DocketNumber: Docket No. 25140-82.
Citation Numbers: 50 T.C.M. 941, 1985 Tax Ct. Memo LEXIS 170, 1985 T.C. Memo. 457
Filed Date: 9/3/1985
Status: Non-Precedential
Modified Date: 11/21/2020
MEMORANDUM FINDINGS OF FACT AND OPINION
GERBER,
FINDINGS OF FACT
Some of the facts have been stipulated and are so found. The stipulation of facts and attached exhibits are incorporated herein by reference.
Petitioners resided in Redlands, California, at the time the petition in this case was filed. They timely filed their 1978 income tax return with the Internal Revenue Service Center.
On June 17, 1977, petitioner filed suit for divorce from Katherine in the Superior Court of California, County*172 of Riverside. At that time Katherine was a housewife and the mother of three children born to the marriage, Douglas, born January 25, 1963; Christine, born November 3, 1965; and Gregory, born October 13, 1966.
In an Order to Show Cause, dated October 7, 1977, petitioner was directed to make certain payments to and on behalf of Katherine. The order provided in part, as follows:
Petitioner is ordered to pay respondent [Katherine], as and for spousal support, the sum of $250.00 per month, payable one-half on 1st and one-half on the 15th days of each month, commencing September 15, 1977, and continuing until further order of the court.
As and for additional spousal support, petitioner is ordered to pay the payments due on the 1975 Datsun station wagon in the approximate sum of $143.00 per month and on the microwave oven in the approximate sum of $100.00 per month together with the payments due on the obligations listed in his Financial Declaration on file herein. 2 Petitioner shall have credit for the payments made by him pursuant to this order at the time of trial.
*173 The order also required petitioner to pay Katherine $500 per month for child support and to maintain health insurance coverage for Katherine and the three children's benefit. Pursuant to the order, custody of the oldest child was awarded to petitioner, custody of the middle child was awarded to Katherine, and joint custody was awarded of the youngest child, pending final resolution of the divorce suit.
An Interlocutory Judgment of Dissolution of Marriage was granted on March 22, 1978. All other issues were reserved and continued to June 23, 1978. The divorce became final on October 11, 1978, under a Final Judgment (Marriage) of Dissolution.
On January 3, 1979, the remaining issues were resolved in a Judgment Re Custody, Support, Division of Property and Fees. In the judgment, the court ordered the following division of the marital property:
To the petitioner [Dr. Fowler] as his sole and | Value |
separate property | |
1. All household furniture and furnishing in | |
his possession | $3,210.00 |
2. 1975 Datsun automobile | 2,325.00 |
3. Loan due from Health Ministry Foundation | 5,130.00 |
4. Tools and equipment in his possession, | |
subject to encumbrance thereon (Sears) | 3,980.00 |
5. Farm equipment donated to Loma Linda | |
University | 6,225.00 |
6. Backhoe and skip loader, grain drill and | 6,000.00 |
disc | |
7. Retirement benefits through petitioner's | |
employment | 334.00 |
8. Utility trailer | 250.00 |
9. Industrial shelves | 650.00 |
10. Bicycle | 50.00 |
11. All life insurance policies insuring | |
petitioner's life. Petitioner is ordered | |
to maintain the minor children as | |
beneficiaries of the life insurance | |
policies awarded to him hereunder so long | |
as he is under any obligation to support | |
said children. | |
Total | $28,154.00 |
Present | |
Community Obligations | Balance |
1. La Loma Employee's Credit Union | $9,329.00 |
2. Associates Financial Services, Co. | 9,134.00 |
3. Sears, Roebuck & Co., revolving charge | 201.00 |
4. Master Charge, Crocker National Bank | 818.00 |
Total | $19,482.00 |
Petitioner is ordered to pay the above community obligations and save respondent harmless therefrom.
Net value of property to petitioner: | $8,672.00 |
To the respondent [Katherine] as her sole and | Value |
separate property | |
1. All household furniture and furnishing in | |
her possession | $7,420.00 |
2. 1975 Datsun automobile subject to existing | |
encumbrance thereon 3 | 1,152.00 |
3. Bauer movie camera | 100.00 |
Net value of property to respondent: | $8,672.00 |
In addition, the judgment contained provisions pertaining to custody of the children and petitioner's obligations for child support and alimony. Joint custody of the three children was awarded, with actual physical care and control of the oldest child*175 to petitioner, and actual physical care and control of the middle child and the youngest child to Katherine. Petitioner was required to pay Katherine child support of $500 per month until the children became self-supporting, married, reached age 18, or until further order of the court, whichever occurred first. As additional child support, petitioner was required to maintain health insurance for the children's benefit and pay one-half of their reasonable orthodontia and school tuition expenses. Petitioner was also required to pay Katherine $350 per month for her support, commencing July 1, 1978, and continuing thereafter until the earliest of the death of either party, Katherine's remarriage, or further order of the court.
Pursuant to the court order dated October 7, 1977, petitioner made payments totaling $12,299 during 1978. 4 On their 1978 Federal income tax return, petitioners deducted $12,299 as alimony payments. Respondent, in his notice of deficiency, disallowed the following deductions:
Amount | Nature of the payment |
$1,308.15 | Automobile payments on the 1975 Datsun |
5,718.38 | One-half of the community debts paid |
in 1978 | |
2,272.47 | Payments for health and life insurance, |
school expenses, etc. 5 |
Petitioner contends that because he was not given credit for the payments in dispute when the marital property was divided the payments are deductible as alimony. Respondent, on the other hand, argues that the payments were taken into account when the marital property was divided and that, consequently, they are in the nature of a property settlement, which is not deductible. We agree with respondent.
OPINION
The only issue for consideration is whether certain of the payments petitioner made during 1978, pursuant to court order, for the benefit of Katherine are deductible by him as alimony payments.
Section 215 allows a deduction for payments made to an exspouse which are includable in*177 the recipient's income under section 71. Section 71(a) includes in gross income periodic payments received in discharge of a legal obligation which, because of the marital or family relationship, is imposed on or incurred by the paying spouse under a divorce decree or written instrument incident to the divorce.
"Periodic payments" do not include installment payments which discharge an obligation to pay a principal sum specified in the decree, instrument, or agreement. Section 71(c)(1). An exception to the general rule, however, is provided for installment payments that are paid over a period ending more than 10 years from the date of the decree or agreement, but only to the extent of 10 percent of the principal sum in any one taxable year. Section 71(c)(2). A principal sum is stated in the document if the aggregate total to be paid can be determined by mathematical calculation.
The requirement that the payments be made in discharge of a legal obligation imposed because of the marital or family relationship has been interpreted to require that the payments be in the nature of support rather than a property settlement.*178
The issue of whether payments are in the nature of support or part of a property settlement is a factual one which must be resolved by examining the surrounding facts and circumstances of each case.
Both petitioner and respondent agree that the Superior Court was authorized to order petitioner to pay the community debts, pending the resolution of the divorce issue. Petitioner's payment of these debts pursuant to court order, however, does not in itself make the payments*179 deductible as alimony. Rather, the deductibility of these payments must be determined by applying a number of objective criteria.
Factors that indicate the payments are in the nature of a property settlement rather than for support are: (1) The parties in their agreement, or in the decree, intended the payments to effect a division of the marital property,
Petitioner argues that he was not given credit for the payments in dispute when the property was divided as directed by the court. In the judgment dated January 3, 1979, however, the court ordered an equal division of the marital property, as required under California law. Petitioner was awarded property with a value of $28,154 and assigned the obligation to pay the community debts in the amount of $19,483. Petitioner thus received property with a net value of $8,672. Katherine was also awarded property with a net value of $8,672. As in
In addition, the payments are more in the nature of a property settlement because Katherine surrendered valuable property rights in exchange for the payments. See
Petitioner received additional property in the amount of $7,026.53 pursuant to the division of the property. This additional property represented Katherine's rights in the property which she relinquished in exchange for petitioner's payment of her half of the community debts during 1978. If petitioner was not given credit for the payments in dispute, as he argues, Katherine would have received additional property in the amount of $7,026.53, representing her rights in the equity which was acquired through the payments petitioner made during 1978. Therefore, the payments in dispute were implicitly taken into account when the value of the property was determined and equally divided.
Katherine's rights in property transferred to petitioner in exchange for the payments he made on her behalf supports our finding that the payments were made to effect a property settlement rather than as support. Petitioner further argues that the Internal Revenue Service recognizes that payment of community obligations constitutes deductible alimony where no economic benefit of any kind is obtained by the paying spouse at*183 the time of the division of property. This is merely another way of saying that petitioner was not given credit for the payments in dispute, a matter considered above.
There are other factors in this case which support our finding that the payments concerned a property settlement. For example, the terms of the court order obligated petitioner to pay a fixed sum in monthly installments. These payments were not subject to change in the event that petitioner's income increased or decreased; neither were these payments subject to any contingencies such as the death of either party or Katherine's remarriage. See
Another factor that supports a finding of property settlement is that Katherine's support was provided for in a separate provision elsewhere in the Order. See
Petitioner also argues that the Superior Court of California characterized the payments as support, therefore such characterization is conclusive. It is well settled, however, that the labels given to the payments by the parties or the courts are not dispositive of the tax characterization.
A crucial factor is that the payments were not "periodic" as required by section 71(a) and defined in section 71(c). The court order pursuant to which petitioner made the payments refers to the community debts listed in petitioner's Financial Declaration. In this declaration the balance of each debt was listed in a fixed amount, as well as the amount of the monthly payments due. 7 The amount petitioner was directed to pay could be ascertained by mathematical calculation. Full payment was to be made over a period ending less than 10 years from the date of the court order. The largest debt petitioner listed had a balance of $15,000 as of June 3, 1977. The monthly payment due on this debt was $385. Absent default, petitioner would have paid off this debt, as well as the other debts, within 39 months from the date of the court order.Therefore, these periodic payments do not satisfy the 10-year requirement of section 71(c)(2).
Based on the foregoing, we hold that the payments in dispute were in the nature of a property settlement. Therefore, petitioners are*186 not entitled to deduct these payments from their income under section 215.
To reflect the foregoing,
1. Unless otherwise indicated, all section references are to the Internal Revenue Code of 1954, as amended and in effect during the year in issue.↩
2. The obligations listed in Dr. Fowler's Financial Declaration were as follows:
Monthly | ||
Payment | Balance | |
Master Charge | $200 | $2,000 |
La Loma Credit Union | 385 | 15,000 |
Assoc. Fin. Inc. | 434 | 15,000 |
Ford Motor Co. | 550 | 16,000 |
Sears | 200 | 5,000 |
3. Dr. Fowler and Katherine owned two 1975 Datsun automobiles. The one awarded to Katherine was the one on which Dr. Fowler was directed by the court to make payments.↩
4. The payments made by Dr. Fowler were comprised of the following:
$3,000.00 | payments to Katherine for her support |
1,308.15 | payments on the 1975 Datsun automobile |
5,718.38 | payments representing one-half of the |
community obligations paid in 1978 | |
2,272.47 | payments for health and life insurance, |
school expenses, etc. |
5. Petitioners have conceded that the $2,272.47 paid for health and life insurance, school expenses, etc., is not deductible as alimony.↩
6. See debts listed in n. 2,
7. See n. 2,
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