TAX COURT OPINION

Case: Christy J. Forsythe
Docket Number: 6883-12S
Judge: Holmes
Opinion Type: bench
Filed: 03/15/2013
Pages: 12

UNITED STATES TAX COURT WASHINGTON, DC 20217 Christy J. Forsythe, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent ) ) ) ) ) ) ) O R D E R Docket No. 6883-12S. Pursuant to Rule 152(b), Tax Court Rules of Practice and Procedure, it is ORDERED that the Clerk of the Court shall transmit to the trial in the above case before Judge Mark V. Holmes at petitioner and respondent a copy of of Chicago, of trial. IL, on February 5, 2013, the pages of the transcript rendered after the conclusion (Signed) Mark V. Holmes Judge Dated: Washington, D.C. March 15, 2013 SERVED MAR 1 9 2013 Capital Reporting Company 3 1 2 Bench Opinion by Judge Mark V. Holmes February 5, 2013 3 Christy J. Forsythe v. Commissioner 4 5 6 Docket No. 6883-12S THE COURT: In the case of Christy J. Forsythe v. Commissioner, Docket No. 6883-12S, the 7 Court has decided to render oral findings of fact and 8 9 10 11 12 13 14 opinion and the following represents the court's Oral Findings of Fact and Opinion. This bench opinion is made pursuant to the authority granted by Section 7459(b) of the Internal Revenue Code of 1986 as amended and Rule 152 of the Tax Court's Rules of Practice and Procedure. The record in this case consisted of the stipulation to 15 which the parties agreed. And the testimony of Ms. 16 17 18 19 20 21 22 23 24 25 Forsythe herself. She was an Illinois resident when she filed the petition and remains one today. Let me first go over the factual background in this case arising from her 2009 tax year. It actually dates back to 2008 when she and her former husband divorced. The divorce decree called a Judgment for Dissolution of Marriage and Marital Settlement Agreement in Illinois qualifies as a divorce decree under Section 71 of the Internal Revenue Code. And it imposed numerous obligations on 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 4 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 both Ms. Forsythe and her ex-husband. She was under an obligation to pay maintenance payments of $2,200 per month during the year 2009, the year that's at issue. He was obligated to pay monthly child support of $565 a month together with various periodic reimbursements to her of 30 percent of their two children's college educations, extracurricular activities, medical insurance and other medical expenses, and he was to reimburse her for costs associated with her principal residence for varying amounts including her prior repairs to the house and 55 percent of subsequent mortgage payments and home repairs. Unfortunately the great recession began shortly thereafter and in 2009 Mr. Forsythe stopped 16 working steadily, he hadn't been working very much 17 18 19 20 21 22 before then either. And he certainly stopped paying his obligations under this divorce decree. Somebody had to pay for the expenses, particularly the kids and house where Ms. Forsythe and they were living. And as it turned out, she ended up paying more than $40,000 of these expenses, and she understandably did 23, so, needing to preserve both the house as well as her 24 25 kids' chance for college educations and their other incidental expenses. 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 5 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 What started this case though is that she offset what her ex owed her against her own alimony payments owed to him. It's this offset that gave rise to this case. As a result of this offset that she took against the payments that he owed her, she claimed an alimony deduction under Section 215 of the Internal Revenue Code of $26,400 for the tax year 2009, which broken down means the $2200 she owed him each month. She was in other words taking the full alimony deduction to which she was entitled under the divorce decree. The Commissioner however, allowed her a deduction of only $2,370.26. He says that she gets an alimony deduction only for $1,805.26 she made in cash payments, technically checks, I believe, to her former husband in 2009, plus one $565 offset of his child support payments owed to her. The reason that the Commissioner has for giving her an offset of only $565 is that the divorce decree mentions the right of offset only in Section 4.3 of that decree. Again, to quote from the decree, "Christy, that's Mrs. Forsythe, may deduct the total child support payment of $565 representing Steve's, that's Mr. Forsythe, child support obligation from her monthly maintenance payment, and pay over to 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 6 1 2 3 4 Steve the sum of $1,635 monthly in order to avoid the party's exchanging monthly sums of money". So, to sum up the party's arguments here, what the former Mrs. Forsythe wants is an offset of 5 more, up to the level of the alimony paid, the total 6 7 8 9 10 11 12 13 14 15 $26,400 that she reported on her return. Well, the law here is easy to recite. Section 215 of the Internal Revenue Code gives taxpayers a deduction for alimony paid. Alimony is then defined in Section 71. We're here because one sentence in Section 71NQ, "the term alimony or separate maintenance payment means any payment in cash if (A) such payment is received by or on behalf of a spouse under a divorce or separation instrument." Well, what does it mean to receive 16 money on behalf of someone? In part, that means 17 18 19 20 21 22 23 24 25 payments to a third party in discharge of the second party's obligations. And some of the payments that Ms. Forsythe made are, were made on behalf of Mr. Forsythe. It seems reasonable under their divorce decree that at least some of her payments were to third parties of cash that her ex owed under the terms of the divorce decree. However, many of them under the terms of the divorce decree were expenses that she was obliged to incur, but had a right to be 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 7 1 2 3 4 5 6 7 8 9 10 11 12 13 14 l$ 16 17 18 19 20 21 reimbursed by her ex for. On some of these it's very easy when he had an obligation to pay third parties, an obligation that she paid for herself, the result here is easy because there's a regulation. That regulation is Section 26 CFR Section 1.71-1T(b)q-6 and a-6, "a payment of cash by the payer spouse to a third party under the terms of the divorce or separation instrument will qualify as a payment of cash which is received on behalf of a spouse." So, she would get characterization as alimony payments to a third party if, but only if, those payments were required to be made by her on her spouse's behalf under the terms of the written agreement, and by necessity, those kind of payments she was making to third. parties that he owed do not qualify under the regulation. But there are these questions of her right to reimbursement of expenses made to third parties. And those in fact constitute everything else and indeed because the divorce decree itself is a little 22 bit ambiguous here, may cover everything that is 23 24 25 involved in her claim to a full $26,400 in alimony for the calendar year 2009. Now her position, and let me quote again 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 8 1 2 3 4 5 6 7 from Section 71 here, her position is that these obligations to pay third parties or be reimbursed by her ex-husband are all "under the divorce instrument". His obligation to pay her $565 a month in child support is likewise under the divorce instrument. So her position is that all the money that she ended up paying out of pocket, including the 8 money that he should have been paying, were payments 9 that gave rise to a right of reimbursement from him 10 11 12 13 14 15 16 17 under the divorce instrument. Now, the Commissioner's perspective is that yes, there is a right to offset, but that right is limited to the right to offsets expressly allowed under the divorce instrument. And that is only the $565 in the section that I've already quoted. The offset of other reimbursable expenses according to the Commissioner is not specifically 18 mentioned in the divorce instrument and therefore not 19 20 21 22 paid by Ms. Forsythe under that instrument. Now, this is a distinction. An offset is Ms. Forsythe's right under the divorce decree as I said, and æ& the government concedes up to $565 a 23 mont 9 put there is also a right 34 setoff debts more 24 25 generally, and that's also a right, but it's a right that is generally found under common law, 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 1 2 3 4 5 6 7 8 9 10 11 incorporated into Federal common law of contracts in some cases and certainly enacted into statutory law on the bankruptcy code as well. But its right in general is a right that's defined by common law, and it's not expressly stated in this divorce decree or incorporated by reference in this divorce decree, except to the extent of $565 a month. Now, this gets complicated because Section 71 defines alimony as payment received by a spouse under a divorce decree. Now, the payments of Mr. Forsythe's debts by Mrs. Forsythe through offset 12 weren't received under the divorce decree. They were 13 14 15 received through the exercise of what I suspect is probably the common law right in Illinois of the setoff of mutual debts. Now there is some force to 16 Mrs. Forsythe's reading that she made these payments 17 18 19 20 21 22 23 24 25 under the divorce decree. So you can look at Section 71 which says, such payment is received by a spouse under a divorce decree and focus first on was the payment made under the divorce decree because of course, Mrs. Forsythe says that all her payments of her spouse' s reimbursable expenses were made under that decree and her right to be reimbursed was created by that decree. On the other hand, the government says it 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 10 1 2 3 4 5 was her right to pay her husband's expenses and thereby generating common law right of setoff received by him under the divorce decree. The answer I think lies in all things, one of those old canons of statutory construction. The last antecedent rule 6 which says that a qualifying phrase where no contrary 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 intention applies refers solely to the last antecedent. In other words, usually a modifying phrase modifies what comes immediately before it. The key modifying phrase here is, nder a divorce or separation instruction what occurs before it is received by a spouse. So in this, I think the government has the better reading of Section 71 and I conclude that I have to side with the Commissioner and rule in his favor on the question of whether her alimony deduction is limited'to what the government said in its notice of deficiency. That leaves the question of penalties. Under Internal Revenue Code Section 6662, a penalty applies to the portion of an underpayment of tax required to be shown on the return which is attributable to among other things a substantial understatement of income tax. On her 2009 income tax return, Ms. Forsythe 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 11 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 reported that she owed tax in the amount of $22,298. Based upon the adjustments made by the Commissioner in his notice of deficiency, she was required to show total tax for the 2009 year in the amount of $30,107. Since the understatement of income tax for the 2009 tax year is in excess of the greater of ten percent of the amount of tax required to be shown, or.$5,000, the understatement is considered substantial. The government's made out its prima facie case. However, as the Commissioner also notes, the accuracy related penalty will not apply to any part of the underpayment to the extent the taxpayer shows that he or she had reasonable cause and acted in good faith. See Internal Revenue Code Section 6664cl. Ms. Forsythe made out two sorts of defenses under reasonable cause and good faith. One is that she herself had reasonable cause and good faith. 18. This was in fact a very close question of law, and 19 20 21 22 23 24 25 the Court had to resort to canons of statutory interpretation to try to figure out whether the right of offset is still a form of payment under a divorce decree or not. The only precedens that both sides cited that were kind of close were prohibited from citation as precedent under Section 7463b, and they're not exactly on point. There are certainly no 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 12 1 2 3 4 5 6 7 8 9 regulations directly on point. So this is a case where the code section is ambiguous, and the conclusion entirely reasonable that Mrs. Forsythe drew, plus I certainly find good faith on her part. She's a skilled and successful businesswoman, but she's not trained in law or accounting. Secondly, she also presented the defense + reliance on a professional. The woman who prepared her taxes is apparently a CPA and there's no 10 doubt in my mind that Ms. Forsythe just dumped all 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 this on her CPA and told her to fill out the tax returns the best way possible. There certainly is no reason to question that preparer's competence and Ms. Forsythe had not previously had any problems with the tax system and certainly not in her position that these offset amounts constituted alimony in previous years. So, I conclude that there'll be no penalty in this case, and we'll instead enter a decision that for the tax year 2009 Ms. Forsythe does owe the deficiency of $7,809, but that there is no penalty owed under 6662. This concludes the Court's Oral Findings of Fact and Opinion in this case and the Chicago session. 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 13 Thank you very much. (Whereupon, at 3:01 p.m., the above- entitled matter was concluded.) 1 2 3 S 6 7 8 9 ,10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 866.488.DEPO www.CapitalReportingCompany.com