TAX COURT OPINION

Case: David J. Schneider & Carrie Briggs
Docket Number: 17923-09S
Judge: Colvin
Opinion Type: bench
Filed: 11/30/2010
Pages: 15

UNITED STATES TAX COURT WASHINGTON, DC 20217 DAVID J. SCHNEIDER AND CARRIE BRIGGS, Petitioners, v. Docket No. 17923-09S. COMMISSIONER OF . INTERNAL REVENUE = '' Respondent - O R D E R . Pursuarit to Rule 152 (b) , Tax Court Rules of Practice and Procedure, it is ORDERED that the Clerk of the Court shall transmit herewith e the to petitioner and to respondent a copy of transcript of in the above case .before Judge David Gustafson at Philadelphia, Penns'ylvania, on October 20, 2010, containing his oral findings of fact and opinion rendered .at conclusion of the pages of the trial. the trial - the In accordance with the oral findings òf fact and opinion, decision will be entered for respondent as to the deficiency and for petitioners as to the accuracy-related penalty. Dated: Washington, D.Ce November 30, 2010 (Signed) David Gustafson Judge SERVED DEC --3 2010 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 Judge David Gustafson Schneider v. Commissioner, No. 17923-095 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 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. By a statutory notice of deficiency dated May 15, 2009, the Internal Revenue Service (IRS) determined a deficiency in the Federal income tax of petitioners David J. Schneider and Carrie Briggs for the year 2007, in the amount of $13,381, plus an accuracy- related penalty of $2,676.20 under section 6662(a) and (b) (1). The issue to be decided in this case is whether payments that.Mr. Schneider made to his former wife are deductible alimony under section 215(a)--in particular, whether, under section 71(b) (1) (D), Mr. Schneider had no liability to make those payments after the death of his former wife. Trial of this case was conducted on October 18, 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 2010, in Philadelphia, Pennsylvania. Mr. Schneider appeared and was the only witness who testified. The parties' Stipulation of Facts, with Exhibits 1-J through 3-J was admitted into evidence at trial. FINDINGS OF FACT Mr. Schneider was formerly married to Robin Schneider. (Stip. 4.) In January 2004 a Texas court entered an "Agreed Final Decree of Divorce" dissolving their marriage. (Stip. 4.) The decree had been drafted by Robin's lawyer after Mr. Schneider and Robin discussed what they agreed on; and Mr. Schneider then reviewed the lawyer's draft himself without hiring a lawyer to represent him. The divorce decree provided (at 31-32) a provision for "Maintenance" payments to be.made to Robin by Mr. Schneider. The decree refers to these payments once as "maintenance (alimony)". The decree states that the payments are made because Robin "does not have the financial ability to support herself" and because she "lacks the earning ability in the labor market in order to provide support for her minimum necessary needs". When he signed the divorce decree, Mr. Schneider believed that, for Federal income tax purposes, these payments would be deductible as "alimony" pursuant to section 215(a). 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 However, Texas law limits the amount and circumstances of court-ordered alimony. That is, court-ordered alimony payments may not exceed the lesser of $2,500 or 20 percent of the payor's monthly income and may not be payable over a period that exceeds three years. The parties agree--and the decree acknowledges (Ex. 3-J at 31-32)--that the agreed payments ordered in the decree exceed those limits. Consequently, as allowed by Texas law that we will discuss later, the divorce decree provides that, "to the extent permitted by law, the parties stipulate the agreement is enforceable as a contract." (Stip. 5, Ex. 3-J at 2.) It provides (at 32) that these excess features reflect "a contractual agreement between the parties which if it cannot be enforced by contempt, will be enforced by a breach of this alimony contract suit". The divorce decree made no explicit provision as to whether the maintenance payments would or would not continue in the event of the death of either of the parties. During the year at issue, 2007, Mr. Schneider paid Robin $41,990 pursuant to the divorce decree. Without any advice from a lawyer or accountant, Mr. Schneider prepared for himself and his new wife a 2007 return (Ex. 2-J) on which he deducted those 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 payments as alimony. They timely filed that return in April 2008. (Stip. 3.) On May 15, 2009, the IRS mailed them a notice of deficiency (Ex. 1-J) pursuant to section 6212, on which the IRS disallowed the alimony deduction. Part of the notice of deficiency is a Form 886-A, 'Explanation of Items," that includes an entry entitled "Alimony Paid". That entry states: For tax years beginning after December 31, 1984, alimony must meet the following requirements: (1) The payment is made in cash, (2) The parties do not designate that the payment is not alimony, (3) If the parties are separated under a decree of divorce or separate maintenance, the parties are not members of the same household when the payments are made, (4) There :ù3 no liability to make any payment (in cash or property) after the death of the recipient spouse, and (5) The payment is not treated as child support. We cannot allow the Alimony Deduction until verification of the deduction is provided. Acceptable documents are: a complete copy of the Divorce Decree and/or any Modifications of the decree, copies of cancelled checks, money orders 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 or pay statements showing wage garnishments and information to verify that you are current with child support (if applicable.) The Social Security number of the recipient is also required. We note in particular that paragraph (4) in that entry recited the requirement as to liability to pay after death. In response to this notice of deficiency, Mr. Schneider and Ms. Briggs timely filed a petition in this Court on July 27, 2009. At that time they resided in Pennsylvania. OPINION The IRS's determination is presumed correct, and generally the taxpayer bears the burden to prove his entitlement to the deductions he claims. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). However, Mr. Schneider contends that the IRS's position in this case--i.e., that the payments did not discontinue at death--is new matter not in the notice of deficiency, as to which the IRS would bear the burden of proof, ïf indeed the IRS is not altogether estopped from making the contention. We therefore address that issue separately below. The definition of alimony Section 215(a) allows a deduction to the paying 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 8 spouse for the alimony or separate maintenance payments made during the paying spouse's tax year that are includable in the recipient spouse's gross income under section 71(a). Whether a payment constitutes alimony within the meaning of sections 71(a) and 215(a) is determined by reference to section 71(b) (1), which gives a four-part definition, the fourth element of which is: (:D) there is no liability to make any such payment for any period after the death of the payee spouse * * *. Respondent does not dispute that Mr. Schneider's payments satisfy the first three subparagraphs of section 71(b) (1) but disputes Ithat they satisfy subparagraph (D), i.e., whether Mr. Schneider's liability to make the payments would have survived the death of his ex-wife. The adequacy of the notice of deficiency Mr. Schneider contends, in effect, that the notice of deficiency does not adequately raise the issue of section 71(b) (1) (D). He seems to contend that the notice of deficiency questioned only whether the payments had been substantiated. But that is not what the notice says. Rather, the notice lists five requirements for deductible alimony, the fourth 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 9 which is given as: (4) There is no liability to make any payment (in cash or property) after the death of the recipient spouse * * *. After listing the five requirements, the notice states: We cannot allow the Alimony Deduction until verification of the deduction is provided. The notice thus calls for "Verification of the deduction"--not just substantiation of the payments. The deduction turns on compliance with all the rules, and "verification" would therefore include verifying that the liability to make payments would not survive the death of the payee. This issue is therefore adequately raised in the notice of deficiency. This is not "new matter" as to which the IRS is estopped or bears the burden of proof. The interpretation of the decree Mr. Schneider bears the burden to prove that he had "no liability" to make payments in the event of his ex-wife's death. The text of the divorce decree includes no such provision. On the contrary, it sets out an unqualified schedule according to which Mr. Schneider was required to make payments. The plain language of the decree does not support him. 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 He argues, however, that ambiguity in the text arises from two features of the agreement that might imply that its payments should be understood to discontinue if the payee dies: (1) The payments are justified by Robin's need for maintenance, which need would disappear if she died. (2) They are referred to as "alimony", which traditionally discontinues when the payee dies. We conclude, however, that these do not raise any ambiguity. A contract may recite the occasion for its terms (here, Robin's need for maintenance), but unless a contract provides that its obligations are excused when the circumstances change, there is no reason to suppose that the obligations may be conditional. And the use of the term "alimony"-- especially in Texas--does not at all indicate termination at death. Texas case law refers to payments like those at issue here as "contractual alimony" and makes clear that the traditional alimony rules do not apply. See Cardwell v. Sicola-Cardwell, 978 S.W.2d 722, 726 (Tex. Ct. App. 1998). Moreover, even if we were to find the contract ambiguous, that hardly makes petitioner's case. Rather, it merely opens the door to his attempting to prove that the ambiguous contract should be interpreted to mean that the payments ceased at Heritage Reporting Corporation (202) 628-4888 l 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 11 Robin's death. Mr. Schneider did not carry that burden of proof. He gave very brief and summary characterizations of alleged consensus between himself and Robin that the payments were "alimony", that Robin would include the payments as income and he would deduct them, and that the payments would cease upon Robin's remarriage or death. He did not present any evidence (other than his own testimony) to show that Robin (or her attorney) shared his understanding on this point. He did not recount a chronology of negotiations or even state specifically that he discussed with the attorney all the things that were allegedly included in his consensus with Robin. At most he proved a unilateral understanding, which was a unilateral mistake unless Texas law (discussed below) could fill in the missing term. If using the word "alimony" automatically creates an ambiguity that a taxpayer can use to import a no- liability-after-death term into an agreement, then the specificity of section 71(b) (1) (D) would be vitiated. The Schneider's divorce decree would then be a textbook example of clever drafting and abusive practice: The payee spouse could always exclude the payments from income on the indisputable grounds that the agreement does not provide that they cease at 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 12 death, while the payor spouse could always deduct them nonetheless by pointing to the supposed ambiguity and supporting a no-liability-after-death term by his own uncorroborated testimony. We cannot hold that the divorce decree at issue includes such a term. The effect of Texas law Whether a post-death obligation exists may be determined by the terms of the divorce or separation instrument or, if the instrument is silent on the matter (as we hold the Schneiders' divorce decree is), then by State law. Morgan v. Commissioner, 309 U.S. 78, 80-81 (1940). That is, whether or not there is "no liability" really turns, in this case, on whether the Texas courts would hold that there is no liability. We have already noted that Texas law distinguishes between alimony (which has limits that the divorce decree exceeded) and "contractual alimony". In Cardwell, supra, the,State court of appeals held that contractual alimony agreements in Texas are governed by the law of contracts, and generally survive the death of one of the parties. The court stated: Neither the historical treatment of alimony in Texas, nor Texas case law, indicates that the general rules of alimony--i.e., court-ordered 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 13 spousal support--should apply to contracts for spousal support, particularly the rule that alimony presumptively terminates on the obligor's death. Mr. Schneider acknowledges this authority, but he points out that Cardwell involved the death of the obligor spouse, not the payee; and he urges that while Texas provides that alimony contracts are enforced under contract law, it is a different matter to assert that such contracts ought to be interpreted under matrimonial law (under which he contends the payments would be deemed to cease at death). However, the Texas case law provides no reason to think that Texas courts would find an implicit no- liability-after-death term in the Schneider's divorce decree. It is true that Cardwell involved the death of the obligor, but the opinion does not bear out the distinction that petitioner requires. Cardwell states, 978 S.W.2d at 726, that "contractual alimony agreements in Texas are governed by the law of contracts"--not just enforced under the law of contracts but governed by it. The court expressly denied that "the general rules of alimony * * * should apply to contracts for spousal support". Accordingly, we hold that Mr. Schneider's Heritage Reporting Corporation (202) 628-4888 14 payments made to his ex-ùife in 2007 did not satisfy all the conditions set forth in section 71 and thus are not properly deductible as alimony. Accuracv-related penalty under section 6662 Section 6662 imposes an "accuracy-related penalty" of 20 percent of the portion of the underpayment of tax attributable to any substantial understatement of income tax. See sec. 6662(a), (b) (2). Pursuant to section 7491(c), the Commissioner bears the burden of production and must produce sufficient evidence showing the imposition of the penalty is appropriate in a given case. Higbee v. Commissioner, 116 T.C.. 438, 446 (2001) . An understatement of income tax is substantial if it exceeds the greater of $5,000 or 10 percent of the tax required to be shown on the return. Sec. 6662(d) (1). The Commissioner meets his burden, because the deficiency attributable to the tax is $13,381, and the corrected tax liability is $53,114; thus the understatement is both greater than $5,000 and greater than 10 percent of $53,114. Once the Commissioner meets this burden the taxpayer must-come forward with persuasive evidence that the Commissioner's determination is incorrect. Rule 142(a); Higbee v. .Commissioner, supra at 447. 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 I 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 15 A taxpayer who is otherwise liable for the accuracy-related penalty may avoid the liability if it successfully invokes one of three other provisions: Section 6662 (d) (2) (.B) provides that an understatement may be reduced, first, where the taxpayer had substantial authority 'for its treatment of any item giving rise to the understatement or, second, where the relevant facts affecting.the item's treatment are adequately disclosed and the taxpayer had a reasonable basis for its treatment of that item. Third, section.6664(c) (1) provides that, if the taxpayer shows that there was reasonable cause for a portion of an underpayment and that he acted in good faith with respect to such portion, no accuracy related penalty shall be imposed with respect to that portion. Whether the taxpayer acted with reasonable cause and in good faith depends on the pertinent facts and circumstances. We are persuaded that Mr. Schneider successfully invokes that third provision. On all the facts and circumstances, he had reasonable cause and acted in good faith. Consequently, the deficiency in tax as determined by respondent will be sustained, but the accuracy- related penalty will not be sustained. Heritage Reporting Corporation (202) 628-4888 | 1 2 3 4 s 6 7 8 9 io 11 12 13 14 is 16 17 18 19 20 21 22 23 24 2s This concludes the Court' s oral Findings of Fact Nand Opinion in this case. (Whereupon, at 3:02 p.m., the bench opinion in the above-entitled matter was concluded.) 16 // // // // // // // // // // // // // // // // // // // // // Heritage Reporting Corporation (202) 628-4888