Judges: JACOBS
Attorneys: Marilyn K. Summitt , Jeffrey B. Kahn, and Joseph M. Goldstein, for petitioner. Alison W. Lehr , for respondent.
Filed: Apr. 22, 1998
Latest Update: Nov. 21, 2020
Summary: T.C. Memo. 1998-147 UNITED STATES TAX COURT CATHERINE H. POOLE, f.k.a. CATHERINE H. DAMES, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent Docket No. 4492-97. Filed April 22, 1998. Marilyn K. Summitt, Jeffrey B. Kahn, and Joseph M. Goldstein, for petitioner. Alison W. Lehr, for respondent. MEMORANDUM FINDINGS OF FACT AND OPINION JACOBS, Judge: By two separate notices of deficiency, respondent determined the following deficiencies in petitioner's Federal income taxes: -2- Year Defici
Summary: T.C. Memo. 1998-147 UNITED STATES TAX COURT CATHERINE H. POOLE, f.k.a. CATHERINE H. DAMES, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent Docket No. 4492-97. Filed April 22, 1998. Marilyn K. Summitt, Jeffrey B. Kahn, and Joseph M. Goldstein, for petitioner. Alison W. Lehr, for respondent. MEMORANDUM FINDINGS OF FACT AND OPINION JACOBS, Judge: By two separate notices of deficiency, respondent determined the following deficiencies in petitioner's Federal income taxes: -2- Year Deficie..
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T.C. Memo. 1998-147
UNITED STATES TAX COURT
CATHERINE H. POOLE, f.k.a. CATHERINE H. DAMES, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 4492-97. Filed April 22, 1998.
Marilyn K. Summitt, Jeffrey B. Kahn, and Joseph M.
Goldstein, for petitioner.
Alison W. Lehr, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
JACOBS, Judge: By two separate notices of deficiency,
respondent determined the following deficiencies in petitioner's
Federal income taxes:
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Year Deficiency
1989 $16,263
1990 15,814
1991 15,994
1992 13,469
1993 7,455
Following a concession by petitioner, the issue for decision
is whether payments received by petitioner during the years in
issue from her former husband pursuant to a divorce decree were
alimony or a property settlement distribution. If the payments are
determined to be alimony, then they are taxable to petitioner; if
they are determined to be in the nature of a property settlement,
then they are nontaxable. For the reasons set forth herein, we
find that the payments are in the nature of alimony.
All section references are to the Internal Revenue Code.1 All
Rule references are to the Tax Court Rules of Practice and
Procedure.
FINDINGS OF FACT
Some of the facts have been stipulated and are found
accordingly. The stipulation of facts and the attached exhibits
are incorporated herein by this reference.
At the time she filed her petition, petitioner resided in
Ponte Vedra, Florida.
1
The Deficit Reduction Act of 1984, Pub. L. 98-369, sec.
422, 98 Stat. 494, 795, extensively changed the alimony rules
effective for divorce decrees executed after Dec. 31, 1984. This
case involves sec. 71(a)(1) prior to its revision.
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Background
Petitioner, known as Catherine H. Poole at the time of trial,
was married to Dr. John R. Ibach, Jr. from March 24, 1959, until
May 27, 1983. At the start of their marriage, petitioner worked as
a registered nurse, supporting her husband, who was completing his
residency following medical school. Dr. Ibach became a
cardiovascular surgeon.
After petitioner gave birth to her first child in 1961, she no
longer worked outside the home. Petitioner and Dr. Ibach
subsequently had four more children. Although petitioner primarily
stayed home to raise the children, she also assisted her husband in
his office.
Petitioner's Divorce From Dr. Ibach
On May 27, 1983, petitioner and Dr. Ibach were divorced by the
Circuit Court in and for Duval County, Florida, in a Final Judgment
of Dissolution of Marriage (the divorce decree).2 Petitioner and
Dr. Ibach submitted separate financial affidavits to the Court,
each dated May 27, 1983: Dr. Ibach reported the current value of
his and petitioner's assets to be $943,750; petitioner reported the
2
Attached to the Final Judgment of Dissolution of
Marriage (the divorce decree) was a Stipulation (dissolution
stipulation) between petitioner and Dr. Ibach (entered into on
May 25, 1983), which was adopted and incorporated by reference
into the divorce decree. A substantial portion of the divorce
decree mirrors provisions of the dissolution stipulation.
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value of her and Dr. Ibach's net assets to be $1,114,300.3 Thus,
the value of petitioner's and Dr. Ibach's net assets at the date of
their divorce was approximately $1 million.
The divorce decree states in pertinent part:
7. As settlement of all claims the Wife
may have for temporary and permanent alimony,
Husband shall pay to Wife the lump sum of
$500,000.00, with interest at 8% per annum on
the unpaid balance, payable as follows:
One hundred twenty (120) monthly
installments of $6,050.00, and one (1) monthly
installment of $3,016.53. Said monthly
installments shall commence on the 1st day of
June, 1983, and continue on the first day of
each month thereafter for the payment period of
ten (10) years and one (1) month until paid in
full. The parties' intent is that this is lump
sum alimony, payable over a period of more than
ten (10) years as provided in section 71(c),
Internal Revenue Code. Said sum is not subject
to modification, is payable regardless of
Wife's death or remarriage, and shall be
deductible by Husband and taxable to Wife.
Provided, however, any of said lump sum
remaining unpaid at Wife's death shall be paid
into a trust created by Wife for the benefit of
the parties' children, with Husband and a
commercial bank of Wife's choice as co-
trustees. It shall not be a claim against
Husband's estate in the event of his untimely
death, so long as he maintains the life
insurance provided for in paragraph 8 hereof,
and, if not, shall be a claim against his
estate for the unpaid balance.
8. Husband shall, within sixty (60) days
from May 25, 1983, make Wife the sole
beneficiary of $500,000.00 in life insurance in
3
The discrepancy in amounts arises primarily from Dr.
Ibach's reporting total liabilities of $406,000 and petitioner's
reporting total liabilities of $281,000.
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order to insure his obligation for lump sum
alimony as set out herein. * * *
9. During their marriage, the parties
regarded themselves as a joint economic unit
or partnership sharing equally in the
ownership of appreciable portions of their
income and assets. Each participated
diligently in the enhancement of such income
and assets, contributing services, funds,
counsel, ideas and other assistance as
appropriate. They commingled their incomes
and applied themselves jointly to the
accomplishment of joint financial endeavors,
intending that the accumulated fruits of their
joint endeavors would be jointly owned
property (whether held in joint or individual
names). As and [sic] for an equal property
exchange, the parties shall make the following
transfers and payments in an effort to
equitably distribute their estate:
a) Husband shall pay direct to Wife
the sum of $50,000.00 cash on this date.
Thereafter, Husband shall pay to Wife the sum
of $50,000.00 one year from the date hereof,
and $50,000.00 two years from date hereof, all
without interest.
b) Husband shall convey to Wife, by
appropriate instrument, all of his right,
title and interest in the property located at
2636 Forest Point Court, Jacksonville, Florida
32217 * * *
c) Wife shall convey to Husband, by
appropriate instrument, all of her right,
title and interest in the marital home located
at 1362 Mandarin Road, Jacksonville, Florida
32223 * * *
d) Wife shall convey to Husband by
appropriate instrument, all of her right,
title and interest in and to the following
real property located at 2428 South Ponte
Vedra Boulevard, South Ponte Vedra, Florida *
* *
* * * * * * *
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10. Wife shall forthwith release and
transfer to the Husband any and all interest
she has or asserts to the Husband's Profit
Sharing and Pension Plan and further releases
any claim to the John R. Ibach, Jr., M.D.,
P.A. and all of its assets.
11. Wife shall forthwith release and
transfer to the Husband any and all interest
she has or asserts to the Husband's Bache
account and Husband's savings account.
12. Wife shall forthwith release and
transfer to the Husband any and all interest
she has or asserts to the Husband's Tax
Shelter Investments.
* * * * * * *
17. Each party has agreed upon the
custody, support and visitation of the minor
children of the parties, and have also agreed
upon alimony and property settlement * * *
Petitioner also received an automobile valued at $5,000, and Dr.
Ibach agreed to pay for the minor children's college and graduate
school education. Moreover, petitioner was relieved of any
liability she had for outstanding loans and joint debts, including
mortgage payments (with the exception of the mortgage on the Forest
Point Court property) and responsibility for the children's
education.
Both petitioner and Dr. Ibach were represented by counsel
during the course of their divorce proceedings.
Between 1989 and 1993, Dr. Ibach made all the payments
required under the terms of the divorce decree, including the
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following principal and interest payments pursuant to Paragraph 7
of the divorce decree:
Year Total Paid Principal Interest
Pre-1989 $405,350.00 $228,517.01 $176,832.99
1989 72,600.00 52,789.10 19,810.90
1990 72,600.00 57,170.57 15,429.43
1991 72,600.00 61,915.70 10,684.30
1992 72,600.00 67,054.67 5,545.33
1993 33,266.53 32,552.95 713.58
Dr. Ibach also paid petitioner $150,000 pursuant to Paragraph
9a of the divorce decree.
Petitioner's Subsequent Marriages
On June 14, 1986, petitioner married Thomas Dames and became
known as Catherine H. Dames; this marriage subsequently ended in
divorce. In 1994, petitioner married Mr. Poole.4
Petitioner's Federal Income Tax Returns
Petitioner filed joint Federal income tax returns with Mr.
Dames for 1989, 1990, and 1991. She filed Federal income tax
returns for 1992 and 1993 as a single taxpayer. Petitioner did not
include in income any of the principal Dr. Ibach paid her pursuant
to Paragraph 7 of the divorce decree on any of these returns; she
did, however, report on these returns the interest Dr. Ibach paid
her (with the exception of $713.58 in interest she received from
Dr. Ibach during 1993).
4
The record is void as to Mr. Poole's first name.
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On his 1989-93 income tax returns, Dr. Ibach deducted as
alimony the payments he made to petitioner pursuant to Paragraph 7
of the divorce decree.
Notices of Deficiency
Respondent sent a notice of deficiency to petitioner and her
former husband Mr. Dames for their 1989-91 tax years, determining
that petitioner improperly excluded from income $72,600 of alimony
payments for each taxable year. Accordingly, respondent increased
petitioner's taxable income for each year by $50,000. In the
second notice of deficiency sent to petitioner for her 1992 and
1993 tax years, respondent determined that she improperly excluded
from income $72,600 and $32,553 of alimony income for 1992 and
1993, respectively. Accordingly, respondent increased petitioner's
taxable income by $50,000 and $32,553, respectively, for 1992 and
1993. (These determinations were based upon respondent's view that
Dr. Ibach's payments to petitioner were taxable to her as alimony
up to 10 percent of the principal sum in each year.)
OPINION
The issue for decision is whether payments Dr. Ibach made to
petitioner pursuant to Paragraph 7 of the divorce decree during the
years in issue were alimony or a property settlement. Petitioner
contends that the payments were nontaxable, lump-sum installment
payments of a property settlement, not in the nature of support.
Respondent disagrees.
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Section 71(a)(1) sets forth the requirements for inclusion in
gross income of payments received pursuant to a decree of divorce
or separate maintenance. In sum, the payments are includable in
income if: (1) The payments are periodic; (2) the payments arise
because of a marital or family relationship; (3) the payments are
made pursuant to a decree of divorce or separate maintenance or
pursuant to a written instrument incident thereto; and (4) the
payor is under a legal obligation to make the payments.
With respect to the instant case, the requirements that
payments be made pursuant to a decree of divorce and that the payor
be under a legal obligation to make the payments are not in issue.
The divorce decree of the Duval County Circuit Court, which
incorporated the dissolution stipulation of petitioner and Dr.
Ibach, satisfies these requirements. Nor is any problem presented
regarding the classification of the payments as periodic. Under
the general rules of section 71(c)(1), installment payments
discharging a principal sum obligation, as opposed to continuing
payments of an indefinite duration, are not treated as periodic
payments. See also sec. 1.71-1(d)(1), Income Tax Regs. Section
71(c)(2) provides a statutory exception to the general rule of
section 71(c)(1). Subject to a percentage limitation,5 section
5
The limitation of sec. 71(c)(2) is that "the
installment payments shall be treated as periodic payments for
purposes of subsection (a), but (in the case of any one taxable
year of the wife) only to the extent of 10 percent of the
principal sum."
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71(c)(2) permits installment payments of a principal sum obligation
to be treated as periodic payments if the period for payments
extends more than 10 years beyond the date of the decree or
agreement. See Warnack v. Commissioner, 71 T.C. 541 (1979). That
is the case herein.6 All other requirements of section 71(a)(1)
having been met, the decisive question is whether the payments were
made "because of the marital or family relationship". For the
reasons set forth below, we believe they were.
The statutory phrase "payments * * * [imposed] because of the
marital or family relationship" requires that the payments be in
the nature of support rather than property settlement. Beard v.
Commissioner, 77 T.C. 1275, 1283 (1981); Martin v. Commissioner,
73
T.C. 255, 265 n.2 (1979); sec. 1.71-1(b)(4), Income Tax Regs.
Payments that are part of a property settlement are capital in
nature and, therefore, are not deemed alimony subject to the
provisions of section 71. Gammill v. Commissioner,
73 T.C. 921
(1980), affd.
710 F.2d 607 (10th Cir. 1982).
In evaluating whether a particular payment constitutes support
or property settlement, the labels assigned to the payments are not
determinative. Id.; Hesse v. Commissioner, 60 T.C. 685, 691 (1974),
affd. without published opinion
511 F.2d 1393 (3d Cir. 1975). In
deciding the character of an award in a divorce or separation
6
The principal sum of the payments petitioner received
was $500,000. Petitioner was therefore treated by respondent as
if she had received alimony of no more than $50,000, or 10
percent of the principal sum, during each of the years at issue.
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decree, great weight is given, however, to the language and
structure of the decree. Griffith v. Commissioner, 749 F.2d 11, 13
(6th Cir. 1984), affg. T.C. Memo. 1983-278. In addition, an
examination of surrounding facts and circumstances may be required.
Yoakum v. Commissioner,
82 T.C. 128, 140 (1984); Gammill v.
Commissioner, supra.
This Court has frequently looked to State law in considering
whether payments between spouses constitute alimony or a property
settlement. See Yoakum v. Commissioner, supra at 136. Under
Florida law, following the termination of a marital relationship,
the financially advantaged spouse must provide support and
maintenance for the financially disadvantaged spouse. Fla. Stat.
Ann. sec. 61.08 (West 1985). Clearly, in this case, petitioner was
the financially disadvantaged spouse. Under Florida law, Dr. Ibach
was obligated to make payments to petitioner for her support. We
believe he did so pursuant to Paragraph 7.
Moreover, there was an equitable property division between
petitioner and Dr. Ibach. Excluding the Paragraph 7 payments,
there was almost an equal division of their property. See Eckroade
v. Eckroade, 570 So. 2d 1347, 1349 (Fla. Dist. Ct. App. 1990).
However, although "State law defines property rights, Federal law
determines the tax consequences which attend these defined rights."
Williams v. Commissioner, T.C. Memo. 1993-163 (citing Sampson v.
Commissioner,
81 T.C. 614, 618 (1983), affd. without published
opinion
829 F.2d 39 (6th Cir. 1987)).
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This Court looks to the following factors which indicate that
payments are in the nature of a property settlement rather than a
support allowance: (1) The parties in their agreement (or the court
in its decree) intended the payments to effect a division of their
assets; (2) the recipient surrendered valuable property rights in
exchange for the payments; (3) the payments are fixed in amount and
not subject to contingencies, such as the remarriage or death of
the recipient; (4) the payments are secured; (5) the amount of the
payments plus the other property awarded to the recipient equals
approximately one-half of the property accumulated by the parties
during marriage; (6) the needs of the recipient were not taken into
consideration in determining the amount of the payments; and (7) a
separate provision for support was provided elsewhere in the decree
or agreement. Benedict v. Commissioner, 82 T.C. 573, 577-578
(1984); Beard v.
Commissioner, supra at 1284-1285. Failure to
satisfy one or more of the factors articulated herein may tend to
indicate that the payments in question are more in the nature of a
support allowance. See Beard v.
Commissioner, supra at 1285.
Applying the above factors, we conclude that Dr. Ibach's
payments to petitioner were in the nature of alimony. Our analysis
of the factors in reaching our conclusion is as follows.
With regard to the first factor, we believe the agreement was
intended to be a comprehensive and final settlement of all issues
regarding custody, support, visitation, alimony, and property
settlement between petitioner and Dr. Ibach. Paragraph 9 provides
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for a division of the assets of petitioner and Dr. Ibach ("the
parties shall make the following transfers and payments in an
effort to equitably distribute their estate"). The only payments
at issue, however, are those pursuant to Paragraph 7.
As indicated, great weight is given to the language and
structure of the decree. See Griffith v. Commissioner, supra. The
language of Paragraph 7 is explicit:
As settlement of all claims the Wife may have
for temporary and permanent alimony, Husband
shall pay to Wife the lump sum of $500,000 * *
* The parties' intent is that this is lump sum
alimony, payable over a period of more than
ten (10) years as provided in section 71(c),
Internal Revenue Code. Said sum * * * shall be
deductible by Husband and taxable to Wife.
This factor favors treating the payments as alimony.
With regard to the second factor, petitioner surrendered
valuable property rights valued at or greater than $500,000,
including: The Mandarin Road marital home; the South Ponte Vedra
beach house; Dr. Ibach's profit sharing and pension plan;
investments; and tax shelters. However, once she relinquished her
rights to these properties under Paragraphs 9c, 9d, 10, 11, and 12,
it does not appear that she had any further rights in tangible
property to exchange for the Paragraph 7 payments. See
Schottenstein v. Commissioner, 75 T.C. 451, 461 (1980). Thus, this
factor favors treating the payments as alimony.
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With regard to the third factor, the payments were fixed in
amount and were not subject to contingencies. This factor favors
treating the payments as part of a property settlement.
With regard to the fourth factor, although the total amount of
the installment payments was not secured, in the event of Dr.
Ibach's early death, petitioner was entitled either to have a claim
against his estate or receive proceeds of his life insurance. This
factor favors treating the payments as part of a property
settlement.
With regard to the fifth factor, at the time petitioner and
Dr. Ibach divorced, their net assets were valued at approximately
$1 million. Petitioner received $150,000 pursuant to Paragraph 9a,
the Forest Point Court house valued at $173,000, and a car valued
at $5,000. Moreover, petitioner was relieved of loan obligations
totaling at least $120,000 as well as her obligations to educate
her children. The $448,000 total petitioner received is exclusive
of the Paragraph 7 payments. Thus, the amount of the Paragraph 7
payments plus the other property awarded to petitioner exceeded
one-half of the property accumulated by petitioner and Dr. Ibach
during their marriage. This factor favors treating the payments as
alimony.
With regard to the sixth factor, petitioner was financially
dependent upon Dr. Ibach for 24 years. Petitioner and Dr. Ibach
submitted separate financial affidavits to the divorce court.
There appears to be a correlation between the amount of monthly
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expenses petitioner incurred ($4,931.09) and the amount of monthly
payments Dr. Ibach made ($6,050). We believe that petitioner's
needs were considered when the amount of the Paragraph 7 payments
was determined. Thus, this factor favors treating the payments as
alimony.
Finally, with regard to the seventh factor, petitioner
concedes that no separate provision for support was provided
elsewhere in the divorce decree or dissolution stipulation. This
factor favors treating the payments as alimony.
Considering all the facts and circumstances and the above
Beard factors, we give great weight to the clear language,
structure, and intent of the divorce decree and accordingly
conclude that petitioner and Dr. Ibach intended to provide support
and alimony for petitioner in Paragraph 7 of the divorce decree.
Thus, we hold that the payments pursuant to Paragraph 7 are in the
nature of alimony and therefore taxable to petitioner to the extent
of 10 percent of the principal amount for each of the years in
issue.
To reflect the foregoing, and the concessions by petitioner,
Decision will be entered
for respondent.
