TAX COURT OPINION

Case: Wendy P. Trebat f.k.a. Wendy P. Pellegrini
Docket Number: 28736-12S
Judge: Kerrigan
Opinion Type: bench
Filed: 01/23/2014
Pages: 11

UNITED STATES TAX COURT WASHINGTON, DC 20217 RMM Petitioner, v. WENDY P. TREBAT F.K.A. WENDY P. PELLEGRINI, ) ) ) ) ) Docket No. ) ) ) ) ) COMMISSIONER OF INTERNAL REVENUE, Respondent 28736-12S. Order of Service of Transcript 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 respondent a copy of the pages of the transcript of trial in the above case before Judge Kathleen Kerrigan at Chicago, Illinois, on December 2, 2013, containing her oral findings of fact and opinion rendered at the conclusion of the trial session at which the case was heard. In accordance with the oral findings of fact and opinion, the Court will order the parties to submit computations under Rule 155. (Signed) Kathleen Kerrigan Judge Dated: Washington, D.C. January 23, 2014 SERVEDJan 232014 Capital Reporting Company 3 1 2 Bench Opinion by Judge Kathleen Kerrigan December 2, 2013 3 Wendy P. Pellegrini v. Commissioner 4 5 6 7 8 9 10 11 12 13 14 15 16 Docket No. 28736-12S THE COURT: The Court has decided to render in this case the following as its oral Findings of Fact and Opinion, which shall not be relied on as precedent in any other case. This proceeding was heard as a Small Tax Case pursuant to the provisions of section 7463 of the Internal Revenue Code of 1986, as amended, and Rules 170 and 175 of the Tax Court Rules of Practice and Procedure. This Bench Opinion is made pursuant to the authority granted by section 7459(b) of the Internal Revenue Code and Rule 152 of the Tax Court Rules of Practice and Procedure. Unless otherwise indicated, 17 all section references are to the Internal Revenue 18 19 20 21 22 23 24 25 Code in effect for the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure. We round all monetary amounts to the nearest dollar. Respondent determined deficiencies of $10,243 and $11,976 for tax years 2008 and 2009, respectively. Respondent also determined that petitioner is liable for accuracy-related penalties 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 4 in the amounts of $2,049 and $2,395 for tax years 2008 and 2009, respectively. Respondent conceded the penalty for 2009. The issues for our consideration are (1) whether petitioner received unreported income from alimony payments in the amounts of $56,077 and $54,000 for tax years 2008 and 2009, respectively, and (2) whether petitioner is liable for the accuracy-related penalty of $2,049 for tax year 2008. Trial of this case was conducted on December 2, 2013, in Chicago, Illinois. Petitioner represented herself, and Angela B. Reynolds represented respondent. The parties' stipulation of facts and exhibits 1-J - 9-J, 10-P, and 11-J - 12-J were admitted into evidence. We find the following facts. Findings of Fact Petitioner resided in Illinois when she filed the petition. Petitioner and Edward Pellegrini married on August 26, 1989. During their marriage, petitioner and Mr. Pellegrini had two children: K.P., born in 1990, and B.P., born in 1991. Petitioner and Mr. Pellegrini filed a petition for dissolution of marriage in the Circuit 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 Court of Cook County, Illinois (the Cook County 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 5 1 2 court). On July 26, 2002, the Cook County court entered a Judgment of Dissolution of Marriage, a 3 Marital Settlement Agreement, and a Uniform Order of Support. 4 5 Under the Marital Settlement Agreement, Mr. 6 Pellegrini was ordered to pay petitioner "unallocated 7 maintenance" of $4,500 per month, which would be 8 9 10 11 reduced to $2,250 on July 1, 2008, and would cease on July 1, 2010. These payments would cease upon the death or remarriage of petitioner or upon petitioner's cohabitation with another person. The 12 Marital Settlement Agreement further stated: "The 13 14 15 16 17 18 sums paid by Edward to [petitioner] pursuant to this paragraph *** are acknowledged to be paid incident to Edward's legal obligation to support Wendy. Said sums shall be includable in the gross income of Wendy and deductible from the gross income of Edward for the purpose of federal *** taxation within the 19 meaning and intendment of Sections 71 and 215 of the 20 United States Internal Revenue Code". 21 22 23 24 25 On May 19, 2003, the Cook County court entered an Agreed Order. The Agreed Order modified the Marital Settlement Agreement and stated that the original language was "set aside and held for naught". The Agreed Order provided that Mr. 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 6 1 Pellegrini was to pay petitioner a sum of $4,500 per 2 month as unallocated maintenance, which would I 3 4 5 6 7 8 continue until June 30, 2010. The replacement language did not provide for any reduction in support before the obligation to make the payments was scheduled to terminate on June 30, 2010. In 2008 and 2009, petitioner received cash payments of $56,077 and $54,000, respectively, from 9 Mr. Pellegrini. These payments were then directly 10 deposited into petitioner's checking account. 11 Petitioner did not report any of these payments as 12 13 14 15 16 17 18 19 20 income on her 2008 or 2009 income tax returns. Her returns were prepared by a tax professional who was recommended to petitioner. The tax professional was employed by a national firm. Opinion Generally, the Commissioner's determinations in a notice of deficiency are presumed correct, and a taxpayer bears the burden of providing those determinations are incorrect. Rule 142(a); 21 Welch v. Helvering, 290 U.S. 111, 115 (1933). 22 Petitioner does not contend that the burden of proof 23 24 25 should be shifted to respondent under section 7491(a), and the record does not suggest any basis for a shift. 866.488.DEPO www.CapitalReportingCompany.com 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 7 I. Alimony Payments The parties dispute whether the payments petitioner received from Mr. Pellegrini in 2008 and 2009 are alimony or child support. Section 71(a) provides for the inclusion in income of any alimony or separate maintenance payments received by an individual during his or her taxable year. Section 71(b)(1) defines "alimony or separate maintenance payment: as any payment in cash if -- (A) such 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 such payment as a payment which is not includable in gross income under this section and not allowable as a deduction under section 215. (C) in the case of an individual legally separated from his spouse under a decree of divorce or of separate maintenance, the payee spouse and the payor spouse are not members of the same household at the time such payment is made, and (D) there is no liability to make any such payment for any period after the death of the 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 8 payee spouse and there is no liability to make any payment (in cash or property) as a substitute for such payments after the death of the payee spouse. Section 71(c)(1) provides that the general inclusion rule under section 71(a) "shall not apply to that part of any payment which the terms of the divorce or separation instrument fix (in terms of an amount of money or a part of the payment) as a sum which is payable for the support or children of the payor spouse." Any payment that will be reduced "(A) on the happening of a contingency specified in the instrument relating to a child (such as attaining a specified age, marrying, dying, leaving school or a similar contingency), or (B) at any time which can clearly be associated with a contingency of a kind specified in subparagraph (A)" is treated as an amount fixed as payable for the support of children of the payor spouse. Sec. 71(c)(2). There are only two situations in which payments will be treated as to be reduced at a time which can be clearly associated with the happening of a contingency related to a child of the payor: (1) where payments are to be reduced not more than six 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 months before or after the date the child is to 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 9 1 2 attain the age of 18, 21, or local age of majority and (2) where payments are to be reduced on two or 3 more occasions which occur not more than one year 4 5 6 7 8 before or after a different child of the payor spouse attains a certain age between the ages of 18 and 24 inclusive. Sec. 1.71-1T(c), Q&A-18, Temporary Income Tax Regs. Under the Marital Settlement Agreement, Mr. 9 Pellegrini was ordered to pay petitioner "unallocated 10 maintenance" of $4,500 per month, which would reduce 11 12 13 14 15 to $2,250 on July 1, 2008, and would cease on July 1, 2010. Petitioner contends that the dates of reduction and termination coincide with the high school graduations of her children. The Agreed Order set aside and modified the 16 Marital Settlement Agreement, such that Mr. 17 Pellegrini was to pay $4,500 per month to petitioner 18 until June 30, 2010 with no reduction. We find that 19 the maintenance payments under the Agreed Order meet 20 21 22 23 24 25 the criteria for "alimony or separate maintenance payment: under section 71(b)(2). The Agreed Order does not refer to the date on which either child is to attain the age of 18, 21 or local age of majority. In addition, the Agreed Order cannot be considered payment for the support of the children of the payor 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company spouse and must be considered alimony includable by the payee spouse under section 71(a). We find that payments in the amount of $56,077 and $54,000 for tax years 2008 and 2009, respectively, are income to 10 petitioner. II. Accuracy-Related Penalty Under section 7491(c), the Commissioner bears the burden of production with respect to taxpayer's liability for the section 6662(a) accuracy-related penalty. This means that the Commissioner "must come forward with sufficient evidence indicating that it is appropriate to impose the relevant penalty." Higbee v. Commissioner, 116 T.C. 438, 446 (2001). Once the Commissioner has met this burden, the taxpayer must provide persuasive evidence that the Commissioner's determination is incorrect. See Rule 142(a); Higbee v. Commissioner, 116 T.C. at 447. Respondent met this burden. Respondent determined that petitioner is liable for an accuracy-related penalty pursuant to section 662(a) for tax year 2008. Section 6662(a) adds to the tax required to be shown on the taxpayer's return 20 percent of any underpayment attributable to, among other things, any substantial understatement of income tax within the meaning of 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 11 1 2 3 4 5 6 7 8 9 10 11 section 6662(b)(2). The phrase "substantial understatement of income tax" means an understatement that exceeds the great of $5,000 or 10 percent of the income tax required to be shown on the tax return for the taxable year. Sec. 6662(d)(1)(A). there is a substantial understatement. The section 6662(a) accuracy-related penalty does not apply with respect to any portion of the underpayment for which it is shown that the taxpayer had reasonable cause and acted in good faith. Sec. 6664(c)(1). Whether the taxpayer acted 12 with reasonable cause and in good faith depends on 13 all of the pertinent facts and circumstances. Sec. 14 15 16 17 1.6664-4(b)(1), Income Tax Regs. Generally, the most important factor is the taxpayer's effort to assess his or her proper tax liability. Id. Petitioner contends that the payments were for support of her 18 minor children. She did not believe the payments 19 20 were alimony; and she believed that the payments were related to her children graduating from high school. 21 Petitioner hired a tax preparer who had a good 22 23 24 25 reputation in the community. Petitioner had reasonable cause and acted in good faith. We hold that petitioner is not liable for the accuracy- related penalty for 2008. 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company So that the liability can be recalculated, decision will be entered pursuant to Rule 155. This concludes the Court's oral Findings of Fact and Opinion in this case. 12 (Whereupon, at 2:42 p.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 25 866.488.DEPO www.CapitalReportingCompany.com