                    T.C. Summary Opinion 2006-110



                       UNITED STATES TAX COURT



         JOHN R. RAY IV AND ROCHELLE L. RAY, Petitioners v.
            COMMISSIONER OF INTERNAL REVENUE, Respondent

                    JENNIE S. RAY, Petitioner v.
            COMMISSIONER OF INTERNAL REVENUE, Respondent



       Docket Nos. 5316-05S, 7558-05S.    Filed July 17, 2006.


       Juan F. Vasquez, Jr., for petitioners in docket No. 5316-

05S.

       Peter A. Lowy, for petitioner in docket No. 7558-05S.

       Gordon P. Sanz, for respondent.


       DEAN, Special Trial Judge:   These consolidated cases were

heard pursuant to the provisions of section 7463 of the Internal

Revenue Code in effect at the time the petitions were filed.

Unless otherwise indicated, subsequent section references are to

the Internal Revenue Code as in effect for the year at issue, and
                               - 2 -

all Rule references are to the Tax Court Rules of Practice and

Procedure.   The decisions to be entered are not reviewable by any

other court, and this opinion should not be cited as authority.

     Respondent determined for 2002 a deficiency in the Federal

income tax of petitioners, John R. Ray IV (Mr. Ray) and Rochelle

L. Ray, in the amount of $16,210.   Respondent also determined for

2002 a deficiency in the Federal income tax of petitioner Jennie

S. Ray, now known as Jennie S. Bader (Ms. Bader), in the amount of

$11,391.

     These cases have been consolidated for purposes of trial,

briefing, and opinion, because they involve common questions of

fact and law arising from the separation and divorce of Mr. Ray

and Ms. Bader.

     The issue for decision is whether certain payments made by

Mr. Ray to Ms. Bader in 2002 constitute alimony payments within

the meaning of section 71(b)(1) that are deductible by Mr. Ray

under section 215(a) and that are includable in the income of Ms.

Bader under section 71(a).

                             Background

     The stipulation of facts and the exhibits received into

evidence are incorporated herein by reference.   When the petitions

in these cases were filed, Mr. Ray resided in Spring, Texas, and

Ms. Bader resided in Tomball, Texas.
                               - 3 -
     Mr. Ray and Ms. Bader were married on July 23, 1988.    They

had three children from the marriage.   They separated on July 17,

2001, after which the children resided with Ms. Bader.

     During their separation, Mr. Ray paid to Ms. Bader

approximately $6,000 to $7,000 per month with the understanding

that the funds would be used for the financial support of Ms.

Bader and the three minor children.    Ms. Bader acknowledged that

Mr. Ray paid “what he felt was fair”, and the amount of the

monthly payments varied accordingly.    Mr. Ray conceded that any

support payments made prior to March 13, 2002, were voluntary and

do not constitute alimony for Federal income tax purposes.

State Court Proceedings

     On July 25, 2001, Ms. Bader filed an Original Petition for

Divorce in the District Court of Harris County, Texas (State

court).

     The State court, pursuant to an agreed order submitted by the

parties’ divorce counsel, appointed an arbitrator to resolve all

pending issues relating to the dissolution of the marriage and the

children.   An arbitration was scheduled for March 13, 2002 (March

13 arbitration).   A week prior to arbitration, Mr. Ray’s divorce

counsel submitted to the arbitrator a Mediation Memorandum to

brief her on the background and the issues to be resolved.

     On the arbitration date, Mr. Ray and Ms. Bader reached an

agreement on all outstanding issues, and the terms of the divorce

were recited into the record by their respective divorce counsel.
                                 - 4 -
Both Mr. Ray and Ms. Bader testified under oath that they

understood and agreed to the terms recited therein.    A transcript

of the March 13 arbitration was prepared and was filed with the

State court as “The Arbitration Agreement Statement of Facts

Between Jennie Sophia Ray and John Robert Ray, IV March 13, 2002”

(arbitration agreement).   Under the arbitration agreement, Mr. Ray

agreed to pay to Ms. Bader the sum of $20,000 in alimony, payable

at the rate of $4,000 per month, beginning in April of 2002 and

terminating in August of 2002.

     On April 22, 2002, the State court entered an Agreed Final

Decree of Divorce (divorce decree), dissolving the marriage of Mr.

Ray and Ms. Bader.   Consistent with the arbitration agreement,

section 1.2 of the divorce decree obligated Mr. Ray to pay a total

of $20,000 in alimony, to commence on April 1, 2002.   Section 1.2

of the divorce decree provides:

     1.2   Terms, Conditions, and Contingencies

     Amount - JOHN ROBERT RAY, IV will pay to JENNIE SOPHIA
     RAY $4,000.00 per month as alimony. These payments will
     be payable beginning April 1, 2002, on or before the 1st
     day of each month, beginning on the first such day after
     the date of divorce in this case.

     Term - The payments will end after the payment of
     $20,000.00 total, with the last payment being due on
     August 1, 2002, providing all payments have been made.
                                 - 5 -

Payments Made by Mr. Ray to Ms. Bader

     The arbitration agreement did not require alimony payments to

begin until April of 2002.     The divorce decree, likewise, did not

require alimony payments to begin until April 1, 2002.

Nevertheless, at the end of March of 2002, Mr. Ray made a payment

to Ms. Bader--check No. 1095, dated March 22, 2002, in the amount

of $3,000.

     During the examination of his return by respondent, Mr. Ray

substantiated that he paid alimony of $16,000 between April 1 and

August 1, 2002.    All of the payments were made by personal checks,

and some of the checks included both alimony and child support.

The final payment was check No. 1219, which bore the notation of

“Alimony-Final”.   A summary of the substantiated alimony payments

follows:

     Check No.     2002 Date     Amount    Alimony   Child Support
     1109          Apr. 8        $3,000    $2,000    $1,000
     1114          Apr. 21        3,000     2,000     1,000
     1129          May 5          3,000     2,000     1,000
     1161          June 5         2,0001    2,000      --
     1162          June 6         2,000     2,000      --
     1177          June 21        2,000     2,000      --
     1199          July 8         2,000     2,000      --
     1219          July 24        2,000     2,000      --

The 2002 Deficiencies
     Mr. Ray married his current wife, Rochelle Ray, in 2002.

They jointly filed a 2002 Form 1040, U.S. Individual Income Tax

Return, prepared by Ernst and Young LLP, on which they claimed an


     1
      Although the exhibits prepared by Mr. Ray indicated that
check No. 1161 was a check for $3,000, the bank statement shows
that the correct amount is $2,000.
                                - 6 -
alimony deduction of $41,000.   Ms. Bader filed a 2002 Form 1040,

U.S. Individual Income Tax Return, prepared by a certified public

accountant, on which she failed to report any alimony income.

                             Discussion

     Mr. Ray and Ms. Bader bear the burden of proving that

respondent’s determinations in the respective notices are

erroneous.   Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115

(1933).2

I.   Parties’ Arguments

     In the role of a stakeholder, respondent issued separate

statutory notices of deficiency to Mr. Ray and Ms. Bader,

addressing their inconsistent treatment of the payments.

Respondent disallowed Mr. Ray’s alimony deduction of $41,000 based

on the determination that Mr. Ray failed to substantiate that he

actually paid $41,000 or that such amount was alimony.    Respondent

determined that Ms. Bader received alimony of $41,000 in 2002 and

adjusted her income accordingly.

     Mr. Ray alleges that the claimed deduction of $41,000

represented the sum of all the payments made by him in 2002.    He

now agrees that any payments made prior to the March 13


     2
      With respect to any factual issue relevant to ascertaining
the liability of the taxpayer, sec. 7491(a) shifts the burden of
proof to the Commissioner in certain situations. The resolution
of the factual issue in this case does not depend upon which
party has the burden of proof. Rather, the factual issue is
decided upon the basis of the stipulated facts and the documents
contained in the record. Therefore, sec. 7491(a) does not apply.
                                 - 7 -
arbitration were voluntary and did not constitute alimony for

Federal income tax purposes.   Subsequent to March 13, 2002, Mr.

Ray wrote to Ms. Bader a total of 10 checks, totaling $23,000 of

which he states that he intended $20,000 to be alimony and the

remainder to be child support.    Of the $20,000, Mr. Ray

substantiated that $16,000 was alimony.    Ms. Bader agrees that she

received alimony of $16,000 in 2002 and has paid Federal income

tax on that amount.

II.   Issues Raised

      At issue in this case is whether the remaining $4,000

constitutes alimony within the meaning of section 71(b)(1) that is

deductible by Mr. Ray under section 215(a) and that is includable

in the income of Ms. Bader under section 71(a).

      The $4,000 at issue is represented by three checks:   (1)

$2,000 is attributable to check No. 1095, dated March 22, 2002,

(2) $1,000 is attributable to check No. 1129, dated May 5, 2002,

and (3) $1,000 is attributable to check No. 1148, dated May 20,

2002.

      Check No. 1095 was a check for $3,000.   Of that amount, Mr.

Ray claims that he intended $2,000 to be his initial alimony

payment (Initial Payment) and the remainder to be child support.

Mr. Ray testified that he made the Initial Payment prior to the

prescribed date of April 1, 2002, because he assumed that the

divorce was final after the March 13 arbitration.    He also assumed
                               - 8 -
that any payments made thereafter would be in furtherance of the

divorce.

     The Initial Payment was made after the parties entered into

the arbitration agreement, but before April 1, 2002.    This raises

two legal issues:   (1) Whether the arbitration agreement is a

“divorce or separation instrument” as defined by section 71(b)(2),

and (2) whether the Initial Payment was made “under” a divorce or

separation instrument as required by section 71(b)(1).

     As for check Nos. 1129 and 1148, Mr. Ray testified that,

subsequent to the examination of his return, he discovered

additional documentation to show that the two checks represent

alimony that was not previously accounted for.   He claimed that

the checks, together with the documentation previously submitted

to respondent, show that he paid a total of $18,000 in alimony

between April 1 and August 1, 2002, or $2,000 more than previously

substantiated.

     Mr. Ray argues that check No. 1129 should be recharacterized

to reflect that the entire check amount of $3,000, instead of only

$2,000, was alimony.   Mr. Ray further argues that check No. 1148,

in the amount of $1,000, represented alimony, but it was not

accounted for, because the check was not discovered until after

the examination.

     Check Nos. 1129 and 1148 raise an issue of fact.    There is no

dispute that these payments were made under the divorce decree.
                                - 9 -
Therefore, the only dispute is whether the $2,000 was paid as

alimony or child support.

     Ms. Bader contends that she received alimony of only $16,000

in 2002.    She takes the position that any payments in excess of

$16,000 were either voluntary or child support and did not

constitute alimony within the meaning of section 71(b)(1).

     A.     Whether the Initial Payment Qualifies as
            Alimony Under Section 71(b)

     Section 215(a) allows a deduction for the payment of alimony

during a taxable year.    Section 215(b) defines alimony as a

payment that is includable in the gross income of the recipient

under section 71.    Section 71(a) provides that gross income

includes amounts received as alimony or separate maintenance

payments.    Under section 71(b)(1), the term “alimony or separate

maintenance payment” means any cash payment 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.
                               - 10 -

     The Initial Payment satisfies all of the requirements under

section 71(b)(1)(B)-(D).   In dispute is section 71(b)(1)(A),

specifically:   (1) Whether the arbitration agreement was a

“divorce or separation instrument”, and if yes, (2) whether the

Initial Payment was received by Ms. Bader “under” a divorce or

separation instrument.

     Whether the Arbitration Agreement Was a
     “Divorce or Separation Instrument”

     Section 71(b) defines the term “divorce or separation

instrument” as:

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

 *         *          *         *          *          *           *

          (2) Divorce or separation instrument.--The term “divorce
     or separation instrument” means-

                 (A) a decree of divorce or separate maintenance
          or a written instrument incident to such a decree,

                  (B) a written separation agreement, or

                 (C) a decree (not described in subparagraph (A))
          requiring a spouse to make payments for the support or
          maintenance of the other spouse.

     Mr. Ray contends that the arbitration agreement is a “decree

of divorce”, because the arbitration agreement merged with the

divorce decree once the decree was filed with the State court on

April 12, 2002.   The merger clause under the divorce decree

provides for a merger of a “mediation agreement” into a final

decree of divorce:
                                - 11 -

     This Final Decree of Divorce is stipulated to represent
     a merger of a mediation agreement between the parties.
     To the extent there exist any differences between the
     mediation agreement and this Final Decree of Divorce,
     this Final Decree of Divorce shall control in all
     instances.

     The parties used the terms “mediation” and “arbitration”

interchangeably when referring to the March 13 arbitration.     For

example, the memorandum that Mr. Ray’s divorce counsel prepared in

advance of the March 13 arbitration was labeled “Mediation

Memorandum” rather than “Arbitration Memorandum”.   Although the

arbitration agreement was not labeled as the “mediation

agreement”, both parties intended it as such.

     Merger, with respect to the law of contracts under Texas law,

refers to the extinguishment of one contract by its absorption

into another contract and is largely a matter of the intention of

the parties.   Smith v. Smith, 794 S.W.2d 823, 827-828 (Tex. App.

1990).   Before one contract is merged into another, the last

contract must be between the same parties as the first, must

embrace the same subject matter, and must have been so intended by

the parties.   Id. at 828.

     When an agreement is incorporated into a divorce decree, the

decree is a consent judgment.   McGuire v. McGuire, 4 S.W.3d 382,

386 (Tex. App. 1999); Rivera v. Office of Attorney General, 960

S.W.2d 280, 283 (Tex. App. 1997).   Once the court approves the

agreement and makes it a part of the judgment, the agreement is no
                                 - 12 -

longer merely a contract between private individuals but is the

judgment of the court.    McGuire v. McGuire, supra.

     In this case, the arbitration agreement and the divorce

decree were made between the same parties, embraced the same

subject matter, ordered the same support amounts and payment

schedule, and was intended by the parties to be incorporated into

the divorce decree.    Under Texas law, the arbitration agreement

became a part of the consent judgment once it was incorporated

into the final divorce decree.    Therefore, by virtue of the

merger, the arbitration agreement becomes an integrated part of

the “divorce or separation instrument” within the meaning of

section 71(b).

            Whether the Initial Payment Was Received
            “Under” a Divorce or Separation Instrument

     The resolution of whether the Initial Payment was received

“under” a divorce or separation instrument turns on the question

of timing.    Both the arbitration agreement and the divorce decree

(collectively, the qualifying divorce instrument) are explicit in

their terms that alimony payments “will be payable beginning April

1, 2002”.

     Mr. Ray contends that his legal obligation was to pay alimony

of $20,000.    He argues that so long as the sum of $20,000 was

paid, it is irrelevant whether he commenced the alimony payments

in March or in April of 2002.    Mr. Ray’s argument ignores the

question of the Initial Payment’s timing.
                                - 13 -

     On the other hand, the focus of Ms. Bader’s argument is that

the Initial Payment was made too early.   She argues that the

Initial Payment is not alimony because it was paid prior to the

prescribed date of April 1, 2002.   She further argues that Mr. Ray

failed to produce any documentation that would authorize him to

shift the Initial Payment into April, or to deem the Initial

Payment alimony.

     The obligation to make alimony payments must have been

imposed by the decree itself.   Healey v. Commissioner, 54 T.C.

1702, 1705-1706 (1970), affd. without published opinion 28 AFTR 2d

71-5217, 71-2 USTC par. 9536 (4th Cir. 1971); see Prince v.

Commissioner, 66 T.C. 1058 (1976); Joslyn v. Commissioner, 23 T.C.

126, 133-134 (1954) (holding that payments that fell outside of

the scope of a qualified divorce or separation instrument were not

alimony), revd. in part and affd. in part on other grounds 230

F.2d 871 (7th Cir. 1956); Leventhal v. Commissioner, T.C. Memo.

2000-92 (same).

     The qualifying divorce decree, from which Mr. Ray’s alimony

obligation arose, required alimony payments to commence on April

1, 2002.   The Court must decide whether the Initial Payment fell

outside of the scope of the qualifying divorce decree, because it

was made prior to April 1, 2002.    The Court holds that it does.

     Under section 71(b)(1)(A), the Court has strictly construed

the terms of the instrument in determining whether a payment has
                                 - 14 -

been made “under” a qualified divorce or separation instrument.

In Wells v. Commissioner, T.C. Memo. 1998-2, by the express terms

of the court order, the taxpayer’s legal obligation to pay alimony

commenced on October 15, 1990.    In determining whether the

taxpayer’s payments were made pursuant to a “written separation

instrument”, the Court looked to when the payments were made and

concluded that all payments made from January 1 through October

14, 1990, were not made pursuant to a “written separation

instrument”.   Id.

     Similarly, in Abood v. Commissioner, T.C. Memo. 1990-453, by

the express terms of the court order, the taxpayer’s obligation to

pay alimony terminated on June 1, 1985.    The Court held that any

payments made thereafter were purely voluntary and hence did not

qualify as alimony under sections 71(a) and 215(a).    Id.; see also

Serednesky v. Commissioner, T.C. Memo. 1993-566 (holding that

taxpayer may not deduct rental payments made on behalf of his

former wife as alimony, because the divorce judgment specifically

required him to provide “housing”).

     Mr. Ray testified that he was told that the divorce was final

after the March 13 arbitration and that he understood this to mean

that he had a choice of when to make the first alimony payment.

Mr. Ray chose to make the Initial Payment on March 22, 2002,

because he wanted to “get it over with” and because it was
                                 - 15 -

convenient for him to schedule his alimony payments on or

immediately after his paydays.    In 2002, Mr. Ray was paid by his

employer on the 7th and the 21st of every month.

     Regardless of when the divorce was ultimately finalized, Mr.

Ray did not have an obligation to pay alimony under the qualifying

divorce instrument until April 1, 2002.   Where the payments were

not mandated by a qualifying divorce or separation instrument at

the time that they were made, the Court has construed those

payments as voluntary.   Meyer v. Commissioner, T.C. Memo. 2003-12;

Hart v. Commissioner, T.C. Memo. 1997-11; Abood v. Commissioner,

supra; Dean v. Commissioner, T.C. Memo. 1981-554.    Voluntary

payments do not qualify as alimony for Federal income tax

purposes.   See Meyer v. Commissioner, supra; Hart v. Commissioner,

supra.

     According to Mr. Ray, although the Initial Payment was made

prior to April 1, 2002, he fully intended it to be a part of his

$20,000 alimony obligation.   The Court, however, has held that

even if the payments made were no less in the nature of support

than amounts paid under a divorce decree, those payments are not

deductible unless there is some written agreement that creates a

legally enforceable right to the support payments.    Anderson v.

Commissioner, T.C. Memo. 1999-53; Brooks v. Commissioner, T.C.

Memo. 1983-304 (holding that the writing must provide adequate
                               - 16 -

proof of the existence of a contract between the parties and it

must memorialize the parties’ understanding regarding the terms of

alimony payments).

     Accordingly, the Initial Payment was not made “under” the

qualifying divorce instrument because it was paid prior to April

1, 2002.   Payments not received under a divorce decree or

separation instrument are not deductible under section 215.

Healey v. Commissioner, supra; Ali v. Commissioner, T.C. Memo.

2004-284; Meyer v. Commissioner, supra; Jachym v. Commissioner,

T.C. Memo. 1984-181.

     Based on the foregoing, the Court concludes that the Initial

Payment was voluntary because it fell outside of the scope of the

qualified divorce instrument, and it is therefore not alimony

within the meaning of section 71(b)(1).

     B.    Whether Check Nos. 1129 and 1148 Were
           Alimony or Child Support Payments

     The divorce decree obligated Mr. Ray to pay child support of

$2,000 per month, with the first payment due and payable on April

1, 2002.   All child support payments were required to be made

through the Harris County Child Support Department (department)

and remitted by the department to Ms. Bader.

     During the examination, Mr. Ray and the examining agent

assumed that any check in the amount of $3,000, dated after April

1, 2002, was intended as alimony of $2,000 and child support of
                               - 17 -

$1,000, unless Mr. Ray could prove otherwise.   Check No. 1129

falls within this category.

     Subsequent to the examination, Mr. Ray obtained a copy of

canceled check No. 1129.   It was made payable to “Jennie Ray”, and

had a notation of “Alimony”.   In addition, Mr. Ray introduced a

copy of canceled check No. 1126, dated May 2, 2002, made payable

to “Harris County Child Support” in the amount of $2,000 (May

child support) to prove that a separate child support payment was

sent to the department in May of 2002.   At trial, Mr. Ray argued

that check Nos. 1129 and 1126, when viewed together, showed that

the entire $3,000 of check 1129 was alimony.

     Mr. Ray contends that the May child support payment was the

first time that he had sent his payment through the department.

Mr. Ray explained that check No. 1114, the payment immediately

preceding check No. 1129, bore a notation of “1000-child support

2000-alimony”, because in April he did not know where the child

support payments should be sent.   Checks thereafter did not

specify a child support and alimony split, because all child

support payments were sent through Harris County, and all alimony

payments were sent directly to Ms. Bader.

     Ms. Bader, on the other hand, does not remember whether the

checks at issue were intended as child support or alimony, but she

nevertheless contends that they were for child support.   Ms. Bader
                                - 18 -

presented a bank statement to show that she did not receive her

first child support payment from the department, via direct

deposit, until July 8, 2002.   She therefore argues that check Nos.

1129 and 1148, both dated in May and whose sum is equal to an

installment of a child support payment, were in actuality child

support since she received nothing from the department until July.

     Ms. Bader is essentially arguing that Mr. Ray failed to pay

the May child support to the department.   This argument, however,

is not persuasive.   According to Ms. Bader’s own testimony, Mr.

Ray had always been timely with his child support payments during

their separation.    In the one instance where he forgot to make his

child support payment, he promptly paid upon her request.   It is

likely that the 2-month delay was attributable to processing and

setting up the initial account for the child support payments.     In

light of Mr. Ray’s payment history and the canceled check for the

May child support payment, the Court concludes that Mr. Ray paid

child support to the department for May of 2002.

     In this case, both check Nos. 1129 and 1148 were made payable

to “Jennie Ray” in May of 2002 and were dated after the check for

May child support.   It logically follows that these payments were

alimony.   For the Court to find otherwise, it would require an

assumption that Mr. Ray made $4,000 of child support payments in

May of 2002--$2,000 to the department and another $2,000 to Ms.
                               - 19 -

Bader.   This is not likely since Mr. Ray made it clear that he had

no interest in making any payments to Ms. Bader unless it was in

furtherance of the divorce.

     Based on the evidence presented, the Court finds that the

$2,000 attributable to check Nos. 1129 and 1148 is alimony.

Accordingly, Mr. Ray paid a total of $18,000 of alimony between

April 1 and August 1, 2002.

     Reviewed and adopted as the report of the Small Tax Case

Division.



                                         Decisions will be entered

                                    under Rule 155.
