Spector v. Commissioner
| Citation | 71 T.C.M. 3224 |
| Decision Date | 26 June 1996 |
| Docket Number | Docket No. 21548-91.,Docket No. 20102-91. |
| Parties | Norman Spector and Marcia Spector v. Commissioner. Lionel Ehrenworth and Beth Ehrenworth v. Commissioner. |
| Court | United States Tax Court |
Robert J. Alter and Richard J. Sapinski, Newark, N.J., for the petitioners Norman Spector and Marcia Spector. Stephen H. Skoller and Stephen E. Lampf, for the petitioners Lionel Ehrenworth and Beth Ehrenworth. Craig Connell, for the respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
Respondent determined deficiencies in petitioners' Federal income taxes and additions to tax as follows:
Petitioners Marcia Spector and Lionel Ehrenworth were divorced in 1980. Petitioners filed cross-motions for partial summary judgment relating to whether payments made by Dr. Ehrenworth to Mrs. Spector after their divorce were alimony or a property settlement. We denied both motions. Spector v. Commissioner [Dec. 49,768(M)], T.C. Memo. 1994-147. We held that whether a payment is alimony under section 71(a)(1) is determined by considering all the facts and circumstances, and not solely by reference to how it is characterized by the separation agreement or by reference to State law.
After concessions,2 the issues for decision are:
1. Whether payments Dr. Ehrenworth made to Mrs. Spector in 1986, 1987, and 1988 were alimony or a property settlement. We hold that they were in part alimony and in part a property settlement.
2. Whether Dr. Ehrenworth is liable for additions to tax for 1986 and 1987 for negligence under section 6653(a) with respect to claimed dependency exemption deductions. We hold that he is.
3. Whether the Spectors are liable for an addition to tax for 1986 for negligence under section 6653(a) with respect to a claimed dependency exemption deduction. We hold that they are not.
References to petitioners are to the Spectors and the Ehrenworths. References to Mrs. Spector are to Marcia Spector. References to Dr. Ehrenworth are to Lionel Ehrenworth. Unless otherwise indicated, section references are to the Internal Revenue Code in effect for the years at issue. Rule references are to the Tax Court Rules of Practice and Procedure.
Mrs. Spector (formerly Mrs. Ehrenworth) and Dr. Ehrenworth were married in June 1955. They had four children (Richard, Andrew, Robert, and Douglas). They filed cross-motions for divorce around 1977. Mrs. Spector and Dr. Ehrenworth settled the property distribution and alimony issues at a conference before the Superior Court of New Jersey, Chancery Division, Essex County on March 13, 1980.
Dr. Ehrenworth earned a large amount of income while he was married to Mrs. Spector. She earned little or no income during those years.
The Ehrenworths lived in New Jersey, and the Spectors lived in California, when they filed their petitions.
On July 3, 1980, Mrs. Spector and Dr. Ehrenworth signed a "Property Settlement and Support Agreement" (the support agreement). In it, among other things, Mrs. Spector waived all rights she had to any interest in Dr. Ehrenworth's pension fund and medical practice. She also conveyed by deed any interest she had in a medical building and any rights she had to shares in the Phoenix Corp. The Phoenix Corp. is an inactive company that has never had any assets. Dr. Ehrenworth agreed to pay Mrs. Spector $224,450 on July 3, 1980, and $100,000 by August 1, 1980, for certain objects of art. Dr. Ehrenworth agreed to pay $7,000 per year to support Richard and Andrew until they began their post-high-school education or were emancipated. At the time of the settlement, Richard was 11 and Andrew was 15.
Dr. Ehrenworth agreed to pay Mrs. Spector $800 per week for 12 years regardless of Mrs. Spector's financial circumstances, income, or health and regardless of whether Dr. Ehrenworth's or Mrs. Spector's financial circumstances changed. They agreed that the payments would cease if Mrs. Spector died but not if she remarried. Their support agreement stated that these payments were alimony. Mrs. Spector agreed to maintain a life insurance policy on the life of Dr. Ehrenworth which had a face value of $300,000. If Dr. Ehrenworth died before making all the weekly payments to Mrs. Spector, he agreed that his estate would pay the balance, less the insurance proceeds Mrs. Spector received. The weekly payments provision was the only provision for support in the support agreement.
Dr. Ehrenworth and Mrs. Spector negotiated the division of their marital assets. They then used the weekly payments both to achieve an acceptable division of their marital assets and to provide support for Mrs. Spector.
Mrs. Spector and Dr. Ehrenworth were divorced on July 7, 1980. The judgment of divorce provided that the:
[The next page is 3225-3.]
Property Settlement and Support Agreement dated July 3, 1980, a copy of which is attached hereto, which Property Settlement and Support Agreement was voluntarily entered into by the parties and reduced to writing to memorialize the parties' prior oral Property Settlement and Support Agreement dated March 13, 1980, be and the same is incorporated but not merged in the within Judgment * * *
Dr. Ehrenworth made the payments on Fridays at Mrs. Spector's request so that she could plan her week.
Mrs. Spector married Norman Spector on August 23, 1980. After that time, Dr. Ehrenworth stopped paying Mrs. Spector the $800 per week. On April 10, 1981, Mrs. Spector filed a motion in New Jersey Superior Court to compel Dr. Ehrenworth to continue paying $800 per week to her. Dr. Ehrenworth filed a cross-motion to terminate these payments and to vacate arrearages. He argued that the payments were alimony and that Mrs. Spector could not continue to recover alimony under N.J. Stat. Ann. sec. 2A:34-25 (1987)3 because she had remarried.
On April 1, 1981, Mrs. Spector filed a certification in support of her motion to compel Dr. Ehrenworth to make the weekly payments in which she referred to the payments as "alimony". On May 6, 1981, Mrs. Spector filed a second certification in which she referred to the weekly payments as "alimony". On December 23, 1981, Mrs. Spector filed a third certification in which she referred to the weekly payments as "support".
The judge who had handled the divorce case and conducted the settlement negotiations decided the motions. He granted Mrs. Spector's motion. Dr. Ehrenworth appealed. On October 7, 1982, the Appellate Division of the Superior Court affirmed the lower court's ruling. Ehrenworth v. Ehrenworth, 187 N.J. Super. 342, 347, 454 A.2d 895 (App. Div. 1982). The Appellate Division stated:
[The New Jersey statute] is intended to provide that if the court has awarded alimony, then upon the wife's remarriage the alimony must cease.
* * * * * * *
We see no reason in public policy why the agreement should not be enforced. The parties voluntarily agreed upon its terms in proceedings of the greatest formality. If the payments were to be treated by the parties as installments on a fixed obligation as opposed to alimony, it cannot be doubted that * * * [Dr. Ehrenworth] would be denied relief since * * * [the New Jersey statute] deals only with alimony. We do not see why the fact that for perceived tax advantages the parties preferred to call the payments alimony should have a bearing on the outcome of this litigation. Enforcement of * * * [the New Jersey statute] in the circumstances of this case would work an unconscionable result relieving * * * [Dr. Ehrenworth] of his freely bargained-for obligation and depriving plaintiff of the benefit for which she negotiated. In negotiating this agreement * * * [Mrs. Spector] thereby forewent the possibility of obtaining other consideration from * * * [Dr. Ehrenworth]. [Id. at 348-349, 454 A.2d at 899; fn. ref. omitted.]
Dr. Ehrenworth paid Mrs. Spector $41,600 in 1986 and $41,600 in 1987 in accordance with the support agreement. In 1988, Dr. Ehrenworth paid $40,000 ($800 per week for 50 weeks). Dr. Ehrenworth deducted the payments from his gross income for the years in issue. Mrs. Spector did not include the payments in her gross income.
To continue reading
Request your trial