                              T.C. Memo. 2017-101



                        UNITED STATES TAX COURT



                  PAUL S. MUDRICH, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 20719-14.                         Filed June 1, 2017.



      Paul S. Mudrich, pro se.

      S. Mark Barnes, for respondent.



                          MEMORANDUM OPINION


      BUCH, Judge: The parties submitted this case fully stipulated under

Rule 122.1 Paul S. Mudrich earned a bonus in 2006 while married to Lauri



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

[*2] Mudrich.2 He received that bonus in 2007, the year in issue, while still

married to Lauri and paid her one-half of the bonus net of taxes. They executed an

agreement that the bonus was community property, that Mr. Mudrich would pay

Lauri one-half of the bonus net of taxes, and that he would report the bonus on his

return. Mr. Mudrich failed to file a timely return for 2007. When he filed the

return, Mr. Mudrich claimed an alimony deduction for the payment to Lauri. The

Commissioner issued a notice of deficiency disallowing that deduction and

determining an addition to tax and a penalty.

      In general, alimony is a division of income that is paid under a divorce or

separation agreement and that meets additional statutory requirements.3 Because

this payment was not made pursuant to a divorce or separation agreement, it is not

alimony. Because Mr. Mudrich did not file a timely return for 2007, he is liable

for an addition to tax for failure to timely file. And the Commissioner has met his

burden of production to show that an addition to tax and an accuracy-related

penalty apply.




      2
        During 2007 Mr. Mudrich divorced Lauri and married Kyera Mudrich. To
avoid confusion, we will refer to Mr. Mudrich’s spouse and his former spouse by
their first names.
      3
          See sec. 71(b)(1).
                                        -3-

[*3]                                Background

       The facts that are central to this case involve a bonus Mr. Mudrich earned

and the payment of a portion of that bonus to Lauri, who was his wife during 2006

and the first part of 2007. The chronology is as follows:

       •     Mr. Mudrich performed work as an attorney in 2006, and that work
             gave rise to a future bonus payment.

       •     In January 2007 Mr. Mudrich filed for divorce from Lauri.4

       •     Mr. Mudrich received the bonus for work performed in 2006. The
             gross amount of the bonus was $250,000, and after tax withholding
             Mr. Mudrich received $156,617.92.

       •     On May 18, 2007, Mr. Mudrich paid Lauri $74,753, an amount that
             represents approximately one-half of his 2006 bonus net of
             withholding taxes.

       •     On May 21, 2007, Lauri signed a document titled “Stipulation and
             Order Re: 2006 Bonus”, which provided that Mr. Mudrich would pay
             her one-half of his bonus net of taxes and report the bonus on his
             return (bonus agreement). The document included an order line for
             the superior court judge to sign.

       •     On June 18, 2007, Mr. Mudrich signed the bonus agreement to pay
             Lauri one-half of his bonus net of taxes and report the bonus on his
             return.




       4
       We take judicial notice of the docket in Mudrich v. Mudrich, No. D07-
00594 (Cal. Super. Ct. filed Jan. 31, 2007). The case is still active. The parties
have filed agreements related to certain assets, but the superior court has not
entered a property settlement.
                                       -4-

[*4] •      On July 23, 2007, the superior court received a document titled
            “Stipulation & Order Re: 2006 Bonus”.

      •     On August 8, 2007, the superior court issued an order terminating the
            marriage and determining spousal support (support order).

I.    The Bonus Agreement

      Mr. Mudrich and Lauri executed an agreement regarding Mr. Mudrich’s

bonus. The bonus agreement is a proposed order titled “Stipulation and Order Re:

2006 Bonus” and provides:

      •     Mr. Mudrich “received in 2007 a bonus for his work in 2006”, and
            that bonus is his and Lauri’s “community property”.

      •     Mr. Mudrich must pay to Lauri “by 5/18/07 * * * one-half of his 2006
            bonus net of withholding”.

      •     Mr. Mudrich “shall report the 2006 bonus on his 2007 state and
            federal income tax returns.”

      •     “The Court reserves jurisdiction to allocate the withholding and
            allocate the payment of state and federal income taxes” on the 2006
            bonus.

      •     Mr. Mudrich and Lauri “specifically stipulate (agree) that all taxes
            due on the bonus are their community debt.”

II.   The Support Order

      Subsequently, the superior court entered a support order providing that Mr.

Mudrich “shall pay * * * [Lauri] $3,270 per month temporary spousal support.”

As additional support, the superior court required Mr. Mudrich to “pay * * *
                                        -5-

[*5] [Lauri] 31.3% from any income * * * [Mr. Mudrich] earns in excess of

$12,500 per month.” The superior court credited Mr. Mudrich with payments

made as of June 1, 2007. The support order did not mention the payment of the

2006 bonus. A passage in the support order referred to a “percentage of bonus as

additional support”, but that passage was stricken by hand and initialed by counsel

for Mr. Mudrich and Lauri.

       During June through December 2007 Mr. Mudrich paid Lauri $3,100 per

month.

       In 2008 Lauri filed with the superior court a motion for an order to show

cause. She requested that the superior court order Mr. Mudrich to pay her

delinquent support payments. She attached as an exhibit a list of court-ordered

payments and shortfalls beginning June 2007. She did not list the payment of the

2006 bonus.

III.   Reporting and the Notice of Deficiency

       Mr. Mudrich did not file a timely return for 2007. The Commissioner

prepared a substitute for return in November 2010. On February 11, 2013, Mr.

Mudrich filed a joint, amended return for 2007 with his new spouse, Kyera. They

claimed a deduction for alimony of $127,228. A certified public accountant

prepared their return.
                                         -6-

[*6] The Commissioner sent Mr. Mudrich a notice of deficiency, disallowing the

deduction for alimony paid and determining an addition to tax for failure to timely

file and an accuracy-related penalty as well as other correlative adjustments.

While residing in Victor, Idaho, Mr. Mudrich filed a timely petition and alleged

that he is entitled to an alimony deduction, including a deduction for the portion of

the 2006 bonus he paid to Lauri. Because the parties agreed that the facts are not

in dispute, we granted the parties’ motion to submit the case fully stipulated under

Rule 122.

                                     Discussion

      Mr. Mudrich deducted a payment made to Lauri that was one-half of his

bonus net of taxes. After concessions by both parties,5 we must decide whether

this payment is alimony. We must also decide whether Mr. Mudrich is liable for

an addition to tax for failure to timely file and for an accuracy-related penalty.




      5
        There are three groups of payments that make up Mr. Mudrich’s deduction
for alimony of $127,228: the lump-sum cash payment of $74,753 from his bonus,
the seven payments of $3,100 each, and a remainder of $30,775. The
Commissioner concedes that the seven payments totaling $21,700 are alimony. In
the motion to submit the case under Rule 122 Mr. Mudrich concedes that the
remaining $30,775 is not alimony.
                                             -7-

[*7] I.            Burden of Proof

          The Commissioner’s determinations in the notice of deficiency are generally

presumed correct, and taxpayers bear the burden of proving otherwise.6 In limited

situations the burden may shift to the Commissioner under section 7491(a), but

there is not enough information in the record here to conclude that the burden

should shift under section 7491(a), and Mr. Mudrich does not argue that it should.

Accordingly, the burden remains on him. Taxpayers bear the burden of proving

that they have met all requirements necessary to be entitled to their claimed

deductions.7

II.       Alimony Deduction

          Payments incident to divorce generally fall into one of two categories:

alimony or property settlements. In general, alimony is a division of income, and

property settlements are a division of marital property.8 A property settlement is

not a taxable event and does not give rise to any gain or loss.9 In contrast, alimony



          6
              Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933).
          7
              Rule 142(a); INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992).
          8
       See Rogers v. Commissioner, T.C. Memo. 2005-50, 89 T.C.M. (CCH) 850,
851 (2005).
          9
              Sec. 1041.
                                       -8-

[*8] payments give rise to a deduction for the paying spouse and to income for the

receiving spouse.10

      An alimony payment is any cash payment that satisfies the four

requirements of section 71(b)(1): (A) the 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 the payment as one that is not includible in gross

income of the payee and not allowable as a deduction to the payor; (C) the payor

and payee spouses are not members of the same household at the time the

payments are made if they are legally separated; and (D) the payments or

substitutes end after the payee spouse’s death. These requirements provide an

objective standard to distinguish payments that are a division of property from

payments that are made as spousal support.11




      10
           Secs. 71(a), 215(a).
      11
        See Estate of Goldman v. Commissioner, 112 T.C. 317, 322 (1999) (“The
committee bill attempts to define alimony in a way that would conform to general
notions of what type of payments constitute alimony as distinguished from
property settlements and to prevent the deduction of large, one-time lump-sum
property settlements.” (quoting H.R. Rept. No. 98-432 (Part 2), at 1495 (1984))
(citing Hoover v. Commissioner, 102 F.2d 842, 845 (6th Cir. 1996), aff’g T.C.
Memo. 1995-183, aff’d without published opinion sub nom. Schutter v.
Commissioner, 242 F.3d 390 (10th Cir. 2000).
                                         -9-

[*9] Section 71(b)(1)(A) requires that the payment be “received by (or on behalf

of) a spouse under a divorce or separation instrument”. Section 71(b)(2) defines a

“divorce or separation instrument” as a decree of divorce or a written instrument

incident to such a decree, a written separation agreement, or a decree requiring a

spouse to make payments for support or maintenance of the other spouse. The

record does not support a conclusion that the payment at issue was made pursuant

to a divorce or separation instrument.

      The record does not contain sufficient evidence to indicate that the bonus

agreement is a decree or a written instrument incident to a decree. There is no

evidence in the record showing that the bonus agreement ever became an order in

the divorce proceeding. Moreover, the bonus agreement is not a written

separation agreement. The term “written separation agreement” has been

interpreted to require a clear, written statement memorializing the terms of support

between the parties and entered into in contemplation of separation status.12 There

is no question that Mr. Mudrich and Lauri entered into a bilateral written

agreement; however, that agreement specifically provides for division of




      12
       See Jacklin v. Commissioner, 79 T.C. 340, 350 (1982) (citing Bogard v.
Commissioner, 59 T.C. 97, 101 (1972)); Leventhal v. Commissioner, T.C. Memo.
2000-92, 79 T.C.M. (CCH) 1670, 1675 (2000).
                                          - 10 -

[*10] community property and not support. Thus, the bonus agreement is also not a

written separation agreement.

      Because the bonus agreement was not a divorce or separation instrument,

the payment to Lauri pursuant to the bonus agreement is not alimony.

      The facts also make it clear that the payment was not made pursuant to the

support order. Mr. Mudrich principally argues that the payment was directed by

the support order because that order required him to pay Lauri 31.3% of any

income he earns in excess of $12,500 per month. Simple math contradicts this

assertion. The payment of the $74,753 to Lauri is wholly consistent with the

calculation set forth in the bonus agreement: 50% of the bonus payment after

withholding. The amount of the payment to Lauri is not consistent with the

formula set forth in the support order.

      Moreover, the payment predated the support order. The bonus agreement

indicates that Lauri received her portion by May 18, 2007. The superior court

entered the support order some time after June 1, 2007, and credited Mr. Mudrich

with support payments through June 1, 2007. It is well established that payments

made before the existence of a written divorce or separation instrument are not
                                        - 11 -

[*11] deductible as alimony.13 Therefore, the payment was not received under the

support order. Because the payment was received before the court entered the

support order, Mr. Mudrich failed to show that the payment satisfies section

71(b)(1)(A).

       Mr. Mudrich also failed to meet his burden to prove that he and Lauri lived

separately, if they were legally separated at the time of the payment, as required by

section 71(b)(1)(C). Mr. Mudrich did not put any evidence into the record as to

whether he and Lauri were legally separated or living apart at the time of the

payment.

       In sum, Mr. Mudrich failed to show that the payment was alimony. He

failed to show that the payment was made under a divorce or settlement agreement

and that he and Lauri were living separately if they were legally separated. He

may not deduct the payment.

III.   Section 6651(a)(1) Failure To Timely File

       Section 6651(a)(1) imposes an addition to tax for failure to timely file a

Federal income tax return unless the taxpayer shows that the failure was due to


       13
        Ali v. Commissioner, T.C. Memo. 2004-284, 88 T.C.M. (CCH) 622, 623
(2004); see also Gordon v. Commissioner, 70 T.C. 525, 529-530 (1978); Healey v.
Commissioner, 54 T.C. 1702, 1705-1706 (1970), aff’d without published opinion,
28 A.F.T.R. 2d (RIA) 71-5217 (4th Cir. 1971).
                                        - 12 -

[*12] reasonable cause and not due to willful neglect.14 The Commissioner bears

the burden of production for this addition to tax before the burden shifts to

taxpayers to prove that it should not apply.15 Mr. Mudrich was required to file a

timely return for 2007.16 He stipulated that he did not do so. Thus, the

Commissioner has met his burden, and the burden shifts to Mr. Mudrich to

establish a defense. But he does not raise any defense or address this issue in his

brief. We deem this issue abandoned.17

IV.   Section 6662(a) Accuracy-Related Penalty

      Section 6662(a) and (b)(1) and (2) imposes a 20% accuracy-related penalty

on any portion of an underpayment of tax that is due to any negligence or

disregard of rules or regulations or a substantial understatement of income tax.

The term “negligence” includes any failure to make a reasonable attempt to

comply with the provisions of the Code, and the term “disregard” includes any

careless, reckless, or intentional disregard.18 Negligence has been further defined


      14
           Higbee v. Commissioner, 116 T.C. 438, 447 (2001).
      15
           See sec. 7491(c); Higbee v. Commissioner, 116 T.C. at 446-447.
      16
           Sec. 6012(a)(1).
      17
           Mendes v. Commissioner, 121 T.C. 308, 312-313 (2003).
      18
           Sec. 6662(c).
                                         - 13 -

[*13] as a “lack of due care or failure to do what a reasonable and ordinarily

prudent person would do under the circumstances.”19 Additionally, a taxpayer is

negligent if he fails to maintain sufficient records to substantiate the items in

question.20 An understatement of income tax is “substantial” when it exceeds the

greater of 10% of the tax required to be shown on the return or $5,000.21 The

Commissioner bears the burden of production for this penalty before the burden

shifts to taxpayers to prove that the penalty should not apply.22

      A return position that does not have a reasonable basis is attributable to

negligence.23 Whether a position satisfies the reasonable basis standard depends

on the extent to which it is supported by authorities of the type relevant to




      19
        Neely v. Commissioner, 85 T.C. 934, 947 (1985) (quoting Marcello v.
Commissioner, 380 F.2d 499, 506 (5th Cir. 1967), aff’g in part, remanding in part
43 T.C. 168 (1964) and T.C. Memo. 1964-299).
      20
       See Higbee v. Commissioner, 116 T.C. at 449; sec. 1.6662-3(b)(1), Income
Tax Regs.
      21
           Sec. 6662(d)(1)(A).
      22
           See sec. 7491(c); Higbee v. Commissioner, 116 T.C. at 446-447.
      23
        See Smith v. Commissioner, T.C. Memo. 2006-51, 91 T.C.M. (CCH) 909,
911 (2006) (citing Van Camp & Bennion v. United States, 251 F.3d 862, 866 (9th
Cir. 2001)); sec. 1.6662-3(b)(1), (3), Income Tax Regs.
                                        - 14 -

[*14] determining substantial authority.24 Reasonable basis is a relatively high

standard of tax reporting and is not satisfied by a return position that is merely

arguable or that is merely a colorable claim.25 Mr. Mudrich did not cite any

authority for his position that he may deduct the payment of one-half of his bonus

to Lauri. Thus, Mr. Mudrich did not have a reasonable basis, and his return

position with respect to the portion of the alimony deduction attributable to the

bonus payment was due to negligence.

      The Commissioner established that the remaining $30,755 of the disallowed

alimony deduction was attributable to negligence. Mr. Mudrich did not provide

any records to show that he was entitled to that deduction, and he conceded that he

was not entitled to the alimony deduction for the remainder. Thus, the

Commissioner met his burden of production with respect to the remaining

$30,755.

      The Commissioner may have also met his burden regarding a substantial

understatement of income tax. In accordance with this opinion and the stipulation

allowing a portion of the alimony deduction, Mr. Mudrich’s exact underpayment


      24
        See sec. 1.6662-3(b)(3), Income Tax Regs. (cross-referencing sec. 1.6662-
4(d)(3)(iii), Income Tax Regs.).
      25
        Smith v. Commissioner, 91 T.C.M. (CCH) at 911 (quoting sec. 1.6662-
3(b)(3), Income Tax Regs.).
                                       - 15 -

[*15] for 2007 depends on the Rule 155 computations. If these computations

establish a substantial understatement of income tax for 2007, the Commissioner

will have met his burden of production.26

      Thus, the burden shifts to Mr. Mudrich to prove he had reasonable cause

and acted in good faith.27 Mr. Mudrich argues that he relied on legal counsel.

Taxpayers may establish that they had reasonable cause and acted in good faith

through reliance on the advice of a tax professional.28 But other than a bare

allegation, Mr. Mudrich did not provide any evidence that he relied on a tax

professional. Thus, he is liable for a section 6662(a) accuracy-related penalty.

V.    Conclusion

      Mr. Mudrich may not deduct the payment as alimony. He failed to meet his

burden of proving that the payment was alimony because he failed to show that it

was made under a divorce or separation instrument or that he and Lauri were

living separately if they were legally separated. The Commissioner met his burden



      26
       See Olagunju v. Commissioner, T.C. Memo. 2012-119, 103 T.C.M. (CCH)
1653, 1662 (2012); Jarman v. Commissioner, T.C. Memo. 2010-285, 100 T.C.M.
(CCH) 599, 602 (2010).
      27
           Sec. 6664(c)(1).
      28
        Neonatology Assocs., P.A. v. Commissioner, 115 T.C. 43, 98 (2000),
aff’d, 299 F.3d 221 (3d Cir. 2002); sec. 1.6664-4(c), Income Tax Regs.
                                        - 16 -

[*16] of proving that Mr. Mudrich failed to file his 2007 return, and Mr. Mudrich

concedes that he did not timely file his return. Thus, he is liable for an addition to

tax for failure to timely file. Moreover, Mr. Mudrich’s position with respect to the

portion of the alimony deduction attributable to the bonus payment was due to

negligence. Likewise, the Commissioner established that Mr. Mudrich was

negligent with respect to the $30,755 remainder. Mr. Mudrich did not establish

that he had reasonable cause and acted in good faith. Thus, he is liable for the

accuracy-related penalty.

      To reflect the foregoing,


                                                 Decision will be entered

                                        under Rule 155.
