TAX COURT OPINION

Case: Joyce A. Perkins
Docket Number: 6521-06
Judge: Wherry
Opinion Type: memo
Filed: 02/26/2008
Pages: 18

S~l~ 'Lc)~CC ~-~ ~ F.X cO RDED STAT . T .C . Memo . 2008-4 L UNITED STATES TAX COURT JOYCE A . PERKINS, Petit oner v . COMMISSIONER OF INTERNAL REV E P E, Responden t Docket No . 6521-06 . Fil l d February 26, 2008 . R determined a deficiency of $ income tax for 2003 . R also determ penalty of $1,316 .40 pursuant to se I .R .C . ,582 in P's Federal ned an accuracy-related . 6662 (a) and (b) (1) , Held : P is liable for the defi 6662, I .R .C ., penalty . iency but not the sec . John P . Konvalinka , for petitioner . John R . Bampfield , for respondent . 'SERVED FEB 2 6 2008 - 2 - MEMORANDUM FINDINGS OF FACT AND OPINION WHERRY, Judge : This case is before the Court on a petition for redetermination of a $6,582 deficiency in Federal income tax that respondent determined for petitioner's 2003 taxable year . Respondent also determined an accuracy-related penalty pursuant to section 6662(a) and (b) (1) in the amount of $1,316 .40 .1 The issues for decision are : (1) Whether $26,400 paid to petitioner in 2003 by her ex- husband was includable in petitioner's 2003 taxable income as alimony under section 71(a) and (b) ; an d (2) whether petitioner is liable for an accuracy-related penalty under section 6662(a) and (b)(1) in the amount of $1,316 .40 . FINDINGS OF FACT Some of the facts have been stipulated, and the stipulated facts and the accompanying exhibits are hereby incorporated by reference into our findings . At the time she filed her petition, petitioner resided in Chattanooga, Tennessee . On July 1, 1998, petitioner and her husband, Dr . Thornton D . Perkins (Dr . Perkins), entered into a marital dissolution agreement (MDA), which was approved by the Chancery Court o f 1 All section references are to the Internal Revenue Code of 1986, as amended and in effect for the taxable year at issue . The Rule references are to the Tax Court Rules of Practice and Procedure . Hamilton County, Tennessee, and incorpo - 3 - final divorce decree . The first few p s of the MDA ar e dedicated to the division of marital p erty . Under the heading "Alimony", paragraph 14(a) of the MDA p vided that Dr . Perkin s would pay to petitioner, until May 9 , , when she would reac h the age of 59-1/2, alimony in futuro in n amount equal to 20 percent of Dr . Perkins' s earned income . Paragraph 14(b) of the MDA stated that Dr . Perkins's obligatio to pay alimony in futur o would cease upon the death of petition e upon petitioner' s remarriage, or at Dr . Perkins's deat h uld it occur before May 9, 2004 . Under paragraph 14(f), the M D provided that if Dr . Perkins was to become disabled and recei e benefits from his professional disability policy, petition r was to receive 20 percent of the policy benefits until Dr . Perkins's alimony obligation terminated on May 9, 2004 . At some point prior to January 1, 2 03, Dr . Perkins became disabled and started receiving payments nder his professional disability policy . During 2003, Dr . Per ins paid to petitioner $26,400 of his policy benefits for tha t ear . 2 Petitioner filed, in a timely manne a Form 1040, U .S . Individual Income Tax Return, for the 20 3 taxable year, on which she failed to report any of the $26,400 aid to her by Dr . 2 That amount was paid to petition installments of $2,200 . - 4 - Perkins .3 On March 13, 2006, respondent issued a notice of deficiency . Petitioner then filed a timely petition with this Court . A trial was held on March 7, 2007, in Knoxville, Tennessee . OPINION I . Taxability of the $26,400 in Disability Benefits Received by Petitioner Pursuant to Paragraph 14(f) of the MDA As a general rule, the Commissioner's determination of a taxpayer's liability for an income tax deficiency is presumed correct, and the taxpayer bears the burden of proving that the determination is improper . See Rule 142(a) ; Welch v . Helvering , 290 U .S . 111, 115 (1933) . But see sec . 7491(a) . "Payments incident to a divorce traditionally fell into one of two categories for [the purpose of] Federal tax law : property settlements or alimony ." Rogers v . Commissioner , T .C . Memo . 2005-50 . Payments characterized as property settlements are generally neither deductible from the income of the payor nor includable in the income of the payee . See Yoakum v . Commissioner , 82 T .C . 128, 134 (1984) . The opposite is true for payments characterized as alimony . See sec . 215(a) ("In the case of an individual, there shall be allowed as a deduction an amount equal to the alimony or separate maintenance payments paid during such individual's taxable year .") ; sec . 71(a) ("Gross incom e 3 That return was prepared by John P . Konvalinka, the attorney representing petitioner in this case . - 5 - includes amounts received as alimony or *eparate maintenanc e payments .") . For Federal income tax purposes, a l mony is defined as any payment in cash that satisfies all of t h following fou r requirements : (a) Such payment is recei v d by, or on behalf of, a spouse under a divorce or separation in s rument ; (b) the divorce or separation instrument does not desig n to such payment as a payment which is not includable in gros s income under section 71 and not allowable as a deduction under s ction 215 ; (c) the payee spouse and the payor spouse are not memb rs of the same household at the time the payment is made ; and (d ) there is no liability t o make any such payment, or a substitute f r such payment, in cash or property, after the death of the pay e spouse . Sec . 71 (b) (1) ( A) - (D) . The characterization o the payments as "alimony" in the divorce or separation i strument does not establish whether those payments are tr e ted as alimony for Federal income tax purposes ; the test is whether the four statutory requirements are met . See Hoo er v . Commissioner, 102 F .3d 842, 844 (6th Cir . 1996 )(" The mere se of the word 'alimony' does not affect the tax consequences of ayments ."), affg . T .C . Memo . 1995-183 . In this case, the first three requi ments of section 71(b)(1) are clearly satisfied with resp t to the payments at - 6 - issue .' Because the MDA is silent as to whether Dr . Perkins's obligation under paragraph 14(f) of the MDA would have survived petitioner ' s death, the MDA itself does not resolve explicitly the question of whether the fourth and final requirement o f section 71 ( b)(1) has been satisfied . As a consequence , we must look to Tennessee law in order to properly characterize the payments at issue in this case . Under Tennessee law, two types of alimony are relevant in this case : alimony in futuro and alimony in solido .5 The purpose of alimony in futuro " is to provide financial support to a spouse who cannot be rehabilitated ." Burlew v . Burlew , 40 S .W .3d 465, 471 (Tenn . 2001 ) . Alimony in futuro terminates "automatically and unconditionally upon the death or remarriage of the recipient " or upon the occurrence of a stated contingency, such as a specific termination date . Tenn . Code Ann . sec . 36-5- ' That is true because ( 1) those payments were received under an MDA , ( 2) the MDA did not designate the payments as not includable in gross income under sec . 71 and not allowable as a deduction under sec . 215, and ( 3) petitioner and Dr . Perkins were not members of the same household when the payments at issue were made . 5 See Tenn . Code Ann . sec . 36-5-101 ( 2003 ) ; Burlew v . Burlew , 40 S .W .3d 465, 471 ( Tenn . 2001) . In 2005, Tenn . Code Ann . sec . 36 - 5-101 was deleted in its entirety and replaced . The deleted section was amended and recodified in Tenn Code Ann . sec . 36-5-121 . In addition to alimony in futuro and alimony in solido, Tennessee law provides for rehabilitative alimony and transitional alimony, neither of which is relevant in this case because they were not provided for in the MDA (transitional alimony was not even introduced into the Tennessee Code until 2003, long after the parties entered into the MDA) . - 7 - 101(a)(2)(B) (2003) ; see Waddey v . Wadd , 6 S .W .3d 230, 23 2 (Tenn . 1999) . Alimony in solido, which s often awarded to cure an imbalance in the distribution of mar' al property, is an awar d of a definite sum of alimony that "may paid in installments provided the payments are ordered over definite period of time and the sum of the alimony to be paid is ascertainable whe n awarded ." Waddey v . Waddey , supra at 23 . Unlike alimony in futuro, alimony in solido does not autom tically terminate upo n the death of either party . See Burlew v Burlew , su ra . Thi s Court has observed that alimony in solid is roughly equivalen t to a property settlement and that alimon in futuro is roughl y equivalent to alimony as defined in sect on 71 (b) . See Rogers v . Commissioner , supra . "The determinative factor in decid ng whether an award o f spousal support is alimony in solido, is the intent of th e parties, or the court, that the award be for a fixed amount . " Bryan v . Leach , 85 S .W .3d 136, 146 (Tenn Ct . App . 2001) . I n contrast, alimony in futuro "lacks sum-c rtainty due t o contingencies affecting the total amount of alimony to be paid . " Waddey v . Waddey , supra at 232 . In addi ion, the Supreme Cour t of Tennessee has held that distinguishin alimony on the basis of "the definiteness of the term of the awa * * * actuall y reflects the essential purpose of each a rd" . Self v . Self , 861 S .W .2d 360, 362 (Tenn . 1993) . - 8 - As explained below, we conclude that Dr . Perkins's obligation under paragraph 14(f) of the MDA was an obligation to pay alimony in futuro, which would not have survived petitioner's death . Consequently, the $26,400 in disability benefit s petitioner received in 2003 is taxable alimony under section 71 . Because the Tennessee courts have held that the definiteness or indefiniteness of an award of alimony determines whether it is alimony in solido or alimony in futuro, we begin by discussing that issue . Petitioner argues that Dr . Perkins's obligation was alimony in solido because "the amount is calculable when awarded in that the amount to be paid to Petitioner can be calculated based upon the date that Thornton Perkins became disabled ." Respondent argues that the award was alimony in futuro because it was contingent on Dr . Perkins's becoming disabled and because it was for an uncertain amount . We agree with respondent . When the parties entered into the MDA on July 1, 1998, Dr . Perkins's obligation under paragraph 14(f) would have arisen only in the event that Dr . Perkins became disabled at some future time . Thus, Dr . Perkins's very obligation to pay petitioner a portion of his disability benefits, if he ever received any, not to mention the amount of that obligation, was not fixed and definite . By that standard, Dr . Perkins's obligation under paragraph 14(f) constituted alimony in futuro under Tennessee law . See McKee v . McKee , 655 S .W .2d 164, 165 (Tenn . Ct . App . - 9 - 1983) ("The determining factor in distil guishing whether alimon y is in futuro or in solido is the defini eness or indefinitenes s of the amount ordered to be paid .") . Because the Tennessee courts alsolllook to the essentia l purpose of the alimony award, see Sel f Self , supra at 362, we will next address that issue . Our ultii to conclusion in tha t regard, based largely on the relationship between paragraphs 14(a) and 14(f) of the MDA, is that th e urpose of paragraph 14(f) was to oblige Dr . Perkins to pay a imony in futuro . Robin Lyn Miller, an attorney who presented petitioner in her divorce from Dr . Perkins, testified t trial that it was her intent in negotiating the MDA that Dr . P rkins's obligation under paragraph 14(f) represent his obligation to pay petitioner for her share of a marital asset . Attorney iller further testifie d that, if petitioner died before May 9, 2 04 it was intended tha t payments made by Dr . Perkins pursuant to paragraph 14(f) of the MDA would have gone to petitioner's est a e . Upon cross-examination, however, when asked w ether it was just a coincidence that Dr . Perkins's obligatio under paragraph 14(f) of the MDA terminated on the same day as his obligation to pay alimony in futuro--when petitioner reach d the age of 59-1/2-- attorney Miller responded : I don't think -- it's not coincides e . Certainly she would have had a penalty to withdra earlier . In negotiating divorce cases, you have to -- I mean, these are those odd asset[s] that may or y not come into - 10 - fruition, so if Dr . Perkins had died during that time that she was receiving what is clearly the alimony in futuro, she would have had no more income, and she would have had to have gone to her savings . In our view, in light of its placement in the MDA and attorney Miller's testimony, the most reasonable construction of paragraph 14(f) of the MDA is that it represents contingency planning designed to provide an alternative source of funds from which Dr . Perkins would pay alimony in futuro in the event that he was to become disabled .6 The purpose of paragraph 14(f) was to ensure that Dr . Perkins would pay alimony in futuro even if he could no longer work, not to divide a marital asset . That obligation, like Dr . Perkins's obligation under paragraph 14(a) of the MDA, constituted alimony in futuro which, pursuant to Tenn . Code Ann . sec . 36-5-101(a)(2)(B), would not have survived petitioner's death . Because that obligation would not have survived petitioner's death, and because the other requirements of section 71(b) were met, see supra note 4, petitioner was required to include in her gross income the money she received pursuant to paragraph 14(f) of the MDA . See sec . 71(a) . 6 As noted earlier, par . 14(a) of the MDA provided that Dr . Perkins would pay to petitioner, until May 9, 2004, when she would reach the age of 59-1/2, alimony in futuro in an amount equal to 20 percent of Dr . Perkins's earned income . It is only logical to infer that payments to petitioner of a portion of Dr . Perkins's disability benefits under par . 14(f) of the MDA, also calculated at 20 percent, were intended as a substitute for the earnings lost as a result of the disability . - 11 - Finally, the MDA itself strongly s ggests that the parties did not consider Dr . Perkins's potentia postdivorce disabilit y benefits to be marital property . The p ties went to great lengths to divide their marital propert including househol d furnishings, automobiles, Dr . Perkins's rofit-sharing plan, Dr . Perkins's medical practice, and the par es' individua l retirement accounts . There is no mentio f Dr . Perkins' s disability benefits except in paragraph 4(f) . In sum, we find unavailing petitioner's argument that p agraph 14(f) provided for the division of a marital asset, o r limony in solido . The parties were in the best posit i n to specify how they wanted the payments at issue to be clas s fied for Federal incom e tax purposes .' Section 71 expressly pe r itted the parties t o specify that the payments at issue would not be treated as alimony for Federal income tax purposes . See sec . 71(b) (1) (B ) (providing that a payment will not be a l mony if the divorce or separation instrument designates the p ent as not includable i n In fact, they did just that in p a respect to temporary alimony paid to pet pendency of the divorce action . Par . 14 amount of temporary alimony paid was tax Perkins . Although one could argue that so specify in par . 14(f) means that the opposite with respect to payments made u inference is warranted . The bottom lin e how to designate payments for Federal in not designate the payments to be made pu be nonincludable/nondeductible . . 14(d) of the MDA wit h tioner during th e d) provided that the deductible by Dr . he parties' failure to arties intended th e der par . 14(f), no suc h is that the parties kne w ome tax purposes and did suant to par . 14(f) to - 12 - gross income and not allowable as an alimony deduction) . As the Supreme Court of Tennessee noted in Self v . Self , supra at 364 , In addition to the rights and obligations of the parties with respect to each other, the liability for taxes, the rights of creditors, and other significant consequences may depend upon the preciseness of the language employed in the decree . Construction by the courts of uncertain and ambiguous language is a poor substitute for careful articulation . II . Section 6662 Penalt y Subsection (a) of section 6662 imposes an accuracy-related penalty on an underpayment of tax that is equal to 20 percent of any underpayment that is attributable to a list of causes contained in subsection (b) . Among the causes justifying the imposition of the penalty are (1) negligence or disregard of rules or regulations and (2) any substantial understatement of income tax . Section 6662(c) defines negligence as "any failure to make a reasonable attempt to comply with the provisions of this title ." "[D]isregard" is defined to include "any careless, reckless, or intentional disregard ." Id . Under caselaw, "'Negligence is a lack of due care or the failure to do what a reasonable and ordinarily prudent person would do under the circumstances .'" Freytag v . Commissioner , 89 T .C . 849, 887 (1987) (quoting Marcello v . Commissioner , 380 F .2d 499, 506 (5th Cir . 1967), affg . on this issue 43 T .C . 168 (1964) and T .C . Memo . 1964-299), affd . 904 F .2d 1011 (5th Cir . 1990), affd . 501 U .S . 868 (1991) . - 13 - There is a "substantial understat e " of an individual' s income tax for any taxable year where amount of th e understatement exceeds the greater of 10 percent of the tax required to be shown on the return fo r taxable year or (2) $5,000 . Sec . 6662(d) (1) (A) (i) and (ii) However, the amount of the understatement is reduced to the e x t attributable to a n item (1) for which there is or was subst ntial authority for the taxpayer's treatment thereof, or (2) wi t respect to which th e relevant facts were adequately disclose d on the taxpayer's return or an attached statement and there is a easonable basis for the taxpayer's treatment of the item . See s c . 6662(d) (2) (B) . There is an exception to the secti n 6662(a) penalty when a taxpayer can demonstrate (1) reasonable ause for the underpayment and (2) that the taxpayer a ted in good faith with respect to the underpayment . Sec . 6664( )(1) . Regulations promulgated under section 6664(c) furthe provide that the determination of reasonable cause and go d faith "is made on a case-by-case basis, taking into account 11 pertinent facts and circumstances ." Sec . 1 .6664-4(b)(1), I n ome Tax Regs . Reliance upon the advice of a tax p ofessional may, but doe s not necessarily, establish reasonable ca and good faith fo r the purpose of avoiding a section 6662(a penalty . See United States v . Boyle , 469 U .S . 241, 251 (1985 ("Reliance by a lay person on a lawyer is of course common ; t that reliance cannot - 14 - function as a substitute for compliance with an unambiguous statute ." ) . Such reliance does not serve as an "absolute defense" ; it is merely " a factor to be considered ." Freytag v . Commissioner , supra at 888 . The caselaw sets forth the following three requirements in order for a taxpayer to use reliance on a tax professional to avoid liability for a section 6662(a) penalty : "(1) The adviser was a competent professional who had sufficient expertise to justify reliance , ( 2) the taxpayer provided necessary and accurate information to the adviser, and (3) the taxpayer actually relied in good faith on the adviser's judgment ." See Neonatology Associates , P .A . v . Commissioner , 115 T .C . 43, 99 ( 2000 ), affd . 299 F . 3d 221 ( 3d Cir . 2002) . In this case , the notice of deficiency included the imposition of a $1,316 .40 penalty under section 6662(a) and (b)(1) .8 In her arguments regarding the section 6662 ( a) penalty, petitioner does not contest that, in the event that the Court would find against her regarding the taxability of the alimony, she substantially understated her 2003 income tax . Petitioner argues that she is not liable for the penalty because (1) section 71(b)(1)( D) and paragraph 14(f) of the MDA are substantial authority for her position that the $26,400 pai d 6 The notice of deficiency refers only to sec . 6662(a) and (b)(1) . It does not refer to sec . 6662 ( b)(2), which provides for the imposition of a sec . 6662 penalty for any substantial understatement of income tax . Respondent raises the substantial underpayment issue in his pretrial memorandum and briefs . - 15 - to her in 2003 by Dr . Perkins was not i ludable in her 2003 income for Federal income tax purposes d (2) she reasonabl y relied on professional advice in faili n o report the $26,40 0 paid to her in 2003 by Dr . Perkins as a l mony income . Because, as explained below, we agree with petit ner that she ha s satisfied the requirements of the reas o ble reliance exception, petitioner is not liable for a section 62 penalty . 9 With respect to the first prong o he Neonatology test, we conclude that petitioner has establishe that her attorney was a competent professional who had suffici e expertise to justif y reliance . Respondent does not dispute o r conclusion . See Neonatology Associates, P .A . v . Comm ssioner , supra at 99 ; see also United States v . Boyle , supra a 250-251 . With respect to the second pron g the Neonatology test , we are satisfied that the evidence of re ord, particularl y attorney Miller's testimony, which ref le is that attorney Mille r consulted with attorney Konvalinka in 2 0 regarding the taxability of the payments at issue i n is case, demonstrates that petitioner provided necessary and a curate information in a timely manner to her tax adviser, attorn y Konvalinka, regardin g 9 Because we conclude that the reas o applies here, we need not discuss the me argument regarding the substantial autho able reliance exceptio n is of petitioner's ty exception . - 16 - her receipt of the payments now at issue . 10 Because petitioner's failure to report those payments is the sole basis argued by respondent to support the imposition of a penalty in this case, petitioner has satisfied the second prong of the Neonatology test . Turning to the third prong of the Neonatology test, we conclude that petitioner has demonstrated that she actually relied in good faith on the advice of attorneys Miller and Konvalinka . The issue in this case involves the tax consequence s that flow from construction by the Court of a portion of the MDA that is ambiguous . Petitioner, who has no discernable expertise in tax matters, relied on attorney Konvalinka, an experienced tax attorney, for the preparation of her 2003 Federal income ta x return . Attorney Konvalinka arrived at his decision to advise petitioner not to report the payments now at issue because they were not alimony within the meaning of section 71(b) following his consultation with attorney Miller . Attorney Miller had represented petitioner in her divorce from Dr . Perkins . 10 Although respondent contends that no evidence was introduced regarding when attorney Miller's alleged consultation with attorney Konvalinka occurred, we find attorney Miller's testimony sufficient to support a conclusion, logically derived from the facts and circumstances of this case, that such consultation was made prior to the filing of petitioner's 2003 Federal income tax return on April 1, 2004 . In addition, it is only logical to conclude that such consultation took place after petitioner disclosed the payments at issue in this case to attorney Konvalinka . - 17 - Petitioner was not required to second g ess attorney Konvalinka's advice . See United States v . Boyle , su ra at 251 ("To requir e the taxpayer to challenge the attorney, o seek a 'second opinion,' or to try to monitor counse l the provisions of the Code himself would nullify the very pur se of seeking the advice of a presumed expert in the first place ) . Petitioner ha s therefore demonstrated reasonable cause d good faith for th e underpayment . As a result, she is not able for an accuracy- related penalty under section 6662 . The Court has considered all of pe t respondent's contentions, arguments, r e To the extent not discussed herein, we c meritless, moot, or irrelevant . To reflect the foregoing,