                     T.C. Summary Opinion 2006-70



                       UNITED STATES TAX COURT



                 MICHAEL P. TULAY, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 21664-04S.              Filed April 26, 2006.



     Michael P. Tulay, pro se.

     James L. May, Jr., for respondent.



     COHEN, Judge:    This case was heard pursuant to the

provisions of section 7463 of the Internal Revenue Code in effect

at the time the petition was filed.    The decision to be entered

is not reviewable by any other court, and this opinion should not

be cited as authority.    Unless otherwise indicated, all section

references are to the Internal Revenue Code in effect for the

year in issue.
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       Respondent determined a deficiency of $11,026 in

petitioner’s Federal income tax for 2002.      Respondent also

determined an accuracy-related penalty under section 6662(a) and

(b)(1) and (2) of $2,205.20.    The issues for decision are whether

petitioner’s $35,000 payment to his former wife was alimony,

deductible under section 71(b), and whether petitioner is liable

for the penalty for negligence or substantial understatement of

tax.

                             Background

       Some of the facts have been stipulated, and the stipulated

facts are incorporated in our findings by this reference.

Petitioner resided in Knoxville, Tennessee, at the time that he

filed his petition.

       On August 19, 2002, petitioner and his then wife, Pamela

Moritz Tulay (Tulay), met with their respective attorneys to

negotiate the terms of their divorce after failed attempts at

mediation.    At the time of the August 19 meeting, petitioner was

represented by William A. Mynatt (Mynatt), and Tulay was

represented by Wanda G. Sobieski (Sobieski).      Tulay had

previously been represented by different counsel in the divorce

proceedings.    A court reporter was present at the August 19

meeting and prepared a transcript.      At the end of the meeting,

Sobieski read into the record the understanding that the parties

had reached as follows:    Petitioner would pay $3,900 a month in
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child support; Tulay would keep the house in which she was

living, and petitioner would keep the condominium in which he was

living; each party retained his or her vehicle; personal property

would remain in the possession of whoever had it on that date and

“Any stock or cash accounts * * * [would] be divided 50/50 as of

their balance” on that date (August 19, 2002); Tulay was to be

“granted a 50 percent plus $35,000 interest in” petitioner’s

retirement accounts; and an account for the children would be

maintained with Tulay as custodian and petitioner as trustee.

Petitioner agreed to be bound by the stated terms.   After the

meeting, in accordance with the understanding that had been

stated, Sobieski prepared the Marital Dissolution Agreement (MDA)

to be signed by petitioner and Tulay.

     Petitioner had taken handwritten notes at the August 19

meeting, and Tulay initialed petitioner’s notes.   On the last

page of those notes, petitioner had labeled the $35,000 cash

payment as “rehab alimony”.

     The terms of the MDA followed the understanding of the

parties as stated at the August 19 meeting.   Under the heading

“Retirement Accounts/Investment Accounts”, petitioner was to

transfer 50 percent plus $35,000 of his retirement accounts to

Tulay, and he agreed to assist Tulay “in obtaining any Qualified

Domestic Relations Order or other documents necessary to secure

the transfer of those funds” to Tulay without penalty.   There was
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neither a heading nor a specific designation of money to be paid

to Tulay as alimony.    Petitioner signed the MDA on August 23,

2002, and it was filed by Sobieski with the Chancery Court for

Knox County, Tennessee (the Tennessee Court), on August 28, 2002.

       On September 3, 2002, the Tennessee Court entered a Final

Decree of Divorce and found that petitioner and Tulay had made

“adequate and sufficient provisions in their * * * [MDA] for an

equitable settlement of any and all property rights, custody and

support”.    The MDA was incorporated as an “Order of the Court”,

and petitioner and Tulay were ordered to comply with its terms.

       On September 16, 2002, UBS Paine Webber (Paine Webber)

issued a check to Tulay in the amount of $79,340.74, representing

a 50-percent interest in one of petitioner’s retirement accounts

and the $35,000 payment required under the terms of the MDA.

       On April 15, 2003, petitioner electronically filed a Form

1040, U.S. Individual Income Tax Return, for 2002, on which he

claimed a deduction of $35,000 for alimony.    Petitioner had

assistance from Harold Adair (Adair) of H&R Block in filling out

his tax return.    Adair had been assisting petitioner in filling

out his tax returns for the prior 6 or 7 years.    Petitioner told

Adair that the $35,000 payment was alimony to pay for the

education of Tulay; however, he did not provide Adair with the

MDA.    After reviewing with petitioner Internal Revenue Service

Publication 504 and the requirements for a payment to be
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considered alimony, Adair determined that petitioner met the

requirements and deducted the payment on petitioner’s tax return.

     In the notice of deficiency, the Internal Revenue Service

disallowed petitioner’s deduction because he “did not establish

that the amount shown was (a) alimony and (b) paid, it is not

deductible.”

                            Discussion

Characterization of the $35,000 Payment

     The parties dispute whether the $35,000 payment at issue was

a property settlement or alimony.   In the event the payment was

some form of alimony, the parties dispute whether it met the

requirement of section 71(b)(1)(D).

     Property settlement payments are not deductible for tax

purposes from the income of the paying spouse.   Yoakum v.

Commissioner, 82 T.C. 128, 134 (1984), and cases there cited; see

Rogers v. Commissioner, T.C. Memo. 2005-50 (applying Tennessee

law).   Under section 215, a deduction is allowed for an amount

equal to alimony or separate maintenance payments paid during the

taxable year.   “Alimony or separate maintenance payment” means

any alimony or separate maintenance payment that is includable in

the gross income of the recipient under section 71.   Sec. 215(b).

     Section 71(b)(1) defines “alimony or separate maintenance

payment” as any payment in cash if--

          (A) such payment is received by (or on behalf of)
     a spouse under a divorce or separation instrument,
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          (B) the divorce or separation instrument does not
     designate such payment as a payment which is not
     includible 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.

     If the payor is liable for any qualifying payment after the

recipient’s death, none of the related payments required will be

taxed as alimony.   Sec. 1.71-1T(b), Q&A-13, Temporary Income Tax

Regs., 49 Fed. Reg. 34456 (Aug. 31, 1984).   Whether a postdeath

obligation exists may be determined by the terms of the divorce

or separation instrument or, if the instrument is silent on the

matter, by State law.   Morgan v. Commissioner, 309 U.S. 78, 80-81

(1940); see Rogers v. Commissioner, supra.   The parties agree

that the divorce decree does not provide any conditions for the

termination of the payment.

     Tennessee law provides for three kinds of alimony:   Alimony

in futuro, alimony in solido, and rehabilitative alimony.    See

Burlew v. Burlew, 40 S.W.3d 465, 470-471 (Tenn. 2001); see also

Self v. Self, 861 S.W.2d 360, 363 (Tenn. 1993).   Alimony in

futuro is awarded to provide financial support to a spouse who

cannot be rehabilitated.   Burlew v. Burlew, supra at 471.     It is
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subject to modification and its duration is uncertain due to

contingencies agreed upon by the parties or imposed by the

courts.    Id.   Alimony in futuro terminates upon the death or

remarriage of the recipient.    Tenn. Code Ann. sec.

36-5-101(a)(2)(B) (2003).    Alimony in solido is an award of a

definite sum of money to be paid in a lump sum or as installments

over a definite period of time.    It is not subject to

modification and does not terminate upon the death of either

party.    Burlew v. Burlew, supra at 471.   Rehabilitative alimony

is awarded when it is feasible for the economically disadvantaged

spouse to achieve, with reasonable effort, an earning capacity

that will allow for the spouse to be self-sufficient and have a

standard of living comparable to the one he or she enjoyed during

the marriage.     Id.; Tenn. Code Ann. sec. 36-5-101(d)(1)(C).

Rehabilitative alimony is modifiable and terminates upon the

death of either spouse.    Tenn. Code Ann. sec. 36-5-101(d)(1)(C);

Self v. Self, supra at 363.

     Respondent argues that the disputed $35,000 payment was, on

the face of the agreement, part of the property settlement rather

than alimony and would not have terminated upon the death of

Tulay.    In the alternative, respondent argues that, if the Court

were to determine the payment was alimony, the same result would

follow because the lump-sum payment was alimony in solido under

Tennessee law, which would not terminate upon the death of Tulay.
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     Petitioner argues that the payment was rehabilitative

alimony to cover the cost of Tulay’s obtaining a postgraduate

degree and, therefore, would terminate upon the death of Tulay.

Petitioner claims that the $35,000 amount was determined “based

on her receiving $600/month for 58 months, which represented

approximate costs for graduate school and the length of time

until * * * [the] youngest child would begin school respectively.

* * * The $600/month was consistent with the rehabilitative

alimony figures discussed during mediation.”

     At trial, both Sobieski and Mynatt testified as to the terms

of the MDA.    According to Sobieski, there was no agreement as to

alimony payments at any time.    She testified that the unequal

division of assets, i.e., the “imbalance”, was intended as an

“equitable” division and that Tulay always claimed that she was

entitled to more than 50 percent of the property.

     Mynatt testified that correspondence with Tulay’s previous

counsel regarding division of property and a draft MDA prepared

by Tulay’s previous counsel indicated that there was to be

alimony for Tulay in order for her to pursue a postgraduate

degree.    However, none of the correspondence with Tulay’s

previous counsel was presented as evidence, and Mynatt

acknowledged that Sobieski never requested alimony on behalf of

Tulay.    Mynatt recalled discussing support for Tulay at the

August 19, 2002, meeting, but he said that support was not
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mentioned in the MDA because “It was her demand that she be given

that payment of $35,000 instead.”

     The Supreme Court of Tennessee in Self v. Self, supra at

363-364, stated:

     Obviously, great care should be exercised by counsel
     and trial courts in crafting decrees. The decree
     should reflect the court’s findings with regard to the
     circumstances of the parties, the purpose or expected
     results of the relief granted, and the specific
     benefits granted to and obligations imposed upon the
     respective parties. In addition to the rights and
     obligations of the parties with respect to each other,
     the liability for taxes, the rights of creditors, and
     other significant consequences may depend upon the
     preciseness of the language employed in the decree.
     Construction by the courts of uncertain and ambiguous
     language is a poor substitute for careful articulation.

Much litigation in this Court results from failure of negotiating

parties to be precise in drafting the terms of marital

agreements.   This case is an example of that type of litigation.

     Though the payment reflected an unequal division of property

in Tulay’s favor, there is no requirement that marital property

in Tennessee be divided equally in order for the division to be

equitable.    See Norman v. Norman, 2005 WL 2860274, 2005 Tenn.

App. LEXIS 687 (Ct. App., Oct. 31, 2005); see also Bookout v.

Bookout, 954 S.W.2d 730, 731 (Tenn. Ct. App. 1997).   There are 11

statutorily prescribed factors to be considered.   Tenn. Code Ann.

sec. 36-4-121(c).   For example, when dividing property, a court

may take into consideration “The tangible or intangible

contributions by one party to the education, training or
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increased earning power of the other party”.       Tenn. Code Ann.

sec. 36-4-121(c)(3).   It may also consider “The contribution of

each party to the acquisition, preservation, appreciation,

depreciation or dissipation of the marital or separate property,

including the contribution of a party to the marriage as

homemaker, wage earner or parent”.       Tenn. Code Ann. sec. 36-4-

121(c)(5).   The unequal division of the marital property in this

case, therefore, is inconclusive.

     After examining all of the facts and circumstances, we

conclude that the $35,000 payment by petitioner to Tulay was part

of a property settlement.   The MDA provides that the payment to

Tulay was made from petitioner’s retirement account, and there is

no indication anywhere in the document that it was for alimony.

The only evidence that the payment was intended as alimony is

petitioner’s and Mynatt’s testimony and petitioner’s handwritten

notes.   It is not clear that the payment would not be due if

Tulay had died before it was made.       See Rogers v. Commissioner,

supra.   The written agreement is the final agreement of the

parties, and it leads to the conclusion that the $35,000 was

designated as a division of property.       The payment does not

satisfy the requirement of section 71(b)(1)(D) and, therefore, is

not deductible by petitioner.
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Section 6662 Accuracy-Related Penalties

     Under section 6662, a taxpayer may be liable for a penalty

of 20 percent on the portion of an underpayment of tax due to

(1) negligence or intentional disregard of rules or regulations

or (2) any substantial understatement of income tax.    Sec.

6662(a) and (b)(1) and (2).   Section 6662(c) defines “negligence”

as including any failure to make a reasonable attempt to comply

with the provisions of the Internal Revenue Code and defines

“disregard” as any careless, reckless, or intentional disregard.

     An understatement of income tax is “substantial” if it

exceeds the greater of 10 percent of the tax required to be shown

on the return or $5,000.   Sec. 6662(d)(1)(A).   An

“understatement” is defined as the excess of the tax required to

be shown on the return over the tax actually shown on the return,

less any rebate.   Sec. 6662(d)(2)(A).   Petitioner’s

understatement of tax for 2002 is substantial.

     The section 6662(a) penalty is not imposed with respect to

any portion of the underpayment as to which the taxpayer acted

with reasonable cause and in good faith.    Sec. 6664(c)(1); see

also Higbee v. Commissioner, 116 T.C. 438, 488 (2001).    The

decision as to whether a taxpayer acted with reasonable cause and

in good faith is made by taking into account all of the pertinent

facts and circumstances.   Sec. 1.6664-4(b)(1), Income Tax Regs.

Relevant factors include the taxpayer’s efforts to assess his or
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her proper tax liability, including an honest misunderstanding of

fact or law that is reasonable in light of all of the facts and

circumstances.   Id.

     Petitioner intended and calculated that the $35,000 payment

made to Tulay was rehabilitative alimony for her to obtain a

postgraduate degree.   Looking to all of the facts and

circumstances, it was reasonable for petitioner to believe that

the $35,000 payment to Tulay was deductible alimony, and we

conclude that he acted in good faith.

     To reflect the foregoing,



                                         Decision will be entered

                                    for respondent as to the

                                    deficiency and for petitioner

                                    as to the penalty.
