6694 - alimony- reliance

Section 71(b) of the Code provides a statutory definition of "alimony or separate maintenance payments." If return preparers merely accept a number from a client as “alimony or separate maintenance” without checking the documentation for that number or the legal definition directly in the Code, that would be clearly “reckless” and I do not have the slightest doubt that the return preparer and the firm who employs the return preparer will each be liable for $5,000 in penalties.

There is zero doubt in my mind that the failure to not follow Code and Regulation definitions is per se “reckless” within the meaning of section 6694(b).

This issues comes up with some frequency. I have received lots of calls from taxpayers when audited on this issues and, for that reason.

Where there are CPA firms and other tax preparation organizations, you need to make sure that you have procedures in place to make sure employees do not miss the substantiation requirements in statutes and regulations, as well as IRS published positions.

Although the final 6694 regulations indicate that you can rely on data from clients, those regulations also have due diligence requirements. All exclusion from income issues should be documented and substantiated. That should be in every procedures book for every return preparer and return preparation firm.

I do not know how return preparers without technical research services will be able to survive as tax return preparers because of the large size of the return preparer penalties. For those with research capabilities, you need to staff up for the extra time that will be needed to prepare tax returns.

For any questions on this topic, contact ab@irstaxattorney.com.




W.O. MelvinDecember 29, 2008WALTER OLIVER MELVIN, Petitioner-Appellant v. COMMISSIONER OF IRS, Respondent-Appellee.

IN THE UNITED STATES COURT OF APPEALS FOR THE ELEVENTH CIRCUIT. No. 08-13329. Non-Argument Calendar. Agency No. 21192-06. Petition for Review of a Decision of the United States Tax Court. (December 17, 2008).

Before DUBINA, BARKETT and PRYOR, Circuit Judges.PER CURIAM: Appellant Walter Oliver Melvin, proceeding pro se , appeals the U.S. Tax Court's final decision in favor of the Commissioner of the Internal Revenue Service ("Commissioner" or the "IRS") on his petition for redetermination of deficiency.

On appeal, Melvin first argues that he was entitled to deduct $6,000 from his 2003 income tax returns because his 1985 divorce decree ordered that he pay alimony, through the seizure of property to be credited at the rate of $500 per month, to his ex-spouse. He asserts that, because he was required to pay all of the alimony in advance, he should thus be allowed to claim a deduction on his 2003 tax return. Second, Melvin argues that he was denied due process of law because his trial before the Tax Court was cut short before he was allowed to hear the position of, and cross-examine, the IRS.

I. Tax Deficiency

We review a Tax Court's conclusions of law de novo and its factual findings for clear error. Creel v. Comm'r , 419 F.3d 1135, 1139 (11th Cir. 2005). "The Commissioner's determination of a deficiency is presumed correct, and the taxpayer has the burden of proving it is incorrect." Webb v. Comm'r , 872 F.2d 380, 381 (11th Cir. 1989).Section 215 of the Internal Revenue Code ("I.R.C.") states, "[i]n the case of an individual, there shall be allowed as a deduction an amount equal to the alimony or separate maintenance payments paid during such individual's taxable year." I.R.C. § 215(a) , 26 U.S.C. § 215(a) . It further states that alimony means any alimony payment as defined in I.R.C. § 71(b) "which is includible in the gross income of the recipient under section 71 ." I.R.C. § 215(b) , 26 U.S.C. § 215(b) .Section 71(b) of the I.R.C. states:

(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 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.
I.R.C. § 71(b) , 26 U.S.C. § 71(b) ."If [a] statute's meaning is plain and unambiguous, there is no need for further inquiry. The plain language is presumed to express congressional intent and will control a court's interpretation." United States v. Fisher , 289 F.3d 1329, 1338 (11th Cir. 2002).Because in 2003 Melvin admittedly made no alimony payments, as defined in the I.R.C., we conclude that he was not allowed to claim an alimony deduction on his 2003 income tax returns. Melvin was thus unable to meet his burden to show that the Commissioner erred in Melvin's deficiency determination, and the Tax Court properly entered a decision in the Commissioner's favor.

II. Due Process

The Due Process Clause of the Fifth Amendment provides that "[n]o person shall ... be deprived of life, liberty, or property, without due process of law." U.S. Const. amend. V. Rudimentary due process includes reasonable notice and an opportunity to rebut the charges and be heard. American Druggists Ins. Co., Inc. v. Bogart , 707 F.2d 1229, 1237 (11th Cir. 1983).The IRS made its arguments known to Melvin in both its answer to his petition, and its pretrial memorandum. At Melvin's trial before the Tax Court, Melvin and the Commissioner had the opportunity to challenge each other's arguments. Furthermore, Melvin and the Commissioner prepared memoranda addressing their arguments raised during trial. We thus conclude from the record that Melvin was afforded the opportunity to be heard, both at his trial and in a memorandum of law. See id. Accordingly, his due process argument fails.For the above-stated reasons, we affirm the Tax Court's judgment.AFFIRMED.

Other cases that deal with this issues are noted below

Monthly payments that were awarded to a taxpayer in a legal separation and were reaffirmed in the final divorce decree were includible in her gross income. The payments were in the nature of support, rather than a property division, as indicated by the fact that they were in addition to the taxpayer's award of substantially all of the marital estate.C.S. McKay, 52 TCM 820, Dec. 43,443(M), TC Memo. 1986-514.Amounts paid by a taxpayer to his ex-wife were alimony payments rather than nontaxable distributions of community property. The payments were originally characterized as support, but a subsequent court order reduced the wife's share of the couple's community property by the amount of the support payments. That reduction alone did not convert the payments into a division of marital property as long as they continued to meet the statutory definition of alimony. The tax-benefit rule had no application since the reduction represented part of the determination by the court, and not a recovery of any portion of the payments.M.H. Soriano, 61 TCM 1622, Dec. 47,103(M), TC Memo. 1991-2.Lump-sum alimony payments made by a taxpayer to his former spouse were not deductible as alimony because they were made under a consent order that specifically identified them as an additional property settlement. However, the characterization of the payments as lump-sum alimony did not apply to alimony arrearages that had accrued prior to the settlement. Therefore, the arrearages constituted deductible alimony.P.M. Barrett, Jr., CA-5, 96-1 USTC ¶50,084, 74 F3d 661.An individual's periodic payments to his ex-spouse under their integrated property settlement were not alimony. Although the settlement described the payments as alimony, the evidence showed that they were part of the couple's property division. Also, the husband was obliged to continue the payments after the wife's death. E.S. Pettet, DC N.C., 97-2 USTC ¶50,948.A husband's payments under a marital settlement agreement were not deductible as alimony. The agreement's unequivocal terms provided that the parties waived all rights to support or maintenance and that all payments were for the division of community property. Further, the payments would not terminate at the death of the wife.A.T. Croteau, 75 TCM 1550, Dec. 52,511(M), TC Memo. 1998-9.A husband could deduct payments he made under a divorce decree because they satisfied the statutory requirements for alimony. It was irrelevant that an appellate court that later reviewed the decree held that the payments were in the nature of a property division.T.H. Nelson, 76 TCM 145, Dec. 52,804(M), TC Memo. 1998-268.One half of the amounts that a certified public accountant's ex-wife withdrew from a money market account while she and her ex-husband owned it jointly as tenants by the entirety constituted alimony that was includible in her gross income and deductible by her ex-husband. Although their divorce agreement did not provide a definitive characterization of the withdrawals, a subsequent court order confirmed that the funds were required for her support and maintenance. Further, language in the agreement that made the husband responsible for taxes on the withdrawals did not amount to a designation that the payments did not constitute alimony. The other half of her withdrawals represented a distribution of her own funds.I.C. Jaffe, 77 TCM 2167, Dec. 53,417(M), TC Memo. 1999-196.Amounts received by the taxpayer under a provisional order entered by a state (Indiana) divorce court were for her support and, thus, constituted taxable alimony. The payments were not in the nature of a property settlement because they would have terminated in the event of her death under state (Indiana) law. Moreover, a provisional order was merely for the purpose of maintenance and was distinct from a property settlement.M.K. Heckaman, 79 TCM 1643, Dec. 53,795(M), TC Memo. 2000-85.Military retirement payments received by the divorced wife of an Air Force officer under the couple's divorce judgment constituted alimony, despite the fact that the provision appeared under the "Property Settlement" title of the couple's divorce judgment. A common-sense reading of the divorce judgment did not establish a nonalimony designation regarding the income tax implications of the payments.M.J. Baker, 79 TCM 2050, Dec. 53,889(M), TC Memo. 2000-164.A payment that the taxpayer made to his former spouse under their divorce decree was not deductible as alimony. Both the decree and a subsequent modification designated the payment as a nontaxable division of marital property. The payment, which represented the ex-wife's share of a lump-sum separation payment the taxpayer received in lieu of his retirement benefits from the armed forces, was explicitly designated in the modified decree as a nontaxable event. Further, the original divorce decree precluded the payment of spousal support by either party.T. Clarence, 80 TCM 53, Dec. 53,952(M), TC Memo. 2000-214.The intent of formerly married individuals was frustrated when the IRS determined that the husband was liable for taxes on payments made under a divorce settlement agreement. The IRS had determined that the payments in question were taxable as a property settlement, even though the terms of the settlement provided that the payments were alimony taxable to the wife and deductible by the husband. Thus, the calculation of taxes that the wife was obligated to reimburse to the husband did not modify the settlement agreement, it only effectuated the intent of the parties in a manner that preserved the rights of the parties under the agreement. E.A. Eldridge, CA of Mich., 2003-1 USTC ¶50,485.A payment made by a divorced husband to his ex-wife under their divorce decree constituted a property settlement and did not give rise to an alimony deduction. The decree specifically stated that the payment "does not constitute, nor shall it be interpreted to be, any form of spousal support, alimony, or child support." R.S. Simpson, I, 86 TCM 470, Dec. 55,325(M), TC Memo. 2003-294.A taxpayer's contributions and loan repayments to his retirement plan were not deductible alimony. Although his divorce settlement awarded his ex-wife an interest in the plan, it also designated the plan as marital property; thus, payments related to the plan were part of the couple's marital property settlement.W.E. Johnson, 91 TCM 1239, Dec. 56,534(M), TC Memo. 2006-116.The portion of a husband's disability benefits that he paid over to his ex-wife was alimony, and not a division of martial property. There was no indication that the couple had considered his professional disability insurance policy to be marital property. Rather, their divorce agreement merely required him to pay alimony from his earned income or from his disability benefits. J.A. Perkins, 95 TCM 1165, Dec. 57,345(M) , TC Memo. 2008-41.Payments made under a divorce decree were part of the couple's property settlement, rather than alimony. The decree characterized the payments as personalty rather than as alimony, it provided that they were not taxable to the recipient, the amount of the payments was much larger than the amount of the payments that were characterized as alimony, and it did not appear that the payment obligation would terminate upon the recipient's death.R.W. Fields, 96 TCM 130, Dec. 57,528(M), TC Memo. 2008-207.