Burns v. Comm'r

T.C. Summary Opinion 2007-43
UNITED STATES TAX COURT
MARGARET CAROL BURNS, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 5724-05S. Filed March 15, 2007.
Margaret Carol Burns, pro se.
Marshall R. Jones, for respondent.
GALE, 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 the
opinion shall not be treated as a precedent for any other case.
1
Unless otherwise indicated, all subsequent section
references are to the Internal Revenue Code of 1986 as in effect
for the taxable year in issue.
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Respondent determined a deficiency in petitioner's Federal
income tax for 2002 of $2,745. The sole issue for decision is
whether certain payments petitioner received from her former
spouse during 2002 are includible in petitioner's income under
section 71(a).
Background
Some of the facts have been stipulated and are so found. We
incorporate by this reference the stipulation of facts and the
exhibits attached thereto. At the time the petition was filed,
petitioner resided in Pensacola, Florida.
Petitioner and William Mills Burns (Mr. Burns) were married
in March 1989 and lived together as husband and wife in a house
they mutually owned (marital home) until their separation around
August 2000. After their separation, Mr. Burns did not reside in
the marital home. Early in 2001, petitioner and Mr. Burns
discussed and agreed to the terms for dividing their property and
divorcing. Petitioner summarized the general terms of their
agreement in a handwritten outline. The outline provided, inter
alia, that (1) the marital home was to be sold with 60 percent of
the net proceeds going to petitioner and the remaining 40 percent
going to Mr. Burns, (2) petitioner would have sole use of the
marital home until the sale was complete, and (3) Mr. Burns would
pay petitioner "$1400 a month for house, yard, & animals, until
house sells", and "$500 a month after house sells until I
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[petitioner] can draw SS [Social Security]". Petitioner took the
outline to an attorney who had been retained by her (through her
legal services plan at work) for the purpose of obtaining the
couple's divorce.
Petitioner explained the outline to the attorney, including
the fact that the $1,400 monthly payment to her from Mr. Burns
was to contribute toward the payment of the expenses of the
marital home and the couple's mutually owned elderly pets,
including debt service on the mortgage and the cost of preparing
the marital home for sale, and was to be taxable to Mr. Burns.
Petitioner further explained that the couple had agreed that the
$500 monthly payments by Mr. Burns to petitioner after the
marital home was sold, until such time as she began receiving
Social Security benefits, were to be taxable to petitioner.
The attorney thereafter drafted a Marital Settlement
Agreement (MSA) for petitioner and Mr. Burns to review and sign.
The MSA included provisions intended to memorialize the Burnses'
agreements with respect to the division of all of their marital
debts and all of their real and personal property. It also
contained provisions whereby petitioner and Mr. Burns
relinquished any rights they may have had to each other's
"retirement accounts, pensions, profit sharing plans, etc.", and
released one another from all other claims and demands of any
nature except as provided for in the MSA. The MSA included an
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integration clause specifying that the MSA constituted the
parties' entire agreement and that it superseded any prior
understanding or agreements between them.
With respect to the $1,400 and $500 monthly payment
obligations agreed to by petitioner and Mr. Burns, the attorney
drafted the following provision:
4. ALIMONY FOR THE WIFE: The Husband agrees to pay to
the Wife alimony in the amount of $1400.00 per month,
until such time as the marital home is sold.
Thereafter the Husband agrees to pay to the Wife
alimony in the amount of $500.00 per month, until such
time as the Wife can legally begin receiving social
security benefits. Said payments to be deposited
directly into the Wife's bank account.
On reviewing this provision in the MSA before signing it,
petitioner questioned the attorney as to why both payments were
labeled "alimony" when she and Mr. Burns had agreed on different
tax treatment for each; i.e., the $1,400 monthly obligation being
taxable to Mr. Burns and the $500 monthly obligation being
taxable to her. The attorney advised petitioner that the
determination of the tax consequences for these payments would be
based on how the money was used, not on how the payment was
labeled in the agreement. On the basis of this assurance,
petitioner signed the MSA.
The MSA was thereupon incorporated into and attached to the
Petition for Dissolution of Marriage filed by the attorney with
the Circuit Court of Escambia County, Florida (Circuit Court).
On April 25, 2001, the Circuit Court adopted the MSA as the Final
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Judgment of Dissolution of Marriage between petitioner and Mr.
Burns.
Toward the end of 2001, Mr. Burns sent petitioner a letter
stating that he was going to claim the $1,400 monthly payments as
deductible alimony on his Federal income tax return and that
petitioner would have to pay taxes on it, because the payments
had been designated "alimony" in the MSA. Petitioner took Mr.
Burns's letter to the attorney who drafted the MSA for
explanation and assistance. The attorney refused to take any
corrective action on petitioner's behalf and instead advised
petitioner to "just sell the house and quit taking Bill's money".
During 2002, petitioner received $16,800 from Mr. Burns
pursuant to the terms of the MSA; i.e., $1,400 per month, as the
marital home remained unsold throughout 2002. The money was
utilized by petitioner to pay Mr. Burns's portion of the debt
service on the mortgage, taxes, insurance, maintenance, and
repairs with respect to the marital home, and for veterinary care
for the pets. Respondent determined that the $16,800 petitioner
received from Mr. Burns was includible in her income under
section 71(a).
Petitioner made a formal complaint with the Florida Bar
against the attorney who drafted the MSA. In March 2006, the
Grievance Committee of the Florida Bar recommended, on the basis
of its review of the attorney's conduct in preparing the MSA and
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later refusing to assist petitioner when requested, that the
attorney receive an Admonishment for Minor Misconduct and be
required to attend a continuing legal education program sponsored
by the American Academy of Matrimonial Lawyers. The Grievance
Committee's report concluded that the attorney had "failed to
competently and diligently represent * * * [petitioner] by
properly wording the language of the Marital Settlement Agreement
so that the non-marital payments would not be taxed as income to
her after the entry of the final judgment."
Discussion
For Federal income tax purposes, an alimony or separate
maintenance payment is any payment in cash if: (a) Such payment
is received by, or on behalf of, a former spouse under a divorce
or separation instrument;2 (b) the divorce or separation
instrument does not designate such payment as a payment which is
not includible in gross income under section 71 and not allowable
as a deduction under section 215; (c) the payee spouse and the
payor spouse are not members of the same household at the time
the payment is made; and (d) there is no liability to make any
such payment, or a substitute for such payments, in cash or
2
A divorce or separation instrument means: (a) A decree of
divorce or separate maintenance or any written instrument
incident to such decree, (b) a written separation agreement, or
(c) a decree (not described in (a)) requiring a spouse to make
payments for the support or maintenance of the other spouse.
Sec. 71(b)(2)(A)-(C).
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property, after the death of the payee spouse. Sec. 71(b)(1)(A)-
(D). The test under section 71(b)(1) is conjunctive; a payment
is includible in income as alimony only if all four requirements
of section 71(b)(1) are met. See Johnson v. Commissioner, T.C.
Memo. 2006-116; Jaffe v. Commissioner, T.C. Memo. 1999-196. The
characterization of the payments as "alimony" in the divorce or
separation instrument does not affect their treatment for Federal
income tax purposes; the test is whether the foregoing
requirements are satisfied. Hoover v. Commissioner, 102 F.3d
842, 844 (6th Cir. 1996), affg. T.C. Memo. 1995-183.
It is undisputed that the MSA satisfies the definition of a
divorce or separation instrument. See sec. 71(b)(2). The $1,400
monthly payments at issue herein were made in cash, the agreement
pursuant to which the payments were made did not expressly
designate that they were excludible from petitioner's income and
nondeductible by Mr. Burns,3 and petitioner and Mr. Burns were
living separate and apart. Thus, the payments received by
3
The qualified divorce instrument must contain a clear
direction with regard to tax effect to negate alimony treatment
if the payment would otherwise satisfy the requirements of sec.
71. See Richardson v. Commissioner, 125 F.3d 551 (7th Cir.
1997), affg. T.C. Memo. 1995-554; see also Estate of Goldman v.
Commissioner, 112 T.C. 317 (1999) (finding clear and express
direction from language of the agreement specifying that all
property transfers in the settlement agreement, including a
series of cash payments that would otherwise satisfy sec.
71(b)(1)'s requirements, were to be treated as "nontaxable"
events under sec. 1041), affd. without published opinion sub nom.
Schutter v. Commissioner, 242 F.3d 390 (10th Cir. 2000).
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petitioner from Mr. Burns satisfy the requirements of alimony set
out in section 71(b)(1)(A), (B), and (C). Therefore, the
payments' status as alimony depends upon whether they satisfy
section 71(b)(1)(D); i.e., whether Mr. Burns's liability to make
the payments would have terminated in the event of petitioner's
death.
Petitioner argues that the $16,800 received from Mr. Burns
in 2002 was not taxable alimony but was part of the property
settlement she and Mr. Burns agreed to regarding the marital
home. Petitioner argues that the MSA, as drafted by the
attorney, did not conform to the terms to which she and Mr. Burns
agreed. Specifically, petitioner avers that she and Mr. Burns
agreed that the $1,400 monthly payments she received from Mr.
Burns until the marital home was sold were to be taxable to Mr.
Burns.
The gravamen of respondent's argument is that the payments
made to petitioner pursuant to the MSA were alimony because all
the requirements of section 71(b)(1)(A)-(D) are satisfied. Even
if Mr. Burns's $1,400 monthly payments to petitioner were
intended as part of a property settlement and were to be taxable
to Mr. Burns, respondent argues, they are alimony for Federal
income tax purposes as long as the requirements of section
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71(b)(1)(A)-(D) are satisfied.4 Given the MSA's integration
clause, respondent argues, unless the agreement is reformed by a
court of competent jurisdiction so that it designates that the
payments are not includible in gross income by petitioner and not
allowable as a deduction by Mr. Burns, section 71(a) applies and
the payments are income to petitioner.
We disagree with respondent that the payments satisfy the
section 71(b)(1)(D) requirement that there be no liability to
make any such payment for any period after the death of the payee
spouse. See Okerson v. Commissioner, 123 T.C. 258, 265 (2004).
If the payor is liable for any payments after the payee spouse's
death, none of the payments required under the divorce instrument
are alimony. Sec. 1.71-1T(b), Q&A-10, Temporary Income Tax
Regs., 49 Fed. Reg. 34456 (Aug. 31, 1984). Whether such a post-
death liability exists may be determined by the terms of the
applicable instrument, or if the instrument is silent on the
matter, by looking to State law.5 Morgan v. Commissioner, 309
4
In a departure from pre-1984 law, sec. 71(b) does not
require: (1) that deductible/includible alimony payments be
periodic in nature, (2) that the amount to be paid must be fixed
in the agreement, or (3) that the payments be intended for
spousal maintenance and support. Sec. 71(b) makes no distinction
between transfers of cash meant to provide support or cash
transfers meant to divide marital assets, so long as the payments
meet the sec. 71(b) requirements. See Estate of Goldman v.
Commissioner, supra.
5
Sec. 71, as amended by the Deficit Reduction Act of 1984,
Pub. L. 98-369, sec. 422(a), 98 Stat. 795, required that the
(continued...)
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U.S. 78, 80 (1940); Kean v. Commissioner, T.C. Memo. 2003-163,
affd. 407 F.3d 186 (3d Cir. 2005); Gilbert v. Commissioner, T.C.
Memo. 2003-92, affd. sub nom. Hawley v. Commissioner, 94 Fed.
Appx. 126 (3d Cir. 2004).
As the MSA does not explicitly address Mr. Burns's liability
to make the $1,400 monthly payments in the event of petitioner's
death, we must determine his post mortem obligations under
Florida law. Under Florida law, where (as here) no minor
children are involved, periodic payments incident to divorce are
generally either alimony, which is in the nature of support and
terminates on the death of either spouse by operation of law
(absent express agreement to the contrary),6 or part of property
settlement rights, which are vested and survive the death of
either former spouse7. See O'Malley v. Pan Am. Bank, N.A., 384
So. 2d 1258, 1260 (Fla. 1980). The description of the payments
5
(...continued)
qualified divorce instrument specifically provide that the
alimony obligation would cease at the payee's death. In the Tax
Reform Act of 1986, Pub. L. 99-514, sec. 1843(b), 100 Stat. 2853,
Congress amended sec. 71(b)(1) to eliminate the specific writing
requirement where alimony terminates at the payee's death or
remarriage by operation of State law, effective for payments made
under a divorce or separation instrument entered or executed
after Dec. 31, 1984.
6
See, e.g., Eagan v. Eagan, 392 So. 2d 988, 989 (Fla. Dist.
Ct. App. 1981); Ford v. First Natl. Bank, 260 So. 2d 876, 877
(Fla. Dist. Ct. App. 1972).
7
See, e.g., Scholem v. Scholem, 629 So. 2d 246 (Fla. Dist.
Ct. App. 1993); Kuhnke v. Kuhnke, 556 So. 2d 1121 (Fla. Dist. Ct.
App. 1989).
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as alimony in a divorce or separation instrument is not
conclusive. Fagan v. Lewis, 374 So. 2d 18, 20-21 (Fla. Dist. Ct.
App. 1979) (citing Underwood v. Underwood, 64 So. 2d 281 (Fla.
1953)).
To determine whether periodic payments are alimony or a
property settlement, Florida courts consider the intention of the
parties as evidenced by the plain language of their agreement,
the agreement's overall structure, the surrounding circumstances,
and the agreement's purpose. Kuhnke v. Kuhnke, 556 So. 2d 1121
(Fla. Dist. Ct. App. 1989); see also Underwood v. Underwood,
supra. Whether periodic payments constitute support (and
therefore alimony) or a methodology for division of property
generally depends upon whether the payments are given in return
for a relinquishment of other valuable property rights by the
recipient spouse. See McIntyre v. McIntyre, 824 So. 2d 206, 207
(Fla. Dist. Ct. App. 2002) (citing Petty v. Petty, 548 So. 2d
793, 795 (Fla. Dist. Ct. App. 1989); Draper v. Draper, 604 So. 2d
946, 947 (Fla. Dist. Ct. App. 1992)).
On the basis of Florida law, we conclude that the $1,400
monthly payments, considered in the context of the MSA as a
whole, were part of a property settlement. The MSA provided that
(i) the marital home was to be sold; (ii) Mr. Burns was to
receive 40 percent of the net proceeds; and (iii) Mr. Burns was
to pay $1,400 per month until the sale. The surrounding
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circumstances demonstrate that this $1,400 per month was intended
to service Mr. Burns's portion of the mortgage indebtedness and
to cover his share of the maintenance, taxes, insurance, and
similar expenses of the marital home (including sale preparation
expenses) until such time as the marital home could be sold and
the proceeds divided.8 As such, the payments were integral to
the couple's division of property. In addition, the payments
were subject to a contingency other than the joint lives of the
former spouses (i.e., "until such time as the marital home is
sold"), which indicates that they were a property settlement
rather than alimony. See Underwood v. Underwood, supra at 288.
Moreover, petitioner relinquished other valuable property rights
in the MSA, which supports the same conclusion. Indeed, on very
similar facts, wherein periodic payments were to be made for the
purpose of maintaining the marital residence until it was sold,
the payments were held to be a property settlement rather than
alimony. Bockoven v. Bockoven, 444 So. 2d 30, 31-32 (Fla. Dist.
Ct. App. 1983); see also Salomon v. Salomon, 196 So. 2d 111, 113
(Fla. 1967) (payments terminating upon wife's failure to own or
reside in designated residence are not alimony but a property
settlement).
8
To the extent some portion of the monthly payment was
intended for and in fact expended on the care of the couple's
jointly owned pets, it is consistent with a property settlement
rather than alimony.
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Under Florida law, since the payments at issue were part of
a property settlement, Mr. Burns's liability for them would have
survived petitioner's death. See Salsman v. Salsman, 360 So. 2d
54, 55 (Fla. Dist. Ct. App. 1978) (under separation agreement,
husband was obligated to make mortgage payments on marital home
that was to become wife's sole property; husband's obligation to
make mortgage payments survived wife's death); see also McIntyre
v. McIntyre, supra at 207 (since payor spouse's liability for
periodic payments was incurred in exchange for other property
rights of payee spouse, payments were property settlement and
liability for them survived payor spouse's death). Pursuant to
Florida law, the MSA gave petitioner a vested property right in,
and Mr. Burns had a corresponding liability to petitioner or her
estate for, the payments of $1,400 per month until the marital
home was sold. Consequently, Mr. Burns's liability to make the
payments would not have been extinguished by petitioner's death
but would have continued until the marital home was sold. As a
result, the payments (totaling the $16,800 received by petitioner
in 2002) fail to qualify as alimony because they do not satisfy
section 71(b)(1)(D).
Because we hold in petitioner's favor on the foregoing
basis, we do not address petitioner's contention that the MSA was
the product of mistake insofar as it failed to designate that the
$1,400 monthly payments were not includible in gross income under
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section 71 and not allowable as a deduction under section 215 (as
provided in section 71(b)(1)(B)). To reflect the foregoing,
Decision will be entered
for petitioner.