Johnson v. C.I.R.

• Decision Date: 28 March 2006
• Docket Number: No. 04-72322.,04-72322.
• Citation: 441 F.3d 845
• Parties: Stanley T. JOHNSON; Constance Johnson, Petitioners-Appellants, v. COMMISSIONER of INTERNAL REVENUE, Respondent-Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

441 F.3d 845

Stanley T. JOHNSON; Constance Johnson, Petitioners-Appellants, v. COMMISSIONER of INTERNAL REVENUE, Respondent-Appellee.

No. 04-72322.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted February 15, 2006.

Filed March 28, 2006.

Heidi Parry Stern, Daniel F. Polsenberg, Beckley Singleton, Chtd., Las Vegas, NV, for the petitioners-appellants.

John Schumann, United States Department of Justice, Tax Division, Washington, DC, for the respondent-appellee.

Appeal from a Decision of the United States Tax Court. Tax Ct. No. 7415-02.

Before PROCTER HUG, JR., ARTHUR L. ALARCÓN, and M. MARGARET McKEOWN, Circuit Judges.

ALARCÓN, Circuit Judge.

Stanley T. Johnson and his present wife, Constance Johnson ("Appellants"), appeal from the United States Tax Court's decision that there is a deficiency in income tax due from them for the taxable year 1997. The court has jurisdiction pursuant to 26 U.S.C. § 7482. The gravamen of Appellants' argument is that Internal Revenue Code ("I.R.C.") § 71, as amended in 1984 ("new § 71" or the "new law"), should apply to Mr. Johnson's deduction for alimony in the 1997 tax year, rather than the version of I.R.C. § 71 that existed prior to the amendment ("old § 71" or the "old law"). We disagree and affirm the decision of the Tax Court.

I

Stanley Johnson was formerly married to Joyce J. Johnson ("Joyce"). Joyce was issued a decree of divorce on May 14, 1976. Mr. Johnson was required to pay alimony to Joyce in amounts ranging from $1,250 per month at the outset to $2,400 per month. On March 16, 1993, Mr. Johnson filed a Motion To Modify The Terms of the Divorce and Terminate Alimony Payments in the Family Division of the Clark County Nevada District Court. Joyce responded by filing a Countermotion to Increase Alimony Payments. On April 14, 1997, the district court released its Findings of Fact and Conclusions of Law. Mr. Johnson then filed a Notice of Appeal to the Supreme Court of the State of Nevada and was granted his Application for Stay Re: Increase in Alimony.

Prior to oral argument in the Supreme Court of Nevada, Mr. Johnson and Joyce entered into a Settlement and Release Agreement ("the 1997 Agreement"). It provided that (1) Joyce would dismiss with prejudice her counterclaim to increase alimony payments, (2) the Nevada District Court would not retain jurisdiction over any further claims in the case,¹ and (3) Mr. Johnson would pay $400,000 in one lump-sum no later than Thursday, July 10, 1997. The 1997 Agreement specified that the payment "shall be Stanley's final alimony payment to Joyce and constitute total and complete liquidation and discharge of all debts Stanley owes to Joyce." The agreement makes no reference to I.R.C. § 71. On July 15, 1997, after Mr. Johnson made the payment pursuant to the 1997 Agreement, Joyce's Countermotion was dismissed with prejudice by the Family Division of the District Court for Clark County, Nevada. The dismissal order also stated that Mr. Johnson had "discharged any and all obligations to pay Joyce alimony" by the terms of the 1997 Agreement.

On their tax return for the 1997 tax year, Appellants claimed a deduction for their alimony payments from their income in the amount of $424,000. The Commissioner disallowed $400,000 of that deduction, and issued a notice of deficiency determination. Appellants filed a petition in the Tax Court seeking a redetermination of the deficiency. In response to the parties' cross-motions for summary judgment, the Tax Court granted partial summary judgment in favor of the Appellee.² The Tax Court determined that "new section 71 is applicable only to divorce instruments executed after December 31, 1984, or modified after December 31, 1984, where the modified instrument states that the amended version of section 71 will apply." Johnson v. Commissioner, No. 7415-02, slip. op. at 5 (quoting Marten v. Commissioner, 78 T.C.M (CCH) 584, 585 (1999), aff'd sub nom. Commissioner v. Lane, 40 Fed.Appx. 385 (9th Cir.2002)). The Tax Court found "the 1997 Agreement, taken together with the stipulation and dismissal order, constituted a modification of the divorce decree." Id. Accordingly, the Tax Court held that the law applicable to divorce instruments executed before December 31, 1984 applies to the instant case. Id. In its final decision—the Tax Court held that there is a deficiency in tax due from Appellants in the amount of $153,167. The Tax Court's conclusions of law, including construction of the tax code, are reviewed de novo. Frontier Chevrolet Co. v. Commissioner, 329 F.3d 1131, 1134 (9th Cir.2003).

II

Payments are deductible as "alimony" pursuant to I.R.C. § 215(a). The term "alimony" is defined under I.R.C. § 71. The pertinent part of § 71(b)(1) provides:

(1) In general. The term "alimony or separate maintenance payment" means any payment in cash if—

(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 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 Congress in 1984 as part of the Deficit Reduction Act (DEFRA). The old § 71 provides that payments are only deductible if they are made periodically. I.R.C. of 1954 § 71(a)(1) (current version at 26 U.S.C. § 71 (2006)).³ However, the language requiring that payments be periodic in order to be deductible is absent in new § 71. I.R.C. § 71. Accordingly, if the old law applies, the $400,000 payment to Joyce is not deductible. It would be deductible under the new law.

Appellants argue that the new § 71 applies because the 1997 Agreement is a divorce or separation instrument according to § 71(b)(2)(A). Pursuant to § 71(b)(2), the term "divorce or separation instruments" is defined as:

(A) a decree of divorce or separate maintenance or a written instrument incident to such a decree,

(B) a written separation agreement, or

(C) a decree (not described in subparagraph (A)) requiring a spouse to make payments for the support or maintenance of the other spouse.

However, Appellants' argument is not persuasive because the most important question before the court is not whether the 1997 Agreement, standing alone, satisfies the requirements of the new law. Rather, the Court must determine whether the 1997 Agreement is merely a modification of the 1976 divorce decree, or a separate stand alone instrument of divorce.

This case turns on the relationship between I.R.C. § 71, and § 422(e) of DEFRA. Section 422(e) of DEFRA defines the date on which the new law became effective, and provides guidance as to whether the new law applies to instruments of divorce created prior to the effective date of the legislation. It provides inter alia:

(1) In general. Except as otherwise provided in this subsection, the amendments made by this section [amending 26 U.S.C. §§ 71, 215, 219, 682, 6676, and 7701] shall apply with respect to divorce or separation instruments (as defined in section 71(b)(2) of the Internal Revenue Code of 1954 [1986], as amended by this section) executed after December 31, 1984.

(2) Modifications of instruments executed before January 1, 1985. The amendments made by this section shall also apply to any divorce or separation instrument (as so defined) executed before January 1, 1985, but modified on or after such date if the modification expressly provides that the amendments made by this section shall apply to such modification.

DEFRA, § 422(e), Pub.L. 98-369, 98 Stat. 494, 798 (emphasis added).

Relying on the language of § 422(e)(2), the Commissioner argues that the Tax Court was correct in determining that the old law applies. The parties agree that new § 71 would apply by its own terms if the 1997 Agreement is construed to be a new written instrument "incident to a divorce," and not a further modification of the original 1976 decree, because the rule expressed in § 422(e)(1) of DEFRA would then govern. If, however, the 1997 Agreement is merely a modification of the 1976 divorce decree, as the Commissioner contends, the old law governs. DEFRA, § 422(e)(2), 98 Stat. at 798.

Appellants maintain the first paragraph of DEFRA, § 422(e) is independent of the second paragraph. They argue that the first paragraph of the statute controls this case and it is unnecessary to look at the second paragraph. However, Appellants argument is not persuasive because the first part of the statute begins with the phrase "except as otherwise provided in this subsection." DEFRA, § 422(e), Pub.L. 98-369, 98 Stat. at 798. This language indicates that the first and second paragraph of the statute should be read together.

Appellants also contend any instrument, including the 1997 Agreement, that materially alters the timing or amount of alimony payments is a new stand-alone instrument of divorce and not therefore subject to the second paragraph of DEFRA § 422(e). They cite Treasury Regulation § 1.71-1T⁴ to support that contention. This Court will normally "defer to an agency's construction of a statute it administers" provided that its interpretation is not contrary to congressional intent. Miller v. Commissioner, 310 F.3d 640, 644 (9th Cir.2002) (quoting Cornejo-Barreto v. Seifert, 218 F.3d 1004, 1014 (9th Cir.2000)). The Tax Court was correct in determining that the cited regulation is inapposite pursuant to Tax Decision 7973, which states:

These temporary...