Schutter v. Comm'r of Internal Revenue (In re Estate of Goldman)

• Decision Date: 01 June 1999
• Docket Number: No. 183–97.,183–97.
• Citation: 112 T.C. No. 21,112 T.C. 317
• Parties: Estate of Monte H. GOLDMAN, Deceased, Carole Schutter, f.k.a Carole Goldman, Personal Representative, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
• Court: U.S. Tax Court

112 T.C. 317

112 T.C. No. 21

Estate of Monte H. GOLDMAN, Deceased, Carole Schutter, f.k.a Carole Goldman, Personal Representative, Petitioner

v.COMMISSIONER OF INTERNAL REVENUE, Respondent

No. 183–97.

United States Tax Court.

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 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, J.

In the notice of deficiency respondent determined the following income tax deficiencies and accuracy-related penalties:

+------------------------------------+
                ¦Year¦Deficiency¦Penalty 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 amounts of deficiencies and accuracy-related penalties now at issue are:

+------------------------------------+
                ¦Year¦Deficiency¦Penalty 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 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 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 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 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 to Ms. Parker during 1992, 1993, and 1994. Petitioner claims these payments constitute alimony; respondent claims these...