Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca10-92-09001/USCOURTS-ca10-92-09001-0/pdf.json

Parties Involved:
Commissioner of Internal Revenue
Appellee
David M. Daley
Appellant

Document Text:

UNITED STATES COURT OF APPEALii!sJ~u~t of Appeah, 

U Tenth-Circuit 

FOR THE TENTH CIRCUIT 

DAVID M. DALEY, 

Petitioner-Appellant, 

v. 

COMMISSIONER OF INTERNAL REVENUE, 

Respondent-Appellee. 

ORDER AND JUDGMENT* 

DECO 8 1992 

ROBERT L. HOECKER 

Clerk 

No. 92-9001 

(T.C. No. 20299-90) 

(Petition for Review) 

Before BALDOCK and SETH, Circuit Judges, and BABCOCK,** District 

Judge.*** 

**Honorable Lewis T. Babcock, District Judge, 

District Court for the District of Colorado, 

designation. 

United States 

sitting by 

Petitioner-appellant David M. Daley appeals from an adverse 

memorandum opinion of the Tax Court determining that he was not 

* This order and judgment has no precedential value and shall 

not be cited, or used by any court within the Tenth Circuit, 

except for purposes of establishing the doctrines of the law of 

the case, res judicata, or collateral estoppel. 10th Cir. R. 

36.3. 

*** After examining the briefs and appellate record, this panel 

has determined unanimously that oral argument would not materially 

assist the determination of this petition for review. See 

Fed. R. App. P. 34(a); 10th Cir. R. 34.1.9. The case is therefore 

ordered submitted without oral argument. 

Appellate Case: 92-9001 Document: 010110151436 Date Filed: 12/08/1992 Page: 1 
entitled to any deductions for alimony under 26 U.S.C. § 215 

(1982) and that he was not entitled to include a debt to his 

ex-spouse Annette Daley in the basis of property for purposes of 

determining the depreciation deduction under 26 U.S.C. §§ 167 and 

168 (1982). See Daley v. Commissioner, 62 T.C.M. (CCH) 1197 

(1991). We affirm. 

David and Annette Daley were divorced on February 4, 1980. 

The divorce decree ordered that their residence in Heber City, 

Utah, be sold and the proceeds be split equally after payment of 

debts. Pending sale, Annette was given possession of the 

residence. The divorce decree also awarded Annette custody of the 

children and child support of $300.00 per month. The decree 

expressly stated that Annette would not receive alimony. Support 

and alimony, however, were to be reviewed by the state court on 

the earlier of approximately one year or the sale of the 

residence. 

Subsequently, on October 12, 1980, David and Annette entered 

into a stipulation amending the child support. David was to pay 

Annette $750.00 per month for maintenance for twelve years in lieu 

of child support . Also, he was to pay the mortgage payment on the 

parties' jointly owned house and deduct the mortgage payment from 

the $750.00 per month maintenance amount until the house was sold. 

On January 14, 1981, Annette transferred to David, by 

quitclaim deed, her interest in the Heber City residence. 

Pursuant to their agreement, David assumed all future 

responsibility for mortgage, tax, and interest payments on the 

property. If the property was not sold within two years, David 

2 

Appellate Case: 92-9001 Document: 010110151436 Date Filed: 12/08/1992 Page: 2 
was to pay Annette $33,000.00 over twelve years. If Annette could 

not find a satisfactory residence she had the option to rent the 

Heber City residence for $400.00 per month for one year. 

On September 22, 1982, the state divorce court entered an 

amended order, providing that David would pay the $500.00 mortgage 

on the Heber City residence as child support and that he would 

claim the minor children as exemptions on his tax return. Also, 

David was to pay $750.00 per month for ten years and one month, 

with this amount representing the "cashing out of [Annette's] 

equity in the parties' residence and as maintenance for 

[Annette] . " 

In October, 1982, Suzanne Rowser, who owned a residence in 

Bountiful, Utah, traded her residence for the Heber City 

residence. At the same time, the Daleys entered into an agreement 

in which Annette agreed to accept the $33,000.00 equity in the 

Bountiful residence as her share of the equity in the Heber City 

residence. David transferred his interest in the Bountiful 

residence to Annette by quitclaim deed. David, however, made the 

mortgage payments on the Bountiful residence. 

On September 26, 1986, Annette quitclaimed her interest in 

the Bountiful residence to David. The parties orally agreed that 

he was to assume all liabilities and pay $33,000.00 to Annette in 

the future. Annette and the children then moved into David's 

residence in Highland, Utah. 

On his 1986 and 1987 tax returns, David deducted $7,200.00 as 

alimony. Annette reported alimony income of $7,200.00 for the 

same years. David also took depreciation deductions for those 

3 

Appellate Case: 92-9001 Document: 010110151436 Date Filed: 12/08/1992 Page: 3 
years on the Bountiful residence, including his debt to Annette as 

part of the basis of the property. 

The Internal Revenue Service (IRS) audited David's 1986 and 

1987 tax returns. During the audit, on December 10, 1988, David 

and Annette prepared a written agreement to support their oral 

agreement that Annette sold the Bountiful residence to David, who 

assumed all obligations on the property and allowed Annette and 

the children to use the Highland residence. Pursuant to the 

written agreement, David would pay Annette $32,350.54 on the 

earlier of November 1, 1993, or upon sale of the house. 

In March 1989, the Utah state court entered an order nunc pro 

tune amending the September 22, 1989, order. This order stated 

the $750.00 monthly payment to Annette was maintenance. The nunc 

pro tune order eliminated the language indicating that the $750.00 

payment represented the cashing out of Annette's equity in their 

residence and maintenance. 

On August 23, 1990, the IRS sent David a notice of deficiency 

for 1986 and 1987. The IRS refused to allow a deduction for 

alimony payments and 

disallowing the debt 

decreased the depreciation deduction by 

representing Annette's equity in the 

Bountiful residence as part of David's basis in the residence. 

David filed a petition with the Tax Court seeking a 

redetermination of the deficiency. The Tax Court concluded David 

was not entitled to the deduction for alimony. The court 

determined that David made payments in three different ways: (1) 

allowing Annette and the children to reside in the Highland 

residence rent-free while he made all payments; (2) paying 

4 

Appellate Case: 92-9001 Document: 010110151436 Date Filed: 12/08/1992 Page: 4 
expenses of the children; and (3) paying expenses to Annette or 

others for her. Daley, 62 T.C.M. (CCH) at 1199-1200. The court 

concluded these payments were not proved to be alimony, however. 

The court decided no alimony deduction was available for the 

payments related to the Highland residence because David did not 

show that the rent-free use of the Highland residence was not a 

payment by him on the debt he owed Annette. Id. at 1200. 

Alternatively, the Tax Court stated that David failed to prove the 

rent-free provision 

child support. Id. 

of the Highland residence did not constitute 

Likewise, the Tax Court concluded the 

payments to Annette and others for Annette and the children were 

not proven to be alimony. Id. The court also refused to allow 

David to include in the basis of the Bountiful residence the 

amount he promised to pay Annette for her equity in the property. 

Id. at 1200-01. David appealed. 

This court will not set aside findings of the Tax Court 

unless those 

Commissioner, 

findings are clearly erroneous. 

924 F.2d 967, 969 (10th Cir. 1991). 

Yates v. 

Conclusions of 

law and conclusions of ultimate fact obtained from applying legal 

principles to the facts are subject to de novo review. Id. 

I. 

David first argues that he is entitled to alimony deductions 

for 1986 and 1987. He maintains that it was the intent of himself 

and Annette that the payments be alimony. Additionally, he points 

to the state court's determination as proof that they intended the 

payments to be alimony. 

5 

Appellate Case: 92-9001 Document: 010110151436 Date Filed: 12/08/1992 Page: 5 
The payor may take a deduction for alimony pursuant to 26 

U.S.C. § 215 (1982), if the alimony is included in the income of 

the recipient pursuant to 26 U.S.C. § 71 (1982). Section§ 7l(a) 

provides that when, among other things, payments are periodic and 

arise out of a support obligation, the payments are income to the 

recipient. Gammill v. Commissioner, 710 F.2d 607, 609 (10th Cir. 

1982). Payments which are for child support are not included in 

the gross income of the recipient. 26 U.S.C. § 7l(b) (1982). 

When both alimony and child support are to be paid and the amount 

actually paid is less than the amount specified in the agreement, 

child support obligations are satisfied first. Id. 

To determine whether a payment is alimony, the court must 

look at the facts and circumstances to determine the intent of the 

parties. Gammill, 710 F.2d at 609. "[T]he incidence of taxation 

depends on the substance of a transaction, and the government may 

look at the realities of a transaction to determine its tax 

consequences, despite the form." Riley v. Commissioner, 649 F.2d 

768, 773 (10th Cir. 1981). The characterization of the transfer 

by the state court is not controlling for tax purposes. 

773-74. 

Id. at 

Recognizing the state court's determination as to the 

payments is not binding, David argues 

determination is persuasive. According 

court's original decree of divorce did not 

intent that David pay Annette maintenance. 

the state court's 

to David, the state 

reflect the Daleys' 

The state court, upon 

the Daleys' request, therefore revised the order nunc pro tune. 

6 

Appellate Case: 92-9001 Document: 010110151436 Date Filed: 12/08/1992 Page: 6 
The Tax Court looks at nunc pro tune orders to determine 

whether the order altered the legal status of the parties or 

corrected errors the state court had made in formulating the 

original decree. Segal v. Commissioner, 36 T.C. 148, 152-53 

(1961). When local court error is clearly established, the Tax 

Court gives effect to the nunc pro tune judgment entry. Newman v. 

Commissioner, 68 T.C. 494, 503 (1977). When there is no showing 

the original decree did not reflect the state court's intent at 

the time it was entered, the change in the amended decree was not 

to correct a mistake, it was to change the status of the parties. 

Segal, 36 T.C. at 152-53. Contrary to David's argument, there was 

no showing that the parties initially intended that the payments 

only be alimony. Thus, the nunc pro tune order changed the status 

of the parties. 

David argues that payments he made on behalf of Annette for 

her expenses were alimony, even though these payments were not in 

conformity with the divorce decree. Because she included these 

payments as income on her tax return, he believes he is entitled 

to an alimony deduction. The Tax Court determined that David 

never proved these payments were not child support. Daley, 62 

T.C.M. (CCH) at 1200. The Tax Court's determination is supported 

by the evidence before it. Cf. Grutman v. Commissioner, 80 T.C. 

464, 471 (1983) (generally when husband makes mortgage payments on 

house wife does not own but where she lives, it is not alimony). 

7 

Appellate Case: 92-9001 Document: 010110151436 Date Filed: 12/08/1992 Page: 7 
We conclude, for substantially the reasons set forth by the 

Tax Court, that the Tax Court correctly determined that David is 

. 1 d d d ' f 1· 1 not entit e to a e uction or a imony. 

II. 

David argues that he is entitled to a basis in the Bountiful 

property that includes his $33,000.00 debt to Annette. He 

believes that this full basis should be the basis for depreciation 

deductions. 

A depreciation deduction for wear and tear is permitted for 

property held for the production of income. 26 U.S.C. § 167(a) 

(1982). The basis for purposes of determining the depreciation 

deduction is the adjusted basis. Id. § 167 (g). The basis of 

property is the cost of the property. Id. § 1012. Generally, the 

cost includes liabilities incurred to acquire the property. See 

Crane v. Commissioner, 331 U.S. 1, 11 (1947). When, however, the 

liabilities are contingent, they are not included in the cost 

basis. Estate of Baron v. Commissioner, 798 F.2d 65, 68-70 (2d 

Cir. 1986); Waddell v. Commissioner, 86 T.C. 848, 904 (1986), 

aff'd, 841 F.2d 264 (9th Cir. 1988). Debt will be included in 

1 David also argues that the Tax Court erred because it failed 

to consider five objective factors to determine whether the 

payments were alimony. The five factors are (1) whether the 

payment is a fixed sum; (2) whether the payments are related to 

the obliger's income; (3) whether the payments continue regardless 

of the obligee's death or remarriage; (4) whether the obligee gave 

consideration for the payments; and (5) whether the obliger put up 

security to insure payment. Gammill, 710 F.2d at 610. These five 

objective factors concern whether a payment is part of a property 

settlement or is alimony. Even if the Tax Court should have 

considered these five factors, the court did not err in 

determining David was not entitled to an alimony deduction. 

8 

Appellate Case: 92-9001 Document: 010110151436 Date Filed: 12/08/1992 Page: 8 
basis only if the debt is likely to be paid. Waddell, 86 T.C. at 

902. 

David contends that because the sale of the Bountiful 

property was initially agreed to orally and later memorialized in 

writing there was an actual debt. We agree with the Tax Court's 

conclusion that no valid liability existed at the time of purchase 

such that David assumed a valid liability giving him additional 

basis. As the Tax Court determined, the liability appeared to be 

part of David's obligation to Annette under their property 

settlement. Daley, 62 T.C.M. (CCH) at 1200-01. 

David argues that he fulfilled the property settlement 

obligation in October 1982 when Annette purchased the Bountiful 

residence. Annette could not make payments on the residence, so 

he assumed the payments and agreed to pay her for her equity in 

the Bountiful residence. He maintains that this did not reinstate 

the property settlement obligation and instead was a liability he 

assumed in acquiring the property. 

We disagree with these arguments. The Daleys entered into 

several agreements with regard to their property settlement. The 

Bountiful liability appeared to be, as the Tax Court determined, a 

further part of their property settlement. David's self-serving 

9 

Appellate Case: 92-9001 Document: 010110151436 Date Filed: 12/08/1992 Page: 9 
assertions must be balanced against these circumstances. See 

Riley, 649 F.2d at 773. 

The judgment of the United States Tax Court is AFFIRMED. 

Entered for the Court 

Bobby R. Baldock 

Circuit Judge 

10 

Appellate Case: 92-9001 Document: 010110151436 Date Filed: 12/08/1992 Page: 10