Goldman), the personal representative of the Estate of Monte H. Goldman (hereinafter referred to as petitioner), resided in Colorado at the time the petition was filed.
On July 31, 1974, Mr. Goldman and Sally Goldman (presently known as Sally Parker and hereinafter referred to as Ms. Parker) married. They had two children, one born in 1978 and a second in 1979. On or about November 23, 1983, Mr. Goldman and Ms. Parker separated and did not live together during the years in issue. Subsequently, Ms. Parker (plaintiff) filed a Complaint for Divorce for the dissolution of her marriage to Mr. Goldman (defendant) in the Family Court of First Circuit, County of*30 Honolulu, State of Hawaii. On August 12, 1985, a Final Decree of Divorce was entered.
Both Mr. Goldman and Ms. Parker had their own tax, as well as divorce, counsel. On November 12, 1985, they executed a "Property Settlement Agreement" (the agreement) as part of the divorce proceedings. The divorce court approved this Agreement. The relevant portions of the agreement provide as follows:
*320 1.5 Plaintiff and Defendant desire and
intend by this Agreement to execute a
complete, final and permanent settlement and
adjustment of all property, support and other
financial rights, obligations, interests,
claims and disputes of every kind and nature,
arising from, connected with or related to,
their marital relationship, including, but not
limited to, the Defendant's contention that
there is no marital property and Plaintiff's
claims that there is substantial marital
property.
2. DISPOSITION OF MARITAL PROPERTY AND SEPARATE
PROPERTY:
2.1 Plaintiff and Defendant declare that
they desire to divide the marital assets and
*31 liabilities so that the division of the
marital property is equitable. * * *
2.2 Subject to the conditions
hereinafter set forth, Defendant hereby
conveys, transfers, and assigns to Plaintiff,
as her sole and separate property, all of his
right, title and interest in and to the
following:
2.2.1 The condominium located at
0155 Lone Pine Road, Aspen, Colorado
* * *
2.2.2 The sum of TWO HUNDRED
FIFTY THOUSAND DOLLARS ($ 250,000)
paid on August 21, 1985, receipt of
which the Plaintiff hereby
acknowledges.
The following sums to be paid on or
before five o'clock p.m. on August
28, 1985:
a. Three Million Seven
Hundred Fifty Thousand Dollars
($ 3,750,000.00).
b. Five Hundred Forty
Thousand Dollars ($ 540,000.00).
c. The sum of Five Hundred
Fifteen Thousand Dollars
($ 515,000.00) payable to John S.
*32 Edmunds, Plaintiff's attorney, as
and for attorneys' fees for legal
services performed by Mr. Edmunds
and others on behalf of Plaintiff in
this action.
* * * * * * *
2.2.9 FURTHER PAYMENTS FOR PROPERTY
DIVISION:
In furtherance of the equitable
division of property, Defendant
shall pay to Plaintiff the sum of
Twenty Thousand Dollars ($ 20,000.00)
per month for a period of 240 months
commencing August 21, 1985. Receipt
of the payment of August 21, 1985 is
hereby acknowledged. These monthly
payments shall terminate and be
discharged upon death of Plaintiff.
The obligation contained herein
shall survive Defendant's death and
be a lien against his estate.
Defendant shall have no right to
prepay these monthly payments.
* * * * * * *
6.5 The parties intend and agree that all transfers*33 of
property as provided for herein are subject to the
provisions of
Section 1041, Internal Revenue Code of 1954 ,as amended, entitled, "Treatment of Transfers of Property
Between Spouses or Incident to Divorce", and that they
shall be accounted for and reported on his or her
respective individual income tax returns in such a manner
so that no gain or loss shall be recognized as a result of
the division and transfer of property as provided for
herein. Each party shall file his or her Federal and State
tax returns, and report *321 his or her income and losses
thereon, consistent with the foregoing intent of reporting
the division and transfers of property as a non-taxable
event. * * *
6.6 Plaintiff shall pay, and hold Defendant harmless
from, all Federal and State income taxes due as a result of
the receipt by her in 1984 and 1985 of temporary spousal
support, and on account of the receipt by her of unreported
income from her separate property earned during marriage,
in excess of losses, deductions*34 and credits attributable
thereto.
7. SPOUSAL SUPPORT WAIVER:
The parties acknowledge that as a result of the funds
as and for property division and the release of marital
rights and claims which Plaintiff is to receive as provided
for herein she has no need for spousal support. Plaintiff
expressly waives her right to spousal support from
Defendant. Defendant expressly waives his right to spousal
support from Plaintiff.
In 1985, Mr. Goldman made the required payments (totaling $ 5,055,000) pursuant to paragraph 2.2.2.
Pursuant to paragraph 2.2.9 of the agreement, Mr. Goldman paid Ms. Parker $ 20,000 per month during each of the years in issue (totaling $ 240,000 each year). On his 1992, 1993, and 1994 Federal income tax returns, he characterized these $ 240,000 payments as alimony and took corresponding deductions. Ms. Parker did not report these payments as alimony on her 1992-94 returns.
Mr. Goldman received an opinion letter, dated December 28, 1990, from the law firm of Kornfeld & Franklin of Oklahoma City, Oklahoma, with regard to the deductibility of the $ 240,000 payments on his*35 returns. This letter advised Mr. Goldman that, pursuant to the agreement, he was entitled to deduct these payments as alimony.
In the notice of deficiency, respondent determined that the $ 240,000 payments Mr. Goldman made to Ms. Parker in 1992, 1993, and 1994 are not alimony and thus not deductible. Respondent further determined that petitioner is liable for the
section 6662(a) accuracy-related penalty for each of the years in issue.OPINION
ISSUE 1. DEDUCTIBILITY OF PAYMENTS MR. GOLDMAN CHARACTERIZED AS ALIMONY
The fundamental issue involved herein concerns the characterization of the $ 20,000 monthly payments Mr. Goldman made to Ms. Parker during 1992, 1993, and 1994. Petitioner *322 claims these payments constitute alimony; respondent claims these payments represent a division of marital property. The tax consequences to both the payor and recipient vary significantly depending upon the characterization of these payments.
Generally, property settlements (or transfers of property between spouses) incident to a divorce neither are taxable events nor give rise to deductions or recognizable income. See
sec. 1041 . On the other hand, amounts received as alimony or separate maintenance payments*36 are taxable to the recipient (pursuant tosections 61(a)(8) and71(a) ) and deductible by the payor (pursuant tosection 215(a) ) in the year paid. For tax purposes, the phrase "alimony or separate maintenance payments" is defined insection 71(b)(1) as any cash payment meeting the following four criteria:(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
(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 *37 cash or property) as a
substitute for such payments after the death
of the payee spouse.
Section 71 was amended by the Deficit Reduction Act of 1984, Pub. L. 98-369, sec. 422(a), 98 Stat. 494, 795, to establish an objective standard to distinguish between a payment received in the division of property (which is not includable in gross income) and a payment received as spousal support (which is includable in gross income). SeeHoover v. Commissioner, 102 F.3d 842">102 F.3d 842 , 845 (6th Cir. 1996), affg.T.C. Memo 1995-183">T.C. Memo 1995-183 ; see also H. Rept. 98-432 (Part 2), at 1495 (1984) ("The committee bill attempts to define alimony in a way that would conform to general notions of what type of payments constitute alimony as distinguished from property settlements and to prevent the deduction of large, one-time lump-sum property settlements.").*323 The parties agree that Mr. Goldman's $ 20,000 monthly payments to Ms. Parker satisfy subparagraphs (A), (C), and (D) of
section 71(b)(1) . Therefore, the dispositive question is whether these monthly payments satisfy the requirement of subparagraph (B), which treats a payment as nonalimony if the*38 governing divorce or separation instrument designates the payment as such.In ascertaining the applicability of subparagraph (B) of
section 71(b)(1) , we believe the divorce or separation instrument need not mimic the statutory language of the subparagraph (e.g., the instrument need not specifically refer tosections 71 and215 ). Rather, in our opinion, the divorce or separation instrument contains a nonalimony designation if the substance of such a designation is reflected in the instrument.In the instant case, the language of the agreement is unambiguous; it clearly makes known that the $ 20,000 monthly payments Mr. Goldman made to Ms. Parker constitutes a division of marital assets and not spousal support. The payments at issue were made pursuant to paragraph 2.2.9 of the agreement, entitled "Further Payments for Property Division". That paragraph specifically states that the $ 20,000 monthly payments were "In furtherance of the equitable division of property." Moreover, paragraph 7 of the agreement provides that "as a result of the funds AS AND FOR PROPERTY DIVISION * * * Plaintiff [Ms. Parker] expressly waives her right to spousal support from Defendant [Mr. Goldman]." (Emphasis*39 added.)
The agreement contains a clear, explicit and express direction that the $ 20,000 monthly payments are not to be includable in Ms. Parker's income. See
Richardson v. Commissioner, 125 F.3d 551">125 F.3d 551 , 556 (7th Cir. 1997), affg.T.C. Memo 1995-554">T.C. Memo 1995-554 . The agreement mandates nonalimony treatment of the payments through paragraph 6.5 of the agreement which provides that the payments in question are to be subject to the provisions ofsection 1041 and reported on the parties' tax returns as a nontaxable event.Reading the agreement from a reasonable, commonsense perspective, we find that it contains a nonalimony designation within the purview of subparagraph (B) of
section *324 71(b)(1) . *40 We have considered the remaining arguments made by the parties, and to the extent not discussed above, find them to be without merit.ISSUE 2.
SECTION 6662(a) ACCURACY-RELATED PENALTIESThe other issue for decision concerns the applicability of the
section 6662(a) accuracy-related penalties. Respondent contends that Mr. Goldman substantially understated his tax for the years in issue and is accordingly liable for the penalties. Petitioner disagrees.Pursuant to
section 6664(c)(1) , asection 6662 penalty does not apply to any portion of an underpayment if reasonable cause existed and the taxpayers acted in good faith. Pursuant tosection 1.6664-4(b)(1), Income Tax Regs. , all facts and circumstances must be examined in order to determine whether a taxpayer acted with reasonable cause and in good faith.Petitioner contends that we should not sustain respondent's imposition of the
section 6662(a) accuracy-related penalties because Mr. Goldman received and relied upon an opinion letter prepared by experienced tax counsel. In order to establish good faith reliance on the advice of an adviser, the taxpayer must prove that: (1) He gave the return preparer complete and accurate information, *41 (2) an incorrect return was a result of the preparer's mistakes, and (3) the taxpayer believed in good faith that he was relying on a competent return preparer's advice. SeeMetra Chem Corp. v. Commissioner, 88 T.C. 654">88 T.C. 654 , 662 (1987). These requirements have been met in this case. Consequently, we do not sustain *325 respondent's determination imposing thesection 6662(a) accuracy-related penalties.To reflect the foregoing,
Decision will be entered under Rule 155.
Footnotes
1. In
Hawkins v. Commissioner, 86 F.3d 982">86 F.3d 982 (10th Cir. 1996), the Court of Appeals for the Tenth Circuit, where an appeal of this case would lie, reversed our decision in102 T.C. 61">102 T.C. 61 (1994), regarding the specificity requirements of sec. 414(p)(2). The Court of Appeals held that an agreement awarding petitioner wife $ 1 million from her husband's pension plan was a qualified domestic relations order which shifted the income tax liability to the wife. Although the facts and operative Code section involved in this case differ from those involved in Hawkins, our reading of the specificity requirements ofsec. 71(b)(1)(B) is analogous insofar as we find that the agreement made an effective designation without referring expressly tosec. 71 or215↩ .
Document Info
Docket Number: No. 183-97
Citation Numbers: 112 T.C. 317, 1999 U.S. Tax Ct. LEXIS 24, 112 T.C. No. 21
Judges: "Jacobs, Julian I."
Filed Date: 6/1/1999
Precedential Status: Precedential
Modified Date: 10/19/2024