                  T.C. Summary Opinion 2001-72



                     UNITED STATES TAX COURT



                 CARRIE A. LESNIK, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 12201-99S.                     Filed May 17, 2001.



     Carrie A. Lesnik, pro se.

     Michael J. Calabrese, for respondent.



     DINAN, 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.   The decision to be

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

should not be cited as authority.   Unless otherwise indicated,

subsequent section references are to the Internal Revenue Code in
                               - 2 -

effect for the years in issue, and all Rule references are to the

Tax Court Rules of Practice and Procedure.

     For taxable years 1995, 1996, and 1997 respondent determined

deficiencies in petitioners’ Federal income taxes of $4,757,

$3,512, and $2,506 and accuracy-related penalties of $951.40,

$702.40, and $501.20.

     The issues for decision are:   (1) Whether amounts received

by petitioner pursuant to a judgment of divorce are includable in

her income under section 71; and (2) whether petitioner is liable

for accuracy-related penalties under section 6662(a) for

negligence or disregard of rules or regulations.

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

The stipulations of fact and the attached exhibits are

incorporated herein by this reference.   Petitioner resided in

Milwaukee, Wisconsin, on the date the petition was filed in this

case.

     Petitioner and her former husband, David G. Lesnik, were

divorced pursuant to a judgment entered by the Circuit Court,

Family Court Branch of the State of Wisconsin, Milwaukee County

on July 9, 1984.   The findings of fact accompanying the judgment

provided in relevant part:

     12. FAMILY SUPPORT. That family support shall be set
     at the sum of $750.00 per month. Due to possible
     fluctuation in the income of the petitioner [Mr.
     Lesnik] the petitioner shall furnish to the respondent
     [petitioner] or her attorney quarterly a record of all
     his income. Using 29% of said income, plus $150.00 per
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     month, if the figure exceeds $750.00 per month, the
     petitioner shall pay to the respondent a sum equal to
     said difference. If said figure equals or is less than
     $750.00 p/mo, there will be no adjustment for support
     for that quarter.

The support payments were to commence June 7, 1984, and be made

at the office of (or through assignment to) the clerk of the

court.

     Petitioner filed Federal income tax returns for taxable

years 1995 through 1997 on Forms 1040A, U.S. Individual Income

Tax Return.   No line on the forms was dedicated to “alimony

received”, and no income reported by petitioner was designated as

alimony.   Petitioner reported the following amounts and types of

income in each year:

                           1995             1996         1997

     Form W-2          $14,709.75           -0-      $20,856.27
     Form 1099-R           979.55           -0-           -0-
     Unspecified            -0-         22,097.00      3,022.73
     Total income       15,689.30       22,097.00     23,879.00

Respondent issued petitioner a statutory notice of deficiency

reflecting his determination that petitioner received alimony

income of $16,889, $14,380, and $14,715 in each respective year.1

     The first issue for decision is whether the amounts received

by petitioner pursuant to the judgment of divorce are includable

in her income under section 71.       Petitioner concedes that $150 of


     1
      Respondent also disallowed the earned income credit claimed
by petitioner in each year. This adjustment is computational and
will be resolved by the Court’s holding on the issues in this
case.
                                 - 4 -

the monthly family support payments is alimony and therefore

includable in her income.   She argues, however, that the

remaining $600 was in actuality for child support, and therefore

not includable in her income.2

     We accept petitioner’s testimony that she believed that the

bulk of the monthly family support payments was intended to be

child support in the traditional sense of the term.    In fact, the

record shows that that was most likely the case.    For example,

the transcript of a divorce court hearing regarding petitioner

and her former spouse indicates the court intended that, for

nontax purposes, $150 of the payments was to be alimony and the

remaining $600 child support.    Responding to the question by

counsel for petitioner:   “What’s the $150?”, the court replied

“That’s a figure I’m placing on support for the wife.    I don’t

want to say that because I get involved in the federal tax people

because that is child support. * * * I’m trying to protect him

from saying that the $150 is maintenance and the 29 percent is

support.”   In addition, the payments were referred to as child

support in a court record; the record reflects the reduction of

the payments upon the emancipation of one of petitioner’s

children and the apparent termination of the payments upon the

emancipation of her other child.    However, as discussed below,


     2
      Petitioner does not challenge the specific dollar amounts
of alimony determined by respondent, for which there is a lack of
supporting evidence in the record.
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whether or not the payments were intended to be support earmarked

for the petitioner’s children does not alter the Federal income

tax consequences of the express terms of the divorce judgment.

     Section 71(a)3 lists several requirements which must be met

in order to characterize payments made pursuant to a divorce

decree as alimony payments for purposes of Federal tax law.    If

the requirements of section 71(a) are met, the payments generally

must be included in the payee spouse’s income, whether or not the

payments are “alimony” for purposes other than Federal tax law.

However, section 71(b) provides an exception to the general rule

for certain child support payments.   It provides:

          SEC. 71(b). Payments to Support Minor Children.--
     Subsection (a) shall not apply to that part of any payment
     which the terms of the decree, instrument, or agreement fix,
     in terms of an amount of money or a part of the payment, as
     a sum which is payable for the support of minor children of
     the husband. * * *

The statute clearly requires that the divorce instrument

expressly fix the amount of child support; in the absence of such

an express provision, the exception under section 71(b) does not



     3
      Because the divorce judgement in this case was entered
prior to 1985, we apply the provisions of sec. 71 which were
applicable before the changes made by the Deficit Reduction Act
of 1984 (DEFRA), Pub. L. 98-369, sec. 422(e), 98 Stat. 798. We
note that the amount of the family support payments required by
the judgment in this case was modified at least once after 1984.
However, a post-1984 modification of a pre-1985 judgment does not
cause the DEFRA changes to apply unless the modification
expressly so provides. See id. at sec. 422(e)(2); see also
Libman v. Commissioner, T.C. Memo. 1990-629. Nothing in the
record indicates such a provision existed in this case.
                               - 6 -

apply and the payments must be included in the payee’s income if

they otherwise meet the requirements of section 71(a).   See

Commissioner v. Lester, 366 U.S. 299, 303 (1961).   Any indication

of an intent to allocate a portion of a payment as child support

which is not an express provision of the instrument fixing it as

such is insufficient to cause the section 71(b) exception to

apply.   See id.

     It is clear in this case that the divorce instrument did not

fix any portion of the family support payments as child support.

Consequently, despite the evidence that the payments under the

instrument were in fact primarily for support of the children,

they do not meet the requirements for the exception under section

71(b).   We therefore sustain respondent’s determination that

payments received by petitioner under the judgment of divorce

must be included in her income.

     The second issue for decision is whether petitioner is

liable for accuracy-related penalties under section 6662(a).

Respondent determined that petitioner is liable for an accuracy-

related penalty imposed by section 6662(a) for the entire

underpayment of tax in each of the years in issue because these

underpayments were due to negligence or disregard of rules or

regulations.

     Section 6662(a) imposes a 20-percent penalty on the portion

of an underpayment attributable to any one of various factors,
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one of which is negligence or disregard of rules or regulations.

See sec. 6662(b)(1).      “Negligence” includes any failure to make a

reasonable attempt to comply with the provisions of the Internal

Revenue Code and also includes any failure to keep adequate books

and records or to substantiate items properly.      Sec. 6662(c);

sec. 1.6662-3(b)(1), Income Tax Regs.      Section 6664(c)(1)

provides that the penalty under section 6662(a) shall not apply

to any portion of an underpayment if it is shown that there was

reasonable cause for the taxpayer’s position and that the

taxpayer acted in good faith with respect to that portion.      The

determination of whether a taxpayer acted with reasonable cause

and in good faith is made on a case-by-case basis, taking into

account all the pertinent facts and circumstances.      See sec.

1.6664-4(b)(1), Income Tax Regs.      The most important factor is

the extent of the taxpayer’s effort to assess his proper tax

liability for the year.     See id.   Reasonable cause and good faith

may be indicated by an honest and reasonable misunderstanding of

fact or law.    See id.

     Petitioner asserts that she includes the amount which she

believes to be alimony, $150 per month, in her taxable income

each year.     The record does not support this assertion.   In 1997,

petitioner reported $3,022.73 in excess of her wage income.        This

amount was far in excess of a $150 monthly payment, which would

equal $1,800.     Petitioner did not explain the discrepancy.   We
                               - 8 -

find there to be no indication that petitioner reported any

alimony income in 1997.   In 1996, none of the sources of

petitioner’s income were shown.    In 1995, petitioner reported no

income in excess of the income reported on her Form W-2, Wage and

Tax Statement, and her Form 1099-R, Distributions From Pensions,

Annuities, Retirement Plans, IRAs, Insurance Contracts, etc.     It

is therefore clear that no part of her reported income in that

year could have been from alimony, which was to be paid by Mr.

Lesnik through the county court.   Finally, petitioner did not

dispute the statement in the notice of deficiency that she

reported no alimony income in each of the years in issue.

     We uphold respondent’s determination that petitioner is

liable for the accuracy-related penalties, but only as to that

portion of the penalties which is attributable to her failure to

report what she has conceded to be alimony--$150 per month.

Petitioner’s statements in the record indicate she knew the

amounts to be taxable and yet failed to report them.

     On the other hand, we find that petitioner had reasonable

cause in maintaining her position that the remainder of the

payments were not alimony, and therefore should not be includable

in her income.   This position was a reasonable and honest

misunderstanding of fact and law, and we accept it as

petitioner’s honest belief.   See sec. 1.6664-4(b)(1), Income Tax
                                 - 9 -

Regs.   We therefore hold that petitioner is not liable for

negligence in failing to report these amounts as income.

     Reviewed and adopted as the report of the Small Tax Case

Division.

     To reflect the foregoing,

                                         Decision will be entered

                                 under Rule 155.
