TAX COURT OPINION

Case: Allan Vodicka
Docket Number: 27972-11S
Judge: Morrison
Opinion Type: bench
Filed: 04/19/2013
Pages: 11

UNITED STATES TAX COURT WASHINGTON, DC 20217 ALLAN VODICKA, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent ) ) ) ) ) Docket No. 27972-11S. ) ) ) ) ORDER OF SERVICE OF TRANSCRIPT Pursuant to Rule 152(b), Tax Court Rules of Practice of Procedure, there is transmitted herewith to petitioner and to respondent a copy of the pages of the transcript of the trial of the above case before Judge Richard T. Morrison, at Chicago, Illinois, on March 14, 2013, 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, an appropriate order will be issued and a decision will be entered under Rule 155. (Signed) Richard T. Morrison Judge Dated: Washington, D.C. April 19, 2013 SERVED APR 22 2013 Capital Reporting Company 3 1 Bench Opinion by Judge Richard T. Morrison 2 March 14, 2013 3 Allan Vodicka v. Commissioner 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 Docket No. 27972-11S THE COURT: Good morning. 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 oral findings of fact and opinion shall not be relied on as precedent in any other case. This proceeding for the redetermination of a deficiency is a small tax case conducted pursuant to the provisions of section 7463 of the Internal Revenue Code of 1986, as amended, and Rules 170 through 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, of 1986, as amended, and Rule 152 of the Tax Court Rules of Practice and Procedure. All references to sections are to sections of the Internal Revenue Code as in effect for the 2009 tax year, unless otherwise noted. Francis J. Emmons appeared on behalf of the 25 Petitioner. K. Elizabeth Kelly appeared on behalf of 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 4 1 2 3 4 5 6 7 8 9 10 11 the Respondent. On November 23, 2011 the Respondent issued a statutory notice of deficiency to Petitioner for his 2009 tax year. In the notice, the Respondent determined that the Petitioner is liable for a deficiency of $33,796 and a section 6662 (a) penalty of $6,759.20. At the trial, the Respondent conceded that the Petitioner is not liable for the penalty. The only remaining noncomputational issue is the amount that the Petitioner is entitled to deduct under section 215(a) for payments to his ex-wife, 12 Mary Kirby (hereinafter "Mary"). We hold that he is 13 14 15 16 17 18 19 20 21 22 23 entitled to a deduction of $36,100. Findings of Fact The Petitioner was a resident of Illinois when he filed his petition. In 1991, the Petitioner married Mary. In 1997, he filed a petition for divorce from Mary in the Circuit Court of Cook County, Illinois (hereinafter referred to as "the county court"). On February 27, 2001, the Petitioner and Mary appeared before the county court and, as reflected on the transcript of proceedings for that day, the 24 Petitioner's attorney, David V. Schultz, described a 25 settlement that the Petitioner and Mary had reached. 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 5 1 2 3 4 S Page six of the transcript reflects that they agreed that the Petitioner would pay Mary monthly installments at the rate of $95,000 per year for 10 years . RTM Later on Mary's attorney, David Mann, asked 6 Mary questions regarding her understanding of the 7 8 9 10 11 12 13 agreement. Mann asked Mary if she understood that the monthly payments would be "taxable to you and deductible to Mr . Vodicka". Mary answered yes . This colloquy appeared on the transcript of the proceedings for the day. On August 20, 2001, the county court entered a judgment for dissolution of marriage of the 14 Petitioner and Mary. Paragraphs 8 and 9(B) of the 15 16 17 18 19 20 21 22 23 24 25 judgment stated that the Petitioner and Mary had entered into an oral settlement agreement (or agreements); these paragraphs provided that the oral settlement agreement (or agreements) was incorporated in the judgment. The Petitioner and the Respondent have stipulated that the transcript of the February 27, 2001 county court proceeding constitutes (or at least is part of) the oral agreement or agreements referred to by--and therefore incorporated in--the judgment. Paragraph 8 (C) of the August 20, 2001 judgment states: 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 6 ALLAN shall pay, as and for maint'enance to MARY, due the first day of each month for a period of 120 consecutive months, commencing on April 1, 2001, the sum of $7,916.67 per month: 1. Said payments (totaling $95,000 per year for ten years) called for hereunder are non-modifiable.- 2. Said payments are not terminable by ALLAN's death, MARY's remarriage, [or] MARY's cohabitation. If MARY is to predecease ALLAN then ALLAN shall make the remaining payments to MARY's estate on a nontaxable basis and reduce the amount of the payment proportionally to the loss of the deduction. During tax year 2009, the Petitioner made 12 payments of $7,916.67, totaling $95,000, to Mary. The Petitioner timely filed his federal income tax return for tax year 2009, claiming a deduction for alimony paid in the amount of $95,604. The $604 difference between the $95,000 in payments made by the Petitioner to Mary during 2009 and the $95,604 deduction claimed by the Petitioner resulted from a mathematical error made by the 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 1 Petitioner's return preparer. The return preparer 2 3 4 5 6 calculated the deduction by multiplying 12 payments by $7,967.67, rather than $7,916.67. Opinion Section 71(a) provides that gross income includes amounts received as alimony or separate 7 maintenance payments. Section 71(b) (1) provides that 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 an alimony or separate maintenance payment is any payment in cash if: (A) such payment is received by * * * 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 * * * the payee and 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 payee spouse and there is no liability 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 8 to make any payment (in cash or property) as a substitute for such payments after the death of the payee spouse.[emphasis added.] Section 215(a) provides a deduction for taxpayers who make alimony or separate maintena'nce payments. Section 215(b) provides that alimony or separate maintenance payments are any alimony or separate maintenance payments, as defined in section 71(b), that are includable in the gross income of the recipient under section 71. The Respondent contends that the $95,000 in payments by the Petitioner to Mary during the taxable year are not deductible because part 8 (C) (2) of the divorce judgment required the Petitioner to make $95,000 in annual payments to Mary's estate after her death. See sec. 71(b) (1) (D). The Petitioner contends that the statement incorporated in the divorce judgment that the $95,000 in maintenance payments are deductible to the Petitioner is inconsistent with, and therefore supersedes, the post-death payment obligation imposed by part 8(C)(2).C Therefore, the Petitioner claims he would not have been required to make any payments to Mary's estate if she had died. In the alternative, the 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 9 1 Petitioner contends that if part 8 (C) (2) is not 2 3 4 5 6 7 superseded, it should be interpreted to require post- death payments in annual amounts of $95,000 minus the produce of $95,000 and 38%. Using this calculation, the annual amounts would be $58,900. The legal effect of part 8(C) (2) is considered in the context of what would happen is 8 Mary had died and Mary's estate had sued the 9 Petitioner for nonpayment of the $95,000 in annual 10 11 12 13 payments. In such a lawsuit, an Illinois court could not give effect to both the post-death payment requirement and the statement incorporated in the divorce judgment that the maintenance payments by the 14 Petitioner are deductible. This is because an 15 16 17 18 19 20 21 22 23 24 25 obligation to continue to make maintenance payments after the recipient spouse's death renders the payments nondeductible . See sec. 71(b) (1) (D However, to hold that part 8(C) (2) superseded would deprive Mary's estate of its right to post-death payments expressly guaranteed by the divorce judgment. A state court would not hold that the vague admonition that the maintenance payments to be made by the Petitioner are deductible for income tax purposes would supersede the express provision of the judgment requiring him to make payments after 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 10 1 Mary's death. We therefore reject the Petitioner's 2 main argument. 3 4 5 6 7 8 9 10 11 12 13 14 15 16 We now consider the Petitioner S alternative argument that the Petitioner would not have been liable to Mary's estate for the entire $95,000 annual amount in the event of Mary's death. The divorce judgment provided that the annual amount of post-death payments would be reduced by the "loss of the deduction". The authors of the divorce judgment evidently believed that the Petitioner would be entitled to deduct 100% of the annual payments before Mary's death and would not be entitled to any deductions after Mary's death. _, Therefore the authors of the divorce judgment believed that the amount of the "loss of the deduction" would be equal to the Petitioner's 17 marginal tax rate multiplied by $95,000. For 2009, 18 19 20 21 22 23 24 25 the Petitioner marginal federal income tax rate was 35%. His marginal Illinois income tax rate was 3%. Thus, his total marginal tax rate was 38%. Therefore the loss of the deduction assumed by the authors of the divorce judgment was the product of 38% and $95,000, which is $36,100. We believe that under the relevant principles of Illinois law, the annual payments that would have been required of the 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 11 1 Petitioner after Mary's death would have been $95,000 2 minus $36,100, which is $58,900. 3 4 The effect of partial required payments after the spouse's death has been described in 5 Rutkin, Family Law and Practice, Ch. 40, sec. 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 40.02[7) [a](Matthew Bender). It states: A payment can qualify as alimony or a separate maintenance payment only if there is no liability to make a payment (or a substitute for one) for any period after the death of the payee spouse. [Citing secs. 71(b) (1) (D), 215(b)] If the payor or spouse is obligated to continue making any part of those payments after the recipient's death, then none of those payments qualify as alimony or separate maintenance payments, whether made before or after the payee spouse's death. [Citing sec. 1.71-1T, A-13, Temporary Income Tax Regs; Cunningham v. Commissioner, T.C. Memo 1994-474 ] . Cemçhóó Example: H is required by an instrument to make monthly payments of $2,000 to W for 10 years. The instrument states that if W 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 12 dies, the payments will be reduced to $800 per month. Of the payments made in all years, $1,200 are deductible by H and taxable to W, but $800 are neither deductible not taxable because there is continued liability to make those payments after W's death. [Citing sec. 1.71-1T A-11, Temporary Income Tax Regs, Example (2) ]. 1 2 3 4 5 6 7 8 9 10 Rutkin, supra. Thus, we hold that of the $95,000 11 12 13 14 15 16 that the Petitioner paid to Mary in 2009, he is entitled to deduct $36,100. Our Findings of Fact are based on the preponderance of the evidence. An appropriate order will be issued and a decision will be entered under Rule 155 of the Tax 17 Court Rules of Practice and Procedure. This concludes the Court's Oral Findings of Fact and Opinion in this case. (Whereupon, at 10:10 a.m., the above- entitled matter was concluded.) 18 19 20 21 22 23 24 25 866.488.DEPO www.CapitalReportingCompany.com