Lapas attēli
PDF
ePub

206

In Preston v. Commissioner, for example, the 11th Circuit held that an ex-husband's payment of his ex-wife's car-repair expenses under order of a state court judge was not "alimony" because state law would not have absolved him of the payment obligation if his exwife had died after the car was repaired but prior to his payment of the bill. The payment of the payee's medical and car expenses are not likely disguised property settlements! They are support payments, at least as that term would be commonly understood by divorcing parties.

And the state law inquiries are quite often not easy. Certainly, the divorcing parties themselves, in many of these cases, could have little notion of how state law would affect their payment streams if one should die unexpectedly.

207

In Barrett v. United States, Pat and Helen Barrett divorced in 1984, and the 1984 Mississippi Judgment of Divorce "provided that the parties had reached a proper settlement of all property rights between them." It also required Pat to make the following payments to Helen:

[ocr errors]
[ocr errors]

monthly commencing November 15, 1984, the sum of $1,000 until her death or
remarriage;

until her death or remarriage, [Pat] should provide a major medical insurance policy
comparable to his present medical insurance for [Helen];

until her death or remarriage, [Pat] should provide $100,000 life insurance coverage
208
on his life naming [Helen] as beneficiary.

There was no dispute that these payments qualified as "alimony" for tax purposes.

Because of a change in Helen's income and earnings capacity, Pat's payment obligation was reduced to $1,400 per month by court order in 1985. In 1988, Pat petitioned to have the payments cease due to a material increase in Helen's income, and Helen opposed the motion. The parties settled the matter and entered a consent judgment with the court which provided that Pat must make one $50,000 payment in September of 1989 and another payment of $50,000 in September of 1990 (with the second payment carrying an 8% annual interest rate) and that all prior payment obligations (which were concededly deductible) were cancelled. The parties called this payment a "property settlement," even though the first agreement had stipulated that all property had been divided. No mention was made whether payments would be required to be made to Helen's estate should she die prior to the two payments. Pat sought to deduct these payments as "alimony."

To determine whether these payments qualified as tax “alimony," the 5th Circuit had to delve into Mississippi law, which provided for two kinds of payment streams. One was "periodic alimony" and one was "lump sum alimony." (While Mississippi had recently created a third type of payment stream, called "rehabilitative periodic alimony," the new law was not applicable to the case at bar, for which I'm sure the 5th Circuit panel was very grateful.) After

[blocks in formation]

,,209

examining state law, the 5th Circuit concluded that “[t]he [Mississippi family] court cannot deprive itself of the power to modify periodic alimony in the future and cannot extend the payments past the remarriage of the payee spouse or death of either spouse. As a result, Mississippi's periodic alimony falls within I.R.C. § 215's definition of deductible alimony.' In contrast, lump sum alimony "is a final settlement, substituting as a division of property, between a husband and wife that cannot be subsequently modified for any reason except fraud. The death or remarriage of the payee spouse does not affect the payor spouse's obligation.... Due to these limitations, lump sum alimony"210 is not deductible.

Thus, the 5th Circuit had to determine whether the payments under the consent agreement qualified as periodic alimony or lump sum alimony. In this regard, the 5th Circuit noted that "[t]he Mississippi Supreme Court has repeatedly announced that an alimony decree is presumed to provide for periodic alimony unless the decree 'by clear and express language' provides for lump sum alimony.' Nevertheless, the 5th Circuit concluded that the consent decree replaced a periodic alimony obligation (deductible) with a lump sum alimony obligation that would survive Helen's death (nondeductible).

,,211

A great case to illustrate how divorcing parties themselves, as well as the law in many states, increasingly recognize that payment streams can contain an inextricably intertwined combination of alimony and property settlement is Pettet v. United States,212 where the court's mandatory exploration of whether state law would stop a mixed payment stream on the payee's death was a bit surreal. In that case, Don and Rosa Bullard divorced in 1989. They decided to divide their property through agreement rather than under the terms of the North Carolina Equitable Distribution statute. Their "Separation Agreement and Property Settlement" was incorporated into their divorce decree, part of which provided:

Husband [Don Bullard] shall pay Wife [Rosa Bullard] the sum of $12,500 per
month as alimony, which shall consist in part of the variable first mortgage and
second mortgage monthly payments for the residence located at 813 Inlet View
Drive, as well as the first mortgage monthly payments for the unit located at
Holly Tree Condominiums. It shall be the Wife's responsibility to tender said
monthly mortgage payments for the aforementioned residences from said monthly
alimony payment.

213

The properties were owned solely by Rosa as a result of the divorce. The tax issue was whether any part of the payment stream mandated by that provision qualified as "alimony" for tax purposes.

[blocks in formation]

,,214

Both state and appellate courts in North Carolina, which had been called upon to interpret this agreement in unrelated litigation, characterized this payment stream as “one in which the provisions for alimony and for property settlement were so interrelated that the payments to Rosa were not subject to court modification by reason of changed circumstances, as would be the case for alimony payments standing alone. But, as we all know by now, the only characteristic that really mattered for Federal tax purposes was whether the payments would stop if Rosa died prior to full payment of the mortgages. If they would, then this mixed payment stream would be characterized as 100% includable/deductible alimony; if they would not, then it would be characterized as 100% excludable/nondeductible property settlement. The parties agreement--as usual--was silent. As the trial court observed,

Unfortunately, if the parties fail to expressly specify whether a periodic monthly
payment is intended to terminate upon the death of the payee spouse, a court must
look to state law to determine whether the fourth factor of the Section 71
definition of alimony is satisfied. See [another previously cited case] (noting that
a court is returned "to the vagaries of different State law approaches" to determine
if state law terminates a payor's liability at the death of the payee spouse).

215

Thus, the North Carolina Federal District Court had to try to determine whether North Carolina law would terminate these payments on Rosa's death. (As it happened, Rosa did, in fact, die in an automobile accident just six days before the tax litigation was originally scheduled to start.) It reviewed North Carolina family law decisions, the prior family law litigation that characterized this payment stream as a mixed alimony/property settlement stream, and North Carolina contract law in concluding that the payment stream would not stop on Rosa's death. In connection with North Carolina contract law, the issue was whether the parties intended the payments to stop at death, even though not explicitly provided for in their agreement. Under North Carolina law, the court could look to extrinsic evidence to determine the parties' intent with respect to this issue. The court stated:

Like the final version, an early draft of the parties' Separation Agreement did not
contain a termination at death clause.... However, the draft did contain the
following provision: “Husband and Wife stipulate and agree that in the event that
Wife cohabits with a member of the opposite sex who is not a relative, the amount
of alimony set forth herein shall be reduced to the exact amount of the first
mortgage and second mortgage payments for the residence located at 813 Inlet
View Drive."... This provision was struck by Rosa during the parties
negotiations. The court finds the language of this clause to be meaningful as the
payments would only have been reduced (not terminated) to the amount of the
mortgage payments. This evidences an intent that in negotiating the agreement
the parties intended the mortgage payment obligation to continue despite the
happening of a contingency that Don found undesirable. This provision also
demonstrates that Don, whose attorney drafted the Agreement, knew how to

[blocks in formation]

terminate his obligations... with a contingency clause that would discharge his

duty to make the alimony payments upon the cohabitation, remarriage, or death of
Rosa.

216

Also interesting is the following passage:

Don ... testified that he was unfamiliar with the federal tax law requirements of
26 U.S.C. § 71(b)(1). His attorney, Mr. Davis, testified that he too was unfamiliar
with the requirements of this tax provision including the termination at death
requirement. Don's accountant, Mr. Thomas May, testified that during the
negotiation of the Agreement he advised Rosa and Don of the tax consequences
of paying and receiving alimony, i.e., that it was includable as income for Rosa
and deductible for Don. But he testified that he was unfamiliar with the
termination at death requirement of 26 U.S.C. § 71(b)(1) and advised the parties
on the tax consequences of alimony according to Don's characterization of the
payments as "alimony."

The court finds that use of the term alimony ... is insufficient to prove the parties'
intentions that the payments terminate at Rosa's death. That Don intended the
payments to be "alimony" or even intended them to be deductible from his
income does not demonstrate that both he and Rosa intended the mortgage portion
of the ... payments to terminate upon her death.

217

I have absolutely no doubt that other divorcing parties and divorce lawyers not wellversed in tax law do not know that state law (or their agreement) must provide that payments stop at death to qualify as "alimony" for tax purposes. I would bet that divorcing parties are informed, much like Don and Rosa were, that alimony is includable/deductible, but they likely presume that any payment that is called alimony in their agreement (as in this case), or at least qualifies as alimony under state law, would fall within the inclusion/deduction system for Federal tax purposes. And they probably really scratch their heads when they find out that a payment stream characterized as "alimony" for purposes of Federal bankruptcy law (and thus not dischargeable in bankruptcy proceedings) may not be "alimony" for purposes of Federal tax law 218

As this decision indicates, surely there has got to be an easier way to determine which parties' marginal rate brackets will apply to the payments at issue than requiring Federal tax adjudicators to delve into the surrounding circumstances of the parties' negotiations in order to determine whether, under state law, payments would terminate on the death of the payee. The surreal nature of the inquiry was exacerbated by the knowledge that the payment stream was intended by the parties, and considered under state law, to be a mixed alimony/property settlement payment stream.

[blocks in formation]

218 See Votzmeyer v. U.S., 96-2 U.S.T.C. (CCH) ¶ 50,621 (S.D. Tex. 1996).'

Cunningham v. Commissioner219 provides yet another example of how the difficult interrelationship between the stop-at-death requirement and state law requires tax adjudicators to determine whether payments would qualify as "alimony" under state law-just the kind of inquiry that was supposed to end in 1984. The parties agreed that their divorce agreement should remain a private contract, rather than entered as an order of the court. (Mr. Cunningham did not wish the court to be able to increase his alimony and support payments, and Ms. Cunningham did not wish the court to be able to decrease them, as apparently could occur if they had their agreement formally entered as a court order.) The agreement was silent with respect to whether 142 monthly support payments of $2,500 made by Mr. Cunningham to Ms. Cunningham would stop at her death. (Child support was dealt with in a separate provision.) Ms. Cunningham privately received a tax opinion that stated that, since the proposed agreement did not require the payments to stop on her death, she would be entitled to exclude the payments as "not alimony." She did not include these payments, while Mr. Cunningham sought to deduct them, and both were issued notices of deficiency. (The case recites that Mr. Cunningham sued his family lawyer for malpractice, claiming that the lawyer told him that the payments would be deductible as alimony.)

Since the agreement was silent regarding whether the payments would cease if Ms. Cunningham should die before the end of the 142-month period, the Tax Court had to examine state law, and this was not an easy task. Under North Carolina law, only "alimony" payments stopped on the death of the payee, but no payment stream made under a private agreement that is not entered as a court order can qualify as "alimony." Thus, the court had to construe their private agreement under North Carolina contract law in order to determine whether the payments would stop as a matter of contract law. This allowed consideration of parol evidence, which allowed all of the negotiations and prior drafts of the agreement to come into evidence. The court eventually concluded that, while the evidence was ambiguous, the parties did not likely intend the payments to stop at the payee's death, so the payments did not qualify as tax "alimony." If I counted correctly, the Tax Court had to digest and cite fifteen different North Carolina case law decisions, as well as several North Carolina statutes, in reaching its conclusion. What a mess!

Another fascinating case is Christoph v. United States.220 Under their original divorce decree, Mr. Dieter Christoph was to pay Ms. Jutta Duse unspecified periodic payments for the rest of her life, which presumably qualified as includable/deductible alimony. In 1988, Mr. Christoph petitioned the court to terminate his obligations based on Georgia's live-in lover statute. Ms. Duse also sued, claiming that Mr. Christoph breached certain duties owed to her. The suits were consolidated, and the presiding judge encouraged a settlement. In a hearing on the matter,

[the attorney for Mr. Christoph] announced that "Ms. Duse would be paid a sum
that would 'include $250,000 which will be expressly deductible by Mr.
Christoph, and it is a contingency of this agreement that that payment of $250,000

[blocks in formation]
« iepriekšējāTurpināt »