West v. Dept. of Rev.

• Court: Oregon Tax Court
• Decided: May 2, 2017
• Docket: TC-MD 160254N
• Status: Unpublished

Opinion

IN THE OREGON TAX COURT MAGISTRATE DIVISION Income Tax

CHARLES T. WEST, JR., ) ) Plaintiff, ) TC-MD 160254N ) v. ) ) DEPARTMENT OF REVENUE, ) State of Oregon, ) ) Defendant. ) FINAL DECISION1

Plaintiff appeals Defendant’s Conference Decision Letter and Notice of Assessment,

dated April 8, 2016, for the 2012 tax year. The parties submitted cross-motions for summary

judgment and responses. The matter is now ready for decision.

I. STATEMENT OF FACTS

Plaintiff alleges that he is entitled to deduct as alimony two payments made to SELCO

Credit Union (SELCO). The parties have stipulated to certain facts and exhibits, which are

incorporated herein.

Plaintiff divorced his spouse in Lane County, Oregon in October, 2012. (Ex A at 1.)

After a trial, the Lane County Circuit Court issued a General Judgment of Dissolution of

Marriage (Judgment of Dissolution) dissolving the marriage and ordering Plaintiff to, among

other things, assume two debts owed to SELCO. (Id. at 4.) The first was a “line of credit debt in

the sum of approximately $370,” and the second was a debt “due to [SELCO] Visa with a

balance of approximately $4,700.” (Id. at 1.) Plaintiff’s ex-spouse was the sole “authorized

1 This Final Decision incorporates without change the court’s Decision, entered April 13, 2017. The court did not receive a statement of costs and disbursements within 14 days after its Decision was entered. See Tax Court Rule–Magistrate Division (TCR–MD) 16 C(1).

FINAL DECISION TC-MD 160254N 1 signer” on both SELCO accounts. (Stip Facts at 1.)

The section of the Judgment of Dissolution ordering Plaintiff to assume the two SELCO

debts was entitled “Debts and Liabilities.” (Ex A at 4.) That section is notably distinct from

other sections in the Judgment of Dissolution entitled “Property Division” and “Spousal

Support.”2 (Ex A at 2-5.) The section entitled “Spousal Support” ordered Plaintiff to make

monthly support payments to his ex-spouse and includes the following provision: “[p]ayments

shall terminate upon Husband’s death or Wife’s death, whichever shall first occur.” (Id. at 5.)

The section entitled “Debts and Liabilities” includes no such provision.

During the trial, the judge explained the court’s distribution of the “marital debts” as

follows: “Wife is ordered to assume the $[16,000],3 roughly, in the second mortgage, and

Husband is ordered to assume the $4,727 in the [SELCO] Visa, * * * and the $369 line of

credit.” (Ex B at 12.) The judge later explained, “The second mortgage is her debt. That’s why

he got all the other debt.” (Id. at 20.)

Plaintiff paid both debts in full during the 2012 tax year, charging each to his personal

SELCO Visa account. (Stip Facts at 1.) Plaintiff included both payments in calculating his

alimony deduction for tax year 2012. (Ex C at 3.) Defendant issued a Notice of Deficiency for

tax year 2012, stating that Plaintiff’s payment of the SELCO debt was not deductible under IRC

section 71(b)(1) because the obligations listed under the “Debts and Liabilities” heading in

Plaintiff’s Judgment of Dissolution are “a nontaxable division of marital property.” (Ex C at 3.)

Plaintiff appealed to the Department of Revenue, where a conference officer reached the same

2 Plaintiff was also ordered to make monthly spousal support payments, the deductibility of which is not in dispute. 3 The transcript from the proceeding quotes the amount of the second mortgage as $6,200, but this appears to be a typo by the court reporter. Elsewhere, the second mortgage is listed as approximately $16,000. (See Ex A at 3, 5; Ex B at 3, 11.)

FINAL DECISION TC-MD 160254N 2 conclusion and upheld the adjustment. (Ex E at 3.)

II. ANALYSIS

The only issue before the court is whether Plaintiff may claim an alimony deduction for

his 2012 payment of the SELCO debt.

The burden of proof falls up the party seeking affirmative relief. ORS 305.427. 4

Plaintiff is the party seeking affirmative relief and must prove his claim by a preponderance of

the evidence, which “means the greater weight of evidence, the more convincing evidence.”

Feves v. Dept. of Rev., 4 OTR 302, 312 (1971). Deductions are “a matter of legislative grace”

and taxpayers bear the burden of proving their entitlement to the deductions claimed. INDOPCO,

Inc. v. Comm’r, 503 US 79, 84, 112 S Ct 1039, 117 L Ed 2d 226 (1992). The parties filed cross-

motions for summary judgment. Summary judgment is appropriate when “the pleadings,

depositions, affidavits, declarations, and admissions on file show that there is no genuine issue as

to any material fact and that the moving party is entitled to prevail as a matter of law.” Tax

Court Rule (TCR) 47 C.

In analyzing the law governing allowable deductions for alimony payments, the court is

guided by the legislature’s expressed intent “to make the Oregon personal income tax law

identical in effect to the provisions of the Internal Revenue Code (IRC) relating to the

measurement of taxable income of individuals * * *.” ORS 316.007. Generally, transfers of

property between spouses incident to a divorce are not taxable events and do not give rise to

deductions or recognizable income. Estate of Goldman v. Comm’r, 112 TC 317, 322 (1999),

aff’d sub nom Shutter v. Comm’r, 242 F3d 390 (10th Cir 2000); IRC § 1041; ORS 107.105(3)

4 The court’s references to the Oregon Revised Statutes (ORS) are to the 2011 version.

FINAL DECISION TC-MD 160254N 3 (“This transfer by judgment * * * is not a taxable sale or exchange”).5 However, amounts

received as alimony are taxable to the recipient and deductible by the payor in the year paid.

IRC §§ 71, 215(a).

Plaintiff’s Judgment of Dissolution lists the SELCO debts in the section entitled “Debts

and Liabilities” among other equitable distributions of the couple’s marital debt. The Judgment

of Dissolution has an altogether separate section governing alimony payments entitled “Spousal

Support.” The document thus “reflects the substance of a nonalimony designation” for the

SELCO debts. Goldman, 112 TC at 318. The characterization of payments in a divorce or

separation instrument is not dispositive. See Baker v. Comm’r, 79 TCM (CCH) 2050 (2000),

200 WL 656708 at *4 (US Tax Ct) (finding that “the labeling of the payments as a ‘property

settlement,’ with nothing more, is not a clear, explicit, and express direction that the payments *

* * are not deductible”); cf. Goldman, 112 TC at 323 (considering the heading “Further

Payments for Property Division” relevant to the character of payments in a divorce instrument.)

As Plaintiff correctly asserts, “[t]his court has previously held that the labels the parties attach to

the payments are not as compelling as their characteristics.” (Ptf’s Cross-Mot Summ J at 3)

(quoting Aday v. Dept. of Rev., TC-MD 050739A, WL 167494 at *1 (Or Tax M Div Jan 17,

2006). However, the way the Judgment of Dissolution is organized indicates, at a minimum, that

the SELCO debts are not in the same category as spousal support.

Further, during the divorce trial, the judge ordered Plaintiff to assume the SELCO debts,

explaining that these marital debts would be distributed to Plaintiff in order to offset an

otherwise unequal debt of a second mortgage on real property awarded to Plaintiff’s ex-spouse.

The equation is thus made clear: on one side of the exchange is the encumbered home, a piece of

5 A transfer of property is “incident to the divorce” if it either “(1) occurs within 1 year after the date on which the marriage ceases, or (2) is related to the cessation of the marriage.” IRC §1041(c).

FINAL DECISION TC-MD 160254N 4 marital property, while on the other side are the marital debts, distributed to offset the second

mortgage on the property. “The second mortgage is her debt. That’s why he got all the other

debt.” (Ex B at 20.) That explanation shows that the SELCO debts more closely resemble part

of an equitable property division than alimony.

IRC section 71 sets an objective standard for distinguishing the two types of payments

frequently made pursuant to divorce settlements: property division payments (which are not

deductible) and spousal support or alimony payments (which are deductible). Goldman, 112 TC

at 322. Alimony is defined as “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 designate 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 maintenance, the payee spouse and the payor spouse are not members 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 substitute for such payments after the death of the payee spouse.”

IRC § 71(b)(1). Each of those elements must be satisfied before a payment qualifies as alimony.

See Sa’d v. Comm’r, 104 TCM (CCH) 784 (2012), 2012 WL 6599015 at *3 (US Tax Ct).

A. Payment Received By or On Behalf Of Spouse

Plaintiff’s payments to SELCO satisfy the first prong of the section 71(b)(1) test because

they were made to a third party “on behalf of” Plaintiff’s ex-spouse. The Ninth Circuit has held

that, “[g]enerally, a transfer is considered to have been made ‘on behalf of’ someone if it

satisfied an obligation or a liability of that person.” Ingham v. U.S., 167 F3d 1240, 1244 (9th Cir

1999), quoting Arnes v. U.S., 981 F2d 456, 459 (9th Cir 1992). Plaintiff’s payment to SELCO

FINAL DECISION TC-MD 160254N 5 satisfied his ex-spouse’s obligation to pay SELCO the debt in her name.

Payments made to a third party on behalf of a spouse may qualify as alimony payments if

the payments are made pursuant to a divorce instrument and meet all the other requirements

under IRC section 71(b)(1). Treas Reg § 1.71-1T (1984).6 However, such payments may also

qualify as non-taxable transfers under IRC section 1041, which covers transfers “incident” to

divorce. The Treasury Department has issued a temporary regulation providing that, in certain

circumstances, “transfers of property to third parties on behalf of a * * * former spouse” qualify

for nonrecognition under section 1041(a)(2). Temp Treas Reg § 1.1041—1T at Q-9, A-9 (2003).

The regulation supplies an example in which the transfer to a third party, like the one in this case,

is required by a divorce or separation instrument. Such a transfer “will be treated as made

directly to the nontransferring spouse (or former spouse) and the nontransferring spouse will be

treated as immediately transferring the property to the third party.” Temp Treas Reg § 1.1041-

1T, A-9 (2003); see also Treas Reg 1.71-1T, Q&A #67; see, e.g., Blatt v. Comm’r, 102 TC 77, 80

(1994). The fact that Plaintiff made the payments on behalf of his former spouse is not

conclusive on the question of whether those payments were alimony.

B. Designation of Payments as Non-taxable

As the parties agree, criteria (B) of the section 71(b)(1) alimony test is met. The

Judgment of Dissolution is silent as to whether the payments of those debts are deductible. See

6 Although this regulation appears to be current, its interpretation is in part obsolete after Congressional amendments to the statute. “In the Tax Reform Act of 1986, Congress amended § 71(b)(1)(D) by deleting the parenthetical requirement that the agreement specifically provide for termination upon the death of the payee spouse.” Hoover v. Comm’r, 102 F3d 842, 846 (6th Cir 1996) (citing Pub L No 99-514, tit. XVIII, subtit. A, § 1843(b), 100 Stat. 2085, 2853 (1986)). That statement is directly at odds with Q & A numbers 11 and 12 in the cited regulation, which concern the requirement that the divorce decree state that payments terminate upon death in order to be treated as alimony. The court cites the regulation for a separate proposition having concluded that the cited portion is still valid law. 7 See supra n6. The court has concluded that the cited portion of the regulation is still valid law.

FINAL DECISION TC-MD 160254N 6 Richardson v. Comm’r, 125 F3d 551, 556 (7th Cir 1997) (articulating that “the instrument must

contain a clear, explicit and express direction” that conflicts with characterizing the payments as

alimony).

C. Separate Households

Criteria (C) is also met. The parties do not dispute that Plaintiff and his former spouse

were not sharing a household during the time the payments were made.

D. Liability to Make Payments After Death

The fourth requirement of section 71(b)(1) is that the liability to make the payments end

upon the payee spouse’s death. That requirement “is central to Congress’s intended distinction

between support and property settlements.” Hoover, 102 F3d at 846 (citing HR Rep No 98-432,

Part II, at 1496 (1984)). In analyzing section 71(b)(1)(D), federal courts first look at the terms of

the divorce instrument and then, if it they are unclear, to state law to determine whether the

payments will necessarily terminate upon the payee’s death. See Muniz v. Comm’r, 661 Fed

Appx 1027, 1029 (2016) (“Therefore, when conducting the § 71(b)(1)(D) inquiry, we first look

for termination language in the instrument creating the obligation, but if ‘the order does not

expressly state that the payments cease upon the death of the payee, we must examine the state

law to determine whether the death of the recipient terminates the payment order’ ” (citations

omitted)). If, by operation of state law, the payments will necessarily terminate upon payee’s

death, they may still qualify as deductible alimony. Hoover, 102 F3d at 846.

1. Liability after payee’s death under the Judgment of Dissolution

The parties disagree regarding whether Plaintiff would remain liable for the SELCO

payments in the event of Plaintiff’s ex-spouse’s death in part because the “Debts and Liabilities”

section of the Judgment of Dissolution is silent on the question. Plaintiff argues that the

FINAL DECISION TC-MD 160254N 7 ‘terminate upon death’ provision in the “Spousal Support” section of the Judgment of

Dissolution also applies to the “Debts and Liabilities” section, thus absolving Plaintiff of any

duty to pay SELCO after the death of his ex-spouse. (Ptf’s Cross-Mot Summ J at 2.) The court

is unpersuaded that the ‘terminate on death’ provision extends to cover the SELCO payments.

In arguing that Plaintiff’s obligation to SELCO would be enforceable beyond his ex-

wife’s death, Defendant cites Webb v. Commissioner. (Def’s Resp at 1.) In that case, a divorce

decree provided that the husband pay the wife certain amounts in order to balance the court’s

division of the couple’s marital property. The court held that the language of the decree

“[u]nquestionably * * * created a liability which would have been enforceable by [the wife’s]

estate had she died after the execution of the agreement but before the payments were actually

made.” Webb v. Comm’r, 60 TCM (CCH) 1024 (1990), 1990 WL 155448 (US Tax Ct).

Both the trial judge and the Judgment of Dissolution characterized the debts as part of an

equitable distribution of marital assets and liabilities. Thus, even though Plaintiff’s debt

payments to SELCO were not lump sum payments made directly to the ex-spouse like in Webb,

the court finds the comparison persuasive. However, the language of the Judgment of

Dissolution alone does not resolve the question of the enforceability of Plaintiff’s obligations.

2. Liability after payee’s death under state law

Plaintiff argues that he has no personal liability for the SELCO debts under Oregon law,

maintaining that the debts are in his ex-spouse’s name and that “debts incurred during the

marriage by one spouse are not the other spouse’s responsibility.” (Ptf’s Cross-Mot Summ J at

2.) If Plaintiff had failed to pay the SELCO debts before his ex-spouse’s death, he contends,

neither SELCO nor his ex-spouse’s estate would have any recourse against Plaintiff. (Ex D at 2.)

Defendant asserts that if Plaintiff had failed to pay the SELCO debt before his ex-spouse’s death,

FINAL DECISION TC-MD 160254N 8 his obligation to pay the debt would have continued. (Ex C at 3.)

The court rejects Plaintiff’s contention that he is not personally liable for the SELCO

debts. While generally true that in Oregon, “[n]either husband nor wife is liable * * * for the

separate debts of each other,” an Oregon court may, as part of its authority to divide property,8

divide the debts that the parties incurred during their marriage. ORS 108.020; In re Marriage of

Shlitter, 188 Or App 277, 283, 71 P3d 154, 157 (2003), citing McInnis and McInnis, 62 Or App

524, 527, 661 P2d 942 (1983). “As with assets acquired during the marriage, the debts must be

divided equitably.” Shlitter, 188 Or App at 283 (citation omitted). For purposes of division in a

marital dissolution action in Oregon, courts distinguish marital debts from debts owed by only

one of the parties. In re Marriage of Morton, 252 Or App 525, 541, 287 P3d 1227 (2012). In

making that distinction, courts focus not on the person in whose name the debt was incurred, but

on the use to which it was put. Id. (citations omitted); see also ORS 108.040 (both husband and

wife are jointly liable for “expenses of the family”).

During Plaintiff’s divorce trial, the judge explicitly distinguished marital debt from

personally-incurred debt as she equitably divided the couple’s assets and liabilities. The judge

stated that the couple’s “[m]arital debt” included “[$]16,000, which is roughly the amount of the

second mortgage[,] * * * [$]13,000 Pentagon Federal Credit Union debt,” and the SELCO debts

in question. (Ex B at 11-12.) Alternatively, the judge assigned the responsibility for non-marital

debts, including debts that Plaintiff incurred after the couple had separated, to the spouse who

had incurred the debt, indicating that that type of debt was “not a marital asset.” Id.

ORS 107.115(1) provides that a judgment of dissolution “gives the court jurisdiction to

award, to be effective immediately, the relief provided” by the provisions of the judgment

8 See ORS 107.405 (giving dissolution courts “full equity powers”).

FINAL DECISION TC-MD 160254N 9 (emphasis added). The rights and obligations contained in the judgment of dissolution thus

become “effective for all purposes” the moment a judgment of dissolution is filed. ORS

107.105(3); see also In re Marriage of Cortese, 260 Or App 291, 300, 317 P3d 340 (2013)

(“[O]nce the petition for dissolution is filed, a married couple’s property interests are at once

brought into question and all of the marital assets are subject to an equitable apportionment by

the trial court”). In this case, at the moment the Judgment of Dissolution was filed, Plaintiff

became liable for the SELCO debts, which were explicitly characterized as an equitable

apportionment of marital debt. The death of Plaintiff’s ex-spouse would have no legal effect on

that liability.

III. CONCLUSION

Based on careful review of the law and evidence, the court concludes that Plaintiff’s

payments to SELCO do not meet the IRC section 71 definition of alimony and are therefore not

allowable deductions under section 215. Now, therefore,

IT IS THE DECISION OF THIS COURT that Plaintiff’s appeal for tax year 2012 is

denied.

Dated this day of May 2017.

ALLISON R. BOOMER MAGISTRATE

If you want to appeal this Final Decision, file a complaint in the Regular Division of the Oregon Tax Court, by mailing to: 1163 State Street, Salem, OR 97301-2563; or by hand delivery to: Fourth Floor, 1241 State Street, Salem, OR.

Your complaint must be submitted within 60 days after the date of the Final Decision or this Final Decision cannot be changed. TCR-MD 19 B.

This document was filed and entered on May 2, 2017.

FINAL DECISION TC-MD 160254N 10