TAX COURT OPINION

Case: Gretchen Sue Humiston
Docket Number: 27125-16S
Judge: Buch
Opinion Type: bench
Filed: 07/18/2018
Pages: 9

UNITED STATES TAX COURT WASHINGTON, DC 20217 DRC GRETCHEN SUE HUMISTON, Petitioner, v. ) ) ) ) Docket No. 27125-16S, 1164-17S. COMMISSIONER OF INTERNAL REVENUE, Respondent ) ) ) ORDER Pursuant to Rule 152(b), Tax Court Rules of Practice and Procedure, it is ORDERED that the Clerk of the Court shall transmit with this order to petitioner and respondent a copy of the pages of the transcript of the trial in this case before Judge Ronald L. Buch at Buffalo, New York, containing his oral findings of fact and opinion rendered at the trial session at which the case was heard. In accordance with the oral findings of fact and opinion, decision will be entered for respondent. Dated: Washington, D.C. July 18, 2018 (Signed) Ronald L. Buch Judge SERVED Jul 18 2018 3 1 2 3 4 5 6 7 8 9 Bench Opinion by Judge Ronald L. Buch June 14, 2018 Gretchen Sue Humiston v. Commissioner of Internal Revenue Docket Nos. 27125-16S, 1164-17S The following represents the Court's oral findings of fact and opinion. The oral findings of fact and opinion may not be relied upon as precedent in any other case. This opinion is in conformity with Internal Revenue Code section 7459(b) and Rule 152(a) of the Tax 10 Court Rules of Practice and Procedure. Any section 11 references refer to the Internal Revenue Code or the 12 Treasury regulations in effect during the year at issue, 13 14 15 and Rule references are to the Tax Court Rules of Practice and Procedure. This case was heard pursuant to section 7463. 16 Under section 7463(b), the decision to be entered in this 17 case is not reviewable by any other court, and this 18 opinion may not be treated as precedent for any other 19 case. 20 Facts 21 The Humistons divorced some time ago. When they 22 divorced, they entered into a detailed Matrimonial 23 Settlement Agreement. Under the terms of that agreement, 24 Mr. Humiston agreed to pay Ms. Humiston "regular 25 maintenance for her support" of $200,000 per year for 17 cr bots (973)40Gt250|operations@escribersaet I www.escr6ennet years. 4 Those payments terminate upon the death of either of them, but they do not terminate upon remarriage or cohabitation by Ms. Humiston. The Matrimonial Settlement Agreement is explicit that these payments will be includible in the income of Ms. Humiston and deductible to Mr. Humiston. Under the terms of the Matrimonial Settlement Agreement, Mr. Humiston agreed to purchase and pay the costs associated with a life insurance policy on Ms. 1 2 3 4 5 6 7 8 9 10 Humiston with the Humistons' children to be designated as 11 the beneficiaries. The amount of that life insurance 12 policy is to be maintained at a minimum level set in an 13 attachment to the Matrimonial Settlement Agreement, with a 14 declining value ultimately reducing to zero near the same 15 16 time that the regular maintenance payments would terminate. Under the terms of the Matrimonial Settlement 17 Agreement, payments made to maintain that policy would not 18 be includible in Ms. Humiston's income and would not be 19 deductible to Mr. Humiston. 20 It appears that Mr. Humiston did not live up to 21 his part of the agreement. According to Ms. Humiston, Mr. 22 Humiston was not meeting his regular maintenance 23 obligations under the original Matrimonial Settlement 24 Agreement. According to Ms. Humiston, this led to a 25 Modification Agreement. Under the terms of the ønsomso|openeusemaammse4wmmembasaa 1 Modification Agreement, Mr. Humiston's annual obligation 5 2 3 4 5 6 7 8 9 to make regular maintenance payments was reduced bu't the term over which he was to make those payments was extended until 2034. The Modification Agreement was explicit that the payments would be includible in Ms. Humiston's income and deductible to Mr. Humiston. It appears that Mr. Hemiston again did not live up to his part of the agreement. According to Ms. Humiston, Mr. Humiston has been paying less than the full 10 amount of his regular maintenance obligation under the 11 Modification Agreement. 12 In 2013 and 2014, Ms. Humiston received $120,000 13 per year in regular maintenance payments. She excluded 14 those payments from income. The Commissioner issued 15 notices of deficiency, which she timely petitioned, 16 determining that those payments were income to Ms. 17 Humiston and asserting a substantial understatement 18 penalty in each year. 19 Discussion 20 21 It is the regular maintenance payments that are at the center of the dispute between the Commissioner and 22 Ms. Humiston. Ms. Hamiston argues that the payments are 23 24 in the nature of a property settlement. She cites as evidence of this the life insurance policies that Mr. 25 Humiston is required to maintain. She argues that, (973)406-2 250| operatiomeescribersnet l wwmescrbetsmet although the regular maintenance payments terminate upon death, the life insurance policies mitigate that feature 6 and effectively put the parties in the same position as if the regular maintenance payments continued. I. Burden of Proof The Commissioner's determinations in the notice of deficiency are generally presumed correct, and taxpayers bear the burden of proving otherwise. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). In limited situations, the burden can shift to respondent under section 7491(a), but the record does not establish that the criteria under section 7491 have been met, therefore, the burden of proof remains on the taxpayer. II. Alimony Deduction Payments incident to divorce generally fall into one of two categories: alimony or property settlements. In general, alimony is a division of income, and property settlements are a division of marital property. See 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 Rogers v. Commissioner, T.C. Memo. 2005-50, 89 T.C.M. 20 21 (CCH) 850, 851 (2005). A property settlement is not a taxable event and does not give rise to any gain or loss. 22 Sec. 1041. In contrast, alimony payments give rise to a 23 deduction for the paying spouse and to income for the 24 25 receiving spouse. Secs. 71(a), 215(a). An alimony payment is any cash payment that $73)406-2250|opeestierneescrberuwt|www4saibersmet satisfies the four requirements of section 71(b)(1): (A) 7 the payment is received by (or on behalf of) a spouse under a divorce or separation instrument; (B) the divorce or separation instrument does not designate the payment as one that is not includible in gross income of the payee and not allowable as a deduction to the payor; (C) the payor and payee spouses are not members of the same household at the time the payments are made if they are legally separated; and (D) the payments or substitutes end 1 2 3 4 5 6 7 8 9 10 after the payee spouse's death. "These requirements 11 provide an objective standard to distinguish payments that 12 13 14 are a division of property from payments that are made as spousal support." Mudrich v. Commissioner, T.C. Memo. 2017-101. We do not inquire into the intent of the 15 parties. 16 17 18 19 20 21 22 23 Here the payments that Ms. Humiston received met the requirements for alimony under section 71(b)(1). She received the payments under a divorce or separation instrument, the Matrimonial Settlement Agreement as amended by the Modification Agreement. The agreement designates the payments made to her as includible in her income. She and Mr. Humiston were not members of the same household when the payments were made. And finally, Mr. 24 Humiston is not required to continue to make the payments 25 after Ms. Humiston's death. 8 Ms. Humiston's arguments as to why the payments should be treated gproperty settlement are unavailing. She argues that the payments should not be considered as terminating after her death because the life insurance policy maintained on her is a substitute for those continuing payments. But that life insurance policy does not require any payments by Mr. Haníston after Ms. Humiston's death. Ms. Humiston's principal complaint is that Mr. 1 2 3 4 5 6 7 8 9 10 Humiston has not lived up to his part of the bargain. She 11 12 argues that she should not be saddled by an obligation to pay the taxes when Mr. Humiston has not lived up to his 13 obligation to make the full payments of the regular 14 maintenance. She notes her perceived irony at the fact 15 16 17 18 that the shortfall in Mr. Humiston's regular maintenance payments is roughly equal to tax liability differential that arises from including (for her) and deducting (for him) the regular maintenance payments. But Ms. Humiston 19 does not get to make herself whole by shortchanging the 20 Commissioner. 21 22 III. Section 6662(a) Penalty Section 6662(a) imposes a 20% accuracy-related 23 penalty on "any portion of an underpagnent of tax required 24 to be shown on a return" if the underpayment is due to 25 negligence or disregard of rules or regulations or 9 substantial understatement. Respondent bears the burden of production with respect to any penalty. Sec. 7491(c). The taxpayer then bears the burden of proving any defenses. See Higbee v. Commissioner, 116 T.C. 438, 447 (2001). The penalties will not apply to any portion of the underpayment for which a taxpayer establishes that he or she had reasonable cause and acted in good faith. Sec. 6664(c)(1). An understatement of tax is defined as the 1 2 3 4 5 6 7 8 9 10 excess of "the amount of tax required to be shown on the 11 12 13 14 15 16 return for the taxable year, over the amount of tax imposed which is shown on the return, reduced by any rebate (within the meaning of section 6211(b)(2))." Sec'. 6662(d)(2). And the understatement of tax is substantial if it "exceeds the greater of 10 percent of the tax required to be shown on the return for the taxable year, 17 or $5000." Sec. 6662(d)(1)(A). However, if the taxpayer 18 19 20 has substantial authority for the tax treatment of an item, then the portion of the tax attributable to that item is not included in the understatement. Sec. 1.6662- 21 4(d)(1), Income Tax Regs. 22 The Commissioner bears the initial burden of 23 production as to penalties. Sec. 7491(c). In the case of 24 an individual, this includes evidence of supervisory 25 approval of the penalty. Sec. 6751(b). The Commissioner en;4Snsolosmaaae.×reeuw w.mmatbasam met his burden by putting into evidence the written 10 supervisory approval of the penalty and because the amount of the understatement exceeds the threshold set forth in section 6662(d)(1)(A). Ms. Humiston has not shown that she has substantial authority for her position that the payments she received under the Matrimonial Settlement Agreement as amended by the Modification Agreement were not alimony. She is liable for a penalty for a substantial understatement. Decision will be entered for the Commissioner. (Whereupon, at 9:16 a.m., the above-entitled matter was concluded.) 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