Court Opinion

ID: 9473000
Source: CourtListenerOpinion
Date Created: 2023-08-05 04:16:53.214401+00
Date Added: 2024-06-11T17:43:16.328556
License: Public Domain

CLARK, Circuit Judge,
dissenting:
I am unable to follow the majority’s conclusion that the consideration paid was for past, present, and future alimony obligations and that the amount of $36,183.24 should have been included in the petitioner’s gross income for the 1976 tax year.
The majority, in reaching this conclusion, has committed two errors. First, by strictly adhering to a court developed formula, that is not required under the Internal Revenue Code, the majority has disregarded the plain and specific provisions of the agreement. Second, if one assumes that the majority has correctly interpreted the agreement, it has clearly erred by permitting the government to tax the petitioner on the total value of the mortgages rather than the amount of income which she has received.
The tax court correctly observed that when “the husband is delinquent in making alimony payments, the tax consequences of a future lump-sum payment are less clear-cut, and depend largely upon the intentions of the parties.” Olster v. Commissioner, 79 T.C., 456, 462. (Emphasis added). The majority, however, incorrectly concludes that “[p]ast and future alimony obligations were intended by the parties as consideration for the lump sum settlement.” Majority Opinion at 1172. The majority reaches its conclusion because: (1) the agreement provides for mutual covenants and conditions (thus suggesting mutual obligations and benefits); and (2) the alimony arrearages exceed the value of the mortgages. These conclusions conflict *1176with the plain meaning of the agreement and the history of periodic and lump sum payments.
It is apparent from paragraphs two and three that the intent of the parties was to release the husband from future alimony obligations. Paragraph two of the agreement provides in part:
In consideration of and for Wife having released the Husband from his obligation to provide future alimony ... the Husband agrees to pay as a lump sum settlement of his obligation to pay future alimony ... the following____
Paragraph three provides in part:
In consideration of and for the lump sum settlement of future alimony payments ... the Wife hereby agrees to remise, release, and forever discharge the Husband from any obligation to pay to her any past due alimony____
Both paragraphs specifically state that the consideration is for the release or settlement of future alimony payments. Although paragraph three mentioned the forgiveness of past due alimony, the exclusive consideration given by the petitioner in return for the lump sum payment was the relinquishment of her right to pursue future alimony payments. This is a very affirmative statement of the intent of the parties. To require a more specific agreement in an area of the law which is so uncertain is unfair and contrary to the purposes of tax law. Congress has not amended the tax code to require such a harsh result.
In interpreting the law governing this agreement, the primary issue before the court is whether the transfer has retained its character as a periodic payment or whether it has taken on a new character and become a lump sum payment. The agreement indicates that a lump sum payment for future alimony was intended. I think the nature of the property transferred, i.e. mortgages, supports this conclusion. In Commissioner of Internal Revenue v. Senter, 242 F.2d 400 (4th Cir.1957), the distinction between periodic and lump sum payments was discussed. The court explained that lump sum payments are “ ‘in the nature of division of capital, rather than from the husband’s income so as to be deductible by him.’ ” Id. at 403. Under our tax laws, mortgages are capital investments. Clearly, the assignment of a mortgage, as in this ease, resembles a division of capital. If these mortgages had been transferred to the petitioner under the initial property settlement agreement, there is no doubt that the transaction would have been viewed as a lump sum payment. There is no valid reason for treating the present transaction in a different manner. When a wife receives a lump sum in settlement of alimony, it is not taxable to her as income. Similarly, it is not deductible by the husband.
Assuming that the majority was correct in concluding that the agreement involved past, present, and future alimony obligations, it has erred in allowing petitioner to be taxed as a taxpayer who has elected the accrual method of accounting. “Under the accrual method of accounting, an expense is deductible for the taxable year in which all the events have occurred which determine the fact of liability.” LX Cattle Co. v. United States, 629 F.2d 1096, 1098 (5th Cir.1980). On the other hand, “[c]ash basis taxpayers are required to include items of income in the taxable year in which such income is actually or constructively received by them.” Arnwine v. Commissioner of Internal Revenue, 696 F.2d 1102, 1111 (5th Cir.1983). A taxpayer is deemed to be in constructive receipt of income when it becomes available to the taxpayer without substantial restrictions. Id. at 1111.
In this case, the taxpayer received mortgages valued at $36,183.24. However, the income which she actually received from the mortgages during 1976 was $13,055.62. The majority concluded that $36,183.24 was includable in the taxpayer’s gross income for the year of 1976. This amount is approximately twenty-three thousand dollars more than the income which the taxpayer received from the transferred mortgages. A twenty-three thousand dollar discrepancy *1177is excessive. Under our tax laws, a cash basis taxpayer should not have sustained such an unfair burden. Contrary to the tax court’s observation, the taxpayer met her burden of proving that the mortgages did not have a cash equivalent value and that they should not have been included in her income during the year of receipt. As the Supreme Court stated in Helvering v. Taylor, 293 U.S. 507, 55 S.Ct. 287, 79 L.Ed. 623 (1935):
[W]here ..'. the taxpayer’s evidence shows the Commissioner’s determination to be arbitrary and excessive, it may not reasonably be held that he is bound to pay a tax that confessedly he does not owe, unless his evidence was sufficient also to establish the correct amount that lawfully might be charged against him.
Id. 55 S.Ct. at 291. The facts of this case indicate that the tax imposed on the petitioner is excessive, arbitrary and invalid. Accordingly, I must dissent.