PURSUANT TO INTERNAL REVENUE CODE SECTION 7463(b),THIS OPINION MAY NOT BE TREATED AS PRECEDENT FOR ANY OTHER CASE. T.C. Summary Opinion 2013-103
UNITED STATES TAX COURT
FRED D. MURRAY, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 22807-12S. Filed December 12, 2013.
Gwendolyn Baptist-Hewlett, for petitioner.
William B. McClendon, for respondent.
SUMMARY OPINION
CHIECHI, Judge: This case was heard pursuant to the provisions of section
7463 of the Internal Revenue Code in effect when the petition was filed.1 Pursu-
1 Hereinafter, all section references are to the Internal Revenue Code (Code) in effect for the year at issue. All Rule references are to the Tax Court Rules of Practice and Procedure. -2-
ant to section 7463(b), the decision to be entered is not reviewable by any other
court, and this opinion shall not be treated as precedent for any other case.
Respondent determined a $14,430 deficiency in, and a $2,886 accuracy-
related penalty under section 6662(a) on, petitioner’s Federal income tax (tax) for
his taxable year 2009.
The issues for decision for petitioner’s taxable year 2009 are:
(1) Do the two payments totaling $55,000 that petitioner made to his former
spouse during 2009 constitute alimony deductible under section 215(a)? We hold
that they do not.
(2) Is petitioner liable for the accuracy-related penalty under section
6662(a)? We hold that he is.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found.
Petitioner resided in Mississippi at the time he filed the petition.
At a time not established by the record, petitioner and Lisa Lynn Murray
(Ms. Murray) decided to end their marriage. On March 5, 2009, they signed a
document titled “PROPERTY SETTLEMENT AGREEMENT” (settlement
agreement), which they indicated therein “makes fair and equitable provisions for
the distribution of the property of the parties [petitioner and Ms. Murray]”. -3-
The settlement agreement set forth the agreement of petitioner and Ms.
Murray with respect to certain matters that were identified as follows in that
agreement: “REAL PROPERTY”, “MOTOR VEHICLES”, “BANK ACCOUNTS
AND PERSONAL PROPERTY”, “RETIREMENT ACCOUNTS”, and
“ALIMONY”.
The agreement of petitioner and Ms. Murray in the settlement agreement
with respect to “ALIMONY” was as follows:
5. ALIMONY:
Both parties acknowledge that they are both in good health and have no mental or physical restriction that would prevent either from gainful employment. The parties freely, voluntarily, expressly, and mutually agree to release one another of any and all duty and obliga- tion one may owe to the other for any alimony or related support whether lump sum, periodic, rehabilitative or of any nature, except as specifically set out herein. It is specifically agreed that the Husband shall pay unto the Wife the sum of $55,000.00 as lump sum alimony to be paid as follows: $25,000.00 by cashiers funds upon the execu- tion of this [settlement] agreement and $30,000.00 by cashiers funds within 30 days from the date of the execution of this agreement. The funds shall be paid through the office of the Wife’s attorney. All provisions contained hereinabove for the payment of debts or division of marital property is by way of support one to the other and shall not be dischargeable in bankruptcy.
The agreement of petitioner and Ms. Murray in the settlement agreement
with respect to a “FINAL DECREE OF DIVORCE” was as follows: -4-
In the event a Final Decree of Divorce is entered in any action or proceeding herein, this Agreement and in particular the provisions relating to the property rights and other matters set forth in the said Agreement, if the Court approves the same, shall be incorporated therein, merged with and become a part of such Final Decree of Divorce.
The agreement of petitioner and Ms. Murray in the settlement agreement
with respect to “RELEASES AND OTHER OBLIGATIONS” was in pertinent
part as follows: “Both parties agree that this Agreement shall be binding upon the
parties and their respective heirs, executors, administrators, and assigns.”
The agreement of petitioner and Ms. Murray in the settlement agreement
with respect to its “MODIFICATION” was in pertinent part as follows: “A
modification or waiver of any of the provisions of this agreement shall be effective
only if made in writing and executed with the same formality as this agreement,
and approved by the [Chancery] Court [of DeSoto County, Mississippi]”.
The agreement of petitioner and Ms. Murray in the settlement agreement
with respect to “TAX ADVICE” was as follows:
Both parties further agree that no tax advice has been requested nor furnished by said attorneys in this divorce action regarding the tax consequences of this Property Settlement Agreement and shall hold the law firms and individual attorneys therein, of Myers Law Group, PLLC, and Debra P. Branan harmless and blameless for any tax con- sequences related to this Property Settlement Agreement. -5-
Petitioner and Ms. Murray were divorced pursuant to a “DECREE OF
DIVORCE” (final divorce decree) that the Chancery Court of DeSoto County,
Mississippi, filed on April 1, 2009. That court “ratified, approved and adopted”
the settlement agreement, made it “part of the Decree of Divorce for all property
settlement and other purposes”, and ordered that it “shall and does determine the
rights of the parties”.
Pursuant to paragraph 5 of the settlement agreement, titled “ALIMONY”,
petitioner made payments of $25,000 and $30,000 to Ms. Murray on the two
respective dates in 2009 specified in that paragraph of that agreement.2
Petitioner filed electronically Form 1040, U.S. Individual Income Tax
Return, for his taxable year 2009 (2009 return). In that return, petitioner showed
“total tax” of $5,331 and claimed a deduction as alimony for the two payments
totaling $55,000 that he had made to Ms. Murray during 2009 pursuant to para-
graph 5 of the settlement agreement. Before claiming that deduction in his 2009
return, petitioner did not seek any advice as to the propriety of that deduction. He
did, however, ask H&R Block to review his 2009 return after he had prepared it
2 Pursuant to paragraph 5 of the settlement agreement, petitioner was re- quired to pay (1) $25,000 to Ms. Murray on the date of the execution of that agreement (i.e., March 5, 2009) and (2) $30,000 to her 30 days from the date of that execution (i.e., April 4, 2009). -6-
but before he filed it. He did not provide that company at the time it reviewed that
return a copy of the settlement agreement or the final divorce decree.
Respondent issued a notice of deficiency (notice) to petitioner with respect
to his taxable year 2009. In that notice, respondent determined to disallow the
deduction that petitioner had claimed as alimony in his 2009 return for the two
payments totaling $55,000 that he had made to Ms. Murray during 2009 pursuant
to paragraph 5 of the settlement agreement. Respondent also determined in the
notice that petitioner is liable for the accuracy-related penalty under section
6662(a).
OPINION
Petitioner bears the burden of establishing that the determinations in the
notice are erroneous. See Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115
(1933).
We address initially the alimony deduction that petitioner claimed in his
2009 return for the two payments totaling $55,000 (payments at issue) that he had
made to Ms. Murray during 2009 pursuant to paragraph 5 of the settlement
agreement. Section 215(a) allows an individual to deduct “an amount equal to the
alimony or separate maintenance payments paid during such individual’s taxable
year.” Section 215(b) defines the term “alimony or separate maintenance pay- -7-
ment” for purposes of section 215 to mean “any alimony or separate maintenance
payment (as defined in section 71(b)) which is includible in the gross income of
the recipient under section 71.”
Section 71(b)(1) provides the following definition of the term “alimony or
separate maintenance payment”:
SEC. 71. ALIMONY AND SEPARATE MAINTENANCE PAYMENTS.
(b) Alimony or Separate Maintenance Payments Defined.--For purposes of this section--
(1) In general.--The term “alimony or separate maintenance payment” means any payment in cash if--
(A) such payment is received by (or on behalf of) a spouse under a divorce or separation instrument,
(B) the divorce or separation instrument does not des- ignate such payment as a payment which is not includible in gross income under this section and not allowable as a deduction under section 215,
(C) in the case of an individual legally separated from his spouse under a decree of divorce or of separate mainte- nance, the payee spouse and the payor spouse are not mem- bers of the same household at the time such payment is made, and
(D) there is no liability to make any such payment for any period after the death of the payee spouse and there is no liability to make any payment (in cash or property) as a -8-
substitute for such payments after the death of the payee spouse.
Section 71(b)(2) provides the following definition of the term “divorce or
separation instrument” used in section 71(b)(1)(A) and (B):
(b) Alimony or Separate Maintenance Payments Defined.--For purposes of this section--
* * * * * * *
(2) Divorce or separation instrument.--The term “divorce or separation instrument” means--
(A) a decree of divorce or separate maintenance or a written instrument incident to such a decree,
(B) a written separation agreement, or
(C) a decree (not described in subparagraph (A)) requiring a spouse to make payments for the support or maintenance of the other spouse.
The parties agree that the payments at issue must meet all four requirements
in section 71(b)(1)(A) through (D) in order to constitute an alimony or separate
maintenance payment that is deductible under section 215(a) and includible in the -9-
income of the recipient under section 71(a).3 They disagree as to whether those
payments satisfy the requirement in section 71(b)(1)(D).
The requirement in section 71(b)(1)(D) is satisfied if the payor has “no
liability to make any * * * payment for any period after the death of the payee
spouse and * * * no liability to make any payment (in cash or property) as a
substitute for such payments after the death of the payee spouse.” Whether that
requirement is satisfied is determined by the terms of the applicable instrument or,
if the instrument is silent on the matter, by State law. See Kean v. Commissioner,
T.C. Memo. 2003-163, aff’d, 407 F.3d 186 (3d Cir. 2005).
We consider first the terms of the settlement agreement. That agreement is
silent as to whether petitioner’s obligation in that agreement to make the payments
at issue to Ms. Murray would have terminated if she (or he) had died before he had
made those payments.
Because the settlement agreement is silent, we turn for guidance to the law
of the State of Mississippi (Mississippi law). Before addressing Mississippi law,
we note that our characterization of the payments at issue as periodic alimony or
lump-sum alimony under that law is determinative of whether those payments
3 Consistent with sec. 71(a), sec. 61(a)(8) defines gross income to mean all income from whatever source derived, including alimony and separate mainte- nance payments. - 10 -
satisfy the requirement in section 71(b)(1)(D). That is because under Mississippi
law “[p]eriodic alimony consists of periodic payments to the payee spouse that are
to continue indefinitely until the remarriage of the payee spouse or the death of
either the payor or payee spouse.” Barrett v. United States, 74 F.3d 661, 664 (5th
Cir. 1996) (citing Bowe v. Bowe, 557 So. 2d 793, 795 (Miss. 1990), and Wray v.
Wray, 394 So. 2d 1341, 1344 (Miss. 1981)). Moreover, under Mississippi law,
upon the request of either spouse, a court may modify periodic alimony if the court
were to find that the requesting spouse had a material change in economic circum-
stances. Under Mississippi law, “[t]he court cannot deprive itself of the power to
modify periodic alimony in the future and cannot extend the payments past the
remarriage of the payee spouse or death of either spouse.” Id. (citing Armstrong v.
Armstrong, 618 So. 2d 1278, 1281 (Miss. 1993), Bowe, 557 So. 2d at 795, and
East v. East, 493 So. 2d 927, 931 (Miss. 1986)).
In Barrett, the U.S. Court of Appeals for the Fifth Circuit, the court to which
an appeal in this case would normally lie if this case were appealable, which it is
not because it is an S case, indicated that periodic alimony under Mississippi law
is in contrast to lump-sum alimony under that law. In the words of the Court of
Appeals, - 11 -
Mississippi’s lump sum alimony is a final settlement, substituting as a division of property, between a husband and wife that cannot be subsequently modified for any reason except fraud. The death or remarriage of the payee spouse does not effect [sic] the payor spouse’s obligation; lump sum alimony is treated like a traditional debt and is even chargeable to the estate of the payor spouse. * * *
Id. at 665 (fn. refs. omitted) (citing Armstrong, 618 So. 2d at 1281, Cunningham v.
Lanier, 589 So. 2d 133, 136 (Miss. 1991), Bowe, 557 So. 2d at 795, Wray, 394 So.
2d at 1344, 1345, Hubbard v. Hubbard, 656 So. 2d 124, 129-130 (Miss. 1995), and
Maxcy v. Estate of Maxcy, 485 So. 2d 1077, 1078 (Miss. 1986)).
Under Mississippi law, “an alimony decree is presumed to provide for
periodic alimony unless the decree ‘by clear and express language’ provides for
lump sum alimony. Ideally, a lump sum alimony award will state that the payor
spouse must pay a certain total sum, payable in specified monthly installments;
however, there is no required form for lump sum alimony.” Id. (fn. refs. omitted)
(quoting Creekmore v. Creekmore, 651 So. 2d 513, 518 (Miss. 1995), Sharplin v.
Sharplin, 465 So. 2d 1072, 1073 (Miss. 1985), and Wray, 394 So. 2d at 1345). In
order to ascertain whether a decree or an award of alimony “‘by clear and express
language’ provides for lump sum alimony”, id., we must consider the substance of,
and not the label attached to, the alimony awarded, id. (citing Creekmore, 651 So.
2d at 518). - 12 -
In paragraph 5 of the settlement agreement, petitioner and Ms. Murray used
the phrase “lump sum alimony” to refer to the “sum of $55,000” that he was to pay
to her in two respective installments of $25,000 and $30,000 on the date of the
execution of that agreement (i.e., March 5, 2009) and 30 days from the date of that
execution (i.e., April 4, 2009). We conclude that that phrase “lump sum alimony”
that petitioner and Ms. Murray used in paragraph 5 of the settlement agreement
was not intended by them to be a mere label. That is because in the sentence in
paragraph 5 of the settlement agreement immediately preceding the sentence in
which petitioner and Ms. Murray agreed that he was to pay to her “the sum of
$55,000 as lump sum alimony” they acknowledged in unambiguous language that
each of them was aware of the different types of alimony under Mississippi law.
That immediately preceding sentence set forth the following agreement of peti-
tioner and Ms. Murray: “The parties freely, voluntarily, expressly, and mutually
agree to release one another of any and all duty and obligation one may owe to the
other for any alimony or related support whether lump sum, periodic, rehabilitative
or of any nature, except as specifically set out herein.” (Emphasis added.) We
conclude that when petitioner and Ms. Murray used the phrase “lump sum ali-
mony” in the next sentence in paragraph 5 of the settlement agreement they - 13 -
intended that the substance of the $55,000 amount that he was to pay her in two
installments was lump-sum alimony under Mississippi law.
The characteristics of “the sum of $55,000” that petitioner agreed to pay to
Ms. Murray in paragraph 5 of the settlement agreement reinforce our conclusion.
One of the characteristics of lump-sum alimony under Mississippi law is that the
alimony decree provides “a specified duration of time for the payments, after
which the obligation ceases.” Barrett, 74 F.3d at 665 (citing Creekmore, 651 So.
2d at 518). In paragraph 5 of the settlement agreement, petitioner and Ms. Murray
agreed that he make the following two payments to her totaling $55,000 on the
following dates in 2009: (1) $25,000 on the date of the execution of that agree-
ment (i.e., March 5, 2009) and (2) $30,000 30 days from the date of that execution
(i.e., April 4, 2009).
Another characteristic of lump-sum alimony under Mississippi law is that it
“constitutes a final settlement between the parties that is not subject to subsequent
modification.” Id. at 665-666. Petitioner and Ms. Murray agreed in the settlement
agreement in pertinent part as follows with respect to its “MODIFICATION”: “A
modification or waiver of any of the provisions of this agreement shall be effective
only if made in writing and executed with the same formality as this agreement,
and approved by the [Chancery] Court [of DeSoto County, Mississippi]”. As a - 14 -
result, the Chancery Court of De Soto County, Mississippi, was not allowed to
modify, sua sponte or on the request of either petitioner or Ms. Murray, “the sum
of $55,000” that he was to pay to her “as lump sum alimony” in two installments
on the dates specified, as required in paragraph 5 of the settlement agreement.
On the record before us, we find that under Mississippi law petitioner’s
obligation to make the payments at issue to Ms. Murray, as required by paragraph
5 of the settlement agreement and the final divorce decree, would not have
terminated if he (or she) had died before he had made one or both of those pay-
ments. On that record, we further find that the payments at issue do not satisfy the
requirement in section 71(b)(1)(D). On the record before us, we find that the
payments at issue do not constitute alimony deductible under section 215.
We now address whether petitioner is liable for his taxable year 2009 for the
accuracy-related penalty under section 6662(a). That section imposes an
accuracy-related penalty of 20 percent of the underpayment to which section 6662
applies. Section 6662 applies to the portion of any underpayment which is
attributable to, inter alia, (1) negligence or disregard of rules or regulations, sec.
6662(b)(1), or (2) a substantial understatement of tax, sec. 6662(b)(2).
The term “negligence” in section 6662(b)(1) includes any failure to make a
reasonable attempt to comply with the Code. Sec. 6662(c). Negligence has also - 15 -
been defined as a failure to do what a reasonable person would do under the cir-
cumstances. Leuhsler v. Commissioner, 963 F.2d 907, 910 (6th Cir. 1992), aff’g
T.C. Memo. 1991-179; Antonides v. Commissioner, 91 T.C. 686, 699 (1988),
aff’d, 893 F.2d 656 (4th Cir. 1990). The term “negligence” also includes any
failure by the taxpayer to keep adequate books and records or to substantiate items
properly. Sec. 1.6662-3(b)(1), Income Tax Regs. The term “disregard” includes
any careless, reckless, or intentional disregard. Sec. 6662(c).
For purposes of section 6662(b)(2), an understatement is equal to the excess
of the amount of tax required to be shown in the tax return over the amount of tax
shown in the return. Sec. 6662(d)(2)(A). An understatement is substantial in the
case of an individual if the amount of the understatement for the taxable year ex-
ceeds the greater of 10 percent of the tax required to be shown in the tax return for
that year or $5,000. Sec. 6662(d)(1)(A).
The accuracy-related penalty under section 6662(a) does not apply to any
portion of an underpayment if it is shown that there was reasonable cause for, and
that the taxpayer acted in good faith with respect to, such portion. Sec.
6664(c)(1). The determination of whether the taxpayer acted with reasonable
cause and in good faith depends on all the pertinent facts and circumstances,
including the taxpayer’s efforts to assess the taxpayer’s proper tax liability, the - 16 -
knowledge and experience of the taxpayer, and the reliance on the advice of a
professional, such as an accountant. Sec. 1.6664-4(b)(1), Income Tax Regs.
Reliance on the advice of a professional may demonstrate reasonable cause and
good faith if, under all the circumstances, such reliance was reasonable and the
taxpayer acted in good faith. Id. In this connection, a taxpayer must demonstrate
that the taxpayer’s reliance on the advice of a professional concerning substantive
tax law was objectively reasonable. Goldman v. Commissioner, 39 F.3d 402, 408
(2d Cir. 1994), aff’g T.C. Memo. 1993-480. A taxpayer’s reliance on the advice
of a professional will be objectively reasonable only if the taxpayer has provided
necessary and accurate information to the professional. Neonatology Assocs.,
P.A. v. Commissioner, 115 T.C. 43, 99 (2000), aff’d, 299 F.3d 221 (3d Cir. 2002);
see also Ma-Tran Corp. v. Commissioner, 70 T.C. 158, 173 (1978).
It is respondent’s position that petitioner is liable for his taxable year 2009
for the accuracy-related penalty under section 6662(a) because there is a substan-
tial understatement of tax for that year under section 6662(b)(2).4 On the record
4 Respondent argues in the alternative that petitioner is liable for his taxable year 2009 for the accuracy-related penalty under sec. 6662(a) because he was negligent under sec. 6662(c) since “he made no reasonable attempt to comply with the provisions of this title [26 of the U.S. Code].” - 17 -
before us, we agree with respondent that there is a substantial understatement of
tax for petitioner’s taxable year 2009.5
It is petitioner’s position that he nonetheless is not liable for his taxable year
2009 for the accuracy-related penalty under section 6662(a) because he “intended
for the payments to be periodic alimony, believed that his attorney structured the
Property Settlement Agreement as such. For these reasons, Petitioner has reason-
able cause for deducting his payments as alimony.” Accordingly, petitioner
claims, he “acted in good faith and has reasonable cause for deducting the pay-
ments [at issue] on his tax return.” On the record before us, we reject petitioner’s
position. That is because the record does not support, or belies, petitioner’s claims
in support of his position that he is not liable for the accuracy-related penalty.
On the record before us, we find that petitioner has failed to carry his bur-
den of establishing that there was reasonable cause for, and that he acted in good
faith with respect to, the underpayment for his taxable year 2009. On that record,
we find that petitioner has failed to carry his burden of establishing that he is not
liable for his taxable year 2009 for the accuracy-related penalty under section
5 In petitioner’s 2009 return, he showed “total tax” of $5,331. In the notice, respondent determined a deficiency of $14,430. - 18 -
We have considered all of the contentions and arguments of the parties that
are not discussed herein, and we find them to be without merit, irrelevant, and/or
moot.
To reflect the foregoing,
Decision will be entered for
respondent.