                            T.C. Summary Opinion 2018-41



                            UNITED STATES TAX COURT



                 JEREMY ADAM VANDERHAL, Petitioner v.
             COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 12477-16S.                            Filed September 5, 2018.



      Jeremy Adam Vanderhal, pro se.

      Albert B. Brewster, for respondent.



                                 SUMMARY OPINION


      CARLUZZO, Chief Special Trial Judge: This case was heard pursuant to

the provisions of section 7463 of the Internal Revenue Code in effect when the

petition was filed.1 Pursuant to section 7463(b), the decision to be entered is not


      1
          Unless otherwise indicated, section references are to the Internal Revenue
                                                                          (continued...)
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reviewable by any other court, and this opinion shall not be treated as precedent

for any other case.

      In a notice of deficiency dated March 9, 2016 (notice), respondent

determined a $1,787 deficiency in petitioner’s 2013 Federal income tax and

imposed a $357.40 section 6662(a) accuracy-related penalty.

      The issues for decision are: (1) whether payments petitioner made towards

student loans incurred by his former spouse qualify for deduction as alimony and,

if not, (2) whether petitioner is liable for a section 6662(a) accuracy-related

penalty.

                                     Background

      Some of the facts have been stipulated and are so found. At the time the

petition was filed, petitioner resided in California.

      Petitioner married his former spouse in 2003. They were divorced on April

6, 2011, by a Decree of Divorce (divorce decree) entered by the Family Division

of the Eighth Judicial District Court of Clark County, Nevada. The divorce decree

addresses items routinely found in such documents, such as spousal support and

the division of property. According to the divorce decree, petitioner and his


      1
      (...continued)
Code of 1986, as amended, in effect for the year in issue.
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former spouse “entered into an equitable agreement settling all issues regarding

the division and distribution of assets and debts * * * as set forth in the Exhibit

‘A’” (agreement) attached to the divorce decree.

      The agreement includes a reference to a Sallie Mae student loan account

that relates to petitioner’s former spouse. That reference is found in the “Division

of Community Debts” section of the agreement and obligates petitioner to “assume

and hold * * * [his former spouse] harmless” from that debt.

      The agreement also includes a section titled “Tax Free Transfers” that states

the parties

      believe and agree that the transfers of property between them required
      by * * * [the agreement] are tax free transfers of property between
      them and are therefore tax-free transfers of property made pursuant to
      Section 1041 of the Internal Revenue Code and are not taxable sales
      or exchanges of property or payments for alimony, except where this
      agreement specifically denotes payments as such.

      As relevant here, on his timely filed 2013 Federal income tax return, which

he prepared, petitioner claimed an alimony deduction for the payments he made on

the above-referenced Sallie Mae student loan. Respondent disallowed that

deduction in the notice because, according to respondent, the payments do not fit

within the definition of alimony. See sec. 71(b)(1)(B). Instead, according to

respondent, the payments constitute a division of property.
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                                     Discussion

      The Federal tax consequences of a payment made incident to divorce

depend upon the characterization of such payment. Property settlements incident

to divorce, and equitable divisions of marital property, generally are neither

deductible from the income of the paying spouse nor includable in the income of

the receiving spouse. Sec. 1041; Estate of Goldman v. Commissioner, 112 T.C.

317, 322 (1999), aff’d without published opinion sub nom. Schutter v.

Commissioner, 242 F.3d 390 (10th Cir. 2000). On the other hand, payments made

or received as alimony generally are deductible by the paying spouse under section

215(a) and are includable in gross income by the receiving spouse under sections

61(a)(8) and 71.

      Section 215(b) provides that the paying spouse may deduct a payment as

alimony if the payment is “includible in the gross income of the recipient under

section 71.” Section 71(b)(1) defines an alimony payment as any cash payment

meeting each of the following four criteria:

            (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,
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            (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.

      Respondent agrees that the payments satisfy three of the above-listed

requirements. Relying on the language in the “Tax Free Transfers” section of the

agreement, however, respondent takes the position that petitioner fails to satisfy

subparagraph (B) of section 71(b)(1) because the divorce decree designates the

Sallie Mae student loan payments as nonalimony and subject to the provisions of

section 1041. According to petitioner, that section of the agreement applies only

to the division of property, not community debt, and therefore it does not apply to

the Sallie Mae student loan payments.

      In deciding whether payments constitute “alimony” under this provision, we

begin by examining the terms of the divorce decree and agreement. A divorce or

separation instrument “contains a nonalimony designation if the substance of such

a designation is reflected in the instrument.” Estate of Goldman v. Commissioner,

112 T.C. at 323. Generally, the divorce or separation agreement must provide a

“clear, explicit and express direction” that the payments are not to be treated as
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alimony, but the designation need not mimic the text of sections 71 and 215.

Richardson v. Commissioner, 125 F.3d 551, 556 (7th Cir. 1997), aff’g T.C. Memo.

1995-554; Estate of Goldman v. Commissioner, 112 T.C. at 323.

      In this case the divorce decree and the agreement frequently distinguish

between property and debt. For example, the divorce decree states that petitioner

and his former spouse “entered into an equitable agreement settling all issues

regarding the division and distribution of assets and debts * * * as set forth in the”

agreement. The agreement provides separate sections with respect to the division

of community property and debt. Other provisions of the agreement make

reference to both community property and debt, in which case it is clear that the

provisions apply to both. Notably, the “Tax Free Transfers” paragraph in the

agreement refers only to “property”, without including any reference to debt. As

we construe the divorce decree and agreement, the reference to property in the

“Tax Free Transfers” section of the agreement does not clearly encompass the

division of community debt. Furthermore, in construing divorce or separation

agreements, we can find no authority that suggests that the terms “property” and

“debt” are interchangeable. The divorce decree and the agreement do not

otherwise address or “specifically denote” the division of debts as tax-free

transfers of property made pursuant to section 1041. That being so, we find that
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nothing in the divorce decree or the agreement clearly, explicitly, and expressly

designates the Sallie Mae student loan payments as nonalimony payments. See

Richardson v. Commissioner, 125 F.3d at 556. Consequently, the payments on the

student loan account fit within the definition of alimony under section 71, and

petitioner is entitled to an alimony deduction for those payments.

      It follows that petitioner is not liable for a section 6662(a) penalty.

      To reflect the foregoing,


                                                     Decision will be entered

                                               for petitioner.
