Graham v. Comm'r of Internal Revenue
| Decision Date | 30 August 1982 |
| Docket Number | Docket No. 18973-80. |
| Citation | 79 T.C. 415 |
| Parties | FRANCES GRAHAM, PETITIONER v. COMMISSIONER of INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
In 1974, P was divorced from her husband. Under the decree of divorce, P was awarded custody of the minor children, and the decree ordered the husband to pay “$500.00 per month toward the support of the family.” After she filed her petition in this case, P commenced a proceeding in State court to amend the divorce decree, nunc pro tunc, to state that the monthly payments were for child support. Following hearings on such matter, the State court ordered the amendment of the decree to provide that the monthly payments were for child support and that such amendment was effective, nunc pro tunc, as of the date of the 1974 decree. Such order was not appealed and became binding on P and her former husband. Held: The nunc pro tunc amendment of the 1974 decree was contrary to the law of Kentucky as announced by that State's highest court; therefore, the order of the lower State court will not be given retroactive effect for Federal tax purposes. Accordingly, since the decree did not fix the portion of the monthly payments which was for the support of the minor children, the full amount of such payments was alimony, includable in P's gross income. Rocco J. Celebrezze, for the petitioner.
Ferdinand J. Lotz III, for the respondent.
The Commissioner determined the following deficiencies in the petitioner's Federal income taxes:
+--------------------+
¦Year ¦Deficiency ¦
+------+-------------¦
¦ ¦ ¦
+------+-------------¦
¦1975 ¦$1,590 ¦
+------+-------------¦
¦1976 ¦1,804 ¦
+------+-------------¦
¦1977 ¦2,093 ¦
+--------------------+
The issue for decision is whether certain payments received by the petitioner from her former husband pursuant to a 1974 decree of divorce constitute alimony or child support. The resolution of this issue turns, in part, on the effect, if any, for Federal tax purposes of a 1981 State court order which amended such decree nunc pro tunc.
All of the facts have been stipulated, and those facts are so found.
The petitioner, Frances Graham, maintained her legal residence in Bowling Green, Ky., at the time she filed her petition in this case. She filed her Federal income tax returns for 1975, 1976, and 1977 with the Internal Revenue Service Center, Memphis, Tenn.
In 1957, the petitioner married John T. Graham, and three children were born of such marriage. In 1974, the ages of such children were 15, 12, and 8. On November 27, 1974, the petitioner and Mr. Graham were divorced pursuant to findings of fact, conclusions of law, and decree for dissolution of marriage (the 1974 decree) entered by a judge of the Warren (Kentucky) Circuit Court. Such decree awarded custody of the children to the petitioner and further provided, in part:
PROPERTY RIGHTS
The Court is of the opinion and it is adjudged the parties are equal owners of the home. That the mother and children be permitted to occupy the residence until the youngest child reaches the age of 18 years, or she remarries, at which time the home shall be sold and the net proceeds divided equally between the parties. The father shall make the payments on the home, and pay the taxes, insurance and utilities. *ss
IT IS THEREFORE ORDERED AND ADJUDGED that the marriage between the parties is hereby resolved [sic] and both parties are restored to the rights and privileges of a single person. *ss
He [Mr. Graham] will provide a home as set out above, and pay the necessary medical and dental bills and $500.00 per month toward the support of the family.
During 1975, 1976, and 1977, Mr. Graham, pursuant to the 1974 decree, paid to the petitioner the sum of $500 per month and made the following payments with respect to the family home:
+---------------------------------------------+
¦Payment ¦1975 ¦1976 ¦1977 ¦
+-----------------+--------+---------+--------¦
¦ ¦ ¦ ¦ ¦
+-----------------+--------+---------+--------¦
¦Utilities ¦$863.24 ¦$1,042.41¦$925.18 ¦
+-----------------+--------+---------+--------¦
¦Property taxes ¦578.86 ¦555.82 ¦550.70 ¦
+-----------------+--------+---------+--------¦
¦Insurance ¦200.00 ¦235.00 ¦235.00 ¦
+-----------------+--------+---------+--------¦
¦Mortgage interest¦1,779.06¦1,810.00 ¦1,870.00¦
+---------------------------------------------+
On his Federal income tax returns for 1974, 1975, and 1976, Mr. Graham did not claim a deduction for alimony. Rather, he treated the payments to the petitioner as child support and claimed dependency exemptions for the three children. In 1976, Mr. Graham discussed with his accountant the tax effect of the 1974 decree. As a result of such discussion, the accountant requested a ruling from the Internal Revenue Service as to whether the $500 per month payments “toward the support of the family” were alimony or child support. In July 1977, the IRS ruled that such payments were alimony. Thereafter, Mr. Graham filed amended Federal income tax returns for 1974, 1975, and 1976 on which he claimed a deduction for such payments.
In 1979, the IRS conducted an examination of Mr. Graham's Federal income tax returns for 1975, 1976, and 1977. As a result of such examination, the IRS disallowed Mr. Graham's claim of dependency exemptions for the three children and allowed as alimony deductions, in addition to the $500 per month payments, all of the payments he made for utilities on the family home and 50 percent of the payments for property taxes, insurance, and mortgage interest.
On her Federal income tax returns for 1975, 1976, and 1977, the petitioner did not report any of the payments made by Mr. Graham to her or for her benefit as alimony. Also, she did not claim the three children as dependents. In August 1980, the Commissioner issued a notice of deficiency to the petitioner. In such notice, he determined that for 1975, 1976, and 1977, the $500 per month payments, all of Mr. Graham's payments for utilities, and 50 percent of the payments for property taxes, insurance, and mortgage interest constituted alimony, taxable to the petitioner. In October 1980, the petitioner filed her petition in this case.
In April 1981, the petitioner filed a motion in the Warren Circuit Court in which she sought to amend, nunc pro tunc, the 1974 decree of that court to state that the “$500.00 per month toward the support of the family” should be $500 per month for child support. In May 1981, hearings were held before a commissioner of that court. At such hearings, the judge who issued the 1974 decree testified that although he used the term “family,” his intent and purpose was that such payments were for child support. Also, the petitioner and Mr. Graham testified that they understood and considered that such payments were for child support. In his report following such hearings, the commissioner found that in using the language, the judge who issued the 1974 decree intended to award $500 per month to the petitioner as child support.
Both parties filed exceptions to such report with the Warren Circuit Court. After consideration of these exceptions, such court, on June 25, 1981, issued an order in which it confirmed and approved the report of the Commissioner. Such order further provided that the 1974 decree was amended to the extent that the phrase “$500.00 per month toward the support of the family” should read “$500.00 for child support of the infant children” and that such amendment was effective, nunc pro tunc, as of November 27, 1974. Such order was not appealed and became binding on the petitioner and Mr. Graham.
The first question that we address is whether the $500 per month payments constitute alimony, deductible by Mr. Graham and includable in the gross income of the petitioner, or whether such payments constitute child support, neither deductible by him nor includable in her gross income. The resolution of this question turns on the effect, if any, for Federal tax purposes of the 1981 order of the Warren Circuit Court which amended the 1974 decree nunc pro tunc.
Section 71(a) of the Internal Revenue Code of 19541 provides generally that if a wife is divorced from her husband under a decree of divorce, the wife's gross income includes periodic payments received by her from her former husband if the payments are made by him in discharge of a legal obligation which, because of the marital or family relationship, is imposed on him under the divorce decree. However, section 71(b) provides that the general rule of section 71(a) shall not apply to that part of the payment which the terms of the decree fix as a sum payable for the support of the minor children of the husband. Thus, where periodic payments are received by the wife for the support and maintenance of herself and the minor children of the husband, the provisions of section 71(b) do not apply unless the decree fixes, by specific designation, the amount or percentage of such payments which is for the support of the minor children. If the portion which is for the support of the minor children is not so fixed, the full amount of the payments is includable in the income of the wife. Sec. 1.71-1(e), Income Tax Regs.; Commissioner v. Lester, 366 U.S. 299 (1961).
The petitioner in effect concedes that the language of the 1974 decree, “$500.00 per month toward the support of the family,” did not specifically designate the portion of such payments which was for the support of the minor children and that under Commissioner v. Lester, supra, such payments would have constituted alimony, includable in full in her gross income. However, she argues that such language was used by mistake or inadvertence and that the 1981 order of the Warren Circuit Court, which amended the 1974 decree nunc pro tunc, should be given retroactive effect for...
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