Schilling v. Comm'r

T.C. Memo. 2012-256
UNITED STATES TAX COURT
SHARON F. SCHILLING, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 23399-08. Filed September 5, 2012.
Timothy A. Tepe, for petitioner.
Edward Lee Walter, for respondent.
MEMORANDUM OPINION
SWIFT, Judge: Respondent determined a $3,664 deficiency in petitioner’s
2006 Federal income tax.
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[*2] The issue for decision is how much of the $24,700 in support payments
petitioner received from her ex-husband in 2006 should be treated as taxable
alimony income.
Unless otherwise indicated, all section references are to the Internal Revenue
Code in effect for the year in issue, and all Rule references are to the Tax Court
Rules of Practice and Procedure.
Background
This case was submitted under Rule 122. The stipulated facts are so found.
At the time of filing the petition, petitioner resided in North Carolina.
In March 2003, after 24 years of marriage and having five children together,
petitioner and her ex-husband separated. During their marriage and at the time of
their separation petitioner and her ex-husband apparently lived in Ohio.
On April 22, 2003, petitioner and her ex-husband entered into a separation
agreement which specified that her ex-husband would pay her spousal support
of $2,450 per month for six years but which also specified incremental reductions
in the $2,450 spousal support payments as their three youngest children turned 18
or left home for college during their 18th year, whichever occurred later. If the
children did not go to college in their 18th year, the separation agreement
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[*3] specified that the spousal support would be reduced in September of each
child’s 18th year.
Also on April 22, 2003, petitioner and her ex-husband entered into a plan for
shared parenting. This plan was amended in July 2003 and provided--
Father * * * will pay to * * * [petitioner] $0.00 per month, per child.
* * * The deviation from guideline [child] support is made as a result of
the long term spousal support payments in the amount of $2,450 per
month described in the parties separation agreement which are
calculated to provide support for the minor children as well as to
* * * [petitioner].
On October 16, 2003, petitioner and her ex-husband were divorced, and a
decree of divorce was entered by the court of common pleas, Butler County, Ohio,
attached to which was the April 22, 2003, separation agreement. The parties have
stipulated that at the time of the divorce three of their five children were still minors
and had not left home for college. Still living at home were child A, born February
17, 1985, child B, born September 9, 1986, and child C, born August 31, 1988.1
These children resided primarily with petitioner.
1
Petitioner’s first two children are older and are not involved in any way in
this case. Although the parties stipulated that child A was a minor at the time of
petitioner’s divorce from her ex-husband, the record indicates that child A had
reached Ohio’s age of majority of 18 years. See Ohio Rev. Code Ann. sec. 3109.01
(LexisNexis 2008). This distinction is immaterial for our purposes herein.
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[*4] The specific relevant language of the April 22, 2003, separation agreement
provided as follows:
Husband shall pay to * * * [petitioner] spousal support in the amount of
$2,450.00 per month for a period of six years commencing on the first
day of the first month after the date of separation. The amount will be
lessened by $125.00 per month when (1) * * * [child A] turns 18 or
leaves the house for her first year of college, whichever occurs later
and by another $200.00 per month when (2) * * * [child B] turns 18 or
leaves the house for his first year of college, whichever occurs later.
The amount will be lessened by $200.00 per month when (3)
* * * [child C] turns 18 or leaves the house for his first year of college,
whichever occurs later. If for some reason, any of the three
aforementioned children do not go to college at age 18, the amount will
be lessened in September of the 18th year.
Neither the separation agreement nor the divorce decree specified that
petitioner’s ex-husband’s monthly support payments to her would terminate upon
her death.
Per the above separation agreement and divorce decree, petitioner received
spousal support payments on the first of each month, as follows:
From April 2003 through September 2003 (when child A left for college)--
$2,450 per month;
From October 2003 through September 2004 (when child B turned 18)--
$2,325 per month;
From October 2004 through August 2006 (when child C left for college)--
$2,125 per month;
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[*5] From September 2006 through March 2009 (when the six-year spousal
support period ended)--$1,925 per month.
In 2006 petitioner received from her ex-husband monthly support payments of
$2,125 for eight months and $1,925 for four months--a total of $24,700.
On her 2006 Federal income tax return petitioner reported zero taxable
alimony income. On audit respondent treated as taxable alimony income the portion
of the monthly support payments petitioner received each month that was not
subject to a reduction depending on the age or departure for college of any of her
children--namely, $1,925. For 2006 respondent treated a total of $23,100, or 12
times $1,925, as taxable alimony income to petitioner. Respondent treated the
$1,600 balance, or $24,700 minus $23,100, as nontaxable child support.
Discussion
Generally, cash payments a taxpayer receives from a spouse or ex-spouse
under a separation agreement or a divorce decree are to be treated as taxable
alimony income unless the payments are designated as nontaxable child support or
unless the payments are to continue after the death of the taxpayer. See sec. 71(a),
(b)(1)(D), (c)(1).
Petitioner cites the Commissioner’s temporary regulations, see sec. 1.71-1T,
Q&A-11 and 12, Temporary Income Tax Regs., 49 Fed. Reg. 34451, 34457 (Aug.
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[*6] 31, 1984), and asserts that the failure in the separation agreement or divorce
decree to expressly state that the spousal support payments were to terminate on her
death precludes the payments from being treated as taxable alimony.
Petitioner overlooks the fact that in 1986 Congress amended section 71 to
provide that alimony treatment is not limited to situations where a separation
agreement or a divorce decree expressly states that the support payments are to
terminate upon the death of the payee spouse. See Tax Reform Act of 1986, Pub. L.
No. 99-514, sec. 1843(b), 100 Stat. at 2853; see also Hoover v. Commissioner, 102
F.3d 842, 846 (6th Cir. 1996), aff’g T.C. Memo. 1995-183; IRS Notice 87-9, 1987-
1 C.B. 421. Under the 1986 amendment, payments received under a written
agreement--such as the separation agreement between petitioner and her ex-
husband--generally are also to be treated as taxable alimony for Federal income tax
purposes if under State law the payor’s obligation to make the payments terminates
upon death of the payee spouse. See Rood v. Commissioner, T.C. Memo. 2012-122
(noting that “the court first looks for an unambiguous termination provision in the
divorce decree * * * [and] if there is no unambiguous termination provision, then
* * * to whether the payments would terminate at the payee’s death by operation of
State law”).
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[*7] Here, neither the separation agreement nor the divorce decree states clearly
whether the spousal support payments are to terminate upon petitioner’s death.
However, Ohio law so provides, and accordingly under the above general rule the
payments petitioner received from her ex-husband would be treated as alimony
income. See Ohio Rev. Code Ann. sec. 3105.18(B) (LexisNexis 2008); see also
Hoover v. Commissioner, 102 F.3d at 844-847; Heffron v. Commissioner, T.C.
Memo. 1995-253, aff’d without published opinion sub nom. Murley v.
Commissioner, 104 F.3d 361 (6th Cir. 1996); Meeks v. Meeks, 2006 WL 328685
(Ohio Ct. App. Feb. 14. 2006).
Section 71(c), however, goes on to provide that alimony treatment under
section 71(a) will not apply to the portion of a spousal support payment which
under a separation agreement or divorce decree is payable for the support of
children of the marriage. Further, section 71(c)(2) provides that if the amount
of spousal support to be paid under a separation agreement or divorce decree is to
be reduced either on the happening of a contingency specified in the agreement
relating to a child (e.g., attaining a specified age or leaving for school), see sec.
71(c)(2)(A), or at a time that can clearly be associated with such a contingency,
see sec. 71(c)(2)(B), an amount equal to the amount of the reduction will be
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[*8] treated as child support. Sec. 71(c)(2)(A) and (B); Berry v. Commissioner,
T.C. Memo. 2005-91.
Petitioner argues that the March 31, 2009, termination of all further spousal
support from her ex-husband constituted a fourth reduction in support relating to the
children and therefore that the entire $24,700 she received in 2006 constituted
nontaxable child support.
Respondent argues that the March 31, 2009, termination of all further spousal
support was not a reduction clearly associated with a contingency relating to
petitioner’s children. We agree with respondent.
Section 71(c)(2)(B) does not define the term “clearly associated with”, but
the Commissioner’s temporary regulations explain two “situations” that are to be
presumed to be “clearly associated with” a contingency relating to a child, as
follows:
Q-18. When will a payment be treated as to be reduced at a time
which can clearly be associated with the happening of a contingency
relating to a child of the payor?
A-18. There are two situations, described below, in which payments
which would otherwise * * * [be treated as] as alimony or separate
maintenance payments will be presumed [under the temporary
regulations] to be reduced at a time clearly associated with the
happening of a contingency relating to a child of the payor. In all
other situations, reductions in payments will not be treated as clearly
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[*9] associated with the happening of a contingency relating to a child
of the payor.
The first situation referred to above is where the payments are to
be reduced not more than 6 months before or after the date the child is
to attain the age of 18, 21, or local age of majority [in Ohio 18]. The
second situation is where the payments are to be reduced on two or
more occasions which occur not more than one year before or after a
different child of the payor spouse attains a certain age between the
ages of 18 and 24, inclusive. The certain age referred to in the
preceding sentence must be the same for each such child, but need not
be a whole number of years.
The presumption in the two situations described above that
payments are to be reduced at a time clearly associated with the
happening of a contingency relating to a child of the payor may be
rebutted (either by the Service or by taxpayers) by showing that the
time at which the payments are to be reduced was determined
independently of any contingencies relating to the children of the
payor. The presumption in the first situation will be rebutted
conclusively if the reduction is a complete cessation of alimony or
separate maintenance payments during the sixth post-separation year
* * * . [Sec. 1.71-1T, Q&A-18, Temporary Income Tax Regs., 49 Fed.
Reg. 34451, 34457 (Aug. 31, 1984); emphasis supplied.]
Each of the first three reductions in the spousal support payments petitioner
received from her ex-husband was made because one of the three youngest
children either reached 18 or left for college, and, as explained, respondent has
recognized those events as contingencies relating to the three children under section
72(c)(A).
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[*10] The March 31, 2009, termination (after six years of payments) of all further
support payments to petitioner occurred within six months of child C’s 21st
birthday, but the presumption applicable to the first situation described in the
temporary regulations (that support payments would be treated as related to a
contingency relating to a child under section 72(c)(B)) is “conclusively rebutted”
here because of the rule stated in the last quoted sentence of the temporary
regulations--namely, a complete cessation of support payments during the sixth
postseparation year does not qualify as a contingency relating to a child.
Under the Commissioner’s temporary regulations, no conclusive rebuttal
rule appears to apply to negate the presumption applicable to the second situation
described in the temporary regulations. However, as indicated above, the second
situation involves multiple reductions in payments where each reduction occurs
within a specified time in relation to a different child of the taxpayer. Thus, to be
treated as child support under the second situation described in the temporary
regulations, each of the four reductions in support payments made in this case
would have to have been associated with a different child of petitioner (i.e.,
petitioner would have to have had four children whose specified birthdays
occurred within the time window of the second situation). Petitioner had three
children whose birthdays appear to fall within that window, but not a fourth
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[*11] “different” child. Therefore, the fourth (or March 31, 2009) reduction or
termination of support payments does not qualify under the second situation
described in the temporary regulations, and no presumption of child support
treatment applies thereto.
We reject petitioner’s efforts to classify under the temporary regulations the
March 31, 2009, termination of spousal support as a fourth reduction clearly
associated with a contingency relating to a child. On March 31, 2009, a complete
cessation of support payments occurred, and on the evidence before us that
cessation has not been clearly associated with a contingency relating to a child.2
Finally, the amended shared parenting plan between petitioner and her ex-
husband provided that her ex-husband would pay her child support of “$0.00 per
2
Petitioner argues the application of the so-called taint test under the
Commissioner’s temporary regulations--described in some detail in the BNA
“Separation and Divorce” Tax Management portfolio--supports the applicability of
sec. 71(c)(2)(B) to the “fourth reduction in spousal support” at issue herein. See
Cindy Lynn Woffard, Divorce and Separation, 515-2d Tax Mgmt. (BNA), at A-18-
A-20. That portfolio, however, notes in particular that “[i]t is not clear how the
* * * [taint test] is to be applied if there are three or more reductions due to the
existence of three or more children.” As respondent notes on brief, in the examples
of the taint test found in the BNA portfolio, the number of reductions that are tested
under the above-cited temporary regulations always matches the number of minor
children of the taxpayer. It appears that the amount of spousal support payments
remaining after all child-related reductions are taken into account is not considered
to be child support, and the so-called taint test is not applicable to that amount.
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[*12] month, per child * * * [and that] the amount of $2,450 per month described in
the parties separation agreement * * * [is] calculated to provide support for the
minor children as well as * * * [petitioner].” Here, the monthly spousal support
payments were for the support and maintenance of petitioner and the three minor
children. Because neither the separation agreement, the divorce decree, nor the
shared parenting plan specifically designated any portion of the spousal support
payments for the support of the children, the entire amount of such payments is
includible in petitioner’s income as alimony, subject to respondent’s adjustments
discussed above. See sec. 1.71-1(e), Income Tax Regs.; see also Maes v. United
States, No. CV-09-42-H-DWM, 2010 U.S. Dist. LEXIS 109205, at *9 (D. Mont.
Oct. 13, 2010) (“If the payee can exercise complete discretion on how to spend the
payment, and the parties did not clearly calculate part of the payment to constitute
child support, then the entire payment is alimony and taxable to the payee.”).
After the three adjustments for the child support portion of the spousal
support payments she received in 2006, petitioner has not demonstrated that these
payments should be treated as something other than alimony.
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[*13] To reflect the foregoing,
Decision will be entered
for respondent.