6694 and alimony

This is not a 6694 case but the issues can arise if the returns in this case were prepared by a return preparer. Alimony is an issue that can arise in any tax return, and the analysis in this case is a tutorial on that issues.

The negligence issue in this case is one that would have resulted in a 6694(b) penalty.

U.S. Tax Court, Dkt. No. 7422-08, TC Memo. 2009-238, October 20, 2009.


Alimony Deduction
Petitioner contends that he is entitled to deduct in full the $38,400 he paid to his former wife in 2006 pursuant to the PSA because those payments were alimony, and alimony is a deductible expense. Section 215 permits taxpayers to deduct alimony or separate maintenance payments includable in the gross income of the recipient under section 71. Section 71(b)(1) defines alimony or separate maintenance payment as a payment in cash if: (1) The payment is received by a spouse under a divorce or separation instrument; (2) the divorce or separation instrument does not designate the payment as nondeductible for the paying spouse and not includable in the gross income of the payee spouse; (3) in the case of an individual legally separated from his spouse under a decree of divorce or of separate maintenance, the spouses are not members of the same household when the payment is made; and (4) there is no liability to make any payment for any period after the death of the payee spouse. A divorce or separation instrument is either a decree of divorce or separate maintenance, or a written instrument incident to such a decree; a written separation agreement; or a decree requiring a spouse to make payments for the support or maintenance of the other spouse. Sec. 71(b)(2). Use of the word “alimony” in the decree of divorce or separate maintenance, or in the written separation agreement, will not necessarily result in a payment's being characterized as alimony for Federal income tax purposes. Kean v. Commissioner, supra at 189-190; Okerson v. Commissioner, 123 T.C. 258, 264 (2004).
The first three requirements of the section 71(b)(1) alimony definition are satisfied. First, the PSA payment was made under a divorce or separation instrument because the payment was made pursuant to the PSA, and the PSA was incorporated into the divorce decree. Second, the PSA does not designate the PSA payment as nondeductible for petitioner nor as not includable in the gross income of his former wife. Third, petitioner and petitioner's former wife were not members of the same household during the year in issue.
Ultimately it is not necessary to determine whether the payments are currently allocated. It is necessary to determine only which payments would continue upon petitioner's former wife's death and which would terminate. See sec. 71(b)(1)(D). According to the second sentence of section 9.c. of the PSA, upon the death of petitioner's former wife the payment is allocated $1,700 per month to child support and $1,500 per month to alimony and the alimony portion terminates. Thus, we conclude that the payment of up to $18,000 a year is alimony and anything greater does not satisfy the requirement of section 71(b)(1)(D), and is therefore not deductible.
It appears that the parties to petitioner's divorce created a deliberate ambiguity in order to achieve two purposes, one relating to child support and one relating to tax treatment. It has long been the rule, however, that the labels attached by the parties to a marital settlement agreement or decree are not controlling for Federal tax purposes. See, e.g., Benedict v. Commissioner, 82 T.C. 573, 577 (1984). Even if the language categorizing child support payments as alimony taxable to petitioner's former wife had been unambiguous, the $1,700 per month portion would fail the test for deductibility under section 71(b). As the Court said in Okerson v. Commissioner, supra at 264-265:
Here, the applicable Federal law is set forth in section 71, which, in its present form, provides the exclusive means by which a taxpayer may deduct a payment as alimony for Federal income tax purposes. * * * [ Hoover v. Commissioner, 102 F.3d 842, 844-845 (6th Cir. 1996), affg. T.C. Memo. 1995-183]. Through that section, Congress eliminated any consideration of intent in determining the deductibility of a payment as alimony in favor of a more straightforward, objective test that rests entirely on the fulfillment of explicit requirements set forth in section 71. Id.; see also Rosenthal v. Commissioner, T.C. Memo. 1995-603 (“Whether or not the parties intended for the payments to be deductible to petitioner, we must focus on the legal effect of the agreement in determining whether the payments meet the criteria under section 71.”). As the House Committee on Ways and Means articulated in its report on section 71 in discussing the need for such an objective test:
“The committee believes that a uniform Federal standard should be set forth to determine what constitutes alimony for Federal tax purposes. This will make it easier for the Internal Revenue Service, the parties to a divorce, and the courts to apply the rules to the facts in any particular case and should lead to less litigation. The committee bill attempts to define alimony in a way that would conform to general notions of what type of payments constitute alimony as distinguished from property settlements and to prevent the deduction of large, one-time lump-sum property settlements. [H. Rept. 98-432 (Pt. 2), at 1495-1496 (1984).]” [alteration in original.]
Although the parties to a divorce proceeding may intend that certain payments be considered alimony for Federal income tax purposes, and a court overseeing that proceeding may intend the same, Congress has mandated through section 71(b)(1)(D) that payments qualify as alimony for Federal income tax purposes only when the payor's liability for those payments, or for any payments which may be made in substitute thereof, terminates upon the payee spouse's death. * * *
We need not decide, therefore, whether the terms of the agreement fixed a portion of the payments as child support nondeductible under section 71(a) and (c).
Section 6662 Accuracy-Related Penalty
Petitioner contests the imposition of an accuracy-related penalty for the tax year in issue. Section 6662(a) and (b)(1) and (2) imposes a 20-percent accuracy-related penalty on any underpayment of Federal income tax attributable to a taxpayer's negligence or disregard of rules or regulations, or substantial understatement of income tax. Section 6662(c) defines negligence as including any failure to make a reasonable attempt to comply with the provisions of the Internal Revenue Code and defines disregard as any careless, reckless, or intentional disregard. Disregard of rules or regulations is careless if the taxpayer does not exercise reasonable diligence to determine the correctness of a return position that is contrary to the rule or regulation. Sec. 1.6662-3(b)(2), Income Tax Regs. Disregard of rules or regulations is reckless if the taxpayer makes little or no effort to determine whether a rule or regulation exists. Id.
Under section 7491(c), the Commissioner bears the burden of production with regard to penalties and must come forward with sufficient evidence indicating that it is appropriate to impose penalties. See Higbee v. Commissioner, 116 T.C. 438, 446 (2001). However, once the Commissioner has met the burden of production, the burden of proof remains with the taxpayer, including the burden of proving that the penalties are inappropriate because of reasonable cause or substantial authority. See Rule 142(a); Higbee v. Commissioner, supra at 446-447.
Respondent has satisfied the burden of production by showing that petitioner deducted the entire PSA payment in disregard of the plain language of section 71. See, e.g., Stedman v. Commissioner, T.C. Memo. 2008-239; Tiley v. Commissioner, T.C. Memo. 2003-132.
The accuracy-related penalty under section 6662(a) is not imposed with respect to any portion of the underpayment as to which the taxpayer acted with reasonable cause and in good faith. Sec. 6664(c)(1); Higbee v. Commissioner, supra at 448. The decision as to whether a taxpayer acted with reasonable cause and in good faith is made on a case-by-case basis, taking into account all of the pertinent facts and circumstances. See sec. 1.6664-4(b)(1), Income Tax Regs. “Circumstances that may indicate reasonable cause and good faith include an honest misunderstanding of fact or law that is reasonable in light of all of the facts and circumstances, including the experience, knowledge, and education of the taxpayer.” Id.
Petitioner asserts that he acted with reasonable cause and in good faith. He argues that in deducting the entire PSA payment in 2006 he was just repeating what was ultimately determined by respondent to be permitted in 2005. Furthermore, petitioner points out that although he is an attorney, his practice does not include tax law.
We are not persuaded by petitioner's arguments. What respondent did in 2008 regarding the deduction in 2005 has no bearing on whether petitioner acted with reasonable cause and in good faith in 2006. The statute forbidding a deduction for payments where, as in this case, there is no liability after the death of the payee spouse, is clear. Petitioner's explanations do not demonstrate an honest misunderstanding of fact or law that is reasonable in light of his experience, knowledge, and education.
In reaching our decision, we have considered all arguments made by the parties. To the extent not mentioned or addressed, they are irrelevant or without merit.
For the reasons explained above,
Decision will be entered under Rule 155.
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title Joseph F. Rodkey, Jr., v. Commissioner.
search-title Case: Joseph F. Rodkey, Jr., v. Commissioner., U.S. Tax Court, CCH Dec. 57,967(M), T.C. Memo. 2009-238, (Oct. 20, 2009)
primary-class case-law/case
wk-da number WKUS_TAL_543
CCH Paragraph No. [CCH Dec. 57,967(M)]
language http://psi.oasis-open.org/iso/639/#eng
region United States [http://wk-us.com/meta/regions/#US]
publisher http://wk-us.com/meta/publishers/#CCH
publishing-status new
publishing-dates available-date:
modified-date:
revised-date:
sort-date: 2009-10-20
document-transformation-history SOURCE-CRC: 65475599
G2I-VERSION: Group2Interchange-RELEASE-03-14-0009A
G2I-TRANSFORMATION-DATE: 2009-10-20
I2A-VERSION: I2A-03-15-0005
I2A-TRANSFORMATION-DATE: 2009-10-21
wkcase-law:metadata parties plaintiff:Joseph F. Rodkey, Jr.,
defendant:Commissioner.
case-abbrev-name Joseph F. Rodkey, Jr., v. Commissioner.
case-history [Appealable, barring stipulation to the contrary, to CA-3.—CCH.]
court U.S. Tax Court [http://wk-us.com/meta/courts/#US-FJ-TAX]
document-date , precision: day
2009-10-20
attorneys Joseph F. Rodkey, Jr., pro se; Julia L. Wahl, for respondent.
document-number 7422-08 [docket]
document-number TC Memo. 2009-238 [citation]
document-number CCH Dec. 57,967(M) [primary-citation]
document-number T.C. Memo. 2009-238 [primary-citation]