interpreting similar language in section 71(a) (1)
How later courts described this case
- interpreting similar language in section 71(a) (1)
Written by the judges who cited it.
The opinion
T.C. Memo. 1996-253
UNITED STATES TAX COURT
AUSTIN B. EWELL, JR., Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 16900-93. Filed May 30, 1996.
George F. Belyea, for petitioner.
Lloyd T. Silberzweig, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
COLVIN, Judge: Respondent determined that petitioner has a
deficiency in Federal income tax of $33,513 for 1987. After
concessions, we must decide the following:
1. Whether various payments made by petitioner to and on
behalf of his former spouse from March 27 to December 19, 1987,
were alimony under section 71(b)(1). We hold that they were not
- 2 -
because petitioner and his former spouse first had a divorce or
separation instrument on December 19, 1987.
2. Whether petitioner may deduct $72,024 for interest and
$10,727 for taxes that he paid, on behalf of his former spouse,
as petitioner contends; $10,002, as respondent contends; or some
other amount. We hold that he may deduct a portion of these
expenses equal to the portion he proved he paid with his separate
funds.
3. Whether petitioner may deduct $6,326 for business use
of his Jeep Cherokee. We hold that he may not.
Section references are to the Internal Revenue Code in
effect for the year in issue. Unless otherwise stated, Rule
references are to the Tax Court Rules of Practice and Procedure.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found.
A. Petitioner
Petitioner lived in Fresno, California, when he filed his
petition. He is a lawyer. He represented public water districts
and some farmers and ranchers. He used the cash receipts and
disbursements method of accounting.
B. Real Property Belonging to Petitioner and His Former Spouse
In 1987, petitioner and his former spouse jointly owned the
following property:
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1. 19605 Auberry Road, Clovis, Cal.--587 acres, residence,
buildings, cattle grazing land.
2. Avenue 13 ½ between Roads 35 and 36, Madera County,
Cal.--20 acres of citrus trees.
3. 34711 Avenue 14, Madera County, Cal.--residence,
buildings, and 30 acres of citrus trees and kiwi vines.
4. Millerton Road, Fresno, Cal.--386 acres of cattle
grazing land.
5. Millerton Road (Forman Ranch), Fresno, Cal.--40 acres
of cattle grazing land.
6. Pittman Hill Road, Fresno County, Cal.--a 50-percent
interest in 160 acres of grazing land.
7. 40008 Oakwoods Lane, Shaver Lake, Cal.--rental
residence.
8. 6264 N. Van Ness Boulevard, Fresno, Cal.--residence
9. Zenobia Road, Rural Route 3, Wakeman, Ohio--a one-third
interest in 72 acres with a residence and other
buildings.
10. Zenobia Road (Lone Elm Farms), Rural Route 3, Wakeman,
Ohio--a 50-percent interest in 210 acres with a
residence and other buildings.
Petitioner and his former spouse were jointly liable for the
mortgages and property taxes on their jointly owned property.
- 4 -
Petitioner's former spouse held a 100-percent interest in
lot 752, tract 3230, Tehachapi, Cal. Petitioner held a 27.084-
percent interest in 12 Plover Circle, Watsonville, Cal.
C. Petitioner’s Separation From His Former Spouse
Petitioner and his former spouse separated on March 27,
1987. In April 1987, petitioner’s former spouse gave him a
written list of her expenses.
Petitioner’s former wife was admitted to a psychiatric
hospital in April and released in May 1987. During that time,
petitioner’s father-in-law told petitioner to preserve the
community assets, to maintain the farming and business
properties, and to keep the community payments current.
Petitioner’s father-in-law was a judge on the California Court of
Appeals and a partner with petitioner and petitioner’s former
spouse on some ranches.
D. Petitioner’s Bank Accounts, Income, and Payments
1. Bank Accounts
From March 27 to December 31, 1987, petitioner had five bank
accounts (account Nos. 062-118-2706, 062-118-2714, 062-118-4024,
062-118-9611, and 062-119-0725). On March 27, 1987, petitioner
and his former spouse had $67,611 of community funds in the first
three of those bank accounts.
- 5 -
2. Community Income
Petitioner and his former spouse received $77,866 in
community income from March 27 to December 31, 1987, in addition
to the $67,611 of community funds that they had when they
separated. Their community funds totaled $145,477 from March 27
to December 31, 1987. Their community funds were insufficient to
pay community obligations during that time.
3. Petitioner’s Separate Funds
Petitioner deposited at least $146,019 of his separate funds
in their joint checking accounts. He provided about $20,000 per
month from his salary. Those funds were available to pay their
postseparation community obligations in 1987. Petitioner spent
$172,484 of his separate funds to pay community expenses from
March 27, 1987, to May 8, 1989.
4. Petitioner’s Payments to and on Behalf of His Former
Spouse
In May 1987, petitioner began to pay about $3,700 per
month to support his former spouse. He made no payments to
his former spouse from December 19 to December 31, 1987.
From March 27 to December 31, 1987, petitioner paid
$4,287.27 of the lease expenses for his former spouse’s car
and paid mortgage interest of $144,048, mortgage principal of
$61,541, and property taxes of $21,454 related to property he
owned jointly with his former spouse. From April 1 to
- 6 -
December 31, 1987, petitioner paid his former spouse's 50 percent
share of farming expenses ($8,818) and rental expenses ($6,859).
In 1987, petitioner paid $8,560 for accounting fees to
prepare his and his former spouse’s 1986 joint income tax return.
On December 31, 1987, petitioner paid the California Franchise
Tax Board $5,248 for his and his former spouse’s 1986 State
taxes.
E. Negotiations Between Family Law Attorneys Regarding
Petitioner’s Payments to and on Behalf of His Former Spouse
On August 13, 1987, James B. Preston (Preston), counsel to
petitioner's former spouse, wrote a letter to Donald Magarian
(Magarian), petitioner's divorce counsel, stating in pertinent
part:
As temporary arrangements we would propose the
following temporary orders:
1. Joint legal and physical custody of the minor
children, as arranged between the parties.
2. Each party maintain the furniture, fixtures,
appliances and vehicles in their respective possession.
3. Each party restrained from disposing of community
or separate assets.
4. Family support of $4,000 per month.
5. Personal restraining orders against harassment by
either party against the other party, family members
and friends.
6. Mr. Ewell continue to maintain Mrs. Ewell and the
minor children on major medical/health and vehicle
insurance, and any non-covered medical, dental,
psychological and medication be paid by Mr. Ewell.
- 7 -
7. Mr. Ewell continue to maintain life insurance in
current amounts with Mrs. Ewell and the children as
primary beneficiaries.
8. Mr. Ewell pay the outstanding credit accounts.
9. Mr. Ewell advance attorney fees of $5,000 toward
Mrs. Ewell's attorney fees, plus whatever our
accountant may require as a retainer.
Please review and if satisfactory, I will prepare a
formal order.
Additionally, once the Order is prepared, I would
request my accountants be given access to the financial
records of the parties.
On August 28, 1987, Magarian wrote Preston a letter stating
as follows:
I have received your letter dated August 13, 1987
and have had the opportunity to review it with Mr.
Ewell. After my discussion with Mr. Ewell, it was
brought to my attention that both Mr. Ewell and his
wife feel it would be beneficial for them to go to
joint counselling before any major expenses regarding
the legal aspects of the dissolution of marriage take
place. It appears that the parties would desire to
maintain the status quo at this time.
With the foregoing in mind, I am going to address
the nine points you raised in your letter for a
temporary agreement as follows:
1. The custodial arrangement would be acceptable
pending the parties attending joint counselling with a
psycologist [sic] that they can agree upon.
2. Acceptable.
3. Acceptable, except in the ordinary course of
business.
4. Mr. Ewell would continue to take care of the Wife
and children's needs as he has been doing for the past
few months which appears to be acceptable to the Wife
at this point in time.
- 8 -
5. I do not know the urgency of an immediate
restraining order, however, if your client feels it is
necessary at this time, obviously, Mr. Ewell will
comply.
6. Acceptable, except that psychological and
medication be controlled by some type of dollar amount.
7. Acceptable.
8. Acceptable, however, if there is going to be an
order, we will have to reserve jurisdiction regarding
reimbursement to Mr. Ewell.
9. Mr. Ewell is well aware of the law that would
require him to pay to you reasonable attorney fees for
this case. After some discussion, he feels that at
this point since hopefully, there will be no legal
activity, that he would be willing to pay to you
$1,000.00 on account and then we can discuss further
attorneys fees depending on what the future of this
case has in store at that time. We can also come to
some type of conclusion of how much an accountant would
need. I am sure that will be no problem at the time
when the issues are before us.
After you review this letter, please contact me as
I would like to get your thoughts on the matter.
Robert Stringham (Stringham) succeeded a Mr. Hicks, not
otherwise described in the record, who had succeeded Preston. On
November 3, 1987, Stringham wrote Magarian a letter that included
the following:
Kristine Ewell has called me to tell me that while
Mr. Ewell had agreed to increase support from $3,700.00
per month to $4,000.00 per month, he has instead, in
the last two payments, reduced the support by $350.00
per payment, down to $3,000.00 per month.
We propose in behalf of Mrs. Ewell that we stipulate
to a temporary order providing for child support of
$600.00 per month per child and spousal support of
$2,800.00 per month. Child support and spousal support
proposed to be payable in semi-monthly installments on
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the 1st and 15th of each month commencing November 1,
1987.
We would like to have a partial payment of account of
fees and costs at this time of $2,500.00.
Since Mrs. Ewell is in need of these funds, we look
forward to hearing from you within the next week in the
hope that a hearing can be avoided.
F. Temporary Stipulation and Order Re Child Custody and Joint
Arrangement
On December 18 and 19, 1987, the parties signed a Temporary
Stipulation and Order Re Child Custody and Joint Arrangement,
Family Support, Attorney Fees and Other Orders. The Superior
Court of California for Fresno County filed it on or about
December 23. It provided in part:
IT IS FURTHER ORDERED that Respondent/Husband
shall pay to Petitioner/Wife the sum of $2,100.00 per
month support, commencing December 15, 1987, payable
$1,050 on the 15th and $1,050 on the __, and continuing
__ day of each and every month thereafter until Wife
___ dies, Husband dies, or further order of the court.
In regard to these payments, time shall be of the
essence. The court shall reserve jurisdiction over
whether these payments shall be charged in whole, or
part, to Respondent/Husband's separate property, or the
community
(NOTE: Blanks indicate illegible parts of the copy of the
document in evidence.)
It also required petitioner to:
keep current the obligations of the community to the
best of his ability until such time as the liquidity
of the community estate is known upon presentation of
an accounting by Respondent/Husband, and one-half of
any such payments from Respondent/Husband’s separate
property shall be reimbursed to him by the community.
The Court shall reserve jurisdiction to determine
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whether reimbursement being sought by
Respondent/Husband is a benefit to the community or to
his separate property, or whether community property
asset had a use value which would have an affect [sic]
on reimbursement.
Petitioner's $1,650 payment to his former spouse on
December 16, 1987, included $1,050 for alimony and $600 for child
support.
G. Petitioner’s Jeep Cherokee
In 1987, petitioner leased a 1987 four-wheel-drive Jeep
Cherokee (Jeep) that he used for commuting to work, his law
practice, farming, ranching, and rental businesses, and for
personal use. He also had a 1985 Audi. Petitioner paid $6,326
to lease and operate the Jeep in 1987. He did not have any
records showing how he used the Jeep in 1987.
H. Bankruptcy of Petitioner’s Former Spouse
On July 1, 1988, petitioner’s former spouse filed a petition
in bankruptcy with the U.S. Bankruptcy Court, Case No. 188-02583-
A-11. Petitioner claimed that he was entitled to receive
reimbursement of $86,000 from her bankruptcy estate. The
superior court which had jurisdiction over petitioner’s divorce
approved his claim, but his former spouse disputed it.
Petitioner’s former spouse appealed to the U.S. Court of Appeals
for the Ninth Circuit.
A trustee was appointed in the bankruptcy case. The
bankruptcy estate did not pay petitioner. As of the date of
- 11 -
trial, petitioner had not been reimbursed, and there was little
or nothing left in the estate for petitioner or his former
spouse. It is highly unlikely that petitioner will be reimbursed
by his former spouse’s bankruptcy estate.
OPINION
A. Whether Petitioner and His Former Spouse Had a Written
Separation Agreement Before December 19, 1987
1. Parties' Contentions
Petitioner contends that he may deduct as alimony support
payments he made to and on behalf of his former spouse from
August 27, to December 19, 1987.1 He argues that a written
support agreement existed on August 27, 1987. He contends that
his former spouse’s list of expenses, his claimed oral agreement
to pay her $3,700 per month, the August 1987 exchange of letters
between the family law attorneys, and notations petitioner wrote
on checks constitute a written agreement for purposes of section
71(b)(2)(A).
Respondent contends that there was no written support
agreement before December 19, 1987. On that date the court with
jurisdiction over the parties’ divorce signed the stipulated
judgment. Respondent contends that petitioner’s payments from
August 27 to December 19, 1987, are not alimony, except
1
Petitioner concedes that $13,581 he paid to his former
spouse from Mar. 27 to Aug. 27, 1987, is not alimony.
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respondent concedes that $1,050 that petitioner paid to his
former spouse on December 16, 1987 was alimony.
2. Written Separation Agreement Requirement
A taxpayer may deduct alimony or separate maintenance
payments. Sec. 215(a). Alimony is any payment in cash if, among
other requirements, it is received by (or on behalf of) a spouse
under a divorce or separation instrument. Sec. 71(b)(1)(A).
A divorce or separation instrument is: (a) A decree of divorce
or separate maintenance or a written instrument incident to the
decree; (b) a written separation agreement; or (c) a decree
requiring a spouse to pay for the support or maintenance of the
other spouse. Sec. 71(b)(2). No decree was in effect when
petitioner made the payments at issue. Thus, we must decide
whether there was a written separation agreement under section
71(b)(2) before December 19, 1987.
The term "written separation agreement" is not defined by
section 71(b)(2), its legislative history, or the Commissioner's
regulations. Bogard v. Commissioner, 59 T.C. 97, 100 (1972). A
written separation agreement is a clear, written statement of the
terms of support for separated parties. Id. at 101. It must be
a writing that constitutes an agreement. Grant v. Commissioner,
84 T.C. 809, 823 (1985), affd. without published opinion 809 F.2d
260 (4th Cir. 1986).
- 13 -
3. Whether Petitioner and His Former Spouse Had a Written
Separation Agreement Before December 19, 1987
Petitioner and his former spouse separated on March 27,
1987. Respondent contends that we should not believe
petitioner’s testimony that his former spouse gave him a list of
her expenses which totaled about $3,700 per month which he agreed
to pay. Respondent points out that petitioner did not provide
respondent or the Court with a copy of the list but gives no
other reason that we should disbelieve petitioner. Petitioner’s
claim is consistent with the fact that he in fact paid those
amounts in the months after April 1987. We accept petitioner’s
testimony that his former spouse gave him a written list of her
expenses and that he told her that he would pay those amounts.
Petitioner contends that his oral agreement is part of a
written separation agreement. We disagree; an agreement must be
written for purposes of section 71(b)(2). Sec. 71(b)(2); Grant
v. Commissioner, supra; see Gordon v. Commissioner, 70 T.C. 525,
529 (1978) (interpreting similar language in section 71(a)(1)).
The family law attorneys for petitioner and his former
spouse conducted negotiations relating to the terms of a
separation agreement from August to November 1987, but they did
not reach an agreement. On December 19, 1987, the family law
attorneys signed a stipulated judgment. The stipulated judgment
required petitioner to pay alimony of $2,100 per month and child
support of $1,200 per month, and to pay community obligations
- 14 -
subject to his right to be reimbursed for one-half of the
payments he made with his separate funds.
Petitioner argues that the written list of expenses his
former spouse gave him, the letters exchanged by the attorneys,
and notations petitioner claims he made on checks he issued,
considered together, constitute a written separation agreement.
We disagree. An agreement requires mutual assent or a meeting of
the minds. Kronish v. Commissioner, 90 T.C. 684, 693 (1988).
Letters which do not show that there was a meeting of the minds
are not a written separation agreement under section 71(b)(2).
Grant v. Commissioner, supra; Estate of Hill v. Commissioner, 59
T.C. 846, 856-857 (1973). There was no agreement reached in the
letters between the family law attorneys. The letters show only
that there was a negotiation. Preston made nine proposals,
including family support of $4,000 per month, in his letter dated
August 13, 1987. Magarian said two provisions were acceptable,
two were conditionally acceptable, and five were unacceptable.
Magarian rejected Preston's proposal that petitioner pay family
support of $4,000 per month.
Petitioner contends that he noted on each of his checks that
the payment was for support and that those check notations are a
part of the written separation agreement. We disagree. The
checks are not in evidence. Even if they were, the fact that
- 15 -
petitioner made a notation on a check does not show that he
agreed to provide support.
Petitioner points out that he paid support after the
exchange of letters. However, the fact that he made payments
does not show that there was a written agreement; on the
contrary, the letters themselves show that there was not.
We conclude that petitioner’s former spouse’s list of
expenses, negotiation letters between the family law attorneys,
check notations, and the fact that petitioner provided support
are not a written separation agreement for purposes of sections
71(b)(2) and 215. Thus, payments that petitioner made before the
stipulated judgment was entered on December 19, 1987, are not
alimony.2
B. Whether Petitioner May Deduct $72,024 for Interest and
$10,727 for Taxes as His Former Spouse’s Share of Business
Expenses
1. Parties' Contentions and Background
Petitioner contends that he may deduct his payment of his
former spouse’s share of interest ($72,024) and taxes ($10,727)
for business properties that they owned jointly because he used
his separate funds to pay those expenses.
2
In light of our conclusion, we need not decide
respondent’s contention that we lack jurisdiction to decide
whether petitioner may deduct some of these items because he
did not claim them as a deduction on his 1987 income tax
return or in the petition in this case.
- 16 -
Respondent contends that petitioner did not show that they
were deductible expenses or that he used his separate funds to
pay them. Respondent also contends that petitioner may not
deduct those amounts because he had substantial community funds
available when he paid them. Respondent concedes that petitioner
may deduct his one-half share of those amounts, which we treat as
a concession that the interest and taxes at issue would have been
deductible if paid by petitioner's former spouse.
2. Whether the Possibility That Petitioner May Be
Reimbursed Bars Him From Deducting His Payment of His
Former Spouse’s Share of Mortgage Interest and Property
Taxes
Respondent contends that petitioner may not deduct his
payments of his former spouse’s share of mortgage interest and
property taxes because he has a right to be reimbursed by her.
Respondent contends that Levy v. Commissioner, 212 F.2d 552, 554
(5th Cir. 1954), affg. a Memorandum Opinion of this Court dated
March 9, 1953; Estate of Boyd v. Commissioner, 28 T.C. 564, 566-
567 (1957); and Conte v. Commissioner, T.C. Memo. 1981-571, affd.
722 F.2d 727 (2d Cir. 1983), support this contention. We
disagree.
Petitioner concedes that he had a right to be reimbursed for
community expenses that he paid with his separate funds from
March 27 to December 31, 1987. However, none of the cases
respondent relies on involved mortgage interest and real property
taxes for which the taxpayer was jointly and severally liable.
- 17 -
The payments were for repairs, maintenance, and capital
improvements for jointly owned property paid entirely by one of
the owners. In contrast to this case, the Commissioner conceded
in Conte that the taxpayer could deduct real estate taxes and
mortgage interest to the extent he paid them because he was
jointly and severally liable for those obligations. Conte v.
Commissioner, supra.
Unlike this case, in none of those cases did the court find
that reimbursement would be highly unlikely. In Estate of Boyd
and Conte we did not consider the probability that the taxpayers
would be reimbursed. In Levy, the court found that the taxpayers
did not show that they could not have enforced their right to be
reimbursed. Levy v. Commissioner, supra at 554.
Petitioner and his former spouse are jointly and severally
liable for the mortgage interest and property taxes at issue.
Petitioner could lose the properties if the mortgage interest and
property taxes were not paid. Taxpayers may deduct the payment
of expenses for which they are not liable if necessary to protect
their property interests. Dunn & McCarthy, Inc. v. Commissioner,
139 F.2d 242, 244 (2d Cir. 1943); Waring Prods. Corp. v.
Commissioner, 27 T.C. 921, 929-930 (1957); Catholic News
Publishing Co. v. Commissioner, 10 T.C. 73, 77 (1948).
We conclude that petitioner may deduct the amount he paid
for his former spouse’s share of mortgage interest and real
- 18 -
estate taxes to the extent he has proven that he paid it with his
separate funds.
3. Tracing of Community Funds and Petitioner’s Separate
Funds
The parties agree that petitioner may use either the family
expenditure or direct tracing method to show the amount, if any,
of separate funds that he used to the pay community debts that he
seeks to deduct.
Under the family expenditure method, total community
expenditures are subtracted from total community funds to show
whether any community funds remain. Under the direct tracing
method, each check from and each deposit to a particular account
is listed in chronological order, and the balances in the account
are computed after each transaction. A separate transaction
account balance is computed for the community property, the
husband's separate property, and the wife's separate property for
each account.
4. Whether Exhibit 9 Is Admissible
Petitioner’s Exhibit 9 purports to use the direct tracing
method to show that he used his separate funds to pay the
community debts.3 Exhibit 9 is a worksheet consisting of eight
3
George Belyea, who represented petitioner in this case,
briefly testified to authenticate worksheets (including Exh. 9)
with which the parties had been working for several months to
trace petitioner’s community and separate funds. Respondent
objected to his testimony and the admission of the exhibits that
(continued...)
- 19 -
pages, each with 15 columns. In Exhibit 9, George Belyea
(Belyea), who represented petitioner in this case, used Lotus 1-
2-3 software to analyze 600 to 700 checking account transactions.
The contents of voluminous writings which cannot
conveniently be examined in court may be presented in summary
form if the writings are made available for examination or
copying, or both, by other parties at a reasonable time and
place. Fed. R. Evid. 1006.
Respondent contends that Exhibit 9 is not admissible because
it is an improper summary under rule 1006 of the Federal Rules of
Evidence and because, in violation of the Court’s standing
pretrial order, it was not exhanged 15 days ahead of the first
day of the trial session. Respondent contends that petitioner
did not provide a copy of Exhibit 9 until 2 days before the trial
session began, in violation of the Court’s standing pretrial
order, which requires the parties to exchange documents at least
15 days before the trial session begins.
3
(...continued)
he sought to authenticate on the grounds that his testimony was
barred by Rule 24(f). Respondent’s counsel conceded that he was
not surprised by what Belyea said. We overruled respondent's
objection, but invited the parties to argue this issue on brief.
Respondent did not do so, which we treat as respondent's
concession. See Stringer v. Commissioner, 84 T.C. 693, 708
(1985), affd. without published opinion 789 F.2d 917 (4th Cir.
1986); cf. Kern Co. Elec. Pension Fund v. Commissioner, 96 T.C.
845, 858 (1991), affd. without published opinion 988 F.2d 120
(9th Cir. 1993); Marcus v. Commissioner, 22 T.C. 824, 832 (1954).
- 20 -
Petitioner contends that Belyea gave respondent
substantially similar versions of Exhibit 9 3 months before
trial. Respondent’s counsel said that he saw prior versions of
Exhibit 9 more than 15 days before the trial session began, but
did not see a version of Exhibit 9 with the columns “COMMUNITY
CHECKING ACCOUNT BALANCE” and “COMBINED CHECKING ACCOUNT BALANCE”
until February 4, 1995.
Petitioner contends that the data in Exhibit 9 is taken from
Exhibits 13-M and 10. We disagree. Exhibits 13-M and 10 are not
the source of the data in columns 11 (“COMMUNITY CHECKING ACCOUNT
BALANCE”), 13 (“A B EWELL SALARY & EXPENSE REIMBURSEMENT”), 14
(“A B EWELL SEPARATE PROPERTY CHECKING ACCT BALANCE”), and 15
(“COMBINED CHECKING ACCOUNT BALANCE”) of Exhibit 9. Belyea said
that he gave respondent’s counsel the data on which he based
those columns 3 months before trial. However, at trial, Belyea
could not identify the data on which he based columns 11, 13, 14,
and 15, which included the columns that respondent’s counsel
identified.
Exhibit 10 is apparently the source for column 7 of Exhibit
9, entitled “TRANS FROM COMMUNITY SAVINGS ACCOUNT”, but not for
any other columns. We conclude that columns 1 to 6, 8 to 10, and
12 of Exhibit 9 are based on Exhibit 13-M, and that column 7 of
Exhibit 9 is based on Exhibit 10. The rest of Exhibit 9 is not
- 21 -
based on other evidence. Thus, columns 1-10 and 12 of Exhibit 9
are admissible, but columns 11, 13, 14, and 15 are not.
5. Whether Exhibit 9 Shows That Petitioner Used His
Separate Funds To Pay Business Interest and Taxes
a. Direct Tracing Method
Petitioner contends that Exhibit 9 shows under the direct
tracing method that he used his separate funds to pay business
interest and taxes. We disagree.
Petitioner contends that Exhibit 9 shows that, after
issuance of check No. 1008 on April 1, 1987, there were no
community funds in the checking account, the community balance
remained in deficit for the rest of 1987, and by December 31,
1987, he had used $193,967.44 of his separate funds to pay for
the community deficit. Exhibit 9 without columns 11, 13, 14, and
15 does not establish that there were no community funds in the
accounts on April 1, 1987, or that petitioner and his former
spouse had insufficient community funds to pay community expenses
after April 1, 1987. It does not show all of the community funds
on deposit when petitioner and his former spouse separated.
Exhibit 9 does not include the $67,611 of community funds
petitioner and his former spouse had when they separated on
March 27, 1987.
Even if all of Exhibit 9 were admitted, it only shows a
beginning community checking account balance of $1,496.69 and no
other community funds before March 31, 1987. Petitioner has not
- 22 -
identified the source of the $1,496.69 or any of the beginning
balances in Exhibit 9. Exhibit 9 does not show that they spent
more than $67,611 by April 1, 1987. Exhibit 9 does not properly
apply the direct tracing method. It does not directly trace
petitioner’s separate funds through the commingled accounts to
the specific payments that he seeks to deduct. Exhibit 9 does
not list the balance of each account and the balance of
petitioner’s separate funds computed after each transaction as
required by the direct tracing method. It appears that Belyea
combined petitioner’s five accounts on Exhibit 9. Exhibit 9 does
not directly trace each transaction in each account and show the
community and separate fund balance after each transaction.
Thus, even if Exhibit 9 were fully admitted, petitioner has not
proven that the community funds were in deficit after April 1,
1987.
We conclude that petitioner has not shown that he used his
separate funds to pay his former spouse’s share of mortgage
interest and property taxes for their business properties through
the direct tracing method.
b. Family Expenditure Method
Respondent concedes that the family expenditure method shows
that petitioner used some of his separate funds to pay mortgage
interest and property taxes. Respondent concedes that petitioner
- 23 -
may deduct $10,002. Petitioner contends that he may deduct
$82,751.
Petitioner paid mortgage interest of $144,048, mortgage
principal of $61,541, and property taxes of $21,454 (a total of
$227,043) from March 27 to December 31, 1987. During that time
he had $145,477 of community funds. Community funds in an
account in which community and separate funds are commingled are
presumed to have been used to pay community obligations. See v.
See, 64 Cal. 2d 778, 783, 415 P.2d 776, 779 (1966); Hicks v.
Hicks, 211 Cal. App. 2d 144, 154, 27 Cal. Rptr. 307, 314 (1962).
Applying that presumption here, respondent concedes that
petitioner used $81,566 ($227,043 - $145,477) of his separate
funds to pay community obligations which included mortgage
principal, interest, and property taxes. To compute the amount
of separate and community funds used for principal, interest, and
taxes, the parties, in the Rule 155 computations, should compute
the amount of separate and community funds used to pay principal,
interest, and property taxes by using the ratio of $81,566
(separate funds) over $145,477 (community funds) (56 percent).
Thus, petitioner may deduct 56 percent of his former spouse’s
share of mortgage interest and property taxes that he paid before
January 1, 1988.
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6. Whether Petitioner May Deduct Amounts He Paid With His
Separate Funds If Community Funds Were Available
Respondent contends that petitioner may not deduct amounts
that he paid for his former spouse’s share of community business
expenses with his separate funds because there were community
funds available in a separate savings account. We disagree.
The direct tracing method does not require all community
funds to be exhausted first. Under the direct tracing method,
a party can prove that he or she used his or her separate funds
even if other community funds are available. Our acceptance of
respondent’s contention would, in effect, eliminate the direct
tracing method and require the parties to use the family
expenditure method. Respondent stipulated that either of the two
methods may be used under California law to trace whether a party
used separate funds to pay particular expenditures. Thus,
respondent’s position is contrary to respondent’s stipulation
that allows parties to use the direct tracing and family
expenditure methods to trace funds.
Respondent provides no persuasive authority for this
contention. Respondent contends that Bozek v. Commissioner,
T.C. Memo. 1986-37; Porter v. Commissioner, T.C. Memo. 1979-104;
Kaonis v. Commissioner, T.C. Memo. 1978-184, affd. without
published opinion 639 F.2d 788 (9th Cir. 1981); and Powell v.
Commissioner, T.C. Memo. 1967-32, hold that spouses filing
separate income tax returns may deduct only one-half of the
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community expenses, even if one spouse pays all of them, unless
there is an allocation agreement. However, those cases do not
control here because in them, in contrast to this case, we did
not decide that the taxpayer could not prove that he or she used
separate funds to pay community obligations where community funds
were available.4
We conclude that the fact that community funds were not
exhausted does not preclude petitioner from deducting the amounts
that he paid for community obligations with his separate
property.
7. Conclusion
We conclude that petitioner may deduct 56 percent of his
former spouse's share of mortgage interest and property taxes
that he paid in 1987.
C. Jeep Expenses
Petitioner contends that he may deduct as a business expense
$6,326 which he paid in 1987 to lease and operate his Jeep.5
4
Two cases that respondent cites, Powell v. Commissioner,
T.C. Memo. 1967-32, and Finney v. Commissioner, T.C. Memo. 1976-
329, hold that a taxpayer may not deduct more than the taxpayer’s
share of a community obligation if the taxpayer did not establish
that the taxpayer used separate funds to pay the community
obligation. In Finney, we held that the taxpayer, who owned
property with his wife as tenants by the entirety, could deduct
all of the mortgage interest payment because he made the payments
with his separate funds.
5
Petitioner deducted $6,918 on Schedule A of his 1987
return for employee business expenses relating to his 1987 Jeep.
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Respondent contends that petitioner: (1) Did not substantiate
that he paid those amounts, (2) used the Jeep to commute to his
office and for other personal uses, and (3) had no records of the
business use of the Jeep. Petitioner contends that he is not
required to have automobile use logs because he used the Jeep
almost exclusively for his farming and rental activities, and his
business usage of his Audi exceeds his personal use of the Jeep.
A taxpayer may deduct ordinary and necessary expenses paid
or incurred during the taxable year in carrying on a trade or
business. Sec. 162. However, automobile expenses are subject to
special substantiation rules. The Jeep is listed property under
section 280F(d)(4)(A)(i) because it is a passenger automobile. A
taxpayer may not deduct automobile expenses unless he or she
substantiates by adequate records or sufficient evidence
corroborating the taxpayer’s own statement the amount, time and
place, and business purpose of the expense. Sec. 274(d)(4).
Petitioner has not substantiated the purpose, time, or place
of travel for any of the Jeep expenses as required under section
274(d)(4). He did not have a log or records of the mileage,
dates, locations, or business purpose of the trips he took in the
Jeep.
We disagree with petitioner’s contention that he may count
business use of his Audi to offset personal use of the Jeep.
Petitioner offers no authority to support this argument, and we
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know of none. Also, petitioner has not provided any logs or
other evidence of his use of the Audi.
The substantiation requirements do not apply to a qualified
nonpersonal use vehicle. Sec. 274(d). A qualified nonpersonal
use vehicle is “any vehicle which, by reason of its nature, is
not likely to be used more than a de minimis amount for personal
purposes.” Sec. 274(i). Petitioner contends that the Jeep is a
qualified nonpersonal use vehicle. We disagree. Sec. 1.274-
5T(k)(2)(ii), Temporary Income Tax Regs., 50 Fed. Reg. 46033
(Nov. 6, 1985) (partial list of qualified nonpersonal use
vehicles, including clearly marked police and fire vehicles,
ambulances, hearses, vehicles designed to carry cargo with a
gross weight of more than 14,000 pounds, bucket trucks, cement
mixers, combines, cranes, derricks, delivery trucks with seating
only for the driver, dump trucks, flatbed trucks, forklifts,
refrigerated trucks, school buses, tractors, and other special
purpose farm vehicles.) A Jeep is not like these specialized-use
vehicles.
We conclude that petitioner may not deduct amounts for the
Jeep in excess of that allowed by respondent.
To reflect concessions and the foregoing,
An order will be issued denying
in part respondent's motion to strike
the testimony of George F. Belyea and
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related documents and decision will
be entered under Rule 155.