                  T.C. Summary Opinion 2004-27



                     UNITED STATES TAX COURT



      TYRONE SHARP AND ALVERA SHARP, a.k.a. ALVERA CROCKETT,
   Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 18491-02S.            Filed March 11, 2004.


     Tyrone Sharp, pro se.

     Lorianne D. Masano, for respondent.



     CARLUZZO, Special Trial 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.   Unless otherwise

indicated, subsequent section references are to the Internal

Revenue Code in effect for the taxable years in issue.   Rule

references are to the Tax Court Rules of Practice and Procedure.

The decision to be entered is not reviewable by any other court,

and this opinion should not be cited as authority.
                                     - 2 -

     Respondent determined deficiencies in petitioners’ Federal

income taxes, an addition to tax, and penalties as follows:

                                                       Sec.         Sec.
     Petitioner(s)            Year    Deficiency    6651(a)(1)    6662(a)

     Tyrone Sharp             1999     $5,344          ---       $1,068.80
     Alvera Sharp             1999      1,178          ---          235.60
     Tyrone & Alvera Sharp    2000      4,012         $703          802.40


     After concessions, the following issues remain for

consideration:       (1) Whether Social Security disability benefits

received in 1999 by Tyrone Sharp (petitioner) are includable in

his income for that year; (2) whether petitioner is entitled to

an alimony deduction for 1999 for certain payments made during

that year to, or on behalf of, his former spouse; and (3) whether

petitioner is liable for a section 6662(a) accuracy-related

penalty for 1999.

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

the time the petition was filed, petitioners resided in

Inverness, Florida.

     Petitioner and Margaret Sharp (petitioner’s former spouse)

married in 1994 and divorced in 1999.           They entered into a Joint

Stipulation and Settlement Agreement (settlement agreement) with

the Circuit Court of the Fifth Judicial Circuit In and For Citrus

County, Florida, on September 20, 1999.            Relevant for our

purposes, the settlement agreement contains the following

provisions:
                         - 3 -

     2.     Lump Sum Alimony. Having regard for their
circumstances including, but not limited to, (a) the
needs of the Wife for support, (b) the ability of the
Husband to pay this support, the parties agree that in
full and final settlement and satisfaction of any and
all claims and rights of the Wife for support,
maintenance, the Husband will pay to the Wife as non-
modifiable lump sum alimony the lump sum of $7,260.00
payable in eleven (11) monthly installments of $660.00
per month until the sum is paid in full. These Lump
Sum Alimony payments shall commence on October 1, 1999
and continue on the 1st of each and every month
thereafter until paid in full. The Husband further
agrees that upon the refinancing of the marital
residence he will make an additional lump sum alimony
payment of $20,000.00 to the Wife.

     *      *       *       *       *       *           *

     4.     Health Insurance. The Husband agrees to
continue to pay the Wife’s health insurance premium
until August 1, 2000.   Should the premium increase
above the current rate of $133.00 per month, then the
Wife agrees to be responsible for the amount of such
increase.

     5.     Debts and Obligations. * * * The Husband
further agrees to be responsible for the SBA loan which
is in the Wife’s name until September 1, 2000. The
Husband shall make all regular payments on the SBA loan
until September 1, 2000. * * *

     *      *       *       *       *       *           *

     7.     Automobiles. * * * The parties agree that
the Wife shall retain the 1997 Toyota Camary. The
parties agree that the Husband shall continue to make
the monthly lease payments until and including August,
2000. The Wife shall be responsible for all other
expenses in relation to such automobile, and shall
assume responsibility for any and all lease payments or
fees commencing September 1, 2000.
                               - 4 -

     In accordance with the settlement agreement, during the last

3 months of 1999 petitioner made the following payments directly

to, or on behalf of, his former spouse:    (1) $660 per month as

lump-sum alimony; (2) $299 per month for her car lease; (3) $112

per month for her SBA loan; and (4) $133 per month for her health

insurance.

     During 1999, petitioner received Social Security disability

benefits in the amount of $13,512.     Although paid entirely during

1999, these benefits are attributable to 1997, 1998, and 1999.

     Petitioner married Alvera Sharp (Mrs. Sharp) in 1999.

Although married to Mrs. Sharp as of the close of 1999,

petitioner and his former spouse filed a joint 1999 Federal

income tax return.   They reported adjusted gross income of

$23,159 on that 1999 return.   The adjusted gross income reported

on petitioner’s 1999 return does not take into account the Social

Security disability benefits he received that year.

     In the notice of deficiency, respondent changed petitioner’s

filing status for 1999 from married filing a joint return, to

married filing a separate return.    As a result, respondent

determined that 85 percent of the Social Security disability

benefits ($11,485) received by petitioner during 1999 is

includable in income for that year.
                                  - 5 -

      Discussion1

      A.   Social Security Benefits

      Section 61(a) provides that, except as otherwise provided by

law, gross income includes all income from whatever source

derived.    Relevant for our purposes, section 86(a) provides that

if the taxpayer’s modified adjusted gross income2 plus one-half

of the Social Security benefits received by the taxpayer exceeds

the adjusted base amount, then gross income includes the lesser

of:   (1) The sum of (a) 85 percent of such excess, plus (b) the

lesser of (i) one-half of the Social Security benefits received

during the year or (ii) one-half of the difference between the

adjusted base amount and the base amount of the taxpayer; or (2)

85 percent of the Social Security benefits received during the

taxable year.3      See sec. 86(a)(2).    With respect to a married

taxpayer who does not file a joint return and who does not live

apart from his spouse at all times during the taxable year, both



      1
        Because there are no disputes with respect to any factual
issues in this case, we need not consider the application of sec.
7491(a). Higbee v. Commissioner, 116 T.C. 438 (2001).
      2
        In this case, ignoring adjustments not relevant here,
petitioner’s modified adjusted gross income equals his adjusted
gross income. See sec. 86(b)(2).
      3
        Prior to 1984, certain disability benefits were
excludable from an employee’s gross income under section 105.
However, this section was repealed, and “since 1984 Social
Security disability benefits have been treated in the same manner
as other Social Security benefits.” Maki v. Commissioner, T.C.
Memo. 1996-209.
                                - 6 -

the base amount and the adjusted base amount are zero.    Sec.

86(c)(1)(C) and (2)(C).

     Social Security benefits are included in the recipient’s

gross income in the taxable year in which the benefits are

received.   Sec. 86(a)(1).   An election may be made by taxpayers

who receive lump-sum payments of Social Security benefits during

the taxable year in which a portion of the benefits is

attributable to previous taxable years.   Sec. 86(e).   Section

86(e) provides that, if the election is made, the amount included

in gross income for the taxable year of receipt must not exceed

the sum of the increases in gross income for those previous

taxable years that would result from taking into account the

portion of the benefits attributable to the previous taxable

years.   Accordingly, if no election is made by the taxpayer under

section 86(e), lump-sum distributions of Social Security benefits

are includable in the taxpayer’s gross income in the taxable year

the benefits are received.

     Petitioner did not make an election under section 86(e) with

respect to the lump-sum Social Security disability benefits

received in 1999.   He concedes that his proper filing status for

the 1999 taxable year is married filing separately.     Furthermore,

he does not claim that he lived apart from Mrs. Sharp after their

marriage in 1999, and nothing in the record suggests that he did.
                                 - 7 -

Accordingly, petitioner’s base amount and adjusted base amount

for purposes of the section 86 calculation are zero.     See sec.

86(c)(1)(C) and (2)(C).

     Taking into account petitioner’s 1999 filing status, his

1999 modified adjusted gross income, and the Social Security

benefits he received that year, 85 percent of those benefits are

includable in his 1999 income.    See sec. 86(a), (c).

Respondent’s determination in this regard is, therefore,

sustained.

     B.   Alimony Deduction

     At trial, petitioner claimed an alimony deduction for the

lump-sum alimony payments made to his former spouse and the

payments made on her behalf as required by the terms of the

settlement agreement.4    Respondent contends that the payments

made by petitioner pursuant to the terms of the settlement

agreement are not alimony within the meaning of section 71, and,

thus, petitioner is not entitled to an alimony deduction under

section 215.5



     4
        Petitioner erroneously filed a 1999 joint return with his
former spouse. As filed, it would have made little sense to
claim an alimony deduction on that return. The alimony deduction
issue raised at trial was tried by express consent. See Rule
41(b).
     5
        Respondent now concedes that the payments made by
petitioner for his former spouse’s health insurance premiums meet
the definition of alimony under sec. 71 and are deductible by
petitioner under sec. 215.
                                - 8 -

     Section 215(a) allows an individual a deduction for alimony

paid during the taxable year.   In general, a payment constitutes

alimony within the meaning of section 215 if the payment is made

in cash and meets the following four criteria:   (1) Such payment

is received by (or on behalf of) a spouse under a divorce or

separation instrument, (2) 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, (3) 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 (4) 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.   Secs. 71(b)(1), 215(b).

     Respondent agrees that the payments made by petitioner under

the terms of the settlement agreement satisfy the first three

requirements of section 71(b)(1):   (1) The payments were made

pursuant to a divorce decree; (2) the divorce decree did not

designate the payments as ones that are excluded from treatment

as alimony under section 71 and section 215; and (3) petitioner
                                - 9 -

and his former spouse were legally separated and not members of

the same household at the time the payments were made.

Respondent contends that the payments made by petitioner under

the terms of the separation agreement do not terminate in the

event of his former spouse’s death.

       In 1986, Congress removed the requirement from section

71(b)(1)(D) that a divorce or separation agreement specifically

state that liability terminates upon the death of the payee

spouse.    See Tax Reform Act of 1986, Pub. L. 99-514, sec.

1843(b), 100 Stat. 2853.    Thus, payments now qualify as alimony

as long as termination would occur automatically under State law.

See Human v. Commissioner, T.C. Memo. 1998-106.

       Since the settlement agreement does not expressly address

petitioner’s liability to make the payments in the event of his

former spouse’s death, we look to Florida law to determine his

liability in that regard.    Sampson v. Commissioner, 81 T.C. 614,

618 (1983), affd. per curiam without published opinion 829 F.2d

39 (6th Cir. 1987).

       Florida law recognizes alimony as either periodic or lump

sum.    Fla. Stat. Ann. sec. 61.08 (West 1999); Canakaris v.

Canakaris, 382 So. 2d 1197, 1200 (Fla. 1980).    “Lump sum alimony”

is “a fixed and certain amount, the right to which is vested in

the recipient and which is not therefore subject to increase,

reduction, or termination in the event of any contingency,
                              - 10 -

specifically including those of death or remarriage.”   Boyd v.

Boyd, 478 So. 2d 356, 357 (Fla. Dist. Ct. App. 1985); see also

Canakaris v. Canakaris, supra at 1201 (“Although the award of

lump sum alimony is not dependent upon a finding of a prior

vested right, there does arise upon the entry of a final judgment

of a lump sum award a vested right which is neither terminable

upon a spouse’s remarriage or death nor subject to

modification.”).

     In the present case, the settlement agreement required

petitioner to pay his former spouse lump-sum alimony in eleven

installments of $660.   The settlement agreement further provided

that petitioner pay his former spouse’s automobile lease payments

and SBA loan payments until September 1, 2000.   The number of

payments and the amount of each payment were fixed and certain.

Thus, the payments under the settlement agreement were not

subject to modification or termination in the event of any

contingency.   Since these payments meet the requirements for

lump-sum alimony set forth in Canakaris v. Canakaris, supra, and

Boyd v. Boyd, supra, it follows that they would have remained

payable to the former spouse’s estate in the event of her death.

See Human v. Commissioner, supra.

     Accordingly, we hold that the lump-sum alimony payments,

automobile lease payments, and SBA loan payments made by

petitioner under the terms of the settlement agreement are not
                               - 11 -

alimony within the meaning of section 71.     Consequently, they are

not deductible to petitioner pursuant to section 215(a).

     C.   Section 6662(a) Penalty

     Under section 6662, a penalty is imposed on that portion of

an underpayment of the tax required to be shown on a return if

the underpayment is due to negligence or disregard of rules or

regulations.   Sec. 6662(a) and (b)(1).    Negligence is defined to

include any failure to make a reasonable attempt to comply with

the provisions of the Internal Revenue Code.     Sec. 6662(c).   It

is further defined as the failure to do what a reasonable person

with ordinary prudence would do under the same or similar

circumstances.   Neely v. Commissioner, 85 T.C. 934, 947 (1985).

Disregard is defined to include any careless, reckless, or

intentional disregard.   Sec. 6662(c).     An accuracy-related

penalty will not be imposed with respect to any portion of an

underpayment as to which the taxpayer acted with reasonable cause

and in good faith.   Sec. 6664(c)(1).    Whether the taxpayer acted

with reasonable cause and in good faith depends on the pertinent

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

Circumstances that may indicate reasonable cause and good faith

include the extent of the taxpayer’s effort to properly assess

the tax liability and an honest misunderstanding of fact or law

that is reasonable in light of the taxpayer’s experience,

knowledge, and education.    Id.    The taxpayer bears the burden of
                               - 12 -

proving that he or she did not act negligently or disregard rules

or regulations.   Rule 142(a); Welch v. Helvering, 290 U.S. 111,

115 (1933).

     Respondent supports the imposition of the section 6662(a)

accuracy-related penalty entirely on petitioner’s failure to

include the Social Security disability benefits in his 1999

income.

     We are satisfied that petitioner made a good faith effort to

properly determine his 1999 Federal income tax liability, and his

failure to properly account for his Social Security disability

benefits results from an honest misunderstanding of fact or law

that is reasonable in light of the his experience, knowledge, and

education.    Accordingly, we hold that petitioner is not liable

for the section 6662(a) accuracy-related penalty for his 1999 tax

year.

     Reviewed and adopted as the report of the Small Tax

Division.

     To reflect the foregoing,

                                            Decision will be

                                        entered under Rule 155.
