                        T.C. Memo. 1996-298



                      UNITED STATES TAX COURT



         NORMAN SPECTOR AND MARCIA SPECTOR, Petitioners v.
            COMMISSIONER OF INTERNAL REVENUE, Respondent

     LIONEL EHRENWORTH AND BETH EHRENWORTH, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos. 20102-91, 21548-91.1           Filed June 26, 1996.



     Robert J. Alter and Richard J. Sapinski, for petitioners

Norman Spector and Marcia Spector.

     Stephen H. Skoller and Stephen E. Lampf, for petitioners

Lionel Ehrenworth and Beth Ehrenworth.

     Craig Connell, for respondent.




     1
       These cases were consolidated for trial, briefing, and
opinion.
                                   - 2 -

                 MEMORANDUM FINDINGS OF FACT AND OPINION


       COLVIN, Judge:     Respondent determined deficiencies in

petitioners' Federal income taxes and additions to tax as

follows:

                           Norman and Marcia Spector

                                              Additions to Tax
                                Sec.                Sec.            Sec.
Year       Deficiency      6653(a)(1)(A)      6653(a)(1)(B)       6661(a)
                                                    2
1986        $15,117             $756                              $3,779
                                                    2
1987         16,043               802                              3,845
                                1
1988          9,580               479              --              2,395

                          Lionel Ehrenworth
                                              Additions to Tax
                               Sec.                Sec.            Sec.
Year       Deficiency      6653(a)(1)(A)      6653(a)(1)(B)       6661(a)
                                                    2
1986         26,005            1,300                               6,501
                                                    2
1987         20,610            1,031                               5,153

                          Lionel and Beth Ehrenworth
                                        Additions to Tax
Year       Deficiency         Sec. 6653(a)(1)        Sec. 6661(a)

1988         11,648                  582                  2,912
       1
      Sec. 6653(a)(1) applied in 1988.
       2
      Fifty percent of the interest due on the portion of the
underpayment attributable to negligence.

       Petitioners Marcia Spector and Lionel Ehrenworth were

divorced in 1980.       Petitioners filed cross-motions for partial

summary judgment relating to whether payments made by

Dr. Ehrenworth to Mrs. Spector after their divorce were alimony

or a property settlement.       We denied both motions.     Spector v.

Commissioner, T.C. Memo. 1994-147.         We held that whether a
                                - 3 -

payment is alimony under section 71(a)(1) is determined by

considering all the facts and circumstances, and not solely by

reference to how it is characterized by the separation agreement

or by reference to State law.

       After concessions,2 the issues for decision are:

       1.   Whether payments Dr. Ehrenworth made to Mrs. Spector in

1986, 1987, and 1988 were alimony or a property settlement.      We

hold that they were in part alimony and in part a property

settlement.

       2.   Whether Dr. Ehrenworth is liable for additions to tax

for 1986 and 1987 for negligence under section 6653(a) with

respect to claimed dependency exemption deductions.       We hold that

he is.

       3.   Whether the Spectors are liable for an addition to tax

for 1986 for negligence under section 6653(a) with respect to a

claimed dependency exemption deduction.    We hold that they are

not.

       References to petitioners are to the Spectors and the

Ehrenworths.    References to Mrs. Spector are to Marcia Spector.

References to Dr. Ehrenworth are to Lionel Ehrenworth.       Unless

otherwise indicated, section references are to the Internal

       2
       Respondent concedes that petitioners are not liable for
additions to tax for negligence or substantial understatement
for 1986, 1987, and 1988 for any deficiencies related to the
characterization of the payments from Dr. Ehrenworth to
Mrs. Spector.
                                 - 4 -

Revenue Code in effect for the years at issue.    Rule references

are to the Tax Court Rules of Practice and Procedure.

                           FINDINGS OF FACT

A.   Background

     Mrs. Spector (formerly Mrs. Ehrenworth) and Dr. Ehrenworth

were married in June 1955.    They had four children (Richard,

Andrew, Robert, and Douglas).    They filed cross-motions for

divorce around 1977.    Mrs. Spector and Dr. Ehrenworth settled the

property distribution and alimony issues at a conference before

the Superior Court of New Jersey, Chancery Division, Essex County

on March 13, 1980.

     Dr. Ehrenworth earned a large amount of income while he was

married to Mrs. Spector.    She earned little or no income during

those years.

     The Ehrenworths lived in New Jersey, and the Spectors lived

in California, when they filed their petitions.

B.   The Property Settlement

     On July 3, 1980, Mrs. Spector and Dr. Ehrenworth signed a

"Property Settlement and Support Agreement" (the support

agreement).    In it, among other things, Mrs. Spector waived all

rights she had to any interest in Dr. Ehrenworth's pension fund

and medical practice.    She also conveyed by deed any interest she

had in a medical building and any rights she had to shares in the

Phoenix Corp.     The Phoenix Corp. is an inactive company that has

never had any assets.    Dr. Ehrenworth agreed to pay Mrs. Spector
                                - 5 -

$224,450 on July 3, 1980, and $100,000 by August 1, 1980, for

certain objects of art.    Dr. Ehrenworth agreed to pay $7,000 per

year to support Richard and Andrew until they began their post-

high-school education or were emancipated.    At the time of the

settlement, Richard was 11 and Andrew was 15.

     Dr. Ehrenworth agreed to pay Mrs. Spector $800 per week for

12 years regardless of Mrs. Spector's financial circumstances,

income, or health and regardless of whether Dr. Ehrenworth's or

Mrs. Spector's financial circumstances changed.    They agreed that

the payments would cease if Mrs. Spector died but not if she

remarried.    Their support agreement stated that these payments

were alimony.    Mrs. Spector agreed to maintain a life insurance

policy on the life of Dr. Ehrenworth which had a face value of

$300,000.    If Dr. Ehrenworth died before making all the weekly

payments to Mrs. Spector, he agreed that his estate would pay the

balance, less the insurance proceeds Mrs. Spector received.    The

weekly payments provision was the only provision for support in

the support agreement.

     Dr. Ehrenworth and Mrs. Spector negotiated the division of

their marital assets.    They then used the weekly payments both to

achieve an acceptable division of their marital assets and to

provide support for Mrs. Spector.

     Mrs. Spector and Dr. Ehrenworth were divorced on July 7,

1980.   The judgment of divorce provided that the:
                                - 6 -

     Property Settlement and Support Agreement dated
     July 3, 1980, a copy of which is attached hereto,
     which Property Settlement and Support Agreement was
     voluntarily entered into by the parties and reduced to
     writing to memorialize the parties' prior oral Property
     Settlement and Support Agreement dated March 13, 1980,
     be and the same is incorporated but not merged in the
     within Judgment * * *

C.   Payments to Mrs. Spector

     Dr. Ehrenworth made the payments on Fridays at

Mrs. Spector’s request so that she could plan her week.

     Mrs. Spector married Norman Spector on August 23, 1980.

After that time, Dr. Ehrenworth stopped paying Mrs. Spector the

$800 per week.    On April 10, 1981, Mrs. Spector filed a motion in

New Jersey Superior Court to compel Dr. Ehrenworth to continue

paying $800 per week to her.    Dr. Ehrenworth filed a cross-motion

to terminate these payments and to vacate arrearages.     He argued

that the payments were alimony and that Mrs. Spector could not

continue to recover alimony under N.J. Stat. Ann. sec. 2A:34-25

(1987)3 because she had remarried.



     3
         N.J. Stat. Ann. sec. 2A:34-25 (1987) provides:

          If after the judgment of divorce the wife shall
     remarry, the court shall not make any order as to the
     alimony of such wife except that upon application of
     the former husband, on notice and on proof of the
     marriage of the former wife after the judgment of
     divorce, the court shall modify any order or judgment
     as to the alimony of the former wife by vacating and
     annulling any and all provisions in any such order or
     judgment, or both, directing the payment of money for
     the support of the former wife.

     In 1988, New Jersey revised the statute to be gender
neutral, among other things.
                                - 7 -

     On April 1, 1981, Mrs. Spector filed a certification in

support of her motion to compel Dr. Ehrenworth to make the weekly

payments in which she referred to the payments as “alimony”.    On

May 6, 1981, Mrs. Spector filed a second certification in which

she referred to the weekly payments as “alimony”.    On

December 23, 1981, Mrs. Spector filed a third certification in

which she referred to the weekly payments as "support".

     The judge who had handled the divorce case and conducted the

settlement negotiations decided the motions.    He granted

Mrs. Spector's motion.   Dr. Ehrenworth appealed.   On October 7,

1982, the Appellate Division of the Superior Court affirmed the

lower court's ruling.    Ehrenworth v. Ehrenworth, 187 N.J. Super.

342, 347, 454 A.2d 895 (App. Div. 1982).     The Appellate Division

stated:

     [The New Jersey statute] is intended to provide that
     if the court has awarded alimony, then upon the wife's
     remarriage the alimony must cease.

               *    *     *    *    *    *     *

          We see no reason in public policy why the
     agreement should not be enforced. The parties
     voluntarily agreed upon its terms in proceedings of
     the greatest formality. If the payments were to be
     treated by the parties as installments on a fixed
     obligation as opposed to alimony, it cannot be doubted
     that * * * [Dr. Ehrenworth] would be denied relief
     since * * * [the New Jersey statute] deals only with
     alimony. We do not see why the fact that for perceived
     tax advantages the parties preferred to call the
     payments alimony should have a bearing on the outcome
     of this litigation. Enforcement of * * * [the New
     Jersey statute] in the circumstances of this case would
     work an unconscionable result relieving * * *
     [Dr. Ehrenworth] of his freely bargained-for obligation
     and depriving plaintiff of the benefit for which she
     negotiated. In negotiating this agreement * * *
                                - 8 -

     [Mrs. Spector] thereby forewent the possibility of
     obtaining other consideration from * * * [Dr.
     Ehrenworth]. [Id. at 348-349, 454 A.2d at 899; fn.
     ref. omitted.]

     Dr. Ehrenworth paid Mrs. Spector $41,600 in 1986 and $41,600

in 1987 in accordance with the support agreement.    In 1988,

Dr. Ehrenworth paid $40,000 ($800 per week for 50 weeks).

Dr. Ehrenworth deducted the payments from his gross income for

the years in issue.    Mrs. Spector did not include the payments

in her gross income.

D.   Exemptions

     The Spectors claimed exemptions for Robert, Andrew, and

Richard in 1986, and for Richard in 1987.    Dr. Ehrenworth claimed

exemptions for Robert, Andrew, and Richard in 1986 and 1987.

The Ehrenworths claimed an exemption for Richard in 1988.

     Mrs. Spector had custody of Robert, Andrew, and Richard

after her divorce from Dr. Ehrenworth.    The support agreement

states that Dr. Ehrenworth may claim Douglas and Richard as

exemptions, and Mrs. Spector may claim Andrew and Robert as

exemptions.

     The parties agree that petitioners (the Spectors and the

Ehrenworths) may not claim an exemption for Robert for the years

in dispute, that the Spectors may claim an exemption for Andrew

for 1986, and that Dr. Ehrenworth may not claim an exemption for

Andrew for 1986 or 1987.    Dr. Ehrenworth did not establish that

he provided more than $600 to support Richard in 1986, 1987, or

1988.   The parties also agree that the Spectors (and not
                                   - 9 -

Dr. Ehrenworth or the Ehrenworths) may claim an exemption for

Richard for 1986, 1987, and 1988 because Dr. Ehrenworth did not

establish that he provided the requisite amount of support for

Richard in those years.

     Dr. Ehrenworth's attorney, Irving Tobin, explained the

support agreement to Dr. Ehrenworth.       Dr. Ehrenworth understood

that he agreed not to claim Andrew and Robert as exemptions.

     The Spectors supported Andrew in 1986, and Richard in 1986,

1987, and 1988.    The Spectors provided $48 to support Robert in

1986, $6,400 in 1987, and $2,613 in 1988.

                               OPINION

A.   Whether Payments From Dr. Ehrenworth to Mrs. Spector Were
     Alimony

     1.     Introduction

     The first issue for decision is whether payments from

Dr. Ehrenworth to Mrs. Spector in 1986, 1987, and 1988 were

alimony or a property settlement.      A former spouse must include

in gross income periodic payments received as alimony or separate

maintenance.    Sec. 71(a);4 Brown v. Commissioner, 50 T.C. 865,


     4
         Sec. 71(a)(1) provides:

          (1) Decree of Divorce or Separate Maintenance.--
     If a wife is divorced or legally separated from her
     husband under a decree of divorce or of separate
     maintenance, the wife's gross income includes periodic
     payments (whether or not made at regular intervals)
     received after such decree in discharge of (or
     attributable to property transferred, in trust or
     otherwise, in discharge of) a legal obligation which,
     because of the marital or family relationship, is
     imposed on or incurred by the husband under the decree
                                                    (continued...)
                              - 10 -

867-868 (1968), affd. 415 F.2d 310 (4th Cir. 1969).    Payments

which are a property settlement are not taxable to the recipient

under section 71.   Estate of Smith v. Commissioner, 208 F.2d 349,

351 (3d Cir. 1953), affg. in part and revg. in part a Memorandum

Opinion of this Court dated Nov. 28, 1952; Yoakum v.

Commissioner, 82 T.C. 128, 134 (1984); Thompson v. Commissioner,

50 T.C. 522, 525 (1968).   A taxpayer may deduct amounts paid to

a former spouse if those payments are includable in the former

spouse's gross income under section 71.   Sec. 215; Yoakum v.

Commissioner, supra.

     If the payments in these cases are alimony, then

Dr. Ehrenworth may deduct the payments under section 215(a),

and Mrs. Spector must include the amounts in income under section

61(a)(8).   However, if the payments are a property settlement,

Dr. Ehrenworth may not deduct them and Mrs. Spector need not

include them in income.



     4
      (...continued)
     or under a written instrument incident to such divorce
     or separation.

     Secs. 71 and 215 were amended by the Deficit Reduction Act
of 1984, Pub. L. 98-369, sec. 422(a) and (b), 98 Stat. 795.
The 1984 amendments apply to divorce or separation instruments
executed after Dec. 31, 1984, and instruments modified on or
after Jan. 1, 1985, if the modification provides that the 1984
amendments govern.

     Mrs. Spector and Dr. Ehrenworth were divorced in 1980.
The record does not indicate that they amended the separation
agreement or the divorce decree to provide that the 1984
amendments govern. Thus, the 1984 amendments to secs. 71 and
215 do not apply here.
                             - 11 -

     2.   Contentions of the Parties

     Dr. Ehrenworth argues that the payments are alimony because

the agreement said the payments were alimony and the New Jersey

courts enforced the agreement.   He points out that the agreement

does not say that the payments ceased being alimony when

Mrs. Spector remarried.

     Mrs. Spector argues that the postremarriage weekly payments

are not alimony for tax purposes because, under New Jersey law,

courts may not order alimony to be paid after the remarriage of

the recipient of the payments.   N.J. Stat. Ann. sec. 2A:34-25.

     Respondent argues that we should allocate the payments

between alimony and a property settlement.    Dr. Ehrenworth

testified that the marital estate was worth about $2 million,

and that he received about 55 percent of the estate without

considering the weekly payments.    Respondent contends that

Dr. Ehrenworth received about $200,000 (the difference between

$1.1 million (55 percent of the marital assets) and $900,000 (45

percent)) more than Mrs. Spector.    Respondent points out that, to

equally divide the assets, Dr. Ehrenworth would have had to pay

Mrs. Spector half of the excess he received; i.e., $100,000.

Under the agreement, the weekly payments totaled $499,200

($800/week times 52 weeks times 12 years).    Respondent argues

that we should allocate about 20 percent ($100,000/$499,200) of
                               - 12 -

the weekly payments to property settlement and 80 percent to

alimony.5

     3.     The Nature of the Payments

     In deciding the character of an award in a divorce or

separation decree, great weight is given to the language and

structure of the decree.    Griffith v. Commissioner, 749 F.2d 11,

13 (6th Cir. 1984), affg. T.C. Memo. 1983-278.     The decision

whether payments are in the nature of support or a property

settlement, however, is not controlled by the labels assigned to

the payments by the court in the divorce decree or by the parties

in their agreement but, instead, depends on all of the facts and

circumstances.    Yoakum v. Commissioner, supra at 140; Beard v.

Commissioner, 77 T.C. 1275, 1283-1284 (1981); Gammill v.

Commissioner, 73 T.C. 921, 926-927 (1980), affd. 710 F.2d 607

(10th Cir. 1982); Hesse v. Commissioner, 60 T.C. 685, 691 (1973),

affd. without published opinion 511 F.2d 1393 (3d Cir. 1975).

     In deciding whether payments are a property settlement or

alimony, we have considered whether:     (a) The recipient

surrendered valuable property rights in exchange for the

payments; (b) the parties intended the payments to effect a

division of their assets; (c) the amount of the payments plus the



     5
       Sec. 71(c)(2), which applies to divorce instruments
executed before 1985, designates certain payments which are made
over a period of more than 10 years as periodic and thus taxable
to the recipient to the extent of 10 percent of the principal
sum. Dr. Ehrenworth made payments to Mrs. Spector for 12 years,
under the terms of the agreement. Respondent did not argue and
we do not address the applicability of that section.
                               - 13 -

other property awarded to the recipient equals approximately one-

half of the property accumulated by the parties during marriage;

(d) the payments are fixed in amount and not subject to

contingencies, such as the death or remarriage of the recipient;

(e) the payments are secured; (f) the needs of the recipient were

taken into consideration in determining the amount of the

payments; (g) the payments are related to the obligor's income;

(h) there is a separate provision for support elsewhere in the

agreements; and (i) the State court characterized the payments as

alimony or a property settlement.    Riley v. Commissioner, 649

F.2d 768, 774 (10th Cir. 1981), affg. T.C. Memo. 1979-237; Beard

v. Commissioner, 77 T.C. 1275, 1284-1285 (1981); Widmer v.

Commissioner, 75 T.C. 405, 409 (1980).

     a.     Whether Mrs. Spector Surrendered Valuable Property
            Rights

     Mrs. Spector argues that she surrendered valuable property

rights in Dr. Ehrenworth's pension, Dr. Ehrenworth's medical

practice, the couple's art collection, the medical building, the

Phoenix Corp., and the home Dr. Ehrenworth built in Watchung,

New Jersey, in exchange for the weekly payments.    We disagree

that she surrendered those rights in exchange for the weekly

payments.

     Both spouses surrendered rights to marital assets when they

settled the property issues.    They used the weekly payments both

to achieve an acceptable division of their marital assets and to

provide support for Mrs. Spector.    However, the record does not
                               - 14 -

show that Mrs. Spector surrendered property rights in exchange

for the payments.

     Mrs. Spector claims that various assets were improperly

included or excluded from the division of their marital assets.

We think her argument misses the mark.     We do not decide here

whether the assets were equally divided; we only consider what

Dr. Ehrenworth and Mrs. Spector intended when they negotiated the

property settlement and weekly payments.

     Mrs. Spector contends that Dr. Ehrenworth conceded that she

surrendered property rights in the marital estate in exchange

for the weekly payments.    We disagree.   Dr. Ehrenworth merely

acknowledged that she surrendered rights to property in exchange

for his agreement that the payments would continue even if she

remarried.

     We conclude that Mrs. Spector did not surrender valuable

property rights in exchange for the weekly payments.     This factor

favors treating the payments as alimony.

     b.     Whether Mrs. Spector and Dr. Ehrenworth Intended the
            Payments To Effect a Division of Their Assets

     Mrs. Spector argues that she and Dr. Ehrenworth intended

that the weekly payments would result in an equal division of the

marital property.    She argues that, without the weekly payments,

she would have received less than one-half of the marital

property.    She contends that she agreed to receive the payments

for 12 years to complete the equitable distribution of the
                               - 15 -

marital estate and because of Dr. Ehrenworth's liquidity

problems.   Dr. Ehrenworth maintains that he and Mrs. Spector

split the marital assets almost equally without considering the

weekly payments.

     The record contains little evidence of the total value of

the marital estate.   Except for the artwork, which was appraised

by Sotheby Parke Bernet in June 1979, and the cash payments to

Mrs. Spector, the values of marital assets stated at trial are

unsupported by documentary evidence.    For example, Mrs. Spector

received the marital home, but there is no credible evidence of

its value at the time she and Dr. Ehrenworth divorced.   Also, in

estimating the value of the home, Dr. Ehrenworth did not consider

the mortgage on the home which Mrs. Spector assumed.   Similarly,

under the agreement, Dr. Ehrenworth and Mrs. Spector each kept

jewelry, but there is no evidence of its value.   Dr. Ehrenworth

and Mrs. Spector's testimony concerning the division of the

marital assets was contradictory.   Tobin testified that they

split their assets equally, but he stated that the division of

assets did not include Dr. Ehrenworth's medical practice.

     Dr. Ehrenworth testified that he got about 55 percent of the

marital estate.    We treat this as his concession that he received

55 percent of the marital assets.   However, Mrs. Spector has not

proven that she got less than 45 percent of the marital estate.

This factor is neutral.
                              - 16 -

     c.    Whether the Weekly Payments and Other Property Awarded
           to Mrs. Spector Equaled One-Half of the Marital Estate

     As discussed in paragraph A-3-a, Dr. Ehrenworth and

Mrs. Spector used the weekly payments to achieve an acceptable

division of their marital assets and to provide support for Mrs.

Spector.   The record shows that Mrs. Spector received somewhat

more than one-half of the marital estate in the form of the

weekly payments and other marital property awarded to her.     This

factor is neutral.

     d.    Whether the Weekly Payments Were Fixed in Amount and
           Subject to Contingencies

     The payments were fixed in amount and duration.   Under

New Jersey law, alimony is generally subject to review and

modification on a showing of changed circumstances.    N.J. Stat.

Ann. sec. 2A:34-23 (1987); Lepis v. Lepis, 83 N.J. 139, 416

A.2d 45, 48 (1980).   The agreement required Dr. Ehrenworth to

pay Mrs. Spector $800 per week for 12 years whether or not

Dr. Ehrenworth's or Mrs. Spector's financial circumstances

changed.   The payments were not contingent on Mrs. Spector's

not remarrying, although they would cease if Mrs. Spector died.

See N.J. Stat. Ann. sec. 2A:34-25 (alimony stops on remarriage).

     Mrs. Spector points out that the payments were contingent

only on her staying alive during the payment period.   She argues

that her death is not a significant contingency and that she

agreed that the payments would end when she died because her
                                - 17 -

estate and Dr. Ehrenworth's estate would go to their sons.      We

disagree.   Mrs. Spector had no guarantee that, if she died while

the weekly payments were being made, Dr. Ehrenworth would leave

anything to their sons.   We think her death is a significant

contingency.

     The fact that the payments continued after Mrs. Spector

remarried favors treating them as a property settlement.      In

contrast, the fact that the payments were to stop if she died

favors treating them as alimony.    This factor is neutral.

     e.     Whether the Payments Were Secured

     The payments were secured by a $300,000 life insurance

policy on the life of Dr. Ehrenworth.    Mrs. Spector paid the

premiums on the policy.    If Dr. Ehrenworth died before making all

of the weekly payments, the insurance proceeds would be credited

against the remaining payments and his estate would pay the

balance, if any.    Thus, Dr. Ehrenworth provided no security for

the majority of the payments.    This factor is neutral.

     f.     Whether Mrs. Spector’s Needs Were Considered in Fixing
            the Amount of the Payments

     Mrs. Spector argues that the payments were unrelated to

her financial needs and points out that the payments were not

adjustable based on any change in the cost of living or change

in her financial circumstances.    We disagree.

     During the divorce proceedings, Mrs. Spector's lawyer told

the court that the settlement was based in part on Mrs. Spector's
                                  - 18 -

needs.       Dr. Ehrenworth points out that he made the payments on

Fridays at Mrs. Spector's request so that she could plan her

week.     Mrs. Spector stated in the certification she filed to

compel Dr. Ehrenworth to make the payments after her remarriage

that she needed the money to pay her bills.

     We think Dr. Ehrenworth and Mrs. Spector considered

Mrs. Spector's needs in fixing the payments.        This factor favors

treating the payments as alimony.

     g.        Whether Payments Were Related to Dr. Ehrenworth’s
               Income

        The record does not establish whether the payments were

related to Dr. Ehrenworth's income.        Tobin said Dr. Ehrenworth

and Mrs. Spector considered Dr. Ehrenworth's income, but he did

not say that his income related to the amount of the payments.

The payments were not adjustable based on changes in

Dr. Ehrenworth's financial circumstances.        This factor is

neutral.

        h.     Whether There Was a Separate Provision for Support

        Mrs. Spector points out that the agreement contains a

separate provision for child support.        She admits, however,

that the weekly payments provision is the only provision in

the agreement for her support.

        Mrs. Spector argues that Dr. Ehrenworth's obligation under

State law to support her terminated when she remarried.        She

argues that she and Dr. Ehrenworth agreed that her right to
                              - 19 -

receive postremarriage payments was part of their property

settlement and not alimony for tax purposes.

     The fact that the agreement contains no provision for the

support of Mrs. Spector other than the weekly payments favors

treating the payments as alimony.   If a former spouse agrees to

pay alimony after his or her spouse remarries, and the agreement

is enforced under State law, then the fact that courts in that

State may not order postremarriage alimony absent such an

agreement does not in itself determine whether the payments are

treated as alimony for Federal income tax purposes.   Taylor v.

Campbell, 335 F.2d 841 (5th Cir. 1964); Mass v. Commissioner, 81

T.C. 112 (1983); Dixon v. Commissioner, 44 T.C. 709 (1965); Hogg

v. Commissioner, 13 T.C. 361 (1949); Hesse v. Commissioner, 7

T.C. 700 (1946); Spector v. Commissioner, T.C. Memo. 1994-147.

     i.   How the State Court Characterized the Payments

     The Superior Court of New Jersey characterized the payments

as alimony because Mrs. Spector and Dr. Ehrenworth agreed that

the payments were alimony.   This favors treating them as alimony.

     Mrs. Spector points out that in Ehrenworth v. Ehrenworth,

187 N.J. Super. 342, 349, 345 A.2d 895 (App. Div. 1982), the

Appellate Division of the Superior Court analogized the payments

to installments on a fixed obligation and stated that the fact

that the parties called the payments alimony should not affect

whether the obligation to pay survives Mrs. Spector's remarriage.
                               - 20 -

The court noted that to deny enforcement of the postremarriage

payments would deprive Mrs. Spector of benefits for which she

negotiated and for which she forwent other possible

consideration.   Id. at 349, 345 A.2d at 899.   Mrs. Spector argues

that the forgone consideration to which the appellate court was

referring was the property rights she surrendered as part of the

divorce agreement.

     We disagree.    The appellate court enforced Dr. Ehrenworth’s

obligation to make the alimony payments and held that N.J. Stat.

Ann. sec. 2A:34-25 does not preclude a husband and wife from

agreeing that the obligation to pay alimony may survive the

wife's remarriage.    Id. at 347, 345 A.2d at 898.   Further, the

appellate court expressly declined to characterize the payments

for tax purposes.    Id. at 350, 345 A.2d at 900.

     Mrs. Spector argues that the fact that N.J. Stat. Ann. sec.

2A:34-25 prohibits courts from ordering alimony after the

remarriage of the recipient suggests that she and Dr. Ehrenworth

viewed the payments as a property settlement.   She also contends

that, because she received a significant amount of assets in the

division of the marital property, she would not have received

as large an award of alimony as the weekly payments to which she

and Dr. Ehrenworth agreed.    Lavene v. Lavene, 162 N.J. Super.

187, 203, 392 A.2d 621 (Ch. Div. 1978); Turner v. Turner, 158

N.J. Super. 313, 325, 385 A.2d 1280 (Ch. Div. 1978); Esposito v.

Esposito, 158 N.J. Super. 285, 385 A.2d 1266 (App. Div. 1978).
                              - 21 -

Mrs. Spector argues that if she and Dr. Ehrenworth had not

reached an agreement, the New Jersey court would have awarded a

substantial amount of assets to her and would have required her

to use the income from those assets for her support before

considering any award of alimony.   She contends that the court

would have significantly reduced any award of alimony because of

the large amount of assets awarded her.

     We disagree.   Although we do not speculate about how much

alimony the New Jersey court would have awarded, we think the

New Jersey court would have considered that Mrs. Spector earned

little income and Dr. Ehrenworth earned significant income during

the marriage; that she did not work outside the home during the

marriage; and that they were married for nearly 25 years.    This

suggests that Mrs. Spector was entitled to receive alimony.    See

Lavene v. Lavene, supra; Turner v. Turner, supra; Esposito v.

Esposito, supra.

     Mrs. Spector argues that Dr. Ehrenworth agreed that he would

not claim the deduction for alimony after she remarried.    She

points out that Judge Freedman of the Superior Court told

Dr. Ehrenworth that he would lose the alimony deduction if

Mrs. Spector remarried and that Dr. Ehrenworth understood this.

Notwithstanding that conversation, Dr. Ehrenworth did not agree

in writing that the payments ceased to be alimony for tax

purposes if Mrs. Spector remarried.    We think the fact that the

divorce agreement does not say that the payments are alimony only
                              - 22 -

until Mrs. Spector remarries, and instead refers to the entire

payment term as the "12 year alimony period" shows that

Dr. Ehrenworth and Mrs. Spector did not agree that payments would

cease to be alimony when Mrs. Spector remarried.

     This factor favors treating the payments as alimony.

     4.   Conclusion

     Judge Freedman believed that Dr. Ehrenworth and Mrs. Spector

intended for the payments to be in part for alimony and in part a

property settlement.   We agree.

     As discussed in paragraph A-2, respondent argues that the

payments should be allocated 80 percent to alimony and 20 percent

to a property settlement.   We agree.   See Bishop v. Commissioner,

55 T.C. 720, 726 (1971) (Court found a factual basis for

allocating part of payment to alimony and part to property

settlement).   Upon consideration of the divorce judgment, the

intent of Dr. Ehrenworth and Mrs. Spector when the judgment was

entered, Mrs. Spector's many references to the payments as

alimony, Dr. Ehrenworth's concessions that he received 55 percent

of the marital estate and that the marital estate was worth $2

million, and the factors listed above, we conclude that the

weekly payments were 80 percent alimony and 20 percent property

settlement.
                               - 23 -

B.   Additions to Tax

     1.   Negligence

     Negligence is a lack of due care or failure to do what a

reasonable and ordinarily prudent person would do under the

circumstances.   Zmuda v. Commissioner, 731 F.2d 1417, 1422 (9th

Cir. 1984), affg. 79 T.C. 714 (1982); Marcello v. Commissioner,

380 F.2d 499, 506 (5th Cir. 1967), affg. in part and remanding

in part 43 T.C. 168 (1964) and T.C. Memo. 1964-299; Neely v.

Commissioner, 85 T.C. 934, 947 (1985).    Petitioners must show

that they acted reasonably and exercised due care in claiming

exemptions for the Ehrenworth children.    Neely v. Commissioner,

supra.

     Dr. Ehrenworth did not establish that he provided more than

$600 to support Richard for the years in issue.

     Generally, a parent may claim an exemption for a child for

whom he or she has provided more than half of the support.    Secs.

151 and 152.   The exemption for a child whose parents are

divorced is allocated between the parents under section 152(e).

The noncustodial parent of a child who has the right to claim the

child as a dependent under a divorce decree or written agreement

executed before 1985 and who provides at least $600 in annual

support for the child is treated as providing more than half of

the child's support for purposes of claiming the child as a

dependent.   Sec. 152(e)(4).
                                - 24 -

     Respondent determined that Dr. Ehrenworth negligently

claimed exemptions for Andrew and Robert for 1986 and 1987.      We

agree.    We believe that it was not reasonable for Dr. Ehrenworth

to believe that he could claim exemptions for Robert and Andrew

for 1986 and 1987 because he did not have custody of them and

the agreement did not allow him to claim these exemptions.

Dr. Ehrenworth does not argue that he had reasonable cause for

claiming exemptions for Robert and Andrew.    We treat this as

his concession of this issue.    We find that Dr. Ehrenworth was

negligent with respect to the issue of whether he was entitled

to claim exemptions on his 1986 and 1987 tax returns.

     Respondent also determined that Mrs. Spector negligently

claimed an exemption for Robert for 1986 because she did not show

that she provided more than $600 of support for him in 1986.     We

disagree.    Although she did not establish that she provided more

than $600 to support Robert in 1986, she showed that she provided

more than $600 to support him in 1987 and 1988.    She claimed the

exemption in good faith.    We find that Mrs. Spector was not

negligent in claiming an exemption for Robert for 1986.

     2.     Substantial Understatement of Income Tax

     Respondent determined that petitioners were liable for

additions to tax for substantial understatement of income tax

under section 6661 for 1986, 1987, and 1988.    Respondent conceded

that petitioners are not liable for the additions to tax for

substantial understatement for 1986, 1987, and 1988 for any
                             - 25 -

deficiencies related to the characterization of the payments from

Dr. Ehrenworth to Mrs. Spector.   Respondent did not waive the

section 6661 additions to tax relating to the exemption issue.

The tax related to the exemption issue will not exceed $5,000,

so the section 6661 additions will not apply.

     To reflect concessions and the foregoing,


                                       Decisions will be entered

                                  under Rule 155.
