Spector v. Commissioner

• Decision Date: 07 April 1994
• Docket Number: Docket No. 21548-91.,Docket No. 20102-91.
• Citation: 67 T.C.M. 2601
• Parties: Norman Spector and Marcia Spector v. Commissioner. Lionel Ehrenworth and Beth Ehrenworth v. Commissioner.
• Court: U.S. Tax Court

67 T.C.M. 2601

T.C. Memo. 1994-147

Norman Spector and Marcia Spector v. Commissioner.

Lionel Ehrenworth and Beth Ehrenworth v. Commissioner.

Docket No. 20102-91.

Docket No. 21548-91.

United States Tax Court.

Filed April 7, 1994.

Robert J. Alter and Richard J. Sapinski, One Riverfront Plaza, Neward, N.J., for the petitioners Norman Spector and Marcia Spector. Stephen H. Skoller and Stephen E. Lampf, Orange, N.J., for the petitioners Lionel Ehrenworth and Beth Ehrenworth. Craig Connel, for the respondent.

Memorandum Opinion

COLVIN, Judge:

This matter is before the Court on motions for partial summary judgment filed by Norman and Marcia Spector (the Spectors) in docket No. 20102-91 and Lionel and Beth Ehrenworth (the Ehrenworths) in docket No. 21548-91.¹

Respondent determined deficiencies in petitioners' income tax as follows:

                Norman and Marcia Spector
                                              Additions to Tax
                                    -------------------------------------
                                        Sec.          Sec.         Sec
                Year   Deficiency   6653(a)(A)1 6653(a)(1)(B)   6661(a)
                1986    $15,117        $756             2         $3,779
                1987     16,043         802             2          3,845
                1988      9,580         479             --         2,395
                Lionel Ehrenworth
                                              Additions to Tax
                                       ---------------------------------
                                       Sec.          Sec.         Sec
                Year   Deficiency   6653(a)(A)    6653(a)(1)(B)   6661(a)
                1986     26,005       1,300             2          6,501
                1987     20,610       1,031             2          5,153
                Lionel and Beth Ehrenworth
                                               Additions to Tax
                                    ------------------------------------
                                       Sec.                        Sec.
                Year   Deficiency   6653(a)(1)                    6661(a)
                1988     11,648        582                         2,912
                1 Sec. 6653(a)(1) was in effect for 1988.
                2 Fifty percent of the interest due on the portion of the
                underpayment attributable to negligence.
                

Dr. Ehrenworth and Mrs. Spector were married to each other from 1955 to 1980. When they divorced in 1980, Dr. Ehrenworth agreed to pay alimony. When Mrs. Spector remarried, Dr. Ehrenworth stopped making the payments, but, in response to an action brought by Mrs. Spector, the New Jersey courts ordered Dr. Ehrenworth to continue making the payments.

The Spectors filed a motion for partial summary judgment that the payments were not alimony under section 71. The Ehrenworths filed a motion for partial summary judgment that the payments were alimony under section 71. Respondent filed responses supporting the Ehrenworths' motion and opposing the Spectors' motion.

A motion for summary judgment or partial summary judgment is granted if there is no genuine issue as to any material fact and the decision can be rendered as a matter of law. Rule 121; Shiosaki v. Commissioner [Dec. 32,579], 61 T.C. 861, 862-863 (1974). The parties agree that there is no material fact in dispute relating to the motions.

Petitioners' motions for partial summary judgment raise the following issues:

1. Whether, as Mrs. Spector contends, payments she received from Dr. Ehrenworth are not alimony for Federal tax purposes because New Jersey law, N.J. Stat. Ann. sec. 2A: 34-25 (West 1952), provides that courts may not make any order providing for alimony after remarriage of the recipient spouse. We hold that the Federal income tax treatment of the payments is not determined solely by reference to this provision of New Jersey law, and we deny Mrs. Spector's motion for partial summary judgment.

2. Whether, as Dr. Ehrenworth contends, the payments are alimony for Federal income tax purposes because the agreement accompanying the divorce identified the payments as alimony, and the agreement was enforced by the New Jersey courts. We hold that these facts by themselves do not determine the Federal tax treatment of the payments, and we deny Dr. Ehrenworth's motion for partial summary judgment.

References to Mrs. Spector are to Marcia Spector. References to Dr. Ehrenworth are to Lionel Ehrenworth. 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.

Background

Mrs. Spector (formerly Mrs. Ehrenworth) and Dr. Ehrenworth were married in 1955. They had four children (Richard, Andrew, Robert, and Douglas). They filed cross-motions for divorce in or before 1980. 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.

On July 3, 1980, Mrs. Spector and Dr. Ehrenworth signed a "Property Settlement and Support Agreement" (the support agreement) in which, 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 and all interest she had in a medical building and any and all rights she had to any shares in the Phoenix Corp. 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. They agreed that the payments would cease if Mrs. Spector died, but not if she remarried. These payments were identified in their agreement as alimony. Mrs. Spector agreed to maintain a life insurance policy with a face value of $300,000 insuring the life of Dr. Ehrenworth. If Dr. Ehrenworth died before making all the weekly payments to Mrs. Spector, his estate would pay the balance less the insurance proceeds received by Mrs. Spector. Mrs. Spector and Dr. Ehrenworth were divorced on July 7, 1980. The Judgment of Divorce provided that the

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 * * *

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 her $800 per week. 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:34-25² because she remarried.

The judge who handled the divorce case and conducted the settlement negotiations decided the motions. The judge 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 (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 349.]

Dr. Ehrenworth paid Mrs. Spector $800 per week in accordance with the support agreement in 1986 and 1987. In 1988, Dr. Ehrenworth paid $800 for at least 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.

Discussion

1. Introduction

A former spouse must include in gross income periodic payments received in discharge of a legal obligation which, because of the marital or family relationship, is imposed on the other spouse under a divorce decree or incurred by the other spouse under a written agreement accompanying the divorce. Sec. 71(a)(1);³ Brown v. Commissioner [Dec. 29,129], 50 T.C. 865 (1968), affd. [69-2 USTC ¶ 9617] 415 F.2d 310 (4th Cir. 1969). Payments which are part of a property settlement are not taxable to the recipient under section 71. Estate of Smith v. Commissioner [53-2 USTC [9616], 208 F.2d 349 (3d Cir. 1953), affg. a Memorandum Opinion of this Court dated Nov. 28, 1952; Yoakum v. Commissioner [Dec. 40,950], 82 T.C. 128, 134 (1984); Thompson v. Commissioner [Dec. 29,023], 50 T.C. 522, 525 (1968). A taxpayer may deduct amounts paid to a former spouse if those payments are includable in the former spouse's gross income under section 71. Sec. 215; Yoakum v. Commissioner, supra.

2. The Effect of State Law Terminating Alimony After Remarriage

Mrs. Spector agrees that Dr. Ehrenworth had a legal obligation to make payments to...