                          T.C. Memo. 1995-554



                        UNITED STATES TAX COURT



               EDWARD J. RICHARDSON, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent

               IRENE E. RICHARDSON, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent


     Docket Nos. 28363-92, 26019-93.1    Filed November 21, 1995.


     Maurice P. Wolk, for petitioner Edward J. Richardson.

     Albert L. Grasso, for petitioner Irene E. Richardson.

     Donna C. Hansberry, for respondent.


                          MEMORANDUM OPINION

     FAY, Judge:     In the notice of deficiency, respondent

determined deficiencies in and additions to petitioner Edward J.

Richardson's (hereinafter Edward) Federal income taxes in the

following amounts:

     1
      These cases were consolidated for purposes of trial,
briefing, and opinion.
                                - 2 -

                                        Additions
                                         to Tax                Penalty
                                          Sec.                   Sec.
Year             Deficiency               6661                6662(b)(2)
1988              $72,896                $17,624                  --
1989              275,897                   --                 $55,131
1990               82,904                  --                   16,581

In the notice of deficiency, respondent determined deficiencies

in and additions to petitioner Irene E. Richardson's (hereinafter

Irene) Federal income taxes in the following amounts:

                                   Additions to Tax               Penalty
                                 Sec.                 Sec.         Sec.
Year         Deficiency       6651(a)(1)            6661(a)       6662(a)
1988          $42,035           $10,509             $10,509          --
1989           84,808             --                  --          $16,962
1990           96,782             --                  --           19,356

       Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect for the taxable years in

issue, and all Rule references are to the Tax Court Rules of

Practice and Procedure.

       After concessions, the issues for decision all relate to the

nature of payments by Edward to his former spouse, Irene.

Specifically, we must decide:    (1)    Whether certain payments made

by Edward to his former spouse in the taxable years 1988, 1989,

and 1990 are properly deductible by him under section 215(a);

(2) whether such payments are properly includable as income by

Irene under section 71(a); (3) whether Edward is entitled to a

refund for 1988 or 1990; (4) whether Edward is liable for

additions to tax under section 6661 for the taxable year 1988 and
                                - 3 -

penalties under section 6662(b)(2) for the taxable years 1989 and

1990; and (5) whether Irene is liable for additions to tax under

section 6651(a)(1) and section 6661(a) for the taxable year 1988

and penalties under section 6662(a) for the taxable years 1989

and 1990.

Background

     These cases were submitted to the Court fully stipulated.

The stipulation of facts and the exhibits attached thereto are

incorporated by this reference.

     Edward was a resident of Elburn, Illinois, at the time of

filing his petition.    Irene was a resident of Barrington,

Illinois, at the time of filing her petition.

     Petitioners were married on June 15, 1963.    Petitioners

initially separated in February 1980 but continued to live

together on an irregular basis at the marital residence prior to

March 17, 1983.

     Petitioners entered into a separation agreement on March 17,

1983.   Pursuant to this agreement, Edward transferred to Irene

his entire interest in their marital residence located in

Barrington, Illinois.    Pursuant to the agreement, Edward also

paid Irene from $10,000 to $10,866.67 per month in addition to

certain of her expenses from April 1983 until December 1988.

     On November 23, 1987, Edward sued Irene in the Circuit Court

of Cook County, Illinois, County Department-Domestic Relations

Division (hereinafter the circuit court), for dissolution of
                               - 4 -

their marriage.   In September 1988, Edward ceased paying Irene's

expenses, other than the mortgage payments and real estate taxes

for the marital residence.   In December 1988, Edward ceased all

payments to Irene except the real estate expenses.

     In January 1989, Irene filed an emergency petition for

temporary maintenance and other emergency relief with the circuit

court.   By Memorandum Opinion dated October 3, 1989, the circuit

court established temporary maintenance payments to Irene of

$29,000 per month, retroactive to February 1, 1989, and directed

Edward to continue paying the mortgage installments and real

estate taxes for the marital residence.   On December 15, 1989,

the circuit court modified its order and reduced the temporary

maintenance payments to $26,700 per month.

     On November 13, 1990, the circuit court held that

petitioners' March 17, 1983, agreement was valid and enforceable

and on December 4, 1990, the circuit court entered judgment

dissolving petitioners' marriage.

     Irene appealed the circuit court's decision.    On

September 11, 1992, the First District of the Appellate Court of

Illinois (hereinafter the appellate court) upheld the judgment

dissolving petitioners' marriage but held that the separation

agreement was "procedurally and substantively unconscionable" and

remanded the case to the circuit court for a hearing on the issue

of property settlement.   In re Marriage of Richardson, 179 Ill.

Dec. 224, 236, (1992).
                                 - 5 -

       Edward and Irene filed joint Federal income tax returns from

1980 through 1987.     For 1988, 1989, and 1990, they filed separate

returns.

       For the taxable years 1988, 1989, and 1990, Edward filed his

Federal income tax returns as a married person filing separately

and deducted as alimony on his Federal income tax returns for

each year the following:

                               Real
            Payments         Estate          Mortgage
Year        to Irene          Taxes          Payments      Total
                                         1
1988       $141,266.71      $7,761.42                   $7,363.31
           $156,391.44
1989        293,700.00       8,053.93        9,297.36    311,051.29
1990        320,400.00       9,669.77        9,297.36    339,367.13
1
 In addition, Edward paid but did not deduct as alimony a
mortgage payment in 1988 in the amount of $1,934.

       Irene did not include as income the respective amounts

$158,325.44,2 $311,051, and $339,367, as set forth above, on her

Federal income tax returns for the years 1988, 1989, and 1990,

respectively.    Irene did not timely file her 1988 Federal income

tax return; she filed her 1988 Federal income tax return in

October 1990.

       In a notice of deficiency dated October 31, 1992, respondent

determined that the payments made by Edward were not deductible

by him.    In a separate notice of deficiency dated September 9,



       2
      This amount is the sum of the $156,391.44 paid and deducted
by Edward plus the $1,934 paid by Edward but not deducted, as
indicated in the previous footnote.
                                 - 6 -

1993, respondent determined that the payments received by Irene

were taxable income to her.3

Discussion

      We must determine whether Edward's payments to Irene in

1988, 1989, and 1990 are deductible to Edward and, correspond-

ingly, whether such payments constitute taxable income to Irene.

Under section 215, payments are deductible as alimony or separate

maintenance if those payments are includable in the recipient's

gross income under section 71.     Yoakum v. Commissioner, 82 T.C.

128, 134 (1984).

1.   Payments Made in 1988

      The payments made in 1988, which Edward alleges were made

under the separation agreement executed on March 17, 1983, are

governed by the provisions of section 71, as in effect before

amendment in 1984.   Conformity with each element of the statute

is required.   The parties have stipulated that most of the

requirements of section 71 were met.

      Edward and Irene lived separate and apart at all times

during 1988 and 1989.   Edward and Irene executed a separation

agreement on March 17, 1983.   Edward made payments to Irene

pursuant to the written agreement they had signed.    Edward and

      3
      The Commissioner's practice of issuing inconsistent
deficiency notices in such circumstances in order to protect the
Government's right to tax revenue is recognized as a valid
practice. See e.g., Gerardo v. Commissioner, 552 F.2d 549, 555-
556 (3d Cir. 1977), affg. in part, revg. in part and remanding
T.C. Memo. 1975-341.
                               - 7 -

Irene filed separate Federal income tax returns for the years in

question.

     We must consider whether the payments by Edward to or on

behalf of Irene during 1988 were made under a written separation

agreement.   Irene contends that the payments made to her by

Edward during 1988, prior to entry of the circuit court orders,4

are not includable in her income because a written separation

agreement is a prerequisite to includability, and no such written

agreement existed.   Section 71(a)(2) provides in pertinent part:

          (2) Written separation agreement.--If a wife is
     separated from her husband and there is a written
     separation agreement executed after the date of the
     enactment of this title, the wife's gross income
     includes periodic payments (whether or not made at
     regular intervals) received after such agreement is
     executed which are made under such agreement and
     because of the marital or family relationship (or which
     are attributable to property transferred, in trust or
     otherwise, under such agreement and because of such
     relationship.) This paragraph shall not apply if the
     husband and wife make a single return jointly.

     On March 17, 1983, both parties signed a written agreement

which addressed the issue of support payments for Irene.   The

agreement, among other things, required that Edward pay Irene the

sum of $10,000 per month for her maintenance, such payments to be

indexed to the National Consumer Price Index for all Urban

Consumers.   Edward also agreed to pay tuition and expenses

     4
      On Oct. 3, 1989, the circuit court ordered Edward to pay
$29,000 per month in temporary maintenance to Irene, retroactive
to Feb. 1, 1989. On Dec. 15, 1989, the court corrected a calcu-
lation in its prior order, resetting monthly maintenance at
$26,700.
                                  - 8 -

associated with Irene's attendance at college.      This agreement

was held invalid by the circuit court.      The decision of the State

court, however, is not dispositive of the issue before this

Court.    Section 1.71-1(b)(2)(i), Income Tax Regs., provides that

"payments are includible in the wife's gross income whether or

not the agreement is a legally enforceable instrument."      This

Court's decisions reflect that the unenforceability of an agree-

ment under State law does not prevent the deduction of payments

made pursuant to such an agreement.       Taylor v. Campbell, 335 F.2d

841 (5th Cir. 1964); Engelhardt v. Commissioner, 58 T.C. 641

(1972); Campbell v. Commissioner, 15 T.C. 355 (1950).      We there-

fore conclude that the payments by Edward during 1988 were made

under a written separation agreement for purposes of section

71(a)(2).5   Taylor v. Campbell, supra at 846; Engelhardt v. Com-

missioner, supra at 648.

      The requirements of section 71(a)(2) having been met, we

find that Irene's gross income includes the payments made to her

by Edward pursuant to the written separation agreement of

March 17, 1983.   Moreover, we find that these payments are

deductible by Edward pursuant to section 215, which provides for

the deductibility of such payments.

2.   The 1989 and 1990 Payments



      5
      This would include any payment made by Edward to or on
behalf of Irene pursuant to the agreement during January of 1989,
before the effective date of the Circuit Court's order requiring
Edward to make temporary maintenance payments.
                               - 9 -

     In order for Edward's payments made in 1989 and 1990

pursuant to the orders of the circuit court to be deductible by

him and includable in Irene's income, they would have to qualify

as "alimony or separate maintenance payments."   Secs. 71(a),

215(a).   With respect to a divorce or separation instrument

executed after 1984, an alimony or separate maintenance payment

is defined in section 71(b)(1) as 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
     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.

Furthermore, the payments are not deductible by the payor spouse

and are not taxable to the payee spouse if the spouses filed a

joint return.   Sec. 71(e).

     The October 3, 1989, circuit court opinion is a divorce or

separation instrument for purposes of section 71(b)(1).   Sec.

71(b)(2)(A), (C).   Edward made payments in 1989 and 1990 pursuant

to the circuit court's Memorandum Opinion dated October 3, 1989,

and its modifying Order of December 15, 1989.    The circuit court
                              - 10 -

opinion does not address whether the liability to make such

payments terminates at the death of the payee spouse; however,

under Illinois law, Edward's obligation to continue the payments

will terminate at Irene's death.6    Illinois Marriage and Dissolu-

tion of Marriage Act, sec. 510(c).     Edward and Irene were not

members of the same household at the time the payments were made.

Edward and Irene did not file a joint return for the taxable

years 1989 and 1990.

     Edward and Irene disagree with respect to whether the

circuit court opinion meets the requirements of section

71(b)(1)(B).   The opinion of the circuit court makes no mention

of section 71 or section 215 and does not expressly designate the

payments as being nontaxable to Irene or as nondeductible by

Edward.

     Irene, nonetheless, contends that the circuit court

implicitly intended the payments to be nontaxable to Irene.

Irene asserts that the circuit court intended that she receive

approximately 40 percent of Edward's net income and that, if the

payments were to be taxable to her, her share after taxes would

only be 36.2 percent of Edward's net income.     Irene also contends

that, because the circuit court did not deduct the court-ordered

payments from Edward's gross income when determining Edward's net




     6
      Such State law provision satisfies the termination on death
requirement of sec. 71(b)(1)(D). Notice 87-9, 1987-1 C.B. 421.
                               - 11 -

income, the circuit court intended that Edward should bear the

tax.

       We, however, cannot infer from the circuit court's opinion

an intention to designate Edward as the party required to bear

the tax consequences of the payments.    The circuit court did not

begin its analysis regarding monthly maintenance payments to

Irene with the intention that Irene receive exactly 40 percent of

Edward's net income.    Rather, the court computed Irene's monthly

living expenses, compared the total with Edward's net salary and

dividend income, and concluded that the monthly payment to Irene

of "roughly" 40 percent of Edward's net salary and dividend

income was not unreasonable.    The circuit court found that a

payment of $29,000 per month, equal to "roughly 40 percent" of

Edward's net income, would not be unreasonable.    The circuit

court's modifying order of December 15, 1989, reduced the monthly

payment to $26,700, which constitutes approximately 37.4 percent

of Edward's net income, an amount which the Court also

necessarily did not find unreasonable.    From this, it is clear

that the 40-percent figure mentioned in the circuit court opinion

was not a benchmark from which we can infer that the circuit

court intended that Edward was to bear the tax cost of the

payments.

       Because the circuit court did not expressly designate the

court-ordered payments as payments which were not includable in

Irene's income, the requirements of sections 71 and 215 are met.
                              - 12 -

Accordingly, we find that Edward's payments to Irene in 1989 and

1990 made pursuant to orders of the circuit court were "alimony

or separate maintenance payments" as defined in section 71(b)(1).

As such, the court-ordered payments are includable in Irene's

taxable income and deductible by Edward.

3.   Refund for Edward

      This Court has jurisdiction to determine an overpayment

pursuant to section 6512(b)(1) to the extent that the overpayment

was made after the issuance of the statutory notice.    Sec.

6512(b)(3)(A).   We have found that Edward's separate maintenance

payments to Irene are deductible by him.    As a result of conces-

sions made by the parties and Edward's payment of additional

income tax for 1988 subsequent to the issuance of the statutory

notice, Edward made an overpayment of income tax for 1988

attributable to his failure to deduct a mortgage payment of

$1,934, see supra note 2, supra, and is entitled to a refund for

that year.

      The parties have stipulated that Edward is entitled to

increase his 1990 Schedule A deductions by $10,137.    The period

permitted for filing a claim for refund of Edward's 1990 income

taxes had not expired.   Sec. 6511(b)(2).   Since we hold that

Edward is entitled to deduct the separate maintenance payments

made in 1990, we find that Edward has overpaid his 1990 income

tax by reason of the additional Schedule A deductions and that he

is entitled to a refund for that year.
                                - 13 -

4.   Additions to Tax--Irene

      Respondent determined that Irene filed a delinquent return

for the taxable year 1988 and that she is liable for an addition

to tax under section 6651(a).    Section 6651(a) imposes an

addition to tax for failure to file a timely return unless such

failure is due to reasonable cause.      Because we hold that Irene

received alimony required to be included in her gross income in

1988 and she has failed to show reasonable cause for the delin-

quent filing of her return, she is liable for an addition to tax

under section 6651(a) for 1988.

      Respondent determined that Irene is liable for an addition

to tax under section 6661(a) for a substantial understatement of

tax for the taxable year 1988 and for accuracy-related penalties

under section 6662(b)(2) for substantial understatements of tax

for the taxable years 1989 and 1990.

      Section 6661(a) provides for an addition to tax if there is

a substantial understatement of income tax.

      Section 6661(c) authorizes the Commissioner to waive all or

any part of this addition to tax on a showing by the taxpayer

that there was reasonable cause for the understatement (or part

thereof) and that the taxpayer acted in good faith.

      Section 6662(a) and (b)(2) provides for an accuracy-related

penalty if there is a substantial understatement of tax.      Section

6664(c) provides that the section 6662 penalty is not imposed if

it is shown that the taxpayer had reasonable cause for the
                              - 14 -

underpayment and acted in good faith.     Irene contends that the

underpayment in taxes for 1988, 1989, and 1990 was due to

reasonable cause, arguing that she relied on the decision of the

circuit court and on the advice of a competent tax adviser.

Because the circuit court did not rule on the issue of whether

the payments were taxable to Irene or deductible by Edward, we

find that reliance on the decision was not reasonable.     Irene did

not present sufficient evidence to support her claim that she

filed her returns based upon the advice of a competent tax

professional.   We, therefore, hold that Irene is liable for the

addition to tax under section 6661 for 1988 and the penalties

under section 6662 for 1989 and 1990.

5.   Additions to Tax -- Edward

      Respondent determined that Edward is liable for an addition

to tax under section 6661(a) for the taxable year 1988 and

penalties under section 6662(b)(2) for the taxable years 1989 and

1990.

      Section 6661(b)(2) provides for a penalty if there is a

substantial understatement of tax.     Because we hold that the

payments in 1988 are deductible by Edward, there is no substan-

tial understatement of tax in 1988.     Accordingly, we hold that

Edward is not liable for the understatement addition for 1988.

      Section 6662(a) provides for an addition to tax if there is

a substantial understatement of tax.     Because we hold that the

payments in 1989 and 1990 made pursuant to the circuit court
                             - 15 -

order are deductible by Edward, there is no substantial under-

statement of tax in the taxable years 1989 and 1990.   Accord-

ingly, we hold that Edward is not liable for the penalty under

section 6662 in 1989 and 1990.

     To reflect the above holdings and concessions,

                                        Decisions will be entered

                                   under Rule 155.
