                  T.C. Memo. 1998-455



                UNITED STATES TAX COURT



          ALEC JEFFREY MEGIBOW, Petitioner v.
     COMMISSIONER OF INTERNAL REVENUE, Respondent



Docket No. 22268-96.           Filed December 28, 1998.



     At issue are (1) the deductibility of $50,000
claimed by P as an alimony payment, (2) the
deductibility of $48,651.75 claimed by P as business-
related legal fees, (3) whether P must include in gross
income $30,000 received by him from his employer, and
(4) whether any underpayment is due to P’s negligence
or disregard of rules or regulations.
     Held, the $50,000 payment is not alimony; P has
failed to prove that his obligation to make that
payment would not survive the death of his ex-spouse.
Held, further, P has failed to prove that the legal
fees are either alimony or otherwise deductible. Held,
further, P has failed to prove that the payment from
his employer was other than taxable compensation.
Held, further, P has failed to prove that he neither
was negligent nor disregarded rules or regulations.



Anthony M. Bentley, for petitioner.

Donald E. Edwards, for respondent.
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                        MEMORANDUM OPINION

      HALPERN, Judge:

I.   Introduction

      By notice of deficiency dated July 18, 1996, respondent

determined a deficiency in petitioner’s 1993 Federal income tax

of $48,275 and an accuracy-related penalty in the amount of

$9,655.

      Each party has conceded certain issues and the issues

remaining for decision are (1) the deductibility of $50,000

claimed by petitioner as an alimony payment, (2) the

deductibility of $48,651.75 claimed by petitioner as business-

related legal fees, (3) whether petitioner must include in gross

income $30,000 received by him from Radiology Affiliates of NY,

and (4) whether any underpayment is due to petitioner’s

negligence or disregard of rules or regulations.

      Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect for the year in issue, and

all Rule references are to the Tax Court Rules of Practice and

Procedure.

      Certain facts have been stipulated.    The stipulation of

facts filed by the parties, with attached exhibits, is

incorporated herein by this reference.   We have need to find few

facts in addition to those stipulated and, accordingly, shall not

separately set forth those findings.   We include our additional
                                - 3 -

findings of fact in the discussion that follows.    Petitioner

bears the burden of proof.    Rule 142(a).

II.   The Claimed Payment of Alimony

      A.   Background

      Petitioner and his ex-wife, Marilyn, were divorced in 1993.

A judgment of divorce (judgment of divorce) was entered by the

Supreme Court of the State of New York, County of New York (the

New York court).    The New York court made separate findings of

fact and conclusions of law, which accompanied the judgment of

divorce.    Among those findings were the following:

(1) petitioner and Marilyn had, in open court, entered into a

stipulation of settlement (the settlement stipulation) and

(2) “[n]either of the parties seeks equitable distribution of the

marital property, support and maintenance or relief other than as

set forth in * * * [the settlement stipulation]”.      The New York

court incorporated the settlement stipulation in, and stated that

it would survive, the judgment of divorce.    In pertinent part,

the settlement stipulation provides:    It “shall satisfy all the

economic issues arising out of their [petitioner’s and Marilyn’s]

marriage.”    Petitioner shall pay “maintenance” to Marilyn for a

period of 2 years in the amount of $400 a week.    Petitioner shall

also pay $50,000 to Marilyn, but only upon her vacating a certain

apartment by a certain date.    In the event Marilyn fails to

vacate the apartment by that date, the $50,000 she is to receive

shall not be paid to her until she does vacate the apartment, and
                                - 4 -

she shall suffer a reduction in that amount of $2,000 a month as

liquidated damages in respect of the reasonable rental value of

the apartment.

     During the proceeding giving rise to the settlement

stipulation, Marilyn’s attorney described the $50,000 payment as

“in full and complete satisfaction of all claims of the defendant

[Marilyn] in connection with equitable distribution”.

Petitioner’s attorney in that proceeding did not object to that

characterization.    The New York court immediately thereafter

stated that, upon delivery of the $50,000 (into escrow), Marilyn

would transfer to petitioner her interest in certain “upstate”

real property.

     Apparently, Marilyn vacated the apartment on time and

received the full $50,000 (the $50,000 payment), since petitioner

deducted the $50,000 payment on his 1993 (calendar year) Federal

income tax return as a deductible payment of alimony.    The record

does not establish the date that petitioner made the $50,000

payment.    Respondent disallowed petitioner’s $50,000 deduction on

the ground that the $50,000 payment constituted a property

settlement and not deductible alimony.

     B.    The Deduction for Alimony

     It is generally understood that payments of alimony are

deductible to the paying spouse (here, the ex-husband) and

includable in income by the recipient spouse (here, the ex-wife).

The axis along which that statement runs connects, at one end,
                                - 5 -

section 215 and, at the other, section 71.    In pertinent part,

section 215 provides:

          (a) General Rule.--In the case of an individual,
     there shall be allowed as a deduction an amount equal
     to the alimony or separate maintenance payments paid
     during such individual’s taxable year.

          (b) Alimony or Separate Maintenance Payments
     Defined.--For purposes of this section, the term
     “alimony or separate maintenance payment” means any
     alimony or separate maintenance payment (as defined in
     section 71(b)) which is includable in the gross income
     of the recipient under section 71.

Section 71(a) provides:    “Gross income includes amounts received

as alimony or separate maintenance payments.”    Section 71(b)(1)

provides:

          In general.--The term “alimony or separate
     maintenance payment” means any payment in cash if--

                 (A) such payment is received by (or on behalf
            of) a spouse under a divorce or separation
            instrument,

                 (B) the divorce or separation instrument does
            not designate such payment as a payment which is
            not includable in gross income under this section
            and not allowable as a deduction under section
            215,

                 (C) in the case of an individual legally
            separated from his spouse under a decree of
            divorce or of separate maintenance, the payee
            spouse and the payor spouse are not members of the
            same household at the time such payment is made,
            and

                 (D) there is no liability to make any such
            payment for any period after the death of the
            payee spouse and there is no liability to make any
            payment (in cash or property) as a substitute for
            such payments after the death of the payee spouse.
                                  - 6 -

     On brief, respondent concedes that the $50,000 payment

satisfies the first three subparagraphs of section 71(b)(1).         The

parties agree that the only issue is whether the $50,000 payment

satisfies subparagraph (D), i.e., whether petitioner’s liability

to make the $50,000 payment would have survived the death of

Marilyn.

     C.    Discussion

            1.    New York Domestic Relations Law

     To determine whether the $50,000 payment would survive the

death of Marilyn, we must look to the law of New York.       See

Morgan v. Commissioner, 309 U.S. 78, 80 (1940) (“State law

creates legal interests and rights.       The federal revenue acts

designate what interests or rights, so created, shall be

taxed.”).    In New York, actions for a divorce are classified as

“matrimonial actions” and, with respect to matrimonial actions

commenced after July 19, 1980, are governed by part B of section

236 of the Domestic Relations Law.        N.Y. Dom. Rel. Law sec. 236B

(McKinney 1986).      Under the Domestic Relations Law, the parties

to a matrimonial action may, by agreement, provide for (1) the

division or distribution of separate and marital property and

(2) the amount and duration of maintenance.       N.Y. Dom. Rel. Law

sec. 236B(3).      If they have not so agreed, the court may order

maintenance and determine the respective rights of the parties in

their separate and marital property.       N.Y. Dom. Rel. Law sec.

236B(5)(a).      To aid the court in determining the respective
                                 - 7 -

rights of the parties in marital property, the Domestic Relations

Law provides:   “Marital property shall be distributed equitably

between the parties, considering the circumstances of the case

and of the respective parties.”    N.Y. Dom. Rel. Law sec.

236B(5)(c).    The terms “maintenance” and “distributive award” are

defined in the Domestic Relations Law, N.Y. Dom. Rel. Law sec.

236B(1)(a) and (b), respectively, as follows:

          (a) The term "maintenance" shall mean payments
     provided for in a valid agreement between the parties
     or awarded by the court in accordance with the
     provisions of subdivision six of this part, to be paid
     at fixed intervals for a definite or indefinite period
     of time, but an award of maintenance shall terminate
     upon the death of either party or upon the recipient's
     valid or invalid marriage, or upon modification
     pursuant to paragraph (b) of subdivision nine of
     section two hundred thirty-six of this part or section
     two hundred forty-eight of this chapter.

          (b) The term "distributive award" shall mean
     payments provided for in a valid agreement between the
     parties or awarded by the court, in lieu of or to
     supplement, facilitate or effectuate the division or
     distribution of property where authorized in a
     matrimonial action, and payable either in a lump sum or
     over a period of time in fixed amounts. Distributive
     awards shall not include payments which are treated as
     ordinary income to the recipient under the provisions
     of the United States Internal Revenue Code.

          2.    Petitioner’s and Respondent’s Arguments

     Respondent argues that the $50,000 payment was made in

settlement of property rights:    “The $50,000 payment is part of a

global property settlement.”   Respondent reaches that conclusion

based on the settlement stipulation.     He directs us first to the

separate provision dealing with “maintenance” and then to

Marilyn’s attorney’s description of the $50,000 payment as “in
                              - 8 -

full and complete satisfaction of all claims of the defendant

[Marilyn] in connection with equitable distribution.”   He also

finds support in the New York court’s discussion of other

property transfers in proximity to its discussion of the $50,000

payment.

     Petitioner relies on ambiguity as his defense.   In his post-

trial memorandum, petitioner states:

          It has always been our position, and indeed our
     original planned strategy, that the nature of the
     $50,000 payment was not characterized in open court.
     The stipulation was therefore silent on that matter.
     The invitation by the divorce court to submit a more
     particularized document left open the issue of post
     spousal death liability therefor, to be addressed, if
     at all, by supplementation of the agreement then
     recorded. This was never done.

Apparently, petitioner believed that, if the $50,000 payment was

not labeled “an equitable distribution”, he might have been able

to avoid his obligation to make that payment if Marilyn died

after they were divorced and before any payment was made.

Nevertheless, petitioner admits:   “[M]any might come to the

conclusion that the $50,000 payment was in the nature of

equitable distribution”.

           3.   Analysis

     The $50,000 payment was made pursuant to the settlement

stipulation and, although incorporated into the judgment of

divorce, it cannot be characterized as an amount “awarded by the

court” within the meaning of N.Y. Dom. Rel. Law sec. 236B(1)(a)

(“maintenance”) or (b) (“distributive award”).   Cf. Kaplan v.
                               - 9 -

Kaplan, 82 N.Y. 2d 300, 307, 624 N.E.2d 565 (1993) (assignment of

decedent’s pension benefits made in separation agreement

incorporated into judgment of divorce was not made by court-

ordered equitable distribution).    Because the $50,000 payment was

not made by award of the New York court, the limitation of N.Y.

Dom. Rel. Law sec. 236B(1)(a) (“an award of maintenance shall

terminate upon the death of either party”) is inapplicable.

Petitioner, nevertheless, relies on the calculated ambiguity he

created to establish that his obligation to make the $50,000

payment in the event of Marilyn’s death was fixed neither by the

settlement stipulation nor by an “equitable distribution”, which,

apparently, he believed would create a fixed obligation upon his

divorce from Marilyn.   Petitioner was perhaps a little too clever

in his tactics.   The settlement stipulation obligates petitioner

to make the $50,000 payment and, although the amount of

petitioner’s obligation depends upon the date on which Marilyn

vacated a certain apartment, Marilyn’s survival is not set forth

as a condition precedent to petitioner’s obligation to pay, nor

has petitioner otherwise shown that such condition existed at the

time he made the $50,000 payment.   See Webb v. Commissioner, T.C.

Memo. 1990-540 (language in New York separation agreement that

husband “shall” pay sufficient to create a liability enforceable

by ex-wife’s estate should she have died after the agreement and

before payment); cf. Brower v. Brower, 653 N.Y.S.2d 386, 387-388

(App. Div. 1997) (intent important in determining whether
                                - 10 -

obligations in separation agreement were to be performed

notwithstanding death of husband).

       D.   Conclusion

       Petitioner has failed to prove that the obligation to make

the $50,000 payment would have ended had Marilyn died before the

payment.     Therefore, petitioner has failed to prove that the

$50,000 payment was alimony within the meaning of sections 71(b)

and 215(b).     Petitioner is not entitled to a deduction for the

$50,000 payment under section 215(a).     Respondent’s determination

of a deficiency is sustained to the extent respondent denied

petitioner’s deduction of the $50,000 payment.

III.    Business-Related Legal Fees

       A.   Introduction

       On his 1993 Federal income tax return, petitioner claimed

$58,581 as a deduction for business-related legal fees.     The

amount of the deduction remaining in issue is $48,651.75.

Petitioner now claims that $25,000 of that amount, which was paid

to Charles P. Gallo (the Gallo payment), petitioner’s wife’s

attorney in the matrimonial action, is deductible as the payment

of alimony.     The remaining $23,651.75 was paid to petitioner’s

attorney Anthony M. Bentley (the Bentley payment), and petitioner

claims it was paid for tax planning with respect to the divorce

and for business-related legal advice.
                                - 11 -

     B.   Gallo Payment

     The issue and arguments here are basically the same as they

were with respect to the $50,000 payment.      The issue is whether

petitioner’s obligation to make the Gallo payments was

conditioned on Marilyn’s survival.       Petitioner became obligated

to make the Gallo payment pursuant to the settlement stipulation.

The settlement stipulation required petitioner to place $12,500

of the amount to be paid to Mr. Gallo in an escrow account.

Petitioner made the Gallo payment in 1993.      Our analysis is the

same as with respect to the $50,000 payment.      Petitioner has

failed to prove that his obligation to make the Gallo payment was

conditional on Marilyn’s survival until the time of payment.       For

that reason, petitioner had failed to prove that it was a

deductible alimony payment.   See Smith v. Commissioner, T.C.

Memo. 1998-166 (to be a deductible alimony payment, obligation to

pay wife’s attorney’s fees must be extinguishable on her death);

Rebura v. Commissioner, T.C. Memo. 1997-38 (same), affd. without

published opinion 139 F.3d 907 (9th Cir 1998).      Respondent’s

determination of a deficiency is sustained to the extent

respondent denied petitioner’s deduction for the Gallo payment.

     C.   Bentley Payment

     Petitioner claims that the Bentley payment was for legal

advice concerning tax planning aspects of the marital dissolution

and business-related matters.    Petitioner did not testify.

Mr. Bentley testified as to the work he did to earn that fee.
                              - 12 -

His testimony was vague, unsupported by any billing records or

any other tangible work product that would indicate the business

or tax-related nature of the work, and does not convince us that

any of the expense was related to petitioner's trade or business

or tax-related matters.   Cf. United States v. Gilmore, 372 U.S.

39 (1963) (to be deductible as a business or profit seeking

expense, it is insufficient that an expenditure have a business

or income-related consequence if the origin of the expense is not

in the business or profit seeking activity).   We accord

Mr. Bentley's testimony no weight, and, thus, petitioner has

failed to carry his burden of proof on this matter.   Respondent’s

determination of a deficiency is sustained to the extent

respondent denied petitioner’s deduction for the Bentley payment.

IV.   Payment From Radiology Affiliates

      Radiology Affiliates of NY (Radiology Affiliates) employed

petitioner during 1993.   Petitioner received $30,000 from

Radiology Affiliates during 1993 (the $30,000 payment), which he

did not report as gross income.   Respondent determined that the

$30,000 payment was compensation for services to be performed in

the future and increased petitioner’s gross income by $30,000 on

account thereof.   Petitioner argues that the $30,000 payment was

not an item of gross income because it was a loan.

      Generally, compensation for services is an item of gross

income, including compensation received for future services.

Sec. 61(a)(3); e.g., Huebner v. Commissioner, T.C. Memo. 1966-73
                                - 13 -

(compensation received for future services included in gross

income in year compensation received).     Petitioner does not

quarrel with that result, but insists that the $30,000 payment

was a loan, “secured by a lien on petitioner’s 1994 income, which

income was ultimately reduced by netting out the loan.”

Respondent argues that petitioner has failed to prove that the

$30,000 payment was received as a loan.

     In order to be a bona fide loan, petitioner must demonstrate

that a debtor-creditor relationship was created from the outset

and that the payment constituted an enforceable obligation to

repay the $30,000.    See Beaver v. Commissioner, 55 T.C. 85, 91

(1970); McCormack v. Commissioner, T.C. Memo. 1987-11.        This

relationship "is a question of fact to be determined upon a

consideration of all the evidence."      Beaver v. Commissioner,

supra at 91.   We have looked at whether there were notes of

indebtedness or whether the parties agreed to an interest rate

for the loan in determining if the parties did in fact have the

intent to establish a debtor-creditor relationship.     See

McCormack v. Commissioner, supra.     We have also stated, "An

intent to satisfy or repay ‘loans’ from future earnings of a

corporation or by rendering services in the future does not

satisfy the requirement for a valid debt, i.e., an unconditional

obligation to repay."     Nix v. Commissioner, T.C. Memo. 1982-330

(citing Beaver).     Rather, such advance payments "constituted
                              - 14 -

taxable income in the years received."     Beaver v. Commissioner,

supra at 91.

     Petitioner has failed to prove that the $30,000 was a loan.

Petitioner has provided us with little evidence to support his

claim that the $30,000 was a loan.     We are not persuaded by

Mr. Bentley’s testimony that he prepared a Form 1099,

Miscellaneous Income, showing zero miscellaneous income paid by

Radiology Affiliates, to correct “the 1099 which was * * *

erroneously submitted by the employer contemporaneously with the

transaction”.   Petitioner has failed to produce any loan

documents or testimony of his own or of anyone from Radiology

Affiliates to substantiate his claim of a loan.    This failure to

produce such evidence leads to the inference that either such

evidence does not exist or would be negative to petitioner.

Wichita Terminal Elevator Co. v. Commissioner, 6 T.C. 1158, 1165

(1946) ("the failure of a party to introduce evidence within his

possession and which, if true, would be favorable to him, gives

rise to the presumption that if produced it would be

unfavorable"), affd. 162 F.2d 513 (10th Cir. 1947).     Petitioner

has not given us any reason to believe that the $30,000 was a

loan, and thus, we find that the $30,000 payment was an item of

gross income for 1993.

     Respondent’s determination of a deficiency is sustained to

the extent respondent included the $30,000 payment as gross

income.
                               - 15 -

V.   Negligence or Disregard of Rules or Regulations

      Respondent determined an accuracy-related penalty under

section 6662 on the whole of petitioner’s underpayment of tax for

1993 on account of petitioner’s negligence or disregard of rules

or regulations.    In the petition, petitioner assigned error to

that determination, but did not aver any facts in support of that

determination.    In his trial memorandum, petitioner again

asserted that the section 6662 penalty was in dispute;

nevertheless, he did not further discuss the penalty.    Petitioner

did not address the penalty in his posttrial filing.     We assume

that petitioner’s defense to the section 6662 penalty is that

there is no deficiency in tax.    Since we have sustained portions

of respondent’s determination of a deficiency, to that extent,

petitioner’s defense is unsuccessful, and petitioner has failed

to carry his burden of showing that neither was he negligent nor

did he disregard rules or regulations.    Respondent’s

determination of a penalty under section 6662 is sustained,

modified only to take into account respondent’s concessions.


                                          Decision will be entered

                                     under Rule 155.
