TAX COURT OPINION

Case: Luke A. Weinstein
Docket Number: 23144-09
Judge: Goeke
Opinion Type: bench
Filed: 01/04/2012
Pages: 17

UNITED STATES TAX cOURT WASHHGTON, DC 20217 LUKE A. WEINSTEIN Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent ) ) ) ) ) ) ) Docket Nos. 21344-09, D t. No. corrected by Order D ted 1/6/12-Correct No. iS 2 144-09 Pursuant to Rule 152 (b) , Tax Court R les of Practice and Procedure, it is . O R D E R ORDERED that the Clerk of the Court shall t¼ansmit herewith to petitiöner and to respóndent a copy of the p ges of the transcript the. trial in the. above case beforé Judge Joseph Robert Goeke at of containing . his oral Hartford, Connecticut, findings of the trial. o.n October 26, 2011 fact and opinion rendered at the conclusion of (cid:16)042 In accordance with the oral decision will be entered for a decision w111 be entered fo findings o espondent as t fact and opinion, a the deficiency, and etitioner as tá the penalty. (Signed) Joseph Robert Goeke udge Dated: Washington, D . C. 2 012 January 4 , SERVED AN 5 2012 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 Joseph Robert Goeke Weinstein v. Commissioner Docket Nos. 21344-09, 14213-10 October 26, 2011 The court has decided to render oral findings of fact and opinion in ¼his case, and the following represents the courtis oral findings of fact and opinion. The oral.findings of·fact and opinion shall not be relied upon as precedent in any other case. Hereinafter in this opinion rule references will be to the tax court rules of practice and procedure, and section references, únless otherwise noted, will be to the Internal Revenue code in effect in 2006. The two dockets that are the subject of this opinion today have been consolidat d under Rule 141(a). This opinion is rendered pursuant to Rule 152 and Section 7459 (b) . The court 1 as jurisdiction over the t-wo dockets before us today pursuant to Section 6212 (c) (1) . Respondent issued notices of deficiency to Mrs. Nancy Weinstein and r. Luke Weinsteirí, which are the subject of the two d ckets which ha e been consolidated for purposes of the tria-li and opinion in these two cases. The notice of deficiency issued to Nancy Weinstein asse ted a deficiency for the year Heritage Repofting Corporation (202) 628-4888 I 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 2006 in the amount of $106,610. The notice of deficiency issued to Mr. Luke Weinstein asserted a deficiency in the amount of $26,975, and an addition to tax under Sections 6662(a) and 6662(b) (1) in the amount of $5,395. These determinations were made for the year 2006, as well. Both the petitioners timely petition from these notices of deficiency determinations and the case came to trial the week of(October 24th, ,2011 in Hartford, connecticut. The pa(cid:16)041tieshave sti ulated facts, and the stipulation of facts La the bex exhibits were presented as evidence at trial. Other exhibits were admitted at trial and testimony was taken at trial. The issues for a decision relate to a $350,000 payment received by Nancy Weinstein from Luke Weinstein in 2006. The parties d spute whether this payment was alimony for purposes of the application of the Internal Revenue ode. Respondent has taken alternative position in the two notices of deficiency proposing that the entire amount of $350,000 be treated as gross income of Nancy Weinstein in the notice of deficiency issued to her and disallowing a deduction claimed fo alimony on the income tax return of Mr. Luke Weinstein in the notice of deficiency issued to 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 5 Nancy Weinstein)and Luke Weinstein are former spouses who were married on September 14th, 1991. At the time they filed their petitions in these two consolidated dockets.the petitioners both resided in Connecticut. After over four years of marriage and after the birth of one child Nancy Weinstein filed a complaint seeking to dissolve her marriage due to irretrievable breakdown. In a memorandum of decision filed in the Superios Court of Connecticut dated May 12, 1998 Luke Weinstéin was ordered to pay Nancy Weinstein $100,000 a a property settlement within 60 days of the date of the decision. Luke Weinstein paid this $100,000 amount. Also in the same memorandum of decision Luke Weinstein was ordered to pay petitioner Nancy Weinstein $1,000 per month as limited periodic alimony for a period of five years. Said order of alimony was designated as non-modifiable as to the amount and duration,.and the memorandum of decision described the alimony as being paid to assist Nancy Weinstein to further:establish her latent employment skills. Mr. Luke Weinstein paid the limited periodic alimony during the five year period 1998 through 2003 as ordered in the me orandum of decision. In a separate jddgement filed in the Connecticut Superior Court the sáme property settlement and 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 alimony amounts were reiterated. In this judgement certain child support payments were also ordered as of September, 1998. Product Technologies, Inc. had been started and developed during the course of the marriage of Nancy Weinstein and Luke Weinstein. The parties have stipulated that Product Technology, Inc., in the form of Mr. Weinstein's interest in that corporation was a marital asset of the marriage of Nancy Weinstein and Luke Weinstein. In October, 1998 Luke Weinstein and his partners in Product Technologies, Inc. sold :the company for $6,000,000. Luke Weinstein's share of the proceeds of that sale was approximately $1,450,000. Nancy Weinstein filed a motion for re-argument or reconsideration in C¼nnecticut Superior Court in November, 2001 requesting that the court reconsider the memorandum of decision which denied a prior motion to re-open the memorandum of decision and judgement that had previously been entered in her divorce from Mr. Weinstein. Ms. Weinstein's motion was denied by the Connecticut Superior Court. She appealed the denial of that motion to the Connecticut Appellate Court. The Connecti ut Appellate Court affirmed the denial of her motion). She subsequently appealed the appellate court decision to the Supreme Court 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 7 Connecticut. In a decision reported at 270 Connecticut 671(2005) the Supreme Court of Connecticut reversed the Appellate Court of Connecticut and ordered the Appellate Court of Connecticut to reverse the judgement of the trial court and to remand the case to the trial court to grant petitioner's motion to open the judgement, and for further proceedings under law. After proceedings once again in the Superior Court petitioner Lukè Weinstein and petitioner Nancy Weinstein entered into an.agreement. dated July 24th, 2006 that required L ke Weinstein to pay Nancy Weinstein the sum of $350,000 no later than August 3rd, 2006. The agreement by its own terms was stated to be a full and final settlement of all financial claims of Nancy Weinstein against Luke Weinstein arising from their divorce, and the Supreme Court of Connecticut decision Nancy Weinstein did not report the $350,000 as income on her individual income tax return for 2006. Luke Weinstein treated the payment s a lump sum alimony payment and deducted the ambunt of the $350,000 on his individual income tax return for 2006. Prior to taking this position Luke Weinstein had advised Nancy Weinstein that he intended to do so, and 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 she had advised him that she disagreed with this decision. Prior to filing his return Mr. Weinstein consulted with an ac ountant named Robert Lally, L-A- L-L-Y. Mr. Lally had been involved in Mr. Weinstein's activities associated with Product Technologies, Inc. Mr. Weinstein sent to Mr. Lally the agreement that underlied his payment of $350,000 to Ms. Weinstein, which agreement had been approved and entered as an order by the Connecticut Superior Cburt. Mr. Lally sent Mr. Weinstein an e-mail where he indicated that it might be possible that based ùpon the language in the.agreement Mr. Weinstein may be able to deduct the payment as alimony pursuant to Section 71(b) (1) of the Internal Revenue od . Mr. Weinstein relied upon this memorandum in taking the position h took on his return, although he prepared the reburn himself. The issues befoñe us in these consolidated cases are whether Mr. Weinstein's payment to Mrs. Weinstein of $350,000 in 2006 should be deemed alimony as defined in Section 71 of the Internal Revenue ode and whether Mr. Weinstein is liable for the accuracy related penalty under Section 6662 for! 2006. Generally, alimony payments are taxable to the 1 recipient and deductible by the payor, Section Heritage Reporting Corporation (202) 628-4888 1 2 3 4 61 (a) (8) , 71 (a) , and 215 (á) .. Section 71 (b) (1) dëf ines alimony as follows. "In general, t he term alimony or separate maintenance payment means aný payment in cash if (A) such payment s received by or on behalf of a 5 . spouse under a divorce. or separatidn instrument, (B) 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 the divorce or separation instrumerit does not designate such payment as a payment w ich is not includable in gross income under t is section and not allowable as. a deduccion under Sec io 215, (C) in the case of an individua1. legally separatéd ,from his spouse under a decree of divorce or of a separate maintenance the payeé spouse and t e payor spouse are not members of the same household at t he time such payment is made, and (D) . there is r o liability to make any such payment for any period aft er the death of the payee spouse, and thère is no. lïabilit y to make any payment (in cash or oroperty) as a su stitute for such payments after the dëath of the pa ee spouse . " -Bed-e4 quuLed maLeLial. Mrs . Weinstein' s representatives have argued that the $350, 000 paymënt fails both pa ts in (B) and (D) of the definition of alimony in Section 71(b) . Owt hecetme-e·f-t+e-fwi+ 25 Respondent argues th t the payment in question fails Heritage Reporting Corp ration 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 to meet the definition of alimony under Subsection (D). Because only the failure of one subsection will require determination that the payment is not alimony we will focus our analysis on the application of Subsection (D), and the determination whether the payment in question would've survived the death of Mrs. Weinstein. In 1984 in the Deficit Reduction Act of 1984 congress replaced the former Section 71 with the four prong definition of alimony set forth in Section 71(b) (1) which we have previously quoted. See Pub. L. 98-369 Section 422(a) 98 STAT 494, 795. In the related House of Representatives report the legislation was described as follows. The committee bill attempts to define alimony in a way that would conform to general nptions of what type of payments constitute alimony a distinguishable from property settlements, and to prevent the deduction of large one time lump sum proper y settlements. H.R. rep. No. 98- 432, Part II, 98 Cong., 2nd Sess.,.1495 (1984). In Hoover v. Commissioner 102F 3rd 842 (6th Circuit 1996) the Court of Appeals for the 6th Circuit describes in detail the reasons f r the congres ional change and explains the applica ion of the test in Subsection (D). The Court of Appeals stated hat congress 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 11 specifically intended to eliminate the subjective- inquiries into intent that had risen under the prior law, 102F 3rd at 845. The Court of Appeals also found that determination of the obligation to pay upon the death of the recipieht was central to the statutory change to prevent allowing treatment as alimony for I transfers of property unrelated to support these of the recipient spouse, 102F 3rd at 846. Hoover represents a clear description and analysis of the application of Subsection D. In a divorce instrument if there is no reflection of a discussion of determination of the recipient spouse the agreement as explained in Hoover may be saved by state law provlslons; which must clearly provide that upon the death of a recipient spouse the obligation to pay must be terminated, ,Hoover 102F 3rd at 848. This analysis in Hoover has been widely followed and will apply this analysis to the facts before us. In the present case the divorce instruments created before the appeal to the Connecticut Supreme Court clearly distinguished a $1,000 monthly periodic alimony obligation from a $100,000 support payment. The post appeal agreëment, which was approved ·and ordered by Judge Holly A. Abrey-Wetstone of the Superior Court of Middlesex Connecticut was entered 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 eight years after th original decree, and after the five year period where the monthly alimony payments had expired. Mr. Weinstein argues that in a negotiation conducted by Judge Abrey-Wetstone under the Connecticut pretrial procedures to mediate settlement the judge suggested to him his alimony obligations might be re-visited ånd increased. In fact, the transcript of the pretrial hearing held on July 11th, 2006 reflects that Jùdge Abrey-Wetstone suggested to Mr. Weinstein that a ditional alimony in the amount of $90,000 might be awarded if the case was not settled. Judge Abrey-Wetstone described in her comments how she would've added this $90,000 to a prior saappeet amount she had computed, and she advised Mr. Weinstein that he might be facing an additional obligation of roughly $443,000 as a result of the opinion of the Connecticut Supreme Court. Therë is nothing in the transcript or in any other evidencë of the settlement negotiations that would suggest a y additional alimony amount in excess of this $90,000 played a role in the settlement which led to Mr. Weinstein's payment of $350,000 to Mrs. Weins.tein. Mrs. Weinstein argues that the $350,000 agreed between her and Mr. Weinstein must be reviewed in the context of the original 1998 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 instruments of divor e where alimony was fixed as $1,000 per month. Regardless of the parties contentions, the application of Section 71(b) (1) (d) requires that we look to the agreement itself in the first instance and to state law if the agreement does not speak to the issues presented by Section 71(b). The agreement entered in 2006 which underlies the payment of $350,000 does not address the issue of termination upon the death of Mrs. Weinstein. The parties have made arguments about the application of Connecticut law and we will review those arguments in light of the absence of information in the agreement. Mr. Weinstein relies upon Loughlin-v. Loughlin, L-O-U-G-H-L-I-N, 910A 2nd 963 (Co ecticut Supreme Court 2006). He cites this case a proposition that periodic alimony terminates at the death of the recipient. The cited case addresses whether it was appropriate for the trial court to consider factors beyond the statutory standard in awarding alimony. It has no direct bearing on whether·the agreed and ordered $350,000 in the.present case created an obligation that would've survived rsj Weinstein's death unless we presume the $350,000 is properly designated as alimony under Connecticut law. 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 14 There's no basi to conclude a Connecticut court would find the $350,000 was alimony under Connecticut law. The payment was hót periodic. It did not reference the prior judgement of a imony, and although the Supreme Court ma date allowed the Superior Court to review the entire previous decree of divorce the opinion of the Supreme Court made it clear that the reversal was based upon the existence of undisclosed property in the hands of Mr. Weinstein. We recognize that.the agreement entered in 2006 only provided a short period of time for the payment, and we accept Mr. Weinstein's testimony that he made the payment well befpre the agreed August 3rd date. Nevertheless, in cases addressing the termination issue payments are génerally made while the recipient is still alive. That is not the issue before us. The issue is whether if the recipient ad died before the payment was made, the obligation would've terminated. In this case the period of time when that could've happened is relatively short. But nevertheless, there is no discussion of this question in any agreement. Therefore, similar to the circumstances in.Hoover we find the application:of Connecticut law to be uncertain at best because Mr. Weinstein has failed to establish that the páyment would be treated as alimony Heritage Reporting Corporation (202) 628-4888 under Connecticut law. Mrs . Weinst eiñ argues that the . 15 payment would survive death based tipoA general contract provisions Snder Connecticut law. Given the fact :hat the agreen enth is not characterized as aliinony and that e f ind it unlikely a Connecticut court would find that tl e $350,000 was in fact ;an alimony payment, we bel ev that Connecticut laws treatment of the payment as 1 2 3 4 5 6 7 8 9 · terminating upon the death of Mrs. Weinstein is 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 uncertain at best. Mr. Weinstein rg es that the proximity of the payinent to the act ual agreement (cid:16)042makes the analysis of whether the payinent obligation would've terminated at death acaden ic He itestified that he made the payment through w re transfer within a day after the agreement was finalized. Respondent maintains that this estimony is irrelevant to the determination of whether the agreenenti: provided that the obligation would terminate upori tÉe death of Mrs . Weinstein. We recognize that the agreemer t. þrovided a period of approximately 10 days for the paymènt, and we accept Mr. Weinstein s testimony that he made the payment well before the August 3rd dat e reflected in the agreement. Neve:^theless, ln cases addressing the question of whether termination is provided regarding Heritage Reporting Corp r tion (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 16 such payments the recipient is generally still alive, so the question of whether or not Mrs. Weinstein actually received the payment while she was alive is not the issue before!us. The question is whether had she died, hypothetically, Mr. Weinstein's obligation would've continued despite her death. The agreement does not address this, and Connecticut law does not clearly provide that the payment obligation would not survive her death. Accordingly, we find that the payment of $350,000 fails the Subsection D requirement of Section 71(b) (1). The remaining issue in these two consolidated cases is whether Mr. Weinstein is subject to the addition to tax under Section 6662 for 2006. Respondent has asserted the penalty under Section 6662(a) for 2006, and respondent has computed an addition to tax in the amount of 20 percent of the underpayment attributable to Mr. Weinstein's assertion that the $350,000 was deductible as alimony. Respondent asserts that such assertion by Mr. Weinstein was negligÅnt. Negligence includes any failure to make a reasonable attempt to comply with tax laws, Section 6662(c). Under Section 6664 the addition to tax under Section 6662 will not apply if the taxpayer had 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 17 reasonable cause for|the position taken. Specifically, Section 6664 (c) provides that "no penalty shall be imposed under Section 6662 or 6663 with respect to any þortion of an underpayment if it is shown that there üas a reasonable cause for such portion, and that the taxpayer acted in good faith with respect to such portion." In the present case Mr. Weinstein did not engage the assistance of a tax professional. However, he did consult with a tax professional and provided information to the t x professional upon which he relied. Given the complex circumstances of the application of Secti n 71(b) in the present case, we find that Mr. Weinstein's actions were reasonable, and that he did act reasonably in claiming the deduction as alimony on his 2006 federal income tax return. Therefore, we find t at the addition to tax is not applicable to Mr. Weinstein. Given the court's opinion in this case a decision will be entered for Mrs. Weinstein relative to the deficiency proposed against her. As to Mr. Weinstein a decision will be entered for the respondent concerning the deficiency amounts, but a decision will be entered for Mr. Weinstein relative to the addition to tax. This concludes the courts oral findings of Heritage Reporting Corpðration (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 fact and opinion in phis case. (Whereuponi, at 12:36 p.m., the bench opinion in the above-entitled matter was concluded.) 18 // // // // // // // // // // // // // // // // // // // // // // Heritage keporting Corporation (202) 628-4888