TAX COURT OPINION

Case: Frank L. Martin, Jr.
Docket Number: 18411-10S
Judge: Goeke
Opinion Type: bench
Filed: 06/27/2011
Pages: 9

UNITED STATES TAX COURT WASHINGTON, DC 20217 FRANK J. MARTIN, JR . , Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent ) ) ) ) ) ) ) ) ) O R D E R Docket No. 18411-10S. 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 caså before Judge Joseph Robert Goeke at Tampa, Florida, on June 10, 2011, containing his oral findings of fact and opinion rendered at the conclusion of the trial. In accordance with the oral findings of fact and opinion, a decision will.be entered under Rule 155. (Signed) Joseph Robert Goeke Judge Dated: Washington, D.C. June 27, 2011 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 3 BENCH OPINION BY JUÒGE ROBERT JOSEPH GOEKE, FRANK L. MARTIN, JR., v. COMMISSIONER DOCKET NO.: 18411-10S DATE: June 10, 2010 THE COURT: The Court has decided to render oral findings of fact and opinion in this case and the following represents the Court's oral findings of fact and opinion. The or 1 findings of fact and opinion shall not be relied µpon as precedent in any other case. This case as heard pursuant to the provisions of Sectio 7463 of the Internal Revenue Code in effect at the time the petition was filed. Pursuant to Section 463(b) the decision to be entered is not reviewable by any other court. Section references after this are to the Internal Revenue Code in effect for the years in issue, and Rule references are to the Tax Court Rules of Practice and Procedure. This case is before the Court based upon our jurisdiction to review Respondent's deficiency determinations after the issuance of a Notice of Deficiency and the timely filing of a petition by the taxpayer. Respondent determined a deficiency against the Petitioner for the year 2007 in the amount of 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 4 $29,688. Respondent also asserted an addition to tax under Section 6662(4) in the amount of $5,937.60. The deficiency is based upon Respondent's adjustment to Petitioner's claimed alimony deduction in 2007. In the Notice of Deficiency issued to the Petitioner, Respondept disallowed alimony deductions claimed in the amount of $91,759. Respondent also adjusted Petitioner's itemized deductions. However, the adjustment to the itemized deductions is merely computational based upon the disallowance of the alimony deduction. Petitioner and his former spouse began divorce proceedings ometime in 2003. Petitioner and his former spouse had two dependant children from their marriage. In September of 2003 a hearing was held in the Superior Court for the State of California, County o San Diego, regarding child support and spousal support. An Order was issued subsequent to that hearing ordering the Petitioner to pay child support in the amount of $5,646 per month, and ordering the Petitioner to pay spousal support in the amount of $9,000 per month. On May the 7th, 2004, the Superior Court of California issued another Order regarding child and spousal support. In that Order the Court recognized 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 5 that the Petitioner had lost his job, and the Court nevertheless ordered the Petitioner to continue to pay child support and spousal support pursuant to the earlier, September 2003 Order. The Court also found that the Petitioner was in arrears relative to his support obligations. On March 30th, 2005, a judgment was entered by the Superior Count of California. The judgment had associated with it a marital settlement agreement. It is that agreement and the associated hearing for which a transcript was stipulated at the trial of this case that formed the basis of Petitioner's argument that the amounts he paid n 2007 were in fact alimony. Petitioner points to provisions in the discussions with the Judge in the transcript which indicate that his payments for alimony and child support were limited to percentages of his income. However, Petitioner òverlooks certain key aspects of the marital settlemedt agreement which Petitioner executed and then whi.ch was approved by the Judge on March 30th, 2005, the same Judge who was involved in the discussions which Petitioner cites in the transcript which is in the record. In the marital settlement agreement, paragraph 3.7, it is noted that child support 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 6 obligations had not been met since June of 2004. Paragraph 3.7 goes òn to state as follows: "All monies from retirem nt, profit, or other accounts that have been directed o Joyce since June 2004 have required legal inte vention and have been her fair share which she has used for her and the children. A wage assignment will be imposed on Frank upon the onset of employment to avoid further extended periods of no support." "Joyce" re erences Petitioner's former spouse. In a similar provision discussing spousal support, the marital separation agreement provides as follows in paragraph 4.6: "At this time spousal support obligations have not been met since June 2004. All monies from reti ement, profit, or other accounts that have been directed to Joyce since June 2004, have required legal intervention and has been her fair share. A wage assig ment will be imposed on Frank upon the onset of employment to avoid further extended periods of no support." While Petitioner vehemently maintains that the amounts that he was ordered to pay in San Diego County in 2007 should be subject to the percentage requirements discussed in the transcript associated 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 7 with the March 30th, 2005 marital settlement agreement, he overlooks the discussions quoted above which reference the need for the Petitioner to make catch-up payments to fulfill his obligations under the 2003, 2004 and 2005 Orders by the Superior Court of California. In a subsequent Order on December 9th, 2006, the Superior Court irected Petitioner's employer to withhold from Petit oner's wages, $6,464 per month as child support, $1,6(1.50 per month as past due child support, and other amounts for spousal support. However, the Order limited the total amounts that could be withheld to 50 percent of the Petitioner's disposable income. The amount in dispute in this case was withheld from Petitipner's pay in 2007 pursuant to that 2006 Order. Petitioner maintains that this Order was inaccurate and that it should have reflected a percentage of his inbome and that the entire amount withheld should be t eated based upon the percentage factors shown in the marital settlement agreement and discussed in the tra script of March 30th, 2005, as spousal support . Ho ever, Petitioner overlooks the provisions quoted ab ve and ignores the specific features of the 2006 Order which, as a primary Heritage eporting 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 8 payment, direct withholding from Petitioner's pay of child support beforp spousal support. In Respondent's trial memorandum Respondent analyzes the amount withheld pursuant to the December 9th, 2006 Order in 2007. Respondent determines that $79,840 of the total of $91,759 was withheld from Petitioner's pay as child support, and that only the remaining amounts would be available as spousal support. We believ Respondent's trial memorandum correctly analyzes the directed withholding which followed from the Dëcember 9th, 2006, Order. And that despite Petitioner' contention that these amounts were done in error, we're directed to follow the state court determination :ba this regard. We also note that California Family Code Section 5238(a) provides that child support ill be withheld as a primary obligation and spousal support amounts will only be determined after child support obligations have been fulfilled. Based upon this we believe $12,007 of the $91,759 withheld from Petitioner's pay in 2007 should be treated as spousal support. This is an adjustment to the amounts dete mined in the Notice of Deficiency in the amount of $12,007, as the entire amount was disallowed in the Notice of Deficiency. 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 9 That anal fsis comports with a similar analysis done by this Court relative to Petitioner's 2006 taxable year in a Bench Opinion rendered by the Court on June 2nd, 2009. The remaining issue is the applicability of the additions to tax under Section 6662(a). I Respondent asserts that the disallowance of the $79,840 in claimed alimony expense creates a substantial underst tement as defined by Section 6662(d) (1) and that Petitioner's also negligent in having claimed this amount as alimony expense. • Responden has met the threshold test to establish the addition to tax. The burden then falls upon the Petitioner to show reasonable cause for this understatement. Reasonable cause is a defense to the addition to tax under Section 6662 pursuant to Section 6664(c), which provides that no penalty shall be imposed if it is shàwn that there was a reasonable cause for the understatement in question. In the present situation we accept Petitioner's testimóny that he believed, based upon the testimony at the time of the marital settlement agreement, that his obligations were based upon a percentage of his ir come, and having been unemployed for a period of timd Petitioner maintains that he did 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 not have deficiencies relative to -his obligations to pay spousal and child -support. While Petitioner's analysis is inconsiþtent with the paragraphs we've previously quoted fgom the marital settlement agreement and with the 2006 Order of the California Superior Court, the transcript relied upon by the Petitioner creates bonfusion as to the analysis of the California Superior Count and we believe was the basis for a good faith misunderstanding on the part of the Petitioner as to thè proper treatment of the amounts in question. We find that this good faith misunderstanding is i a proper basis for reasonable cause . And, therefore, we determine that the addition to tax is not appli able to the Petitioner. Based upo the analyses explained herein a computation under R le 155 will be required. This concludes the Court's oral findings of fact and opinion in this case. (Whereupo , at 1:10 p.m., the bench opinion in the above-entitl d matter was concluded.) // // // // // Heritage Reporting Corporation (202) 628-4888