Olster v. C.I.R.

• Decision Date: 28 January 1985
• Docket Number: No. 83-5706,83-5706
• Citation: 751 F.2d 1168
• Parties: -919, 85-1 USTC P 9162 Dorothy OLSTER, Petitioner-Appellant, v. COMMISSIONER OF INTERNAL REVENUE SERVICE, Respondent-Appellee.
• Court: U.S. Court of Appeals — Eleventh Circuit

Page 1168

751 F.2d 1168

55 A.F.T.R.2d 85-919, 85-1 USTC P 9162

Dorothy OLSTER, Petitioner-Appellant, v. COMMISSIONER OF INTERNAL REVENUE SERVICE, Respondent-Appellee.

No. 83-5706.

United States Court of Appeals, Eleventh Circuit.

Jan. 28, 1985.

Andrew H. Moriber, Kenneth M. Bloom, Miami, Fla., for petitioner-appellant.

William H. Connett, Acting Chief Counsel, Robert B. Miscavich, Senior Tech. Reviewer, Tax Litigation Div., I.R.S., Glenn L. Archer, Jr., Asst. Atty. Gen., Michael L. Paup, Chief, David English Carmack, Joan I. Oppenheimer, Appellate Sect., Tax Div., U.S. Dept. of Justice, Washington, D.C., for respondent-appellee.

Appeal from the Decision of the United States Tax Court.

Before HATCHETT and CLARK, Circuit Judges, and STAFFORD ^*, District Judge.

HATCHETT, Circuit Judge:

In this tax case, 79 T.C. 456, we decide the tax consequences arising out of the transfer of mortgages and a promissory note from an ex-husband of the taxpayer, where the transfer occurred when the ex-husband was in arrears in alimony payments. We affirm.

Facts

Dorothy Olster and her husband executed a property settlement and custody agreement (original agreement) dated April 6, 1972, providing that petitioner would receive $2,500 per month alimony for life. Upon remarriage, however, petitioner would only be entitled to a lump sum amount equal to two years' alimony, or $60,000. On April 11, 1972, Olster and her husband were divorced; the final judgment incorporated by reference the original agreement. Over the next few years, Olster's ex-husband experienced severe financial difficulties. By June 10, 1976, he was in substantial arrears in his alimony payments.

On June 10, 1976, Olster and her ex-husband executed a "Stipulation for Modification of Agreements and Lump-Sum Settlement Agreement" (modification agreement) designed to alleviate the harshness of the alimony obligations of the ex-husband under the original agreement and to guarantee a more realistic income flow to petitioner. ¹ Pursuant to paragraph 2(A) of the modification agreement, the ex-husband transferred to Olster mortgages with a face value of $87,243.18. Of the six mortgages transferred, three were wrap-around mortgages. ² The modification agreement also provided that the ex-husband would continue to pay the first mortgages underlying the three wrap-around mortgages. If the ex-husband failed to make the payments, Olster would have been entitled under the modification agreement to the difference between the first mortgage payments owed and the amount due Olster under the wrap-around mortgages. In addition to the mortgages, Olster received a $25,000 promissory note payable one year after execution of the modification agreement. This note was secured by a mortgage on a parcel of land owned by the ex-husband located in Dade County, Florida.

Olster filed a 1976 individual tax return in which she excluded the value of the mortgages. In 1980, the Internal Revenue Service issued a notice of deficiency in the amount of $26,796.62. ³ In July, 1980, Olster filed suit in the tax court seeking a redetermination of this deficiency. The issues before the tax court were (1) whether the mortgages were in settlement of the ex-husband's past as well as future alimony obligations or solely in settlement of future alimony obligations; (2) if the value of the mortgages were in satisfaction of past alimony obligations and are includable in gross income, whether such value is to be measured by the amount of alimony arrearages or the fair market value of the mortgages transferred; (3) what is the value of the alimony arrearages; and (4) what is the fair market value of the mortgages Olster received. The tax court held that the transfer of the mortgages was in consideration for the release of the ex-husband's past alimony obligations and determined that the fair market value of the mortgages, $36,183.24, was includable in Olster's gross income for 1976. Pursuant to 26 U.S.C.A. Sec. 7482(a) (West Supp.1984), Olster brings this appeal.

Issues

On this appeal, we must consider four main issues: (A) whether the tax court's finding that the transferred mortgages were intended as satisfaction of past, present, and future alimony obligations was clearly erroneous; (B) whether the tax court erred as a matter of law in determining that a mortgage transferred without the underlying note has value; (C) whether the tax court erred as a matter of law in determining that the value of the mortgages to be included in gross income was the fair market value of the mortgages, and not the amount of cash received in payment on the mortgage debt during the 1976 tax year; and (D) whether the government has a duty to determine a tax deficiency by the method most favorable to Olster.

Discussion

A. Whether the mortgages were satisfaction for past as well as future alimony obligations.

Olster argues that paragraph 3 of the modification agreement identifies the release of the right to future alimony payments as the exclusive consideration for the transfer of the mortgages and the promissory note. The government contends that paragraphs 2 and 3 must be read together, and when read together, support the interpretation that past alimony payments were also consideration for a receipt of the mortgages and the promissory note.

Under 26 U.S.C.A. Sec. 71(a)(1) (West 1984), Olster is required to include in gross income "periodic payments" made pursuant to a decree of divorce by her ex-spouse. ⁴ Alimony payments received on time are taxed in the year of receipt. The tax consequences of delinquent alimony payments, however, are determined based on the intent of the parties. If the payment is made to satisfy back alimony, it retains the character of the original payments for which it is substituted. Holloway v. United States, 428 F.2d 140, 143 (9th Cir.1970); Davis v. Commissioner, 41 T.C. 815, 820 (1964); Holahan v. Commissioner of Internal Revenue, 21 T.C. 451, 463 (1954), aff'd, 222 F.2d 82 (2d Cir.1955). Lump sum payments made solely in consideration for the wife's release of her husband from future alimony obligations, are not taxable to the wife under section 71(a): these payments are not "periodic payments" within the meaning of section 71(c)(2). ⁵ See Sechrest v. United States, 490 F.2d 102, 104 (4th Cir.1974); Commissioner of Internal Revenue v. Senter, 242 F.2d 400, 403 (4th Cir.1957), aff'g 25 T.C. 1204 (1956).

The law on the tax consequences of lump-sum payments in satisfaction of a mixture of alimony arrearages and future alimony obligations is unsettled. In Holloway v. United States, the Ninth Circuit held that where a lump sum payment is made to satisfy a taxpayer's obligation to pay past, present, and future alimony, and the "nub" of the payment is for alimony arrearages, the payment is treated for tax purposes as alimony to the extent of such arrearages. Holloway, 428 F.2d at 143. While Holloway deals with deductions of lump sum payments and does not clarify its meaning of "nub," we think the proper approach is to treat these payments as satisfaction of unpaid alimony to the extent of such alimony unless there is an amount specifically allocated to the satisfaction of future alimony obligations and the allocation conforms to the substance of the transaction.

While Olster does not dispute this principle, she does argue that the modification agreement, in paragraph 3, specifically allocated the lump sum settlement to future alimony obligations. In her view, she received no consideration for the release of the right to past alimony obligations. Olster's contentions are without merit. Past and future alimony obligations were intended by the parties as consideration for the lump sum settlement. Both parties were benefited by such a bargain: Olster received a guaranteed flow of income while relieving her ex-husband of the obligation to pay past as well as future alimony payments. The conclusion that such benefit was the intent of the modification agreement is further supported by two other observations: (1) in prefatory language, the agreement provides that "covenants and conditions" of the agreement are "mutual," suggesting mutual obligations and benefits; and (2) the alimony arrearages of $44,800 substantially exceed the value of the transferred mortgages, $36,183.24, suggesting that the mortgages were to satisfy the alimony debt. See Holloway, 428 F.2d at 143. We hold, therefore, that the transferred mortgages and the promissory note were in satisfaction of the ex-husband's past, present, and future alimony obligations, and as such, the value of the mortgages and the promissory note are includable in petitioner's gross income as periodic payments under 26 U.S.C.A. Sec. 71(a)(1).

B. Transfer of the mortgages without the note.

Petitioner argues that mortgages transferred without the underlying note have no value. This contention is made for the first time on appeal. "The law is clear that, absent special circumstances, defenses not presented and for which proof is not offered in the trial court cannot be raised for the first time on appeal." Newton v. Pennington, 718 F.2d 1015, 1018 (11th Cir.1983) (citing Johnson v. Smith, 696 F.2d 1334, 1338 (11th Cir.1983) (citations omitted)). Petitioner makes no claim of the existence of special circumstances. See, e.g., Fehlhaber v. Fehlhaber, 681 F.2d 1015 (5th Cir. Unit B 1982) (an issue not preserved for appeal will not be reviewed unless it is a purely legal one and the error is so obvious that a failure to review would be a miscarriage of justice). Accordingly, we will not review this issue.

C. Valuation of mortgages and promissory note.

Olster contends that the mortgages have a value equal to the amount of cash actually received in 1976, $13,055.62. Olster received, under the modification agreement, six mortgages with a face value of $87,243. ⁶ The tax court found that the mortgages had value. ⁷ We agree.

On the specific question of valuation,...