The opinion
123 T.C. No. 14
UNITED STATES TAX COURT
JOHN R. AND PATRICIA G. OKERSON, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 7702-03. Filed September 9, 2004.
In 1995, a State court (court) decreed that P pay
to O in connection with their divorce 113 monthly
payments of alimony totaling $117,000. The 1995 decree
stated that this alimony would terminate if O died
before the $117,000 was paid in full but that P would
then be required to continue making the monthly
payments towards the education of P and O’s children
until the children completed 4 years of college. In
1997, the court decreed that P make 42 additional
monthly payments totaling $33,500 to O’s attorney as
additional alimony to O and that this additional
alimony was deductible by P and taxable income to O.
The 1997 decree also stated that this additional
alimony would terminate if O died before the $33,500
was paid in full but that P would then be required to
continue making the monthly payments to O’s attorney
until the $33,500 was paid in full. During 2000, P
paid $12,600 pursuant to the 1995 decree and $9,000
pursuant to the 1997 decree and claimed on his 2000
Federal income tax return that the total of $21,600 was
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deductible as alimony. In 2004, after P commenced this
proceeding challenging R’s disallowance of that
deduction, the court restated in an order that it
intended for Federal income tax purposes that all of
the $117,000 and the $33,500 be alimony deductible by P
and includable in O’s income. The court also stated in
this order that P had as of then paid both of these
amounts to O, who was still alive.
Held: An alimony deduction for Federal income tax
purposes rests on fulfilling the requirements set forth
in sec. 71, I.R.C. Sec. 71(b)(1)(D), I.R.C., provides
that payments may qualify as alimony only if “there is
no liability to make any such payment * * * as a
substitute for such payments after the death of the
payee spouse.”
Held, further, in accordance with sec. 1.71-1T(b),
Q&A-14, Temporary Income Tax Regs., 49 Fed. Reg. 34456
(Aug. 31, 1984), the payments which P was liable to
make upon O’s death are substitute payments under sec.
71(b)(1)(D), I.R.C., in that those post death payments
would begin as a result of O’s death and would
substitute for a continuation of the payments which
terminated on O’s death and which otherwise qualified
as alimony.
Held, further, in accordance with sec. 1.71-1T(b),
Q&A-13, Temporary Income Tax Regs., supra, the fact
that P was liable to make the substitute payments means
that P may not deduct any of the $21,600 as alimony for
Federal income tax purposes, even though the $21,600
would have otherwise been deductible as such.
Michael J. Stengel, for petitioners.
James L. May, Jr., for respondent.
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OPINION
LARO, Judge: This case is before the Court for decision
without trial. See Rule 122.1 Petitioners petitioned the Court
to redetermine a $7,031 deficiency in their 2000 Federal income
tax. We decide as to that year whether petitioners may deduct as
alimony $21,600 that John R. Okerson (petitioner) paid pursuant
to his divorce from his former wife, Barbara Buhr Okerson
(Okerson). We hold that petitioners may not deduct any of that
amount.
Background
The facts in this background section are obtained from the
parties’ stipulation of facts and the exhibits submitted
therewith. Petitioners resided in Memphis, Tennessee, when their
petition was filed. Petitioner and his former wife, Okerson,
have two children who were born on February 10, 1978, and
April 3, 1983, respectively.
On August 31, 1994, a Tennessee State court (State court)
issued an order awarding Okerson a divorce from petitioner. On
March 13, 1995, the State court entered a supplemental final
decree of divorce (1995 decree) that in relevant part ordered,
adjudged, and decreed as follows:
1
Rule references are to the Tax Court Rules of Practice and
Procedure. Unless otherwise stated, section references are to
the applicable versions of the Internal Revenue Code.
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4. JOHN RUSSELL OKERSON shall pay to BARBARA BUHR
OKERSON One Hundred Seventeen Thousand ($117,000)
Dollars as alimony necessary for her support as
follows: Six Hundred Fifty ($650.00) Dollars per month
for twenty-one (21) months beginning September, 1994
through May, 1996; One Thousand Two Hundred Fifty
($1,250.00) Dollars per month for three months
beginning June, 1996, through August, 1996; One
Thousand Six Hundred ($1,600.00) Dollars per month for
a period of thirty-six (36) months beginning September,
1996, through August, 1999; One Thousand Fifty
($1,050.00) Dollars per month for a period of thirty-
six (36) months beginning September, 1999, through
August, 2002; and Two Hundred Fifty ($250.00) Dollars
per month for a period of sixteen months beginning
September, 2002, through December, 2003; and the final
payment of Two Hundred ($200.00) Dollars to be made in
January, 2004. Said payments shall be payable in two
equal monthly payments on the 16th and 30th day of each
month. Said alimony shall terminate upon the death but
not the remarriage of either JOHN RUSSELL OKERSON or
BARBARA BUHR OKERSON and shall be modifiable only upon
the showing of a substantial change in circumstances
which was not contemplated by this Court at the time of
the trial as set forth in the premises hereinabove.
5. In the event that BARBARA BUHR OKERSON should
die before JOHN RUSSELL OKERSON has satisfied his
alimony obligation under this agreement, JOHN RUSSELL
OKERSON agrees to make payments in an amount equal to
his remaining alimony obligation for or on behalf of
the education of the parties’ two children for a period
no longer than the period originally scheduled for the
alimony payments or until the children have completed
four years of undergraduate collegiate work, whichever
occurs first. In the event that a child does not
pursue her college education after BARBARA BUHR
OKERSON’s demise then JOHN RUSSELL OKERSON’s agreement
for continuing support payments to that child equal to
half of the remaining alimony payments shall cease.
6. JOHN RUSSELL OKERSON shall pay to Larry Rice,
Attorney, as alimony necessary for BARBARA BUHR
OKERSON’s support, the sum of Twelve Thousand Four
Hundred Forty ($12,440.00) Dollars. Five Thousand
($5,000.00) Dollars of said funds shall be paid to
Larry Rice within sixty (60) days of September 7, 1994,
and the remaining Seven Thousand Four Hundred Forty
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($7,440.00) Dollars shall be paid to Larry Rice within
ninety (90) days from September 7, 1994.
On October 2, 1997, the State court, upon remand of the case
from a State appellate court, see Okerson v. Okerson,
No. 02A01-9507-CV-00147 (Tenn Ct. App., Mar. 27, 1997), entered
an order (1997 decree) that decreed as follows:
1. John Russell Okerson shall pay to Larry Rice,
attorney for the Defendant [Barbara Buhr Okerson], for
the benefit of Barbara Buhr Okerson, Thirty Three
Thousand Five Hundred ($33,500.00) Dollars as alimony
necessary for her support as follows: Immediate
payment of Seven Thousand Five Hundred ($7,500.00)
Dollars; Seven Hundred Fifty ($750.00) Dollars per
month for forty-one (41) months beginning October 1997,
with the final payment February 2001. Said alimony is
taxable to the Defendant and deductible by the
Plaintiff [petitioner] and shall terminate upon the
death but not the remarriage of Barbara Buhr Okerson.
2. In the event that Barbara Buhr Okerson should
die before John Russell Okerson has satisfied his
alimony obligation under this agreement, John Russell
Okerson agrees and is hereby ordered to make payments
in an amount equal to his remaining alimony obligation
to Larry Rice, attorney for the Defendant, for a period
no longer than the period originally scheduled for the
alimony payments or until an amount equal to his
remaining alimony obligation (appellate attorney fees
and expenses) has been satisfied.
During 2000, petitioner paid $12,600 pursuant to the 1995
decree and $9,000 pursuant to the 1997 decree. On their joint
2000 Federal income tax return, petitioners claimed an alimony
deduction for the total amount of $21,600. Respondent disallowed
that deduction in a notice of deficiency issued to petitioners on
April 10, 2003. On May 23, 2003, petitioners petitioned this
Court to redetermine that disallowance.
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On February 5, 2004, petitioner moved the State court to
modify its final decree of divorce for alimony and attorney’s
fees. On March 29, 2004, the State court issued with respect to
that motion an order stating as follows:
This cause came on to be heard, on March 19, 2004
upon Petition to Modify Final Decree of Divorce for
Alimony and Attorney’s Fees, filed February 05, 2004,
by John Russell Okerson, through his Attorney,
Charles A. Sevier. Upon Answer of Barbara Buhr Okerson
to said Petition to Modify Final Decree of Divorce for
Alimony and Attorney’s Fees, personal service upon
Barbara Buhr Okerson by certified mail, return receipt
requested, argument of Counsel for John Russell
Okerson, Charles A. Sevier, argument of Counsel for
Barbara Buhr Okerson, Laura D. Rogers; upon Memorandum
of Law in opposition to Petition to Modify Final Decree
of Divorce for Alimony and attorney Fees; from all of
which it appears to the Court as follows:
1. That on March 13, 1995, Judge Wyeth Chandler,
Judge of Division I of the Circuit Court of Shelby
County, Tennessee, entered a Supplemental Final Decree
of Divorce in this Cause in which John Russell Okerson
was ordered to pay certain sums of alimony to Barbara
Buhr Okerson, including attorney fees to Larry Rice, as
her attorney, as alimony necessary for Barbara Buhr
Okerson’s support, said sums totaling One Hundred
Twenty Nine Thousand Four Hundred Forty ($129,440.00)
Dollars, payable in installments;
2. That it was announced to the Court by
Counsels for John Russell Okerson and Barbara Buhr
Okerson that said amounts have been paid in full;
3. That John Russell Okerson by his attorney,
states that in the trial transcript of this Cause held
before the Honorable Wyeth Chandler, the Court clearly
stated more than one time that the Court intended all
ordered alimony to be tax deductible to John Russell
Okerson and taxable income to Barbara Buhr Okerson;
4. It was announced to the Court that, despite
said intention of the Court paragraph five (5) of the
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Supplemental Final Decree of Divorce, entered March 13,
1995, contained language as follows:
“5. In the event BARBARA BUHR OKERSON
should die before JOHN RUSSELL OKERSON has
satisfied his alimony obligation under this
agreement, JOHN RUSSELL OKERSON agrees to
make payments in an amount equal to his
remaining alimony obligation for or on behalf
of the education of the parties’ two children
for a period no longer than the period
originally scheduled for the alimony payments
or until the children have completed four
years of undergraduate collegiate work,
whichever occurs first. In the event that a
child does not pursue her college education
after BARBARA BUHR OKERSON*s demise then JOHN
RUSSELL OKERSON*s agreement for continuing
support payments to that child equal to half
of the remaining alimony payments shall
cease.”
5. It was announced to the Court that said
paragraph quoted above has been construed by the
Internal Revenue Service to question the intent of the
Court in the entry of the Supplemental Final Decree of
Divorce, entered March 13, 1995, that all alimony and
attorney fees paid to Larry Rice, Esq., be tax
deductible to John Russell Okerson and taxable income
to Barbara Buhr Okerson.
6. It further appeared to the Court that said
paragraph five (5) quoted above contains language of
contingency that did not occur and that therefore this
Court should find as fact in this Cause that all of
such alimony paid under the Supplemental Final Decree
of Divorce in this Cause should be tax deductible to
John Russell Okerson and taxable income to Barbara Buhr
Okerson.
7. It further appeared to the Court that in the
Order on Motion for Appellate Attorney*s Fees, entered
October 02, 1997, in which John Russell Okerson was
ordered to pay Larry Rice, then Attorney for Barbara
Buhr Okerson, Thirty-Three Thousand Five Hundred
($33,500.00) Dollars in installments for appellate
attorney fees, that said Order stated “Said alimony is
taxable to the Defendant and deductible by the
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Plaintiff and shall terminate upon the death but not
remarriage of Barbara Buhr Okerson”.
8. It further appeared to the Court that in
paragraph 2 in the Motion on Order for Appellate
Attorney Fees the following appears:
“2. In the event Barbara Buhr Okerson
should die before John Russell Okerson has
satisfied his alimony obligation under this
agreement, John Russell Okerson agrees and is
hereby ordered to make payments in an amount
equal to his remaining alimony obligation to
Larry Rice, attorney for the Defendant, for a
period no longer than the period originally
scheduled for the alimony payments or until
an amount equal to his remaining alimony
obligation (appellate attorney fees and
expenses) have been satisfied.”
9. It has been announced to the Court that said
paragraph 2 appearing in the Order on Motion for
Appellate Attorney Fees has been the basis of the
Internal Revenue Service questioning the tax
deductibility of said fees paid by John Russell
Okerson.
10. It is therefore held by this Honorable Court
in regard to the Order of Motion for Appellate Attorney
Fees that it was the stated intention of this Court to
make said alimony payments, which have been paid in
full by stipulation of the parties, taxable income to
Barbara Buhr Okerson and tax deductible to John Russell
Okerson as alimony.
11. It further appeared to the Court that the
paragraph 2 quote above contained a contingency that
did not occur and therefore should not be the basis of
confusion as to the Court’s intention in this cause.
12. It further appeared to the Court that
notwithstanding Barbara Buhr Okerson’s opposition to
the Court’s decision in this cause that the findings
and holdings of this Order are hereby ADJUDGED, ORDERED
AND DECREED.
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Discussion
We decide whether petitioners may deduct the $21,600 as
alimony. Respondent determined they could not. Petitioners
concede in brief that they must prove this determination wrong in
order to prevail. The fact that this case was submitted to the
Court on the basis of a fully stipulated record neither alters
petitioners’ burden of proof nor changes the requirements
otherwise applicable with respect to adducing proof or the effect
of a failure of proof. See Rule 122(b); Kitch v. Commissioner,
104 T.C. 1, 5 (1995), affd. 103 F.3d 104 (10th Cir. 1996).
An individual such as petitioner may generally deduct
payments made during the taxable year to a spouse2 to the extent
that the payments are alimony that is includable in the spouse’s
gross income. See sec. 215(a) and (b). Payments are alimony
that is includable in a spouse’s gross income when each of the
following requirements is met: (1) The payments are made in
cash, (2) the payments are received by (or on behalf of) the
spouse under a divorce or separation instrument, (3) the divorce
or separation instrument does not provide that the payments are
not reportable as alimony, (4) the spouses reside in separate
households at the time the payments are made, (5) the spouses do
not file a joint return, and (6) the payor spouse’s liability for
2
We use the term “spouse” to refer to a present or former
spouse.
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the payments, or for making other payments in substitute of those
payments, does not continue for any period after the payee
spouse’s death. Sec. 71(b)(1), (e); see also sec. 71(c)(1) (a
payee spouse’s gross income does not include any part of a
payment that a divorce or settlement agreement fixes as payable
for the support of children of the payor spouse). We concern
ourselves only with the requirement in dispute; i.e., the payor
spouse’s liability for the payments and for any substitute
payments must cease as of the payee spouse’s death. See sec.
71(b)(1)(D).3 Whether a payor spouse is liable to make an
alimony or substitute payment after a payee spouse’s death is
determined by looking first to the terms of the applicable
divorce documents which, if they speak unambiguously as to this
matter, are dispositive of the matter. See Hoover v.
Commissioner, 102 F.3d 842 (6th Cir. 1996), affg. T.C. Memo.
1995-183. In construing these documents, the mere fact that the
documents may characterize a payment as alimony has no effect on
the consequences of that payment for Federal income tax purposes.
Id. at 844.
3
Sec. 71(b)(1)(D) provides that payments in cash qualify as
alimony if “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.”
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Here, petitioners acknowledge that the applicable divorce
documents are the 1995 decree and the 1997 decree (collectively,
the decrees) and that the decrees conflict with section
71(b)(1)(D) in that they state that, upon Okerson’s death,
petitioner must continue to make payments in the same amount as
the payments which he must pay before her death. Petitioners
argue, however, that the intent of the State court was to allow
petitioner to deduct the $117,000 and $33,500 as alimony.
Petitioners consider relevant the fact that petitioner paid both
of these amounts during Okerson’s lifetime and that he never had
to pay any of the post death payments described in the decrees.
Petitioners focus erroneously on the intent of the State
court as support for their argument that they are entitled for
Federal income tax purposes to deduct the disputed payments as
alimony. While State law establishes the property interests of
divorcing parties, Federal law controls the Federal income tax
treatment of those interests. Hoover v. Commissioner, supra at
844. 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. Id. at 844-845. 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
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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 1495-1495
(1984).]
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. Petitioners fail this requirement in
that both of the decrees state specifically and unequivocally
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that petitioner’s obligation to pay alimony will terminate upon
the death of Okerson but that petitioner will then be liable to
start making corresponding payments in substitute of the alimony
payments. The complete termination upon the death of the payee
spouse of all payments made as alimony or in substitute thereof
is an indispensable part of Congress’s scheme for deducting a
payment as alimony for Federal income tax purposes, and it is
something that may not be overcome simply because the payor may
establish an intent that the payments be deductible by the payor
spouse as alimony. As the House Committee on Ways and Means
stated sweepingly in its report on section 71: “In order to
prevent the deduction of amounts which are in effect transfers of
property unrelated to the support needs of the recipient, the
bill provides that a payment qualifies as alimony only if the
payor * * * has no liability to make any such payment for any
period following the death of the payee spouse.” H. Rept.
98-432, supra at 1496.
Having decided that the definition of alimony for Federal
income tax purposes turns on a fulfillment of the statutory test
and not on the intent of the parties to a divorce proceeding or
of the court overseeing that proceeding, we now turn to deciding
whether the post death payments described in the decrees are
substitute payments within the context of section 71(b)(1)(D).
Under section 1.71-1T(b), Q&A-14, Temporary Income Tax Regs.,
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49 Fed. Reg. 34456 (Aug. 31, 1984), payments are treated as
substitute payments for purposes of section 71(b)(1)(D) to the
extent that they would begin as a result of the payee spouse’s
death and would substitute for a continuation of payments which
would otherwise qualify as alimony but which would terminate on
account of the payee spouse’s death. See also H. Rept. 98-432,
supra at 1496. Such is the case here. All of the post death
payments described in the decrees would be made after Okerson’s
death, and they would be made only if Okerson died before
petitioner satisfied his alimony obligations under the decrees.
The post death payments also would be made in substitute of the
alimony payments under the decrees, which would terminate on
account of Okerson’s death.
Petitioners rely erroneously upon the fact that petitioner
never actually made one of these post death payments. This fact
is unimportant. The standard established by Congress for
substitute payments is not, as petitioners would have it,
whether a payor spouse actually makes a substitute payment. The
standard, as gleaned from section 71(b)(1)(D), as well as from
the regulations interpreting that section and from the
legislative history, is whether the payor spouse could have to
make a substitute payment upon the death of the payee spouse.
Section 71(b)(1)(D) provides that payments qualify as alimony for
Federal income tax purposes if the payments are made in cash and
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“there is no liability to make any such payment * * * (in cash or
property) as a substitute for such payments after the death of
the payee spouse.” The applicable regulations, specifically
section 1.71-1T(b), Q&A-14, Temporary Income Tax Regs., supra,4
state:
To the extent that one or more payments are to begin to
be made, increase in amount, or become accelerated in
time as a result of the death of the payee spouse, such
payments may be treated as a substitute for the
continuation of payments terminating on the death
of the payee spouse which would otherwise qualify as
alimony or separate maintenance payments. * * *
The legislative history states:
the bill provides that a payment qualifies as alimony
only if the payor * * * has no liability to make any
such payment for any period following the death of the
payee spouse. A provision for a substitute payment,
such as an additional amount to be paid as child
support after the death of the payee spouse will
prevent a corresponding amount of the payment to the
payee spouse from qualifying as alimony. * * *
[H. Rept. 98-432, supra at 1496.]
We conclude that all of the post death payments described in
the decrees are substitute payments for purposes of section
71(b)(1)(D) and turn to decide the tax consequences that result
from this characterization. Pursuant to section 1.71-1T(b), Q&A-
13, Temporary Income Tax Regs., supra, the fact that a payor
spouse is required to make substitute payments means that none of
4
While these temporary regulations were superseded in part
by the technical correction provisions of the Tax Reform Act of
1986, Pub. L. 99-514, sec. 1843(b), 100 Stat. 2853, the portions
of these temporary regulations that we rely upon herein were not
affected by those provisions and continue to be effective.
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the corresponding payments which otherwise qualified as alimony
under section 71 are deductible as alimony. See H. Rept. 98-432,
supra at 1496; see also Cunningham v. Commissioner, T.C. Memo.
1994-474 (“If a payor spouse continues to be liable to make even
one otherwise qualifying payment after the death of the payee
spouse, none of the related payments required before the payee
spouse’s death will be alimony.”). Section 1.71-1T(b), Examples
(1) and (2), Temporary Income Tax Regs., supra, illustrates this
point. Under Example (1), the divorce decree states that A must
pay alimony to B in the form of six annual payments of $30,000.
The decree also states that this obligation will terminate upon
the death of B, but if any of the children of A and B are minors
at that time, A must then make annual payments of $10,000 to a
trust benefiting those children. The example states that A’s
liability to make the $10,000 payments is a substitute for
$10,000 of each of the $30,000 payments and that $10,000 of each
$30,000 payment fails to qualify as alimony. Under Example (2),
the divorce decree states that A must pay alimony to B in the
form of 15 annual payments of $30,000. The decree also states
that this obligation will terminate upon the death of B but that
A must then pay any unpaid amount to B’s estate in a lump sum.
Example (2) states that A’s liability to pay the lump sum is a
substitute for the full amount of each of the $30,000 payments
and that none of the $30,000 payments qualifies as alimony.
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Example (2) also states that the result would be the same even if
the lump sum was required to be discounted to reflect the
prepayment.
Here, petitioner was required by the 1995 decree to pay
Okerson monthly alimony totaling $117,000. This obligation would
have terminated upon Okerson’s death, but petitioner would then
have been required to pay the unpaid alimony towards the
education of his and Okerson’s children until the children
completed 4 years of college. Petitioner also was required by
the 1997 decree to make additional monthly alimony payments
totaling $33,500 to Okerson’s attorney. This obligation also
would have terminated upon the death of Okerson, but petitioner
would then have been required to continue paying the unpaid
amount to Okerson’s attorney. Because under both decrees the
substitute payments would have been the same amount as the
amounts payable as alimony under the decrees, we conclude
consistently with the temporary regulations and the examples set
forth therein and discussed above that petitioner is not entitled
to deduct any of the $21,600 as alimony for Federal income tax
purposes.
In sum, when the terms of the applicable divorce documents
state, as here, that the payor spouse upon the death of the payee
spouse must continue to make payments in substitute of payments
which are required to be paid as alimony, the post death payments
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fail to qualify as alimony for Federal income tax purposes. In
addition, a corresponding amount of any payment which is to be
made before the payee spouse’s death, and which otherwise would
be deductible as alimony, fails to qualify as well. Because
respondent determined as much with respect to the payments in
dispute, we sustain that determination.
All arguments for a contrary result have been considered,
and we have concluded that those arguments not discussed herein
are without merit. Accordingly,
Decision will be entered
for respondent.