                  T.C. Memo. 1998-378



                UNITED STATES TAX COURT



          ALEXANDRA M. MEDLIN, Petitioner v.
     COMMISSIONER OF INTERNAL REVENUE, Respondent

  BURLEY M. MEDLIN AND MARY K. MEDLIN, Petitioners v.
      COMMISSIONER OF INTERNAL REVENUE, Respondent


Docket Nos. 12512-97, 13180-97.     Filed October 19, 1998.



Robert E. Lee, for petitioner in docket No. 12512-97.

E.G. Allen III, for petitioners in docket No. 13180-97.

William Henck, for respondent.
                               - 2 -

                        MEMORANDUM OPINION


     DINAN, Special Trial Judge:   These consolidated cases were

submitted pursuant to the provisions of section 7443A(b)(3) and

Rules 180, 181, and 182.1

     Respondent determined a deficiency in petitioner Alexandra

M. Medlin's (Alexandra) Federal income tax for 1994 in the amount

of $1,946.   Respondent also determined a deficiency in

petitioners Burley M. Medlin's (Burley) and Mary K. Medlin's

(Mary) Federal income tax for 1994 in the amount of $2,170.

     After concessions,2 the issue remaining for decision is

whether the amounts in issue are properly characterized as

alimony or separate maintenance payments within the meaning of

section 71(b).

     These cases were submitted fully stipulated under Rule 122.

The stipulations of fact and attached exhibits are incorporated

herein by this reference.   Alexandra resided in Charlottesville,

Virginia, and Burley and Mary resided in Williamsburg, Virginia,




     1
          Unless otherwise indicated, all section references are
to the Internal Revenue Code in effect for the taxable year in
issue. All Rule references are to the Tax Court Rules of
Practice and Procedure.
     2
          The parties agree that Burley's direct reimbursement of
$784 for Alexandra's medical expenses which were not covered by
her medical insurance constitutes alimony or separate maintenance
payments. As Alexandra points out on brief, she overstated the
amount of such payments on her 1994 original and amended returns
by $19 ($803 - $784).
                                - 3 -

on the dates their respective petitions were filed in these

cases.

     Burley and Alexandra were married on June 20, 1959.      They

separated on or about October 14, 1987.     They entered into a

property settlement agreement (the Agreement) on April 5, 1988,

which fixed the amount to be paid by Burley to Alexandra for her

support and maintenance and fixed their respective rights to

their marital property.   The pertinent provisions of the

Agreement are as follows:

     1. SUPPORT AND MAINTENANCE OF THE WIFE.

          The Husband shall pay to the Wife as and for her
     alimony, maintenance and support, the sum of $1,600.00
     per month, payable on the 1st day of each and every
     month, beginning on the 1st day of the month following
     the execution of this Agreement, to continue thereafter
     until the death of either party, or the Wife's
     remarriage, whichever shall first occur.

          The parties further acknowledge and    agree that all
     payments made by the Husband to the Wife    pursuant to
     this paragraph shall be fully taxable as    income to the
     Wife and reportable by her on all of her    federal and
     state income tax returns, and deductible    by the Husband
     from income as reported by him on all of    his federal
     and state income tax returns.

     *         *            *           *       *         *

     3. PERSONAL PROPERTY.

          The parties make the following division and
     settlement of their personal property.

     *         *            *           *       *         *

          g. Automobile

               The husband shall provide the Wife with
          a new Lincoln Town Car each and every year,
                               - 4 -

          and in addition provide for all maintenance
          on said automobile including, repairs,
          insurance, gas, oil and license, for so long
          as he is a Lincoln-Mercury dealer, until the
          death of either party or until the Wife's
          remarriage, whichever shall first occur. In
          the event the Husband is no longer a Lincoln-
          Mercury dealer, than he shall provide the
          Wife with a new Grand Marquis class car each
          and every year, and in addition provide for
          all maintenance on said automobile including,
          repairs, insurance, gas, oil and license; in
          the event the Husband is no longer an
          automobile dealer, he agrees to provide the
          Wife with a new Grand Marquis class car every
          two years and further agrees to provide for
          all maintenance on said automobile including,
          repairs, insurance, gas, oil and license.

     *         *         *             *      *           *

     6. MEDICAL INSURANCE.

          The Husband agrees to maintain the Wife as
     beneficiary of his present (or comparable)
     medical/hospitalization/dental policy until the death
     of either party or the Wife's remarriage, whichever
     shall first occur. If said coverage can no longer be
     provided through Medlin Motor Company or any dealership
     or business owned by the Husband, then, in such event,
     the Husband shall obtain comparable coverage through a
     private carrier. The parties agree to share equally
     the cost of any medical, dental or psychiatric expenses
     of the Wife not covered by said insurance. The
     Husband's obligation to pay premiums shall not exceed
     the standard market premiums for an insured of the
     Wife's age for the coverage described above.

     Burley and Alexandra were divorced in 1988.   Burley married

Mary sometime thereafter but prior to the end of 1994.

Monthly Payments

     Burley paid Alexandra $19,200 pursuant to paragraph "1" of

the Agreement during 1994.   Alexandra reported this amount as

alimony received on her original and amended 1994 returns.
                                - 5 -

Burley and Mary claimed an alimony paid deduction for this amount

on their 1994 return.   Although their treatment of this amount as

alimony is not in dispute, the proper characterization of amounts

paid for an automobile and related expenses and for medical

insurance premiums remains in issue.

Automobile and Related Expenses

     During 1994, Burley's wholly owned corporation, Medlin Motor

Co., Inc. (the dealership), paid for the lease of an automobile

from Ford Motor Credit Corporation (FMCC).   Burley provided the

automobile to Alexandra for her use during 1994.   Alexandra did

not sign the lease with FMCC.

     The dealership paid for the insurance on the automobile.     It

also provided Alexandra with a dealership credit card which was

used exclusively for charging gas and other maintenance expenses

for the automobile.   The dealership paid for these credit card

charges.   It issued Burley a Form 1099-DIV for 1994 which

reflected that he had received a constructive dividend in the

amount of $4,952, the total cost of the lease, insurance, and

credit card charges paid by the dealership during 1994.

     Alexandra did not report the $4,952 as alimony received on

her original and amended 1994 returns.   Burley and Mary claimed

an alimony paid deduction for this amount on their 1994 return.

In the statutory notices of deficiency, respondent, as a

stakeholder in this case, included the $4,952 in Alexandra's
                                 - 6 -

income as alimony received and disallowed Burley's and Mary's

claimed deduction.

Medical Insurance Premiums

     Alexandra was covered under the dealership's medical

insurance policy until 1992 or 1993, when the insurance carrier

informed the dealership that she no longer qualified as an

insured because she was not its employee.       During 1994, Alexandra

and Burley arranged for the dealership to reimburse Alexandra for

the cost of the premiums for the medical insurance which she had

obtained through her employer.    This arrangement was the least

costly alternative for providing medical insurance for Alexandra.

The dealership issued Burley a Form 1099-DIV for 1994 which

reflected that he had received a constructive dividend in the

amount of $1,998, the total of the medical insurance premiums

reimbursed by the dealership during 1994.

     Alexandra reported the $1,998 as alimony received on her

1994 original return.   She later filed her amended return for

1994 on which she omitted $1,999.3       Burley and Mary claimed an

alimony paid deduction in the amount of $1,998 on their 1994

return.   In the statutory notices of deficiency, respondent

included the $1,998 in Alexandra's income as alimony received and

disallowed Burley's and Mary's claimed deduction.


     3
          This amount represented the previously reported medical
insurance premiums. Alexandra agrees that the correct amount of
the medical insurance premiums in issue is $1,998.
                               - 7 -

     Section 61 defines gross income to mean all income from

whatever source derived, including alimony or separate

maintenance payments.   Sec. 61(a)(8).   Whether a payment

constitutes alimony or separate maintenance within the meaning of

section 61(a)(8) is determined by reference to section 71.

     Section 71(a) generally provides that gross income includes

amounts received as alimony or separate maintenance payments.

Section 71(b)(1) defines the term "alimony or separate

maintenance payment" as 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 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.

     Section 215 allows an individual, in computing adjusted

gross income, to deduct an amount equal to alimony or separate

maintenance paid during such individual's taxable year if such

amount is includable in the gross income of the recipient under

section 71.   Accordingly, if the amounts in issue fail to meet

any of the requirements of section 71(b)(1), such amounts are not
                               - 8 -

alimony and are thus not includable in Alexandra's gross income

or deductible by Burley and Mary.   The parties do not dispute

that the requirements of section 71(b)(1)(C) and (D) have been

satisfied with respect to the amounts in issue.

Section 71(b)(1)

     The initial requirement under this section is that the

payments must be in cash.   Sec. 71(b)(1).     Section 1.71-1T(b),

Q&A 5, Temporary Income Tax Regs., 49 Fed. Reg. 34455 (Aug. 31,

1984), explains that only cash payments, including checks and

money orders payable on demand, qualify as alimony or separate

maintenance payments.   Transfers of services or property,

execution of a debt instrument by the payor, or the use of

property of the payor do not qualify.    Id.

     We are satisfied that the dealership's cash payments for the

lease, insurance, and maintenance of the automobile for

Alexandra's benefit and for the reimbursement of Alexandra's

medical insurance premiums are properly treated as cash payments

made by Burley during 1994.   He included these amounts in income

as constructive dividends and is entitled to any allowable

deductions for the amounts paid.

Section 71(b)(1)(A)

     We next examine whether the cash payments treated as made by

Burley satisfy section 71(b)(1)(A).    Section 1.71-1T(b), Q&A6,

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

provides that a payment of cash by the payor spouse to a third
                                - 9 -

party on behalf of the payee spouse pursuant to the terms of the

divorce or separation instrument qualifies as alimony or a

separate maintenance payment.

     Burley argues that the only logical way for him to satisfy

the obligations in issue was by making cash payments to third

parties.   Respondent agrees that the Agreement "necessarily

authorized cash payments to third parties to effect its

provisions."   Alexandra argues that the pertinent provisions of

the Agreement do not expressly provide for Burley to make any

cash payments to her or on her behalf.

     Clearly, the cash payments in issue meet the conditions

under which cash payments to a third party may satisfy section

71(b)(1)(A).   First, we find that the cash payments were made

"under" the Agreement.   Burley would not have caused the

dealership to make the cash payments but for the terms of the

Agreement.   Second, we find that the cash payments were made "on

behalf of" Alexandra because they were made with respect to

property and services used solely by Alexandra.    Third, we find

that the cash payments were not made to maintain property owned

by Burley.   He had no ownership interest in the leased automobile

or in the medical insurance policy.     Cf. sec. 1.71-1T(b), Q&A6,

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

Section 71(b)(1)(B)

     Alexandra argues that the payments made with respect to the

automobile do not satisfy section 71(b)(1)(B) because the parties
                                - 10 -

implicitly designated such payments as part of their property

settlement and not alimony.   She suggests that the designation of

the monthly payments under paragraph "1" of the Agreement as

alimony combined with the lack of any designation for the

automobile-related payments under subparagraph "g" of paragraph

"3" implies that such payments were designated as not being

alimony.

     Section 71(b)(1)(B), however, only treats a payment as other

than alimony if the governing divorce or separation instrument

designates the payment as a "payment which is not includible in

gross income under * * * [section 71] and not allowable as a

deduction under section 215."    The regulations do not provide for

and we do not interpret this statutory language to allow

designations by implication as Alexandra contends.      Richardson v.

Commissioner, 125 F.3d 551, 557 (7th Cir. 1997), affg. T.C. Memo.

1995-554; see sec. 1.71-1T(b), Q&A8, Temporary Income Tax Regs.,

49 Fed. Reg. 34455 (Aug. 31, 1984).

     We hold that the amounts in issue constitute alimony or

separate maintenance payments which must be included in

Alexandra's gross income and are deductible by Burley and Mary.

     To reflect the foregoing,



                                           Decisions will be entered

                                      under Rule 155.
