Estate of Monte H. Goldman v. Commissioner , 112 T.C. No. 21 ( 1999 )

112 T.C. No. 21UNITED STATES TAX COURT
ESTATE OF MONTE H. GOLDMAN, DECEASED, CAROLE SCHUTTER, f.k.a
CAROLE GOLDMAN, PERSONAL REPRESENTATIVE, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 183-97. Filed June 1, 1999.
On Nov. 12, 1985, H and W executed a Property
Settlement Agreement (the agreement) in connection with
their divorce; the agreement was approved by the divorce
court. Par. 2 of the agreement provides for a division
of marital property. Par. 2.2.9 of the agreement
provides that "In furtherance of the equitable division
of property" H shall pay W $20,000 a month for 240
months. The monthly payments terminate at W's death.
Par. 6.5 of the agreement provides that all transfers of
property are to be subject to the provisions of sec.
1041, I.R.C., and shall be reported on H and W's income
tax returns "as a non-taxable event". The agreement
further provides that both W and H waive spousal support.
H received an opinion letter from a law firm that
the $20,000 monthly payments were deductible as alimony.
On H's 1992, 1993, and 1994 Federal income tax returns,
the payments (totaling $240,000 per year) were
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characterized and deducted as alimony. R determined the
$240,000 payments H made to W in 1992, 1993, and 1994
were not alimony and therefore not deductible. R further
determined that H's estate (H died in January 1995) is
liable for an accuracy-related penalty under sec.
6662(a), I.R.C., for 1992, 1993, and 1994.
Held: In ascertaining the applicability of subpar.
(B) of sec. 71(b)(1), I.R.C., the divorce or separation
instrument need not mimic the statutory language of the
subparagraph. The agreement reflects the substance of
a nonalimony designation. Consequently, the $20,000
monthly payments H made to W in 1992, 1993, and 1994 are
not deductible as alimony.
Held further: Because H reasonably and in good
faith relied on the advice of an experienced, competent
tax counsel, R's determination imposing the sec. 6662(a),
I.R.C., accuracy-related penalties is not sustained.
Dan A. Sciullo and Daniel S. Duggan, for petitioner.
Michael W. Lloyd, for respondent.
JACOBS, Judge: In the notice of deficiency respondent
determined the following income tax deficiencies and accuracy-
related penalties:
Penalty
Year Deficiency Sec. 6662(a)
1992 $141,645 $27,779
1993 97,891 19,578
1994 57,226 11,445
After resolving a protective adjustment for the year 1992
(involving the deduction of expenses of an S corporation which
passed through to Monte H. Goldman), the parties agree that the
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amounts of deficiencies and accuracy-related penalties now at issue
are:
Penalty
Year Deficiency Sec. 6662(a)
1992 $75,707 $15,141
1993 97,891 19,578
1994 54,793 10,959
The issues remaining for decision are: (1) Whether payments of
$240,000 Monte H. Goldman made to Sally Parker during each year in
issue were properly deductible as alimony, and (2) whether a
section 6662(a) accuracy-related penalty is applicable to each year
in issue.
All section references are to the Internal Revenue Code, and
all Rule references are to the Tax Court Rules of Practice and
Procedure.
FINDINGS OF FACT
Some of the facts have been stipulated, and the stipulation of
facts is incorporated in our findings by this reference.
Monte H. Goldman resided in Colorado on January 10, 1995, the
date of his death. Carole Schutter (formerly Carole Goldman), the
personal representative of the Estate of Monte H. Goldman
(hereinafter referred to as petitioner), resided in Colorado at the
time the petition was filed.
On July 31, 1974, Mr. Goldman and Sally Goldman (presently
known as Sally Parker and hereinafter referred to as Ms. Parker)
married. They had two children, one born in 1978 and a second in
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1979. On or about November 23, 1983, Mr. Goldman and Ms. Parker
separated and did not live together during the years in issue.
Subsequently, Ms. Parker (plaintiff) filed a Complaint for Divorce
for the dissolution of her marriage to Mr. Goldman (defendant) in
the Family Court of First Circuit, County of Honolulu, State of
Hawaii. On August 12, 1985, a Final Decree of Divorce was entered.
Both Mr. Goldman and Ms. Parker had their own tax, as well as
divorce, counsel. On November 12, 1985, they executed a "Property
Settlement Agreement" (the agreement) as part of the divorce
proceedings. The divorce court approved this Agreement. The
relevant portions of the agreement provide as follows:
1.5 Plaintiff and Defendant desire and
intend by this Agreement to execute a
complete, final and permanent settlement and
adjustment of all property, support and other
financial rights, obligations, interests,
claims and disputes of every kind and nature,
arising from, connected with or related to,
their marital relationship, including, but not
limited to, the Defendant's contention that
there is no marital property and Plaintiff's
claims that there is substantial marital
property.
2. Disposition of Marital Property and Separate
Property:
2.1 Plaintiff and Defendant declare that
they desire to divide the marital assets and
liabilities so that the division of the
marital property is equitable. * * *
2.2 Subject to the conditions
hereinafter set forth, Defendant hereby
conveys, transfers, and assigns to Plaintiff,
as her sole and separate property, all of his
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right, title and interest in and to the
following:
2.2.1 The condominium located at
0155 Lone Pine Road, Aspen, Colorado
* * *
2.2.2 The sum of TWO HUNDRED
FIFTY THOUSAND DOLLARS ($250,000)
paid on August 21, 1985, receipt of
which the Plaintiff hereby
acknowledges.
The following sums to be paid on or
before five o'clock p.m. on August
28, 1985:
a. Three Million Seven
Hundred Fifty Thousand Dollars
($3,750,000.00).
b. Five Hundred Forty
Thousand Dollars ($540,000.00).
c. The sum of Five Hundred
Fifteen Thousand Dollars
($515,000.00) payable to John S.
Edmunds, Plaintiff's attorney, as
and for attorneys' fees for legal
services performed by Mr. Edmunds
and others on behalf of Plaintiff in
this action.
* * * * * * *
2.2.9 Further Payments for Property
Division:
In furtherance of the equitable
division of property, Defendant
shall pay to Plaintiff the sum of
Twenty Thousand Dollars ($20,000.00)
per month for a period of 240 months
commencing August 21, 1985. Receipt
of the payment of August 21, 1985 is
hereby acknowledged. These monthly
payments shall terminate and be
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discharged upon death of Plaintiff.
The obligation contained herein
shall survive Defendant's death and
be a lien against his estate.
Defendant shall have no right to
prepay these monthly payments.
* * * * * * *
6.5 The parties intend and agree that
all transfers of property as provided for
herein are subject to the provisions of
Section 1041, Internal Revenue Code of 1954,
as amended, entitled, "Treatment of Transfers
of Property Between Spouses or Incident to
Divorce", and that they shall be accounted for
and reported on his or her respective
individual income tax returns in such a manner
so that no gain or loss shall be recognized as
a result of the division and transfer of
property as provided for herein. Each party
shall file his or her Federal and State tax
returns, and report his or her income and
losses thereon, consistent with the foregoing
intent of reporting the division and transfers
of property as a non-taxable event. * * *
6.6 Plaintiff shall pay, and hold
Defendant harmless from, all Federal and State
income taxes due as a result of the receipt by
her in 1984 and 1985 of temporary spousal
support, and on account of the receipt by her
of unreported income from her separate
property earned during marriage, in excess of
losses, deductions and credits attributable
thereto.
7. Spousal Support Waiver:
The parties acknowledge that as a result
of the funds as and for property division and
the release of marital rights and claims which
Plaintiff is to receive as provided for herein
she has no need for spousal support.
Plaintiff expressly waives her right to
spousal support from Defendant. Defendant
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expressly waives his right to spousal support
from Plaintiff.
In 1985, Mr. Goldman made the required payments (totaling
$5,055,000) pursuant to paragraph 2.2.2.
Pursuant to paragraph 2.2.9 of the agreement, Mr. Goldman paid
Ms. Parker $20,000 per month during each of the years in issue
(totaling $240,000 each year). On his 1992, 1993, and 1994 Federal
income tax returns, he characterized these $240,000 payments as
alimony and took corresponding deductions. Ms. Parker did not
report these payments as alimony on her 1992-94 returns.
Mr. Goldman received an opinion letter, dated December 28,
1990, from the law firm of Kornfeld & Franklin of Oklahoma City,
Oklahoma, with regard to the deductibility of the $240,000 payments
on his returns. This letter advised Mr. Goldman that, pursuant to
the agreement, he was entitled to deduct these payments as alimony.
In the notice of deficiency, respondent determined that the
$240,000 payments Mr. Goldman made to Ms. Parker in 1992, 1993, and
1994 are not alimony and thus not deductible. Respondent further
determined that petitioner is liable for the section 6662(a)
accuracy-related penalty for each of the years in issue.
OPINION
Issue 1. Deductibility of Payments Mr. Goldman Characterized as
Alimony
The fundamental issue involved herein concerns the
characterization of the $20,000 monthly payments Mr. Goldman made
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to Ms. Parker during 1992, 1993, and 1994. Petitioner claims these
payments constitute alimony; respondent claims these payments
represent a division of marital property. The tax consequences to
both the payor and recipient vary significantly depending upon the
characterization of these payments.
Generally, property settlements (or transfers of property
between spouses) incident to a divorce neither are taxable events
nor give rise to deductions or recognizable income. See sec. 1041.
On the other hand, amounts received as alimony or separate
maintenance payments are taxable to the recipient (pursuant to
sections 61(a)(8) and 71(a)) and deductible by the payor (pursuant
to section 215(a)) in the year paid. For tax purposes, the phrase
"alimony or separate maintenance payments" is defined in section
71(b)(1) as any cash payment meeting the following four criteria:
(A) such payment is received by (or on
behalf of) 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 includible 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 under a decree of
divorce or of separate maintenance, the payee
spouse and the 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
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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.
Section 71 was amended by the Deficit Reduction Act of 1984,
Pub. L. 98-369, sec. 422(a), 98 Stat. 494, 795, to establish an
objective standard to distinguish between a payment received in the
division of property (which is not includable in gross income) and
a payment received as spousal support (which is includable in gross
income). See Hoover v. Commissioner, 102 F.3d 842, 845 (6th Cir.
1996), affg. T.C. Memo. 1995-183; see also H. Rept. 98-432 (Part
2), at 1495 (1984) ("The committee bill attempts to define alimony
in a way that would conform to general notions of what type of
payments constitute alimony as distinguished from property
settlements and to prevent the deduction of large, one-time lump-
sum property settlements.").
The parties agree that Mr. Goldman's $20,000 monthly payments
to Ms. Parker satisfy subparagraphs (A), (C), and (D) of section
71(b)(1). Therefore, the dispositive question is whether these
monthly payments satisfy the requirement of subparagraph (B), which
treats a payment as nonalimony if the governing divorce or
separation instrument designates the payment as such.
In ascertaining the applicability of subparagraph (B) of
section 71(b)(1), we believe the divorce or separation instrument
need not mimic the statutory language of the subparagraph (e.g.,
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the instrument need not specifically refer to sections 71 and 215).
Rather, in our opinion, the divorce or separation instrument
contains a nonalimony designation if the substance of such a
designation is reflected in the instrument.
In the instant case, the language of the agreement is
unambiguous; it clearly makes known that the $20,000 monthly
payments Mr. Goldman made to Ms. Parker constitutes a division of
marital assets and not spousal support. The payments at issue were
made pursuant to paragraph 2.2.9 of the agreement, entitled
"Further Payments for Property Division". That paragraph
specifically states that the $20,000 monthly payments were "In
furtherance of the equitable division of property." Moreover,
paragraph 7 of the agreement provides that "as a result of the
funds as and for property division * * * Plaintiff [Ms. Parker]
expressly waives her right to spousal support from Defendant [Mr.
Goldman]." (Emphasis added.)
The agreement contains a clear, explicit and express direction
that the $20,000 monthly payments are not to be includable in Ms.
Parker's income. See Richardson v. Commissioner, 125 F.3d 551, 556
(7th Cir. 1997), affg. T.C. Memo. 1995-554. The agreement mandates
nonalimony treatment of the payments through paragraph 6.5 of the
agreement which provides that the payments in question are to be
subject to the provisions of section 1041 and reported on the
parties' tax returns as a nontaxable event.
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Reading the agreement from a reasonable, commonsense
perspective, we find that it contains a nonalimony designation
within the purview of subparagraph (B) of section 71(b)(1).1
Consequently, we hold that the $20,000 monthly payments Mr. Goldman
made to Ms. Parker in 1992, 1993, and 1994 constitute a division of
marital property, rather than alimony, and hence are not deductible
by Mr. Goldman for those years.
We have considered the remaining arguments made by the
parties, and to the extent not discussed above, find them to be
without merit.
Issue 2. Section 6662(a) Accuracy-Related Penalties
The other issue for decision concerns the applicability of the
section 6662(a) accuracy-related penalties. Respondent contends
that Mr. Goldman substantially understated his tax for the years in
issue and is accordingly liable for the penalties. Petitioner
disagrees.
1
In Hawkins v. Commissioner, 86 F.3d 982 (10th Cir.
1996), the Court of Appeals for the Tenth Circuit, where an
appeal of this case would lie, reversed our decision in 102 T.C.
61 (1994), regarding the specificity requirements of sec.
414(p)(2). The Court of Appeals held that an agreement awarding
petitioner wife $1 million from her husband's pension plan was a
qualified domestic relations order which shifted the income tax
liability to the wife. Although the facts and operative Code
section involved in this case differ from those involved in
Hawkins, our reading of the specificity requirements of sec.
71(b)(1)(B) is analogous insofar as we find that the agreement
made an effective designation without referring expressly to sec.
71 or 215.
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Pursuant to section 6664(c)(1), a section 6662 penalty does
not apply to any portion of an underpayment if reasonable cause
existed and the taxpayers acted in good faith. Pursuant to section
1.6664-4(b)(1), Income Tax Regs., all facts and circumstances must
be examined in order to determine whether a taxpayer acted with
reasonable cause and in good faith.
Petitioner contends that we should not sustain respondent's
imposition of the section 6662(a) accuracy-related penalties
because Mr. Goldman received and relied upon an opinion letter
prepared by experienced tax counsel. In order to establish good
faith reliance on the advice of an adviser, the taxpayer must prove
that: (1) He gave the return preparer complete and accurate
information, (2) an incorrect return was a result of the preparer's
mistakes, and (3) the taxpayer believed in good faith that he was
relying on a competent return preparer's advice. See Metra Chem
Corp. v. Commissioner, 88 T.C. 654, 662 (1987). These requirements
have been met in this case. Consequently, we do not sustain
respondent's determination imposing the section 6662(a) accuracy-
related penalties.
To reflect the foregoing,
Decision will be
entered under Rule 155.