Estate of Goldman v. Commissioner , 112 T.C. 317 ( 1999 )


Menu:
  • ESTATE OF MONTE H. GOLDMAN, DECEASED, CAROLE SCHUTTER, F.K.A CAROLE GOLDMAN, PERSONAL REPRESENTATIVE, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
    Estate of Goldman v. Commissioner
    No. 183-97
    United States Tax Court
    June 1, 1999, Filed

    *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 need

       not 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 and Daniel 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 to sections 61(a)(8) and 71(a)) and deductible by the payor (pursuant to section 215(a)) in the year paid. For tax purposes, the phrase "alimony or separate maintenance payments" is defined in section 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). See Hoover 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 to sections 71 and 215). 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 of section 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 PENALTIES

    The 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), a section 6662 penalty does not apply to any portion of an underpayment if reasonable cause existed and the taxpayers acted in good faith. Pursuant to section 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. See Metra 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 the section 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 in 102 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 of sec. 71(b)(1)(B) is analogous insofar as we find that the agreement made an effective designation without referring expressly to sec. 71 or 215.

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

Cited By (46)

Olekanma v. Comm'r , 105 T.C.M. 1220 ( 2013 )

Hielsberg v. Comm'r , 2012 Tax Ct. Summary LEXIS 34 ( 2012 )

Nahhas v. Comm'r , 2007 Tax Ct. Summary LEXIS 28 ( 2007 )

Reynolds v. Comm'r , 2010 Tax Ct. Summary LEXIS 177 ( 2010 )

Burns v. Comm'r , 2007 Tax Ct. Summary LEXIS 42 ( 2007 )

Fields v. Comm'r , 96 T.C.M. 130 ( 2008 )

Neil Jerome Proctor v. Commissioner , 129 T.C. No. 12 ( 2007 )

Banach v. Comm'r , 2010 Tax Ct. Summary LEXIS 35 ( 2010 )

106 LTD., David Palmlund, Tax Matters Partner v. ... , 136 T.C. 67 ( 2011 )

Shelton v. Comm'r , 102 T.C.M. 489 ( 2011 )

Kouskoutis v. Comm'r , 2012 Tax Ct. Summary LEXIS 62 ( 2012 )

Richard Garcia v. Commissioner , 2012 T.C. Summary Opinion 107 ( 2012 )

McNealy v. Comm'r , 2014 Tax Ct. Summary LEXIS 14 ( 2014 )

Jana Renea Henson v. Commissioner , 2014 T.C. Summary Opinion 36 ( 2014 )

Fisher v. Comm'r , 2016 Tax Ct. Summary LEXIS 10 ( 2016 )

Howard v. Comm'r , 2017 Tax Ct. Summary LEXIS 66 ( 2017 )

Baker v. Commissioner , 79 T.C.M. 2050 ( 2000 )

Derrick v. Comm'r , 2014 Tax Ct. Summary LEXIS 64 ( 2014 )

Espaillat v. Comm'r , 110 T.C.M. 387 ( 2015 )

Dato-Nodurft v. Comm'r , 87 T.C.M. 1338 ( 2004 )

View All Citing Opinions »