Bedwell v. Comm'r

T.C. Summary Opinion 2008-139
UNITED STATES TAX COURT
MICHAEL WAYNE AND JOAN ELIZABETH BEDWELL, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 18801-06S. Filed November 3, 2008.
Michael Wayne Bedwell and Joan Elizabeth Bedwell, pro sese.
David Q. Cao, for respondent.
GERBER, 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 Pursuant to section 7463(b), the
decision to be entered is not reviewable by any other court, and
1
Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for 2004, the taxable year in
issue, and all Rule references are to the Tax Court Rules of
Practice and Procedure.
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this opinion shall not be treated as precedent for any other
case.
Respondent determined a $938 deficiency in petitioners’ 2004
Federal income tax. The deficiency determination was based on
the disallowance of a $6,500 deduction petitioner husband claimed
as alimony on petitioners’ 2004 Federal income tax return. The
question we consider is whether petitioners are entitled to the
$6,500 alimony deduction.
Background2
Petitioners resided in Texas at the time their petition was
filed. Petitioner Michael Bedwell (Mr. Bedwell) was married to
petitioner Joan Elizabeth Bedwell (Mrs. Bedwell) during 2004.
Mr. Bedwell was married to Karen Melissa Edwards (Ms. Edwards)
until June 14, 2003, when they were divorced.
The final divorce decree contained a detailed division of
property between Mr. Bedwell and Ms. Edwards. Each party was
allowed to retain his or her personal property, and to be
responsible for any debt connected with the delineated personal
property. Each party was also allowed to keep his or her
individual retirement accounts (IRAs). Mr. Bedwell was allowed
to keep his real property in Texas and jointly owned real
property in Tennessee.
2
The parties’ stipulation of facts and attached exhibits is
incorporated by this reference.
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On the basis of testimony and record of the divorce
proceeding, Mr. Bedwell was ordered to pay Ms. Edwards $13,000,
of which $6,500 was payable during 2003 and $6,500 was payable on
either the sale of the jointly owned real property in Tennessee,
or March 1, 2004, whichever was earlier. The divorce decree does
not specifically denominate the purpose of the $13,000 payment;
i.e., whether it was alimony or a property settlement, or whether
the requirement to make the two annual payments would terminate
upon the death of either party. The value of the Tennessee real
property was not set forth in the decree, and it was not
designated as the source of the $13,000 in payments to Ms.
Edwards. In accordance with the divorce decree, Mr. Bedwell made
equal $6,500 payments to Ms. Edwards during 2003 and 2004.
In connection with the divorce proceeding, the deposition of
Ms. Edwards was taken on December 11, 2002. Ms. Edwards received
only limited amounts of monthly income. She was able to live
with friends and incurred only nominal living expenses. She did
some work at a horse farm in exchange for board and food for her
horses and was rarely paid anything in exchange for her work.
Ms. Edwards was also a substitute aerobics instructor and
occasionally received $15 for teaching a class. Ms. Edwards had
outstanding debt obligations that relatives and others were
helping to pay.
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Petitioners, on March 6, 2005, timely filed their 2004
Federal income tax return on which they claimed as an alimony
deduction the $6,500 payment to Ms. Edwards.
Discussion
The sole question we consider is whether the $6,500 payment
made to Ms. Edwards was alimony or part of a property settlement.
On brief, respondent argues that he bears no burden in this case.
Petitioners have not questioned respondent’s argument and,
instead, argue that the evidence in the record would support our
holding that the $6,500 payment is deductible alimony.
Accordingly, to the extent relevant, petitioners bear the burden
of proof in this proceeding. See sec. 7491; Rule 142(a).
Section 215(a) allows a deduction for alimony paid during a
taxable year. Section 215(b) broadly defines “alimony” as a
payment includable in the gross income of the recipient. Section
71(b)(1) provides that a payment is “alimony or separate
maintenance” if:
(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
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(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 parties are in agreement that the first three
requirements of section 71(b)(1) are met. Their disagreement
focuses upon whether the fourth requirement is met. The question
of whether Mr. Bedwell was required to make the $6,500 payments
after Ms. Edwards’s death is a matter to be decided under the law
of the State of Tennessee. In an unreported case the Tennessee
court of appeals explained as follows the preference under
Tennessee law for rehabilitative and transitional spousal
support:
There are four separate classes of spousal support
in Tennessee, including rehabilitative alimony,1
alimony in futuro (or periodic alimony),2 alimony in
solido (or lump-sum alimony),3 and transitional
alimony.4 Tennessee law recognizes a statutory
preference for rehabilitative spousal support and
transitional spousal support. T.C.A. § 36-5-
101(C)(Supp. 2004) (now § 36-5-121(d)(2)); Bratton v.
Bratton, 136 S.W.3d 595, 605 (Tenn. 2004); Perry v.
Perry, 114 S.W.3d 465, 467 (Tenn. 2003); Crabtree v.
Crabtree, 16 S.W.3d 356, 358 (Tenn. 2000). This
statutory preference does not entirely displace the
other forms of spousal support when the facts of the
case warrant long-term or more open-ended support.
Aaron v. Aaron, 909 S.W.2d 408, 410 (Tenn. 1995);
Isbell v. Isbell, 816 S.W.2d 735, 739 (Tenn. 1991).
1
T.C.A. § 36-5-101(d)(1)(C) (Supp. 2004) (now recodified
at T.C.A. § 36-5-121).
2
T.C.A. § 36-5-121(f).
3
T.C.A. § 36-5-121(h).
4
T.C.A. § 36-5-101(d)(1)(D) (Supp. 2004) (now recodified
at T.C.A. § 36-5-121(g)).
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Gillespie v. Gillespie, No. E2006-00734-R3-CV, slip op. at 4
(Tenn. Ct. App. Dec. 19, 2006).
Petitioners argue that the $6,500 payments constituted
rehabilitative or transitional alimony. Rehabilitative or
transitional alimony terminates upon the death of the recipient.
Tenn. Code Ann. sec. 36-5-101(d)(1) and (2) (Supp. 2004).
Accordingly, if the $6,500 payment is in futuro, transitional, or
rehabilitative alimony under Tennessee law, Mr. Bedwell would be
entitled to a $6,500 deduction, and if it is in solido he would
not be so entitled.
The Tennessee rehabilitative support and maintenance
statute, in relevant part, provides as follows:
(d)(1) It is the intent of the general assembly that a
spouse, who is economically disadvantaged, relative to
the other spouse, be rehabilitated whenever possible by
the granting of an order for payment of rehabilitative,
temporary support and maintenance. Where there is such
relative economic disadvantage and rehabilitation is
not feasible in consideration of all relevant factors,
including those set out in this subsection, then the
court may grant an order for payment of support and
maintenance on a long-term basis or until the death or
remarriage of the recipient except as otherwise
provided in subdivision (a)(3). Rehabilitative support
and maintenance is a separate class of spousal support
as distinguished from alimony in solido and periodic
alimony. In determining whether the granting of an
order for payment of support and maintenance to a party
is appropriate, and in determining the nature, amount,
length of term, and manner of payment, the court shall
consider all relevant factors, including:
(A) The relative earning capacity, obligations,
needs, and financial resources of each party,
including income from pension, profit sharing or
retirement plans and all other sources;
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(B) The relative education and training of each
party, the ability and opportunity of each party
to secure such education and training, and the
necessity of a party to secure further education
and training to improve such party's earning
capacity to a reasonable level;
(C) The duration of the marriage;
(D) The age and mental condition of each party;
(E) The physical condition of each party,
including, but not limited to, physical disability
or incapacity due to a chronic debilitating
disease;
(F) The extent to which it would be undesirable
for a party to seek employment outside the home
because such party will be custodian of a minor
child of the marriage;
(G) The separate assets of each party, both real
and personal, tangible and intangible;
(H) The provisions made with regard to the
marital property as defined in § 36-4-121;
(I) The standard of living of the parties
established during the marriage;
(J) The extent to which each party has made such
tangible and intangible contributions to the
marriage as monetary and homemaker contributions,
and tangible and intangible contributions by a
party to the education, training or increased
earning power of the other party;
(K) The relative fault of the parties in cases
where the court, in its discretion, deems it
appropriate to do so; and
(L) Such other factors, including the tax consequences
to each party, as are necessary to consider the equities
between the parties.
Tenn. Code Ann. sec. 36-5-101(d)(1) (West 2002).
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Transitional alimony was enacted in a 2003 Tennessee
statute, which in pertinent part provides as follows:
Transitional alimony means a sum of money payable
by (1) one party to, or on behalf of, the other
party for a determinate period of time.
Transitional alimony shall terminate upon the
death of the recipient and as provided in
subdivision (a)(3) which provision shall apply to
transitional alimony * * * . Transitional alimony
is 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, legal separation or other proceeding
where spousal support may be awarded, such as a
petition for an order of protection.
Tenn. Code Ann. sec. 36-5-101(d)(1)(D) (West 2003).
Respondent contends the transitional alimony statutory
provision may not have been enacted at the time of the issuance
of the divorce decree. The provision was to have taken effect
“upon becoming law”. 2003 Tenn. Pub. Acts ch. 305. Although the
provision contains the statement that it was “signed into law on
August 8, 2003”, there is a legislative amendment to the
provision indicating that chapter 305 was approved by the
Governor on June 11, 2003. This is significant, because the
divorce decree is dated June 14, 2003. Id. n.1.
We have considered the record and conclude and hold that
the $6,500 payment was deductible alimony. The record presents a
factual pattern that fits within the Tennessee statutory and
caselaw definitions for rehabilitative or transitional support or
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maintenance.3 We note that Tennessee law contains a statutory
preference for rehabilitative spousal support and transitional
spousal support. Tenn. Code. Ann. sec. 36-5-101(d)(1)(C) (Supp.
2004).
The divorce decree contains a detailed division of the
property of the parties. After the division of property, the
decree provides for payments to Ms. Edwards over and above the
property division. The evidence in the record shows that Ms.
Edwards was not in a position to support herself and the property
provided for her in the decree was subject to debt and she was
also accruing monthly expenditures (such as expenses for her
horses which were being boarded by others). In addition, Ms.
Edwards had no means of support other than the nominal amounts
she was earning, which fell far short of her obligations and
incurred expenses. The $6,500 payments were obviously designed
to temporarily rehabilitate Ms. Edwards’s financial situation and
to give her time to become financially self-sufficient. To that
effect, the decree of the payments fits exactly within the intent
and definition of rehabilitative alimony, which terminates upon
the death of either party.
3
Because we have decided that the rehabilitative provision
applies, it is unnecessary to decide the effective date of the
transitional alimony provision. It is noted, however, that
reliance on the transitional alimony provision would also have
resulted in a holding for petitioners.
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Finally, we note that it is highly unlikely that the $6,500
payments were part of the property division. Each party was
given a substantial amount of property. The property was their
separate property with the exception of a jointly owned parcel of
realty in Tennessee. The payments, however, were not conditioned
on the sale of the Tennessee real property, and there is no
indication in the record that the Tennessee property was burdened
by debt, purchased with assets of Ms. Edwards, and/or had any
equity or value. Accordingly and although the divorce decree
was not specific, the award of the temporary alimony is, under
the facts of this case, not a property settlement.
To reflect the foregoing,
Decision will be entered
for petitioners.