TAX COURT OPINION

Case: Mark Glenn Hexum
Docket Number: 13994-16
Judge: Goeke
Opinion Type: bench
Filed: 04/17/2017
Pages: 10

UNITED STATES TAX COURT WASHINGTON, DC 20217 MARK GLENN HEXUM, Petitioner(s), v. COMMISSIONER OF INTERNAL REVENUE, Respondent ) ) ) ) ) Docket No. 13994-16. ) ) ) ) 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 hearing in the above case before Judge Joseph Robert Goeke at Chicago, Illinois containing his oral findings of fact and opinion rendered at the trial session at which this case was heard. In accordance with the oral findings of fact and opinion, a decision will be entered for respondent. (Signed) Joseph Robert Goeke Judge Dated: Washington, D.C. April 17, 2017 gggg APR 2 1 2017 Capital Reporting Company 3 1 Bench Opinion by Judge Joseph Robert Goeke 2 April 6, 2017 3 Mark Glenn Hexum 7. Commissioner 4 5 Docket No. 13994-16 THE COURT: The Court has decided to render 6 Oral Findings of Fact and Opinion in this case and 7 8 the following represents the Court's Oral Findings of Fact and Opinion. The Oral Findings of Fact and 9 Opinion shall not be relied upon as precedent in any 10 11 12 13 14 other case. This case is before us after trial on April 3rd, 2017 i¢n Chicago, Illinois. We have jurisdiction Ú under section 6213 of the Internal Revenue Code to review the Notice of Deficiency issued to the 15 Petitioner and timely petitiodÑto this Court. This 16 17 18 19 20 21 22 23 24 25 opinion is rendered pursuant to section 7459(b) and Tax Court Rule of Practice and Procedure 152. After this, section references are to the Internal Revenue code and Rule references are to the Tax Court Rules of Practice and Procedure. At the time the timely petition was filed in this case the Petitioner resided in Illinois. This case was submitted to the Court based upon the Stipulation of Facts agreed to by the parties accompanied by the testimony of the 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 4 1 Petitioner. The dispute in this case involves the 2 3 4 5 6 7 8 9 question of whether the amount of $12,953 Petitioner claimed as additional alimony in 2013 should be treated as alimony. Respondent disallowed this alimony deduction in the Notice of Deficiency. Respondent also determined thet addition to tax, based upon section 6662(a), associated with the adjustment made for the disallowance of the alimony. The parties' Stipulation of Facts sets 10 forth the basic circumstances. A final judgment for 11 Dissolution of Marriage was entered on February 23rd, 12 13 2014 in the Circuit Court for Peoria County, Illinois relating to the divorce proceedings between the 14 Petitioner and his former spouse. 15 16 17 18 19 The divorce decree was a written version of an oral agreement approved in open Court on September 27th, 2011 and effective on October 1st, 2011. Section 2 of the divorce decree is titled Alimony and it provides that the Petitioner shall made specific 20 monthly payments to his former spouse beginning on 21 October 1st, 2011. It also provides that he shall pay 22 23 24 25 his former spouse a specific percentage of certain other payments he was to receive associated with his stock options. The divorce decree in Section 2 specifically provides that these payments were to be 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 5 1 2 treated as taxable income to the former spouse and would be deductible from federal income tax by the 3 Petitioner. The divorce decree goes on to state in 4 5 6 Section 2 that the maintenance is awarded because the former spouse had no source of income. Article 4 of the divorce decree is entitled 7 Marital Residence. It provides specifically as 8 follows: "The marital residence located at 6637 9 North Greenwich Place, Peoria, Illinois 61615 shall 10 11 12 13 14 be sold. Each party will receive half of the net equity of said propertyy Ñfter payment of real estate taxes, closing costs, commissions and any liens and indebtedness on said property including, but not limited to, mortgages and home equity loans. 15 Mark will take possession of the marital residence by 16 17 18 19 20 21 22 November 1st, 2011. Mark will pay all expenses associated with the Greenwich property until it is sold. Both parties shall cooperate on the sale of the marital residence, agree on the sale price and continue and cooperate with their listing agent. The parties may decide to change listing agents if necessary. In addition, both parties shall execute 23 all necessary documents to accomplish the sale of the 24 marital residence." 25 The dispute in question arises based upon 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 6 the circumstances after the Petitioner took possession of the marital property by November 1st, 2011 and is based upon his calculation of certain amounts he expended associated with the marital property before the sale on January 11th, 2013. The total gain on the sale of the property was $76,561.89. Between October 1st, 2011 and the date of the sale, Petitioner made mortgage payments that reduced the principal balance on the mortgage in the amount of $25,189. Petitioner also replaced a carpet in the residence which cost $717. On January 14th, 2013 the Petitioner filed a response to a petition for Rule to Show Cause in the divorce proceeding asserting that he was entitled to receive the first $25,906 from the gain on the sale of the house to compensate him for the expenses just explained. On January 14th, 2013 the Peoria Court ordered that the total equity gained on $76,561.89 was to be split evenly between Petitioner and his former spouse, thus denying Petitioner's claim that he should solely receive the initial $25,906. After this the Petitioner decided to include one-half of the $25,906 or $12,953 in the amount that he reflected as alimony on the information he provided to his income tax return preparer for 2013. He 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 7 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 testified that he did not discuss whether this amount properly deductible with the return preparer, but rather he made the determination himself that it should be treated as deductible based upon his review of IRS documentation and of Illinois § 750 5/503, properly cited as 750 ILCS 5/503. Petitioner testified that his rationale was that this amount should not be treated as the disposition of marital property because it involved circumstances after the marriage had ended, and that it was not in any other way described in the Court's order of dissolution of the marriage and therefore, based upon IRS documentation, he felt like it should be properly treated as alimony. Respondent counters that Petitioner has overlooked one of the basic requirements for an alimony deduction. Code section 71(b) provides in subsection 1 that the term alimony or separate 19 maintenance payment means any payment in cash if "(a) 20 21 22 23 24 25 such payment is received by or on behalf of a spouse made 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 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 8 1 2 the case of an individual legally separated from his spouse under a decree of divorce or separate 3 maintenance, the payee spouse and the payor spouse 4 5 6 7 8 9 10 11 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 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." This last requirement is the crux of 12 Respondent's counter to Petitioner's position. 13 Petitioner does not ma-1.at-eri-rr that he would have 14 15 16 17 18 19 20 21 22 23 24 25 continued to have an obligation to pay the gain on the real estate to the estate of his former spouse had she pre-deceased the sale of the property. We can find no authority in Illinois which would support a position that this amount would not have been payable to her estate because it was not in the form of maintenance but rather was specifically described as the proceeds from the real estate in the decree of dissolution. A Federal Court looks to state law to determine if a payment terminates upon death but when the state law is ambiguous of determination of orbko- 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 9 1 2 3 4 5 6 7 8 9 10 11 12 13 14 payments upon the death is not completely clear, a Federal Court is not obligated to enter it a complex, subjective inquiry, Hoover v. Commissioner, 102 F.3d 842, 846 (6th Cir, 1996) In the present case we do not believe a complex inquiry is required as it is undisputed by the Petitioner that he would have continued to have an obligation to make the payments on the gain from the real estate even if his former spouse had passed away before the sale of the real estate. This, in itself, precludes the application of section 71 to provide an alimony deduction to the Petitioner. We realize that the Petitioner is frustrated with some of the rulings in the State 15 Court proceeding and that he has made clear he 16 17 18 continues to contest his legal representation in that proceeding. We do not find any of these circumstances to be relevant to the basic inquiry 19 we've just described and we do not believe there's 20 21 22 23 24 25 any serious question that the Petitioner would have continued to have an obligation to pay the entire gain, or at least his wife's portion of that gain, to her estate had she pre-deceased him. The fact that she did not pre-decease him does not change the outcome of the treatment of the $12,953 in dispute in 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 10 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 this case for the year 2013. We now turn to whether the Petitioner is liable for the addition to tax as determined by the Respondent under section 6662(a). That section imposes a 20 percent accuracy-related penalty on the portion of the understatement that either constitutes a substantial understatement of tax or that is due to negligence or disregard of Rules and Regulations. The accuracy-related penalty will not apply, however, to any part of the understatement to the extent the taxpayer shows that he acted with reasonable cause and in good faith, section 6664(c)(1). Generally, in a situation such as present case, the taxpayer can establish good cause and reasonable care by demonstrating that he consulted 16 with a professional before taking a certain position. 17 18 19 20 21 22 23 24 In the present case the Petitioner did not ask his return preparer whether, in fact, the $12,953 should be treated as deductible. We believe a tax professional would have instructed him that he should make an inquiry whether the payment in question would have been a continuing obligation even upon the death of his spouse, in which case it would not have been deductible as alimony expense. The fact that 25 Petitioner did not make this inquiry we believe makes 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 11 1 2 3 4 5 6 a reasonable cause defense inapplicable to him under section 6662(a) and section 6664(c)(1). Therefore, we believe that the statutory additions to tax is applicable and we sustain the Government's determine of the addition to tax. As a result of this analysis a decision 7 will be entered for Respondent. This concludes the 8 Court's Oral Findings of Fact and Opinion in this 9 case. 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 (Whereupon, at 11:16 a.m., the above- entitled matter was concluded.) . . www.CapitalReportingCompany.com 866.488.DEPO