TAX COURT OPINION

Case: Greg Perry Fancher
Docket Number: 10885-14
Judge: Holmes
Opinion Type: bench
Filed: 08/10/2015
Pages: 21

UNITED STATES TAX COURT WASHINGTON, DC 20217 Greg Perry Fancher, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. ) ) ) ) ) Docket No. 10885-14. ) ) ) ORDER Pursuant to Rule 152(b), Tax Court Rules of Practice and Procedure, it is ORDERED that the Clerk of the Court shall transmit herewith to petitioner and to respondent a copy of the pages of the transcript of the trial in the above case before Judge Mark V. Holmes at St. Paul, Minnesota on June 16, 2015, containing his oral findings of fact and opinion rendered at the trial session at which the case was heard. In accordance with the oral fmdings of fact and opinion, decision will be entered for respondent. (Signed) Mark V. Holmes Judge Dated: Washington, D.C. August 10, 2015 3jäWD AUG 1 2 2015 Capital Reporting Company IN THE UNITED STATES TAX COURT In the Matter of: GREG PERRY FANCHER, Petitioner, v. ) ) ) ) ) ) )Docket No. 10885-14 COMMISSIONER OF INTERNAL REVENUE,) Respondent. ) c- Pag.es.:._ .1 through 19 Place: St. Paul, Minnesota Date: June 16, 2015 (866) 448 - DEPO www.CapitalReportingCompany.com 2015 Capital Reporting Company IN THE UNITED STATES TAX COURT 1 In the Matter of: GREG PERRY FANCHER, ) ) ) ) ) ) )Docket No. 10885-14 ) COMMISSIONER OF INTERNAL REVENUE,) ) ) Petitioner, v. Respondent. Courtroom 444 W.E. Burger Federal Building & U.S. Courthouse 316 North Robert Street St. Paul, Minnesota 55101 June 16, 2015 The above-entitled matter came on for bench opinion, pursuant to notice, at 10:11 a.m. BEFORE: HONORABLE MARK V. HOLMES Judge APPEARANCES: the Petitioner: For (No Appearance) the Respondent: For (No Appearance) (866) 448 - DEPO www.Capita1ReportingCompany.com 2015 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 Capital Reporting Company P R O C E E D I N G S 2 (10:11 a.m.) THE CLERK: Recalling from the calendar 1 2 3 4 Docket No. 10885-14, Greg Perry Fancher. 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 (Whereupon, a bench opinion was rendered.) (866) 448 - DEPO www.CapitalReportingCompany.com 2015 Capital Reporting Company 3 1 Bench opinion by Judge Mark V. Holmes 2 June 16, 2015 3 Greg Perry Fancher v. Commissioner 4 Docket No. 10885-14 5 THE COURT: In the case of Greg Perry 6 Fancher v. Commisisoner, Docket Number 10885-14, the 7 Court has decided to render oral Findings of Fact and 8 Opinion and the following represents the Court's oral 9 Findings of Fact and Opinion. This bench opinion is 10 made pursuant to the authority granted by section 11 12 7459(b) of the Internal Revenue Code of 1986, as amended, and Rule 152 of the Tax Court's Rules of 13 Practice and Procedure. 14 15 Mr. Fancher was a Minnesota resident at the time he filed his petition and at the time of trial. 16 This case involves his 2011 tax year. I want to 17 begin by defining exactly what's at issue here, and 18 that is a single item on his return; the alimony that 19 he excluded that was payable under his 2010 divorce 20 21 decree. He claimed $56,163 in exclusions based on the alimony that he owed his wife under that decree. 22 The I.R.S. disallowed $12,828 of that, leading to a 23 deficiency of slightly more than $4,100. 24 This is important because of what happened 25 at trial. We have jurisdiction to increase the (866) 448 - DEPO www.CapitalReportingCompany.com 2015 Capital Reporting Company 1 amount of the deficiency only "if claim therefore is 2 asserted by the Secretary at or before the hearing or 3 rehearing", section 6214(a). To assert an increased 4 4 deficiency the Commissioner must formally plead a 5 6 7 claim for an increase in either the answer or an amended answer. Estate of Petschek v. Commissioner, 81 T.C. 260, 271-72 (1983), aff'd. 738 F.2d 67 (2nd 8 Cir. 1984); Koufman v. Commissioner, 69 T.C. 473, 9 475-76 (1977). The Commissioner did not do so in 10 this case, so even if we peek outside the pleadings 11 we can find a ssrsr 4ù- of an increased 12 deficiency. The Commissioner's pretrial memorandum 13 listed $4,169 as the deficiency, and so that is the 14 ceiling beyond which the deficiency can't go in this 15 16 17 18 case, phrases that I'll shortly describe and that may be an important consideration here. The rules on alimony are simply stated in the Code, though complicated to apply in practice. 19 Section 71(b)(2) of the Code allows an exclusion for 20 alimony and define the term alimony or separate 21 maintenance payment to mean "any payment in cash if 22 (a) such payment is received by or on behalf of a 23 spouse under a divorce or separation instrument." So 24 I have to see that it's been payable in cash and on 25 behalf of a spouse. (866) 448 - DEPO www.CapitalReportingCompany.com 2015 Capital Reporting Company The regulations elaborate the requirement a 5 little bit more. Regulation 26 C.F.R. section 1.71- 1T, Q-2, A-2 requires that to be excludable from income there has to be a divorce decree, the payment has to be in cash, the payment has to be not , 1 2 3 4 5 6 designated as a payment which is excludable from the 7 gross income of the payee and non-deductible by the 8 payor. The payor has to have no liability to make a 9 payment after the death of the payee and the divorce 10 agreement must state that there is no such liability, 11 12 and the payment must not be treated as child support. With these constraints in mind, Mr. Fancher 13 had a very simple argument. He said, as he said in 14 his petition, that the court ordered divorce decree 15 required payment to his ex-spouse for all her living 16 expenses plus cash at a total of $4,750 a month. 17 Expenses listed in the decree are estimated living 18 expenses he stressed, not documented payments. His 19 deduction for alimony would then be directly offset 20 dollar for dollar by his ex-spouse including payments 21 as income per decree. He also had under the divorce 22 decree any ability to reduce the alimony by a 23 percentage in the increase in the post-divorce income 24 of his wife, which he took advantage of to a rather 25 small degree, thus leading to this odd amount of (866) 448 - DEPO www.CapitalReportingCompany.com 2015 Capital Reporting Company 6 1 2 $56,163 that he claimed as an alimony exclusion. Let me give a little bit of background 3 here. Mr. Fancher is, or was rather, a highly 4 skilled employee working for PricewaterhouseCoopers 5 before his recent disability. He has advanced 6 business degrees but he is not a tax lawyer or an 7 accountant himself. He thought that he could make 8 9 sensible arguments, namely that it doesn't matter to the tax system if he misstated the alimony, that is 10 as long as his ex-wife included it in her income. 11 The reduction in his taxable income would be offset 12 by an increase in hers, and in general that's what 13 the tax policy behind alimony is. 14 15 The problem is that for Tax Court we have to follow the Code and the Regulations and what 16 actually happened, not what the parties promise to do 17 or thought would happen or thought would make sense. 18 There were real problems with verification in this 19 case. The bank statements which showed the payments 20 of alimony were incomplete and nearly all months of 21 his bank statements for 2011 were missing their first 22 page which would have listed deposits and missing the 23 December month altogether, although he did include 24 December of 2010 into January of 2011. The bank statements on the other Kand were very useful. h 25 They (866) 448 - DEPO www.Capita1ReportingCompany.com 2015 Capital Reporting Company 1 included a statement of changes in daily balance 2 which allowed me to interpolate what the deposits 3 were. 4 5 Now remember that the terms of the divorce decree were stated in that divorce decree, so he 6 meets that part of his alimony test. Exhibit 7-J 7 required him to pay $4,750 per month, but in keeping 8 with the Minnesota state policy of encouraging 9 parties to cooperate in formulating their divorce 10 decree that actual divorce decree was simply n a 11 straight payment of $4,750 a month. Instead it was 12 13 $1,675 in cash payable twice a month from Mr. Fancher to his ex, and then $3,075 in cash for specified 14 expenses. Now I want to quote from the divorce 15 decree here because it's important to the outcome of 16 this case. The key paragraph is at page 19 of 17 Exhibit 7-J and it says, "of the $4,750 per month 18 that husband shall be paying to wife in spousal 19 maintenance. The sug of $3,075 shall be deposited 20 into a joint account to cover the following 21 expenses." Here follow a series of expenses, 13 22 different kinds of expenses of the everyday type that 23 couples would have from mortgages to real estate 24 taxes to Net Flix bills and house maintenance, 25 household supplies, furniture replacement and that (866) 448 - DEPO www.Capita1ReportingCompany.com 2015 Capital Reporting Company sort of thing. 8 As it turned out, what happened was that twice each month I could see from the bank records, I should have been able to see from the bank records 1 2 3 4 5 given this agreement and the divorce decree, I should 6 have seen lots of payments of $4,750 or maybe if they 7 were split into two, $2,375.50. I should have seen 8 withdrawals of $16 5 each month nd two 9 installments of $837.50 each month and payments 10 totaling $3,075 or maybe $1,573.50 twice each month. 11 Now, I also should have seen some evidence 12 of the spouse getting this money but she was no 13 14 15 longer on the account after early February, 2011. It had been a joint account previously and the divorce decree talks about these deposits going into a joint 16 account, but that just didn't happen after early 17 February, 2011. 18 So trying to figure out what happened out 19 required some digging. After Mrs. Fancher was off 20 the account I did consistently see two payments each 21 month. One was always for $837.50. In most months 22 the second payment was $817.50, sometimes the second 23 payments was also $837.50. So there is a little bit 24 of variation there. This, again, suggests she did 25 not have access to this account because these (866) 448 - DEPO www.CapitalReportingCompany.com 2015 4 Capital Reporting Company 9 1 2 3 4 payments were out of that account via a check as Mr. Fancher quite clearly testified he'd sometimes leave it on the table in their shared house. There was, however, no such consistent 5 pattern on the remaining $3,075 that he owed under 6 7 the terms of the divorce decree. Instead the pattern that developed was that Mr. Fancher who is skilled, 8 unlike his ex-wife, in making electronic funds 9 transfers would pay the monthly bills that he was 10 required to under the divorce decree. 11 12 Now again, turning to the Regulation, this sometimes does give rise to an alimony exclusion. 13 Under 26 C.F.R. Section 1.71-1T(b), Q-6, the 14 Regulation states, "make payments of cash to a third 15 party on behalf of the spouse qualifies alimony...? 16 A-6 of the regulation then goes on to say, "yes, for 17 example, cash payments of rent, mortgage, checks or 18 tuition liabilities that the payee spouse made under 19 the terms of the divorce or separation instrument 20 will qualify as alimony or separate maintenance 21 payments. Any payments to maintain property owned by 22 the payor spouse and used by the payee spouse 23 including mortgage payments, rent, real estate taxes 24 and insurance premiums are not payments on behalf of 25 the spouse even if those payments are made pursuant (866) 448 - DEPO www.CapitalReportingCompany.com 2015 Capital Reporting Company 10 1 2 to the terms of the divorce or separation instrument. So Mr. Fancher was in the ballpark, but not 3 quite there when it came to this characterization of 4 5 6 7 these third-party payments as qualifying as alimony. Instead what one has to do is go down the list and figure out which payments he was claiming as alimony and which of those then qualify for the alimony 8 exclusion. And indeed one of the exhibits stipulated 9 to by the parties consisted of these bank statements 10 with Mr. Fancher's horizontal strike marks indicating 11 which ones he was claiming as alimony payments. 12 13 Moreover, everything was additionally complicated by a key fact that came out at trial that 14 was not highlighted in the pretrial memos. And that 15 is because of the presence of still minor children in 16 the family, Mr. and Mr. Fancher agreed as part of 17 18 19 20 their divorce to what's called a Bird's Nesting arrangement so that the minor children; their two sons, would continue to live in the marital home and it was Mr. Fancher and Mrs. Fancher who would trade 21 places throughout the year. And they were supposed 22 to do this according to a schedule, although referred 23 to in Exhibit 7-J as being attached, was not in fact 24 attached. 25 And so it was basically impossible for me (866) 448 - DEPO www.Capita1ReportingCompany.com 2015 Capital Reporting Company 11 1 to figure out when precisely Mr. Fancher was in the 2 marital home and when Mrs. Fancher was in the 3 4 5 6 7 8 9 family's condominium and vice-versa, when Mrs. Fancher was in the home and Mr. Fancher was in the condominium. So this Bird's Nesting requirement causes an additional level of complication. It's not unprecedented for couples to do this, of course, but it means the expenses that Mr. Fancher was paying third parties for expenses of the home were actually 10 benefitting he, himself, during those periods of time 11 when he was living in the marital home. For instance 12 13 in the case of Leventhal v. Commissioner, 79 T.C.M. 1670 (2000), we concluded "that one-half of the 14 payments for furniture rental, to Brooklyn Union Gas, 15 to a gardener, to Con Edison for electricity, to 16 Quinlan Oil, to Town & Country Pool, to New York 17 Telephone and for miscellaneous plumbing, electrical 18 and water expenses whether made with respect to the 19 marital home or the apartment related to the 20 occupancy of Harvey (The Husband). These 21 expenditures do not appear to have been capital in 22 nature but merely ordinary expenses of operation and 23 maintenance, thus one-half of these payments were not 24 received on behalf of Hermine (The Wife)." 25 This creates obvious problems of proof (866) 448 - DEPO www.Capita1ReportingCompany.com 2015 Capital Reportmg Company 12 1 because some of these third party payments were 2 benefitting Mr. Fancher to the extent he was living 3 4 5 6 7 8 9 in the home. They were benefitting him to the extent he was taking condominium payments and identifying those as alimony, to the extent he was living in the condominium. And indeed, because the condominium appears to have been titled in his name only, may have been benefitting him exclusively when it comes to calculating the amount of alimony exclusion to 10 which he is entitled. So that's an additional level 11 of problems. 12 13 I do believe Mr. Fancher that he spent at least two months of the year living in the marital 14 home. He referred to doing the Bird's Nest 15 arrangement so that he was in the marital home during 16 the summer break his sons had that year. 17 18 Moreover, there's the additional complication here that Mr. Fancher had identified as 19 alimony payments for the condominium, maintenance 20 payments for the condominium that were not included 21 as his offset obligation in the divorce decree. So we 22 have lots of problems in computation here and lots of 23 problems that prevent extreme precision. 24 So it was just impossible to sort this all 25 out very precisely. I started by looking at the (866) 448 - DEPO www.CapitalReportingCompany.com 2015 Capital Reporting Company 13 1 marks that Mr. Fancher had made during the course of 2 3 4 5 the examination on these bank statements in Exhibit 8-J and trying to figure out first why the government should come up with its own denial of part of these payments specifically $12,828. It became clear that 6 what the government was doing was taking the 7 $1,402.40 mortgage payment on the marital home, 8 multiplying it by 12 and taking half off because the 9 Fanchers were co-obligors on the mortgage so half of 10 each mortgage payment under the government's theory 11 benefitting Mr. Fancher. 12 13 In addition, Mr. Fancher had noted $6,192.65 on the September bank statement as being 14 tuition payments that he was including in his 15 alimony. Those, of course, don't qualify as alimony 16 because they benefitted his children. For reasons 17 that I'll describe a little bit later, those $6,000 18 payments had to be identified by Mr. Fancher to come 19 up to the amount that he was claiming as an alimony 20 exclusion. 21 22 Anyway, getting back to the main thrust of this opinion which is endless plowing through numbe , 23 in the December, 2010 to January, 2011 bank statement 24 I looked very precisely at what Mr. Fancher had 25 identified and found $64.94, $90.47, $193.03 of the (866) 448 - DEPO www.Capita1ReportingCompany.com 2015 Capital Reporting Company 14 1 2 3 4 $1,402.40 mortgage payment, $234.45, the $378 condominium maintenance payment; all of which added up to $2,363.29. Now I'm going to stress part of this was for December, 2010 not at issue . $612.45 5 was paid in January of 2011 and so very much would be 6 at issue. However, there was no bank statement from 7 late December into January, 2012, and so I infer 8 being more likely than not that these payments 9 recurred, and so about slightly less than $2,400 was 10 identified by Mr. Fancher as alimony payments in 11 December to January. We'll call that also December 12 to January at the end of the year. 13 14 For January into February I identified $72.54, $102.63, $188.31, again the mortgage payment 15 of $1,402.40, the $378 condominium maintenance fee, 16 $276.50, $82.16, for a total of $2,502.54. And then 17 18 I began estimating. In February there was about $2,400 of identified expense; March, $2,300; April, 19 $2,400; May, $2,200; June, $2,300; July, $2,500; 20 August, $2,200; September, unusually, I identified 21 $2,300 of these recurring type of expenses, but also 22 23 as I said, the $6192.65 in tuition payments. October reverted to $2,400; November, $2,400 and so forth. 24 So there were fairly consistent patterns of payments, 25 again, with the exception of the September tuition (866) 448 - DEPO www.CapitalReportingCompany.com 2015 Capital Reporting Company 15 1 2 3 4 payments into this account. But then what do I have to conclude from this. The first thing I conclude from this is that if Mr. Fancher did not identify one of these third 5 party payments as being required under the divorce 6 7 8 9 decree I can't allow it as alimony because I can't find that Mrs. Fancher any longer had unfettered access to the funds. It's okay to put alimony payments into a joint checking account. There's a 10 case from the 11th Circuit, Kean v. Commissioner, 407 11 F.3d 186 (3rd Cir. 2005), in which that court 12 approved of an arrangement in which alimony was put 13 into a joint checking account and explained that 14 "slight restrictions of the use of payments should 15 not color a court's overall analysis of the payments 16 (citations omitted)." In that case the taxpayer's 17 was Mr. Kean and his wife was Mrs. Kean. The court 18 said, "Ms. Kean's use of the money was sufficiently 19 unrestricted because Ms. Kean's access and the geow 20 of the money was unfettered we have no trouble 21 22 23 concluding that she "received" the funds as required by section 71(b)(1) (a)", Id at 190-191. That's not the situation we have here. 24 What we have here is, Mrs. Fancher's off the account 25 in February so I can't find that she had unfettered (866) 448 - DEPO www.Capita1ReportingCompany.com 2015 Capital Reporting Company 1 access to whatever other money was being deposited by 16 2 Mr. Fancher into this account. Moreover it was a 3 pre-existing account, not one that he had set up 4 pursuant to the divorce decree, so the deposits were 5 grossly in excess of $4,000 each month. They 6 7 8 included his entire paychecks and reimbursements for travel, I suppose. Anyway, thousands, tens of thousands of dollars going into the account from his 9 employer. Nothing special indicated that Mrs. 10 Fancher had access to this account which meant that 11 unless he could identify monies being paid to the 12 third parties as alimony he's not entitled to them 13 under section 71. 14 15 So that means what amounts did he identify? He identified about $37,000 in third party payments 16 that he claimed as alimony and that's close to what 17 he was referred to pay under the divorce decree. But 18 of course, one of those payments, the $6,192.65 in 19 tuition payments doesn't count as alimony. Moreover, 20 there is no mention in the divorce decree that he had 21 to pay the condo payments which amounted to $15,564 22 all by themselves that month. Wait, no, I'm sorry, 23 all right, it's $4,536 in condo fees which are 24 absolutely not part of the divorce decree and 25 therefore don't count as alimony at all. (866) 448 - DEPO www.Capita1ReportingCompany.com 2015 Capital Reporting Company Moreover, there was $16,828.80 in mortgage 17 payments. These benefitted Mr. Fancher in two ways. 1 2 3 One, he was a co-obligor on the mortgage and so he 4 would have owed them anyway. And secondly, he was 5 actually living in the marital home for at least two 6 months of the year. So I have to exclude, at the 7 very least, $8,414.40; probably I should exclude even 8 more, as explained in Zinsmeister v. Commissioner, a 9 taxpayer can deduct his alimony, one half the 10 payments on the mortgage that he makes with his ex. 11 Zinsmeister v. Commissioner, 80 T.C.M. 774 (2000). 12 13 14 15 Moreover, I would have to exclude the amount that Mr. Fancher claimed on his tax return that he wasn't able to show. That's approximately $15,000 as well and that's the difference between 16 what he owed under the terms of the divorce decree 17 and what he actually paid out which was about $31,000. 18 19 So of the $56,163 that he claimed, $20,100 20 was what he paid to his wife in checks, that's 21 clearly allowable. Approximately $31,000 that he 22 identified, excluding the tuition payments in 23 September of 2011, that leads to about $51,000. 24 However, there is approximately $4,500 in condo fees 25 that's not includable at all; $8,414.40 which is half (866) 448 - DEPO www.CapitalReportingCompany.com 2015 Capital Reporting Company 1 2 the mortgage payments benefitting him, as I said, in two ways, not includable at all. So that leaves us 3 with roughly speaking $38,000 that he could have 18 4 plausibly taken. 5 As I said, the government disallowed from 6 his $56,163 only $12, 828. The Code would have 7 8 required much less in alimony but the government, as I said, did not ask for an increase in the 9 deficiency. Because Mr. Fancher would have been 10 entitled to even less in alimony than he claimed, my 11 decision is entirely in favor of the respondent in 12 13 14 this case and decision will be entered in respondent's favor. This concludes the Court's Oral Findings of 15 Fact and Opinion in this case. (Whereupon, at 10:38 a.m., the above- entitled matter was concluded.) 16 17 18 19 20 21 22 23 24 25 (866) 448 - DEPO www.Capita1ReportingCompany.com 2015 Capital Reporting Company 19 1 CERTIFICATE OF TRANSCRIBER AND PROOFREADER 2 3 CASE NAME: Greg Perry Fancher v. Commissioner DOCKET NO.: 10885-14 4 We the undersigned, do hereby certify that the 5 6 7 8 foregoing pages, numbers 1 through 19, inclusive, are the true, accurate and complete transcript prepared from the verbal recording made by electronic recording by Stuart Karoubas, on June 16, 2015, 9 before the United States Tax Court at its session in 10 St. Paul, Minnesota, in accordance with the 11 applicable provisions of the current verbatim 12 reporting contract of the Court, and have verified 13 the accuracy of the transcript by comparing the 14 15 typewritten transcript against the verbal recording. ____ ___ 16 Lisa Peltonen 6/22/15 (Transcriber) (Date) 17 18 19 Kathleen Huczek 6/23/15 (Proofreader) (Date) 20 21 22 23 24 25 (866) 448 - DEPO www.Capita1ReportingCompany.com 2015