                     T.C. Summary Opinion 2010-35



                        UNITED STATES TAX COURT



         ERNESTO SALCIDO CONTRERAS AND VICTORIA LEE CONTRERAS,
                             Petitioners v.
              COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 21987-08S.                  Filed March 29, 2010.



     Ernesto Salcido Contreras and Victoria Lee Contreras,

pro sese.

     Heather D. Horton, for respondent.



     RUWE, Judge:     This case was heard pursuant to the provisions

of section 74631 of the Internal Revenue Code in effect when the

petition was filed.     Pursuant to section 7463(b), the decision to


     1
       Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the year at issue, and
any Rule references are to the Tax Court Rules of Practice and
Procedure.
                              - 2 -

be entered is not reviewable by any other court, and this opinion

shall not be treated as precedent for any other case.

     In a notice of deficiency respondent initially determined an

$825 deficiency in petitioners’ 2006 Federal income tax pursuant

to the disallowance of certain expenses deducted as alimony.    On

their 2006 return petitioners deducted $11,143 as alimony.     The

parties now agree that petitioners are entitled to deduct as

alimony $1,106.18 for property taxes and $217.15 for insurance

paid on the former marital residence (Casas Lindas residence) of

petitioner Ernesto Salcido Contreras (Mr. Contreras) and his

former spouse, Norma Contreras (Norma).   Respondent further

concedes that petitioners paid and are entitled to an $861.09

alimony deduction for attorney’s fees.    Petitioners concede that

they overstated their original alimony deduction on their 2006

Federal income tax return by $3,377.59.

     After concessions the only remaining issue is whether

petitioners are entitled to an alimony deduction for the full

$5,746 of mortgage payments petitioners made on the Casas Lindas

residence, owned and occupied by Norma, during tax year 2006, or

whether they are only entitled to deduct one-half of those

mortgage payments.

                           Background

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

The stipulation of facts and the attached exhibits are
                               - 3 -

incorporated herein by this reference.   At the time the petition

was filed, petitioners resided in Arizona.

     On or about January 26, 1999, Mr. Contreras and Norma signed

a mortgage note for a loan from Tucson Old Pueblo Credit Union to

purchase the Casas Lindas residence.   Mr. Contreras and Norma

later divorced.   On or about November 15, 2000, the Superior

Court of the State of Arizona in and for the County of Pima

entered a decree of dissolution of marriage (divorce decree)

dividing the marital property so that Norma received, as her sole

and separate property, the Casas Lindas residence.   After

dividing the marital property, the divorce decree further

provides that Mr. Contreras will pay spousal maintenance to

Norma.   In this latter regard, the divorce decree, in pertinent

part, provides:

          5. Petitioner [Mr. Contreras] will pay, as and
     for spousal maintenance, for the benefit of the
     Respondent [Norma], the first mortgage on the
     residence, together with real estate taxes and
     insurance on the property located at * * * Calle De
     Casas Lindas, Tucson, AZ, * * *

          6. The parties understand that the payments being
     made for the first mortgage and for the automobile
     insurance and lien shall be considered spousal
     maintenance, as if it were received directly by
     Respondent [Norma], and shall be reportable as income
     to her and as a deduction for the Petitioner [Mr.
     Contreras] for federal and state income tax purposes.
     Petitioner [Mr. Contreras] shall be obligated to pay
     the spousal maintenance amount, as set forth above,
     until such time as he becomes eligible for retirement
     from the Air Force Reserve and the City of Tucson, and
     the Respondent [Norma] is actually receiving her share
     of such retirement funds, at which time the spousal
                               - 4 -

     maintenance requirement shall terminate completely. In
     the event that Respondent [Norma] receives only a
     portion of the retirement amounts specified above, the
     difference between those amounts received by her and
     the mortgage payment, real estate taxes and insurance
     on the residence shall be paid by Petitioner [Mr.
     Contreras] until Respondent [Norma] receives the full
     amount of her retirement proceeds. Alternatively, if
     Petitioner [Mr. Contreras] receives the Respondent’s
     [Norma’s] share of these retirement funds, he shall
     immediately send them to the Respondent [Norma] so that
     she is receiving her full entitlement. At such time,
     the spousal maintenance payment set forth above shall
     terminate.

     On September 30, 2005, Mr. Contreras executed a quitclaim

deed transferring his interest in the Casas Lindas residence to

Norma.   The record does not indicate whether Mr. Contreras’

contractual obligation to Tucson Old Pueblo Credit Union was

altered when he executed the quitclaim deed.

     During 2006 Mr. Contreras and Norma lived apart, and Norma

occupied the Casas Lindas residence.     Although Norma owned and

occupied the Casas Lindas residence during 2006, petitioners, in

accordance with the divorce decree, made mortgage payments of

$5,746, consisting of principal and interest, on the Casas Lindas

residence.   On their 2006 Federal income tax return, petitioners

claimed an $11,143 alimony deduction.2


     2
       We note that on the basis of the notice of deficiency and
the parties’ agreement and concessions, respondent has allowed an
alimony deduction of $5,057.42 (i.e., $2,873 for one-half of the
mortgage payments, $1,106.18 for property taxes, $217.15 for
insurance, and $861.09 for attorney’s fees), and petitioners have
conceded that they overstated their claimed alimony deduction by
$3,377.59. The remaining one-half of the mortgage payments
                                                   (continued...)
                                - 5 -

                             Discussion

     While the property interests of divorcing parties are

determined by State law, “‘federal law governs the federal income

tax treatment of that property.’”       Zinsmeister v. Commissioner,

T.C. Memo. 2000-364 (quoting Hoover v. Commissioner, 102 F.3d

842, 844 (6th Cir. 1996), affg. T.C. Memo. 1995-183), affd. 21

Fed. Appx. 529 (8th Cir. 2001).     Thus, Federal law determines,

for income tax purposes, whether, and if so to what extent, the

mortgage payments constitute alimony within the meaning of

section 71(b)(1).

     “Generally, property settlements (or transfers of property

between spouses) incident to a divorce neither are taxable events

nor give rise to deductions or recognizable income.”       Estate of

Goldman v. Commissioner, 112 T.C. 317, 322 (1999), affd. without

published opinion sub nom. Schutter v. Commissioner, 242 F.3d 390

(10th Cir. 2000); see also sec. 1041.      However, amounts received

as alimony or separate maintenance payments are taxable to the

recipient (pursuant to sections 61(a)(8) and 71(a)) and

deductible by the payor (pursuant to section 215(a)) in the year

paid.    Estate of Goldman v. Commissioner, supra at 322.



     2
      (...continued)
($2,873) is in dispute. Thus, the sum of the amounts conceded
and still in dispute is $11,308.01, which is $165.01 more than
the $11,143 petitioners originally claimed as alimony on their
2006 Federal income tax return. We expect the parties to
reconcile the difference in their Rule 155 computations.
                               - 6 -

     More specifically, section 215(a) provides that an

individual is allowed to deduct an amount equal to the alimony or

separate maintenance payments paid during such individual’s

taxable year.   For purposes of section 215, “‘alimony or separate

maintenance payment’ means any alimony or separate maintenance

payment (as defined in section 71(b)) which is includible in the

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

     Section 71(b)(1) provides a four-step inquiry for

determining whether a payment is alimony or separate maintenance.

Section 71(b)(1) provides:

          SEC. 71(b). Alimony or Separate Maintenance
     Payments Defined.–-For purposes of this section--

               (1) 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
                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
                                 - 7 -

                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.

     Thus, all four requirements of section 71(b)(1) must be met

for payments to qualify as alimony or separate maintenance.

     Petitioners’ argument centers on section 71(b)(1)(A); i.e.,

whether the mortgage payments were received by (or on behalf of)

Norma.   Petitioners assert that because the divorce decree

clearly delineated those payments as spousal maintenance, i.e.,

“as if it were received directly by * * * [Norma], and shall be

reportable as income to her and as a deduction for * * * [Mr.

Contreras] for federal and state income tax purposes,” they are

entitled to an alimony deduction for those payments.   Petitioners

attempt to bolster their argument by contending that the only

benefit Mr. Contreras received in making the mortgage payments

was the subject tax deduction.

     Respondent appears to agree that the dispute centers on

section 71(b)(1)(A).   In his pretrial memorandum respondent

posits that subparagraphs (B), (C), and (D) of section 71(b)(1)

are not in dispute.3


     3
       Although respondent states that “Subparagraphs (B), (C)
and (D) of I.R.C. § 215 are not in dispute”, it is clear from the
context of the memorandum that respondent was referring to
subpars. (B), (C), and (D) of sec. 71(b)(1), and not sec. 215.
Furthermore, sec. 215 does not contain a subpar. (B), (C), or
(D). Rather, respondent argues that the “remaining issue in
                                                   (continued...)
                                 - 8 -

     Respondent argues that because Mr. Contreras is still

contractually liable on the mortgage note on the Casas Lindas

residence, he received a benefit each time a mortgage payment was

made during the 2006 tax year.    In this respect, respondent

directs the Court’s attention to Zinsmeister v. Commissioner,

supra, wherein the Court stated:

     When a divorce court orders one spouse to make payments
     on a mortgage for which both spouses are jointly
     liable, a portion of such payments discharges the legal
     obligation of the other spouse. In such circumstances
     the payee spouse has received income under the general
     principle of Old Colony Trust Co. v. Commissioner, 279
     U.S. 716 (1929) (payment by a third party of a person’s
     legal obligation is taxable income to that person).
     Accordingly, in such cases, one-half of the mortgage
     payment is includable in the gross income of the payee
     spouse and, to the extent it otherwise qualifies as
     alimony, it is deductible by the payor spouse as
     alimony. See Taylor v. Commissioner, 45 T.C. 120, 123-
     124 (1965); Simpson v. Commissioner, T.C. Memo. 1999-
     251; Zampini v. Commissioner, T.C. Memo. 1991-395; Rev.
     Rul. 67-420, 1967-2 C.B. 63; see also sec. 1.71-1T(b),
     Q&A-6, Temporary Income Tax Regs., 49 Fed. Reg. 34455
     (Aug. 31, 1984).

Although, as respondent recognizes, the facts in the instant

proceeding are not identical to the facts in Zinsmeister

(principally, the fact that in the instant proceeding Mr.

Contreras had no financial interest in the Casas Lindas residence

during 2006), respondent nevertheless argues that because Mr.

Contreras remained contractually liable on the mortgage note, as


     3
      (...continued)
dispute in this case is to what extent the mortgage payments made
by petitioner qualify as alimony as defined at subparagraph (A)
of I.R.C. § 71(b)(1).”
                               - 9 -

in Zinsmeister, one-half of the mortgage payments were paid in

discharge of his contractual obligation and, therefore, benefited

him rather than Norma.   In other words, respondent argues that

despite petitioners’ payment of the entire monthly mortgage

obligation during 2006, one-half of the mortgage payments were

made by (or on behalf of) Norma and the other half were made by

(or on behalf of) Mr. Contreras.

     In Zinsmeister v. Commissioner, T.C. Memo. 2000-364, the

former husband and wife held joint title on the marital

residence, and both were personally liable on the note securing a

first mortgage.   However, only the former husband was liable on

the note securing a second mortgage on the marital residence.

Pursuant to divorce proceedings in 1993 the State court issued a

temporary order that gave possession of the residence to the wife

and required the former husband to make payments on the first and

second mortgages.   Pursuant to their final divorce decree in

1994, the wife was entitled to the marital residence and was

required to make the payments on the first mortgage.   The former

husband was required to make the payments on the second mortgage.

However, the former husband was given a lien on the residence in

an amount approximating the second mortgage, and the wife was

required to pay this amount to him by July 1996.   This Court held

that the former husband was entitled to claim one-half of the

mortgage payments that he made on the first mortgage as an
                             - 10 -

alimony deduction, but that he was not entitled to claim an

alimony deduction for the payments he made on the second mortgage

because he alone was liable on that note and his payments on the

second mortgage only operated to discharge his personal

liabilities.

     Unlike the taxpayer in Zinsmeister, however, Mr. Contreras,

while arguably jointly liable for the liability on the mortgage

note, did not have any financial interest in the Casas Lindas

residence during the 2006 tax year.4   Consequently, we find the

fact that Mr. Contreras lacked any financial interest in the

Casas Lindas residence during 2006 sufficient to distinguish this

case from Zinsmeister.

     On brief respondent refers to section 1.71-1T(b), Q&A-6,

Temporary Income Tax Regs., 49 Fed. Reg. 34455 (Aug. 31, 1984)

(which provides, in pertinent part:    “Any payments to maintain

property owned by the payor spouse and used by the payee spouse



     4
       Mr. Contreras and Norma gave the mortgage to Tucson Old
Pueblo Credit Union to secure the loan to pay all or part of the
purchase price of the Casas Lindas residence. Mr. Contreras
quitclaimed the property to Norma in 2005 and has no financial
interest in the residence. State law provides, with limited
exceptions not relevant in this case, that a lien of judgment in
an action to foreclose such a mortgage does not extend to any
other property of the judgment debtor, nor may general execution
be issued against the judgment debtor to enforce such judgment,
and if the proceeds of the mortgaged real property sold under
special execution are insufficient to satisfy the judgment, the
judgment may not otherwise be satisfied out of other property of
the judgment debtor. See Ariz. Rev. Stat. Ann. sec. 33-729
(2007).
                              - 11 -

(including mortgage payments, real estate taxes and insurance

premiums) are not payments on behalf of a spouse even if those

payments are made pursuant to the terms of the divorce or

separation instrument.”), and concludes that “Based on our facts,

the alternative is also true.”   Or, as respondent further

explains:   “Mortgage payments made by the payor spouse to

maintain property owned and used by the payee spouse are payments

on behalf of a spouse when made pursuant to a divorce decree.

Consequently, the mortgage payments by Petitioner are in

compliance with I.R.C. § 71(b)(1)(A).”

     Respondent further draws our attention to and cites Grutman

v. Commissioner, 80 T.C. 464, 472 (1983), for the proposition

that “in the area of housing, payments which directly and more

than incidentally benefit the wife and which do not directly and

primarily benefit the husband constitute alimony income to the

wife.”   Respondent then concludes that

     Since Norma was the sole owner of the * * * Casas
     Lindas residence in taxable year 2006, the mortgage
     payments made by Petitioner directly and more than
     incidentally benefitted Norma. The mortgage payments
     secured Norma’s right of occupancy, (which is separate
     and distinct from ownership), reduced Norma’s one-half
     of the monthly note owed to the lender and increased or
     preserved Norma’s equity in the * * * Casas Lindas
     residence. The only benefit received by Petitioner was
     the reduction of his one-half of the monthly note owed
     to the lender. Therefore, the mortgage payments
     primarily benefitted Norma and constitute income to her
     in the form of alimony. [Emphasis added.]
                                - 12 -

Nevertheless, after seemingly arriving at the conclusion that the

mortgage payments are alimony, respondent asserts:     “The question

remains to what extent are the mortgage payments as alimony

deductible by Petitioner.”   However, if the mortgage payments are

defined as alimony or separate maintenance under the provisions

of section 71(b)(1), then section 215 allows Mr. Contreras an

equivalent alimony deduction.

     Petitioners’ mortgage payments meet the requirement of

section 71(b)(1)(A).   Section 215 allows a deduction for payments

that constitute alimony under section 71.   Accordingly, we hold

that petitioners are entitled to a $5,746 alimony deduction for

the mortgage payments on the Casas Lindas residence for 2006.

     To reflect the foregoing,


                                          Decision will be entered

                                     under Rule 155.
