Burns v. Commissioner of Internal Revenue, No. 5724-05S (U.S.T.C. 3/15/2007)
| Decision Date | 15 March 2007 |
| Docket Number | No. 5724-05S.,5724-05S. |
| Parties | MARGARET CAROL BURNS, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent. |
| Court | U.S. Tax Court |
Margaret Carol Burns, pro se.
Marshall R. Jones, for respondent.
This case was heard pursuant to the provisions of section 7463 of the Internal Revenue Code in effect when the petition was filed.1 Pursuant to section 7463(b), the decision to be entered is not reviewable by any other court, and the opinion shall not be treated as a precedent for any other case.
Respondent determined a deficiency in petitioner's Federal income tax for 2002 of $2,745. The sole issue for decision is whether certain payments petitioner received from her former spouse during 2002 are includible in petitioner's income under section 71(a).
Some of the facts have been stipulated and are so found. We incorporate by this reference the stipulation of facts and the exhibits attached thereto. At the time the petition was filed, petitioner resided in Pensacola, Florida.
Petitioner and William Mills Burns (Mr. Burns) were married in March 1989 and lived together as husband and wife in a house they mutually owned (marital home) until their separation around August 2000. After their separation, Mr. Burns did not reside in the marital home. Early in 2001, petitioner and Mr. Burns discussed and agreed to the terms for dividing their property and divorcing. Petitioner summarized the general terms of their agreement in a handwritten outline. The outline provided, inter alia, that (1) the marital home was to be sold with 60 percent of the net proceeds going to petitioner and the remaining 40 percent going to Mr. Burns, (2) petitioner would have sole use of the marital home until the sale was complete, and (3) Mr. Burns would pay petitioner "$1400 a month for house, yard, & animals, until house sells", and "$500 a month after house sells until I [petitioner] can draw SS [Social Security]". Petitioner took the outline to an attorney who had been retained by her (through her legal services plan at work) for the purpose of obtaining the couple's divorce.
Petitioner explained the outline to the attorney, including the fact that the $1,400 monthly payment to her from Mr. Burns was to contribute toward the payment of the expenses of the marital home and the couple's mutually owned elderly pets, including debt service on the mortgage and the cost of preparing the marital home for sale, and was to be taxable to Mr. Burns. Petitioner further explained that the couple had agreed that the $500 monthly payments by Mr. Burns to petitioner after the marital home was sold, until such time as she began receiving Social Security benefits, were to be taxable to petitioner.
The attorney thereafter drafted a Marital Settlement Agreement (MSA) for petitioner and Mr. Burns to review and sign. The MSA included provisions intended to memorialize the Burnses' agreements with respect to the division of all of their marital debts and all of their real and personal property. It also contained provisions whereby petitioner and Mr. Burns relinquished any rights they may have had to each other's "retirement accounts, pensions, profit sharing plans, etc.", and released one another from all other claims and demands of any nature except as provided for in the MSA. The MSA included an integration clause specifying that the MSA constituted the parties' entire agreement and that it superseded any prior understanding or agreements between them.
With respect to the $1,400 and $500 monthly payment obligations agreed to by petitioner and Mr. Burns, the attorney drafted the following provision:
4. ALIMONY FOR THE WIFE: The Husband agrees to pay to the Wife alimony in the amount of $1400.00 per month, until such time as the marital home is sold. Thereafter the Husband agrees to pay to the Wife alimony in the amount of $500.00 per month, until such time as the Wife can legally begin receiving social security benefits. Said payments to be deposited directly into the Wife's bank account.
On reviewing this provision in the MSA before signing it, petitioner questioned the attorney as to why both payments were labeled "alimony" when she and Mr. Burns had agreed on different tax treatment for each; i.e., the $1,400 monthly obligation being taxable to Mr. Burns and the $500 monthly obligation being taxable to her. The attorney advised petitioner that the determination of the tax consequences for these payments would be based on how the money was used, not on how the payment was labeled in the agreement. On the basis of this assurance, petitioner signed the MSA.
The MSA was thereupon incorporated into and attached to the Petition for Dissolution of Marriage filed by the attorney with the Circuit Court of Escambia County, Florida (Circuit Court). On April 25, 2001, the Circuit Court adopted the MSA as the Final Judgment of Dissolution of Marriage between petitioner and Mr. Burns.
Toward the end of 2001, Mr. Burns sent petitioner a letter stating that he was going to claim the $1,400 monthly payments as deductible alimony on his Federal income tax return and that petitioner would have to pay taxes on it, because the payments had been designated "alimony" in the MSA. Petitioner took Mr. Burns's letter to the attorney who drafted the MSA for explanation and assistance. The attorney refused to take any corrective action on petitioner's behalf and instead advised petitioner to "just sell the house and quit taking Bill's money".
During 2002, petitioner received $16,800 from Mr. Burns pursuant to the terms of the MSA; i.e., $1,400 per month, as the marital home remained unsold throughout 2002. The money was utilized by petitioner to pay Mr. Burns's portion of the debt service on the mortgage, taxes, insurance, maintenance, and repairs with respect to the marital home, and for veterinary care for the pets. Respondent determined that the $16,800 petitioner received from Mr. Burns was includible in her income under section 71(a).
Petitioner made a formal complaint with the Florida Bar against the attorney who drafted the MSA. In March 2006, the Grievance Committee of the Florida Bar recommended, on the basis of its review of the attorney's conduct in preparing the MSA and later refusing to assist petitioner when requested, that the attorney receive an Admonishment for Minor Misconduct and be required to attend a continuing legal education program sponsored by the American Academy of Matrimonial Lawyers. The Grievance Committee's report concluded that the attorney had "failed to competently and diligently represent * * * [petitioner] by properly wording the language of the Marital Settlement Agreement so that the non-marital payments would not be taxed as income to her after the entry of the final judgment."
For Federal income tax purposes, an alimony or separate maintenance payment is any payment in cash if: (a) Such payment is received by, or on behalf of, a former spouse under a divorce or separation instrument;2 (b) the divorce or separation instrument does not designate such payment as a payment which is not includible in gross income under section 71 and not allowable as a deduction under section 215; (c) the payee spouse and the payor spouse are not members of the same household at the time the payment is made; and (d) there is no liability to make any such payment, or a substitute for such payments, in cash or property, after the death of the payee spouse. Sec. 71(b)(1)(A)-(D). The test under section 71(b)(1) is conjunctive; a payment is includible in income as alimony only if all four requirements of section 71(b)(1) are met. See Johnson v. Commissioner, T.C. Memo. 2006-116; Jaffe v. Commissioner, T.C. Memo. 1999-196. The characterization of the payments as "alimony" in the divorce or separation instrument does not affect their treatment for Federal income tax purposes; the test is whether the foregoing requirements are satisfied. Hoover v. Commissioner, 102 F.3d 842, 844 (6th Cir. 1996), affg. T.C. Memo. 1995-183.
It is undisputed that the MSA satisfies the definition of a divorce or separation instrument. See sec. 71(b)(2). The $1,400 monthly payments at issue herein were made in cash, the agreement pursuant to which the payments were made did not expressly designate that they were excludible from petitioner's income and nondeductible by Mr. Burns,3 and petitioner and Mr. Burns were living separate and apart. Thus, the payments received by petitioner from Mr. Burns satisfy the requirements of alimony set out in section 71(b)(1)(A), (B), and (C). Therefore, the payments' status as alimony depends upon whether they satisfy section 71(b)(1)(D); i.e., whether Mr. Burns's liability to make the payments would have terminated in the event of petitioner's death.
Petitioner argues that the $16,800 received from Mr. Burns in 2002 was not taxable alimony but was part of the property settlement she and Mr. Burns agreed to regarding the marital home. Petitioner argues that the MSA, as drafted by the attorney, did not conform to the terms to which she and Mr. Burns agreed. Specifically, petitioner avers that she and Mr. Burns agreed that the $1,400 monthly payments she received from Mr. Burns until the marital home was sold were to be taxable to Mr. Burns.
The gravamen of respondent's argument is that the payments made to petitioner pursuant to the MSA were alimony because all the requirements of section 71(b)(1)(A)-(D) are satisfied. Even if Mr. Burns's $1,400 monthly payments to petitioner were intended as part of a property settlement and were to be taxable to Mr. Burns, respondent argues, they are alimony for Federal income tax purposes as long as the requirements of section 71(b)(1)(A)-(D) are satisfied.4 Given the MSA's integration clause, respondent argues, unless the agreement is reformed by a court of competent jurisdiction so that it designates that the payments are...
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