TAX COURT OPINION

Case: Patrick Henry Doyle
Docket Number: 18043-11
Judge: Paris
Opinion Type: bench
Filed: 08/17/2012
Pages: 17

UNITED STATES TAX COURT WASHINGTON, DC 20217 PATRICK HENRY DOYLE, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent ) ) ) ) ) Docket No. 18043-11. ) ) ) ) ) ) ORDER Pursuant to Rule 152(b), Tax Court Rules nf Practice and Procedure, it is ORDERED that the Clerk of the Court sha 1 transmit herewith to petitioner and to respondent a copy of the pages of the transcript of the proceedings of this case before Judge Elizabeth Crewson Paris in Ka sas City, Missouri, on June 14, 2012, containing her oral findings of fact and opihion rendered at the trial session at which this case was calendared. In accordance with the oral findings of fact and opinion, a decision will be entered pursuant to Rule 155. (Signed) Elizabeth Crewson Paris Judge Dated: Washington, D.C. August 17, 2012 S§ iMED AUG 2 0 2012 3 Bench Opinion by Judge Elizabeth Crewson Paris Doyle v. Commissioner Docket No. 18043-11 June 14, 2012 The Court has decidëd to render oral findings of fact and opinion in this case, and the following represents the Court's oral findings of fact and opinion (bench opinion). The bench opinion shall not be relied upon as precedent in any other case . Rule references in this opinion will be to the Tax Court Rules of Practice and Procedure, and section references will be to the Internal Revenue Code in effect in 2008. This case is beforelthe Court on the basis of the Court ' s def iciency jurisdict ion under Section 6213 (a) . This bench opinion s issued pursuant to Rule 152 and section 7459(b). Petitioner filed his Federal income tax return for tax year 2008 on April 27, 2009. He was not granted any applicable extension of the April 15, 2009 filing deadline. On his return Petitioner claimed a deduction for alimony paid to his former spouse, Elizabeth Shivers Doyle (Ms . Doyle) , in the amount of $30,758. On April the 29, 2011, Respondent mailed to 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 Petitioner a notice of deficiency for 2008 that Heritage Reporting Corporation (202) 628l4888 4 disallowed $13,826 of Petitioner's claimed alimony deduction resulting in a Federal income tax deficiency of $3,450. In addition to the deficiency, Respondent determined that Petitioner was liable for an addition to tax of $116 under section 6651(a) (1) and an accuracy-related penalty of $690 under 6662(a). Petitioner filed a etition with this Court in response to the notice of deficiency. The issues for decision are whether Peti ioner can deduct the $13,826 disallowed by Respondent as an alimony deduction under section 215(a) in 2008, and (2), whether Petitioner is liable for an addition to tax under section 4444(a) (1) and an accuracy-related 6651 penalty under section 6662(a). Some of the facts have been stipulated and are so found. Petitioner resided in Missouri when the petition was filed. · Petitioner and Ms. boyle were married in 1989 and their divorce was finalized in 2007. The divorce decree, Journal Entry and Decree of Divorce Nunc Pro Tunc, was filed in the Tenth District Court . of Johnson County, Kansas on February the 20, 2007. In the divorce decree the Petitioner was Mr. Doyle and the Respondent was Ms. Doyle, and will be referred to as such in regard to any Johnson County Court issues. 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 Heritage Reporting Corporation (202) 628'4888 I 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 5 The recitals of the divorce decree provided that the " (Petitioner) is therefore hereafter ordered to pay maintenance to (Ms . Doyle) and as for her additional retroactive maintenance, (Petitioner) is ordered to pay certain sums on behalf of (Ms. Doyle) as and for maintenance, which said maint nance is not dischargeable in bankruptcy and is not included as income to (Ms . Doyle) or deductible by (Petitioner) . " This statement regarding the eductibility of the maintenance payments was not included in the ordered paragraphs of the divorce decree. In text provided after the recitals Petitioner was ordered, among other things, to pay Ms. Doyle: (1) $1,500 per month for support and maintenance, beginning on Marbh 1, 2007, and continuing for 80 months, and (2) approximately $48,757 in retroactive maintenance and support comprised of credit card debt . The divorce decree also provided that Petitioner "shall pay to (Ms. Doyle) the sum of $15,000" for attorney fees. Petitioner was ordered to make these payments to Ms. Doyle through the Johnson County District Court Trustee. Submitted into evidence is a ledger from the District Court Trustee summarlz1ng Petitioner's Heritage Reporting Corporation (202) 628-4888 6 payments under the divorce decree for the period of March 1, 2007, through February 1, 2009. According to the ledger Petitioner did not make the first five maintenance payments and, as of August 1st, 2007 was in arrears by $7,500. On January 1, 2008, the tax year at issue, Petitioner was in arrears by $6,000 and * on January 1, 2009, the arrears were reduced to $600. During 2008 Petitioner made 26 maintenance payments of $900 each, an agg egate of $23,400. In addition, pursuant to a Journ 1 Entry filed by the 10th District Court of Johnson County, Kansas on June 6, 2008, $7,358 was garnished from Petitioner's bank account in partial satisfaction of the $15,000 judgment for Ms. Doyle's attokney fees. On his Form 1040 fo 2008, Petitioner deducted as alimony $30,758, hich is the sum of the $23,400 maintenance payments nd $7,358 garnishment. Respondent, in the notice of eficiency, determined that the $13,826 was not dedu tible as alimony. Under rule 142(a) Petitioner has the burden of proof to show that he is entitled to the alimony deduction. Section 215(a) provides that an individual is allowed as a deduâtion th amount equal to the alimony or separate maintenance payments paid during the individual's taxable year. The term "alimony or 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 Heritage Reportin Corporation (202) 628 4888 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 7 separate maintenance payment" means any alimony or separate maintenance payment (as defined in section 71 (b) ) which is includible in the gross income of the recipient under section 71. Section 215(b). An alimony or separate maintenance payment, as defined by section 71(b), is any payment in cash that satisfies the four requirements listed under section 71(b) (1). The first requirement is that the payment be received by or on behalf of a spouse under a divorce or separation instrument, which is defined to include a decree of divorce . Section 71 (b) (1) (A) and (b) (2) . Respondent does not dispute that this requirement is met. Rather, Respondent's position is focused on the second requirement and, specifically, its application to the recitals of the divorce decree. The second requirement under section 71(b) (1) provides that an alimony or separate maintenance payment means any payment in cash if "the divorce or separation instrument does not designate such payment as a payment which is not includable in gross income under this section and not allowable as a deduct ion under se ct ion 215 " . Sect ion 71 (b) (1) (B) . Heritage Reporting Corporation (202) 628-4888 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 deductible by Pctitiencr." And I 2pologico, I have to . Respondent argues that this . requirement is not met because the recitals of the divorce decree provides that "maintenance is not dischargeable in bankruptcy and is not includable as income to (Ms. Doyle) or deductible by (Petitioner)." On the basis of this reasoning, Respondent moved for leave to file an Amendment to Answer to increase Petitioner's deficiency to $7,725 by disallowing Petitioner's alimony deduction in its entirety. Under section 6214(a) the Court has jurisdiction to consider a claim by the Commissioner for an increased deficiency asserted at or before the hearing or rehearing. See, e.g., Ferrill, T c r r i R -1-tversus Commissioner, 684 F.2d 261, 265 (3rd Circuit. 1982), affirmed T.C. memo 1979-501; see also Quick v. Commissioner, 110 T.C. 172, 180 (1998). Having been raised in her Amendment to Answer, and not in the notice of deficiency, the additional liability is a "new matter". Therefore, Respondent has the burden of proving the additional liability. Rule 142(a) (1). In support of her motion Respondent argued that the recitals in the divorce decree provided that Heritage Reporting Corporation (202) 628-4888 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 all maintenance payments made by Petitioner were n.ot deductible. For the reasons discussed herein, the Court finds that the recital paragraph upon which Respondent relies is not operative and is ambiguous as to which payments it refers. The Court therefore denied Respondent's motion for leave to file an Amendment to Answer prior to the start of trial. Respondent's interpretation of the divorce decree recitals is misplaced. The recital at issue, despite addressing the deductibility of certain maintenance payments, was not included in the order paragraphs of the divorce decree and is therefore not controlling. Moreover, as written, is not clear as to which maintenance payments, whether it be the $1,500 monthly payment or the credit card debt, the deductibility clause applies. The Court therefore concludes that the recital in regard to the monthly payments does not affect the character of Petitioner's maintenance payments as alimony, and the second requirement of section 71(b) (1) (B) is met. In the alternative, Respondent contends that Petitioner's periodic maintenance payments of $900 made in 2008 are not deductible as alimony in part because the payments exceed the $1,500 monthly payment ordered in the divorce decree. Respondent's position Heritage Reporting Corporation (202) 628-4888 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 10 is that the additional amount, which is $5,400 for 2008, relates to Petitioner's other obligations under the divorce decree, such as child support. Petitioner, however, contends that the additional payments were made to satisfy his arrearage in alimony. The Court has held that cash payments made in satisfaction of alimony arrearage retain the character of the.payments originally due. . See eg., Davis v. Commissioner, 41 T.C. 815, 820 (1964) ("where a lump sum is paid in settlement of arrearages in alimony, the payment retains the characteristics of the original payments for which it is substituted"); see also Stroud v. Commissioner, T.C. Memo 1993-317; Coleman v. Commissioner, T.C. Memo. 1988-442. On January 1, 2008, Petitioner was in arrears in his alimony payments by $6,000. According to the ledger Petitioner's payments in excess of the $1,500 maintenance payments due each month decreased his alimony arrearage. The Court holds that this excess amount is attributed to, and retained the character of, the periodic maintenance payments in arrears during 2008. Petitioner's $23,400 of maintenance payments made in 2008 are therefore deductible as alimony under section 215(a). Heritage Reporting Corporation (202) 628-4888 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 11 Attorney Fees Next in dispute is whether Petitioner can deduct $7,358 garnished from his bank account to satisfy his obligation under the divorce decree to pay Ms. Doyle $15,000 of attorney fees. At issue is whether attorney fees satisfy the requirement under section 71(b) (1) (D) of whether such payment would terminate in the event of Ms. Doyle's death. Under section 71(b) (1) (D) payments to a former spouse will not be considered alimony if there (cid:16)042 is -ee-liability to make said payments for any period after the death of the payee's spouse. .34hefe-'s-my--eede In deciding whether payments are alimony under section 71(b) (1) (D), the Court must examine the language of the divorce or separation instrument to ascertain whether it contains a condition that terminates the paying spouse's liability upon the death of the recipient spouse, and, if it does not, whether state law applies such a condition in cases where the instrument is silent. Sperling v. Commissioner, T.C. Memo. 2009-141. The Court has held that the paying spouse's liability will extend beyond the death of the recipient spouse where: (1) the divorce decree, in describing a payment, uses the Heritage Reporting Corporation (202) 628-4888 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 12 words "shall pay" and (2) such language stands in contrast to deliberate alimony payment provisions within the divorce decree that specify that payments will cease upon the death of the recipient spouse. Webb v. Commissioner, T.C. Memo. 1990-540. In its order for the attorney fees the divorce decree does not state whether Petitioner's payment terminates upon the death of Ms. Doyle. However the divorce decree orders that Petitioner "shall pay" to Ms. Doyle the sum of $15,000 for attorney fees. In contrast the divorce decree orders that Petitioner pay periodic maintenance payments of $1,500 per month for a period of 80.months unless terminated by, among other things, the death of Ms. Doyle. The divorce decree's language when viewed in light of Webb establishes the Petitioner's liability to pay attorney fees in the amount of $15,000 would not terminate upon the death of Ms. Doyle. Not withstanding the language of the divorce decree, state law analysis would likely achieve the same result. While the Kansas State courts have not addressed the narrow legal issue presented in this case, the majority of State courts considering a similar question have concluded that an award of attorney fees remains viable and enforceable Heritage Reporting Corporation (202) 628-4888 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 13 notwithstanding the death of one spouse before entry of a final divorce decree. See Berry v. Commissioner, T.C. Memo. 2000-373. Furthermore, courts granting awards of attorney fees frequently focus on the public policy underlying the statutory prov1slons authorizing such awards; i.e. providing spouses without financial resources the means to retain counsel in divorce actions. Id. Such courts point out that a spouse's access to counsel would be unduly restricted if counsel were required to bear the risk that his or her client might not survive until a final divorce decree is entered. Id. The Kansas State statute that governs payment of attorney fees in an action for divorce reinforces the notion that such payments extend beyond the death of the recipient spouse. The statute provides that a court may order that an amount awarded for attorneys fees be paid directly to the attorney, who may enforce the order in the attorney's name. K.S.A. section 23-2715(2011) (formerly K.S.A. section 60-1610(b) (4) (2007)). Thus the Kansas legislature intended that the liability for attorney fees be enforceable independent of the recipient spouse's lifespan. The Court.therefore holds that Petitioner's Heritage Reporting Corporation (202) 628-4888 . 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 14 liability to.pay attorney fees in the amount of $15,000 would not terminate upon the death of Ms. Doyle. Accordingly, any amounts paid in satisfaction of this liability are not alimony and are not deductible. Section 6651(a) (1) Addition to Tax. Failure to file a tax return on the date prescribed leads to a mandatory addition to tax unless the taxpayer shows that such failure was due to reasonable cause and not due to willful neglect. Section 6651(a) (1). For each month the return is late, an addition to.tax equal to five percent of the amount of tax required to be shown on the return shall be assessed, not exceeding 25 percent of the aggregate. Id. The burden of proving reasonable cause and lack of willful neglect falls on the taxpayer. Rule 142(a); United States v. Boyle, 469 U.S. 241, 249(1985). Reasonable cause exists where a return is late despite the taxpayer exercising "ordinary business care and prudence." Treasury Reg 301.6651- 1(c), Income Tax Regs. Circumstances that are considered to constitute reasonable cause are typically those outside of the taxpayers control, for example: (1) unavoidable postal delays, (2) timely Heritage Reporting Corporation (202) 628-4888 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 15 filing of a return with the wrong office, (3) death or serious illness of the taxpayer or a member of the taxpayer's immediate family, or (4) destruction by casualty of the taxpayer's records or place of business. McMahan v. Commissioner, 114 F.3d 366, 369(2nd Circuit. 1997). A taxpayer's belief that he overpaid the tax due is not reasonable cause for his failure to timely file a return. Crittendon v. Commissioner, T.C. Memo. 2003-186. Petitioner filed his Federal income tax return for tax year 2008 on April the 27, 2009. Petitioner's return was due on April 15, 2009 and Petitioner was not granted any applicable extensions. of the filing deadline. Petitioner's only reason for not timely filing his return was his belief that he was entitled to a refund. This does not constitute reasonable cause. Accordingly, Petitioner is liable for the addition to tax prescribed under section 6651(a) (1) for the tax year 2008 Section 6662(a) V Accuracy-Related Penalty. Section 6662(a) provides an accuracy-related penalty equal to 20 percent of the underpayment attributable to any substantial understatement of income tax, or to negligence or disregard of rules or regulations. However, no penalty will be imposed Heritage Reporting Corporation (202) 628-4888 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 16 under section 6662(a) if the taxpayer establishes that he acted with reasonable cause and in good faith. Section 6664 (c) (1). Circumstances that indicate reasonable cause and good faith include reliance on the advice of a tax professional or an honest misunderstanding of the law that is reasonable in light of all the facts and circumstances. Section 1.6664-4(b), Income Tax Regs. The taxpayer has the burden of proving that he acted with reasonable cause and in good faith. Rule 142(a); Reilly v. Commissioner, $3 T.C, 8, 14 (1970). The Court has held that the bi-weekly amounts paid by Petitioner, via the District Court Trustee, to Ms. Doyle in tax year 2008 were alimony payments and were therefore deductible from Petitioner's income. The remaining understatement for tax year 2008 results solely from the disallowance of Petitioner's deduction for attorney fees paid on behalf of Ms. Doyle to her attorneys. In Petitioner's divorce decree, the amounts ordered to be paid as monthly alimony were characterized as "support and maintenance" of Ms. Doyle. The amounts subsequently ordered to be paid for attorney fees were then characterized as "additional support and maintenance" of Ms. Doyle. As Heritage Reporting Corporation (202) 628-4888 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 17 a result, it was reasonable for Petitioner to surmise that any amounts paid for attorney fees were the same character as those paid for monthly alimony and that such amounts would be similarly deductible under section 215(a). Accordingly, the Court holds that Petitioner acted with reasonable cause and in good faith in deducting the amount paid for Ms. Doyle's attorney fees for tax year 2008. Petitioner is not liable for the addition to tax prescribed under section 6662(a). In reaching our holdings, the Court has considered all arguments made, and, to the extent not mentioned, we conclude that they are moot, irrelevant, or without merit. To reflect the foregoing, the decision will be entered under Rule 155. This concludes the Court's oral findings of fact and opinion. Upon that note because there were adjustments both ways, neither the notice of deficiency will-e stand as originally presented nor will the Petitioner's original petition wè4+ stand as E P originally requested, that there's adjustments on both sides, or Rule 155 requires a computation of the parties and that matter will be computed after this Heritage Reporting Corporation (202) 628-4888 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 18 order is issue -. This is just considered to be the oral findings of fact . It will be delivered as an order along with the transcript of this bench opinion. (Whereupon, at 5:02 p.m., the bench opinion in the above-entitled matter was concluded.) // // // // // // // // // // // // // // // // // // // // Heritage Reporting Corporation (202) 628-4888