                        T.C. Memo. 2009-238



                     UNITED STATES TAX COURT



              JOSEPH F. RODKEY, JR., Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 7422-08.               Filed October 20, 2009.



     Joseph F. Rodkey, Jr., pro se.

     Julia L. Wahl, for respondent.



                        MEMORANDUM OPINION


     COHEN, Judge:   Respondent determined a deficiency of $11,009

in petitioner’s Federal income tax for 2006 and an accuracy-

related penalty of $2,201.80 pursuant to section 6662(a).

     Unless otherwise indicated, all section references are to

the Internal Revenue Code for the year in issue, and all Rule

references are to the Tax Court Rules of Practice and Procedure.
                                - 2 -

     After concessions, the issues for decision are:

     (1) Whether respondent is estopped from challenging the

amount of alimony deducted by petitioner;

     (2) whether petitioner may deduct more than $18,000 as

alimony; and

     (3) whether petitioner is liable for the section 6662(a)

accuracy-related penalty for the year in issue.

                             Background

     This case was submitted fully stipulated under Rule 122, and

the stipulated facts are incorporated as our findings by this

reference.   Petitioner resided in Pennsylvania at the time the

petition was filed.   Petitioner is a practicing attorney.

     Petitioner was previously married to JoAnn C. Rodkey, but

since 2000 they have continually lived apart from each other, and

in 2004 they divorced.    In August 2004, petitioner, with the

advice of his attorney, entered into a property settlement

agreement (PSA) with his former wife which was incorporated into

their divorce decree.    The PSA originally terminated in August

2006 but was extended until the end of 2006.    The PSA stated in

part:

     9.   Alimony and Child Support

          a. Commencing on March 1, 2004, Husband shall pay
     to Wife the sum of $3,200.00 per month through June
     2006 as non-modifiable alimony and child support. The
     aforementioned alimony portion of said payment shall
     terminate upon parties’ death, Wife’s cohabitation or
     remarriage.
                               - 3 -

          b. It is the understanding of the parties that the
     monthly payments paid by Husband to Wife for her
     support and maintenance, as set forth in subparagraph
     a. hereof, will be fully deductible by Husband for
     federal income tax purposes and declared as income by
     Wife for Federal Income Tax purposes.

          c. Although the entire amount of $3,200.00 shall
     be tax deductible to Husband and tax includable to
     Wife, the parties agree that the allocation, based on
     Husband’s net monthly income and Wife’s earning
     capacity; of the $3,200.00 payment is $1,700.00 child
     support and $1,500.00 alimony. If Wife proceeds to
     file a child support modification action prior to the
     termination of the alimony obligation in June of 2006,
     or should either of the parties die, the entire
     $3,200.00 payment shall be deemed allocated ($1,700.00
     child support/$1,500.00 alimony or upon Wife’s death,
     cohabitation or remarriage, alimony shall terminate)
     and should Wife receive child support in excess of
     $1,700.00 per month Husband shall receive a dollar for
     dollar reduction in his alimony obligation, i.e., if
     Husband’s child support obligation increases by $500.00
     per month, his alimony obligation shall decrease by
     $500.00 per month. If Wife does not receive child
     support in excess of $1,700.00 per month, the $3,200.00
     payment shall remain unallocated.

In accordance with the PSA, petitioner paid $38,400 (PSA payment)

to his former wife in both 2005 and 2006, and he deducted the

payment as alimony on both his 2005 and 2006 Federal income tax

returns.

     On October 25, 2007, the Internal Revenue Service (IRS) sent

petitioner a notice of deficiency for 2005 determining a

deficiency as a result of disallowing petitioner’s $38,400

alimony deduction.   Petitioner timely filed a petition with this

Court challenging the notice of deficiency.   On February 4, 2008,

the IRS sent petitioner a no-change letter, which, without
                                - 4 -

discussing any of the issues, conceded that petitioner owed no

additional taxes.   On March 19, 2008, this Court entered a

stipulated decision in docket No. 211-08 (Rodkey I), which

stated:   “Pursuant to the agreement of the parties in this case

it is ORDERED and DECIDED:    That there is no deficiency in income

tax due from, nor overpayment due to, the petitioner for the

taxable year 2005.”   Three months later, on June 16, 2008, the

IRS sent petitioner’s former wife a notice of deficiency

determining a Federal income tax deficiency as a result of her

failure to include the $38,400 PSA payment in her income in 2005.

     On March 21, 2008, the IRS sent petitioner a notice of

deficiency for 2006, again determining a Federal income tax

deficiency and a penalty as a result of disallowing petitioner’s

$38,400 alimony deduction.

                              Discussion

     Respondent has conceded that petitioner properly deducted

$18,000 of the PSA payment.    The controversy concerns the

remaining $20,400 that petitioner deducted as alimony.

Petitioner argues that respondent is collaterally estopped from

challenging the deduction because it was allowed in Rodkey I.

Alternatively, petitioner claims that the entire PSA payment is

alimony and deductible.   Respondent asserts that the deduction

may be challenged because the issue was not fully litigated in

Rodkey I and that only $18,000 of the PSA payment is alimony.
                                - 5 -

Petitioner also challenges the section 6662(a) accuracy-related

penalty determined by respondent.

Estoppel

     Generally, the Commissioner may challenge in a succeeding

year what was condoned in a previous year.     Auto. Club of Mich.

v. Commissioner, 353 U.S. 180, 183-184 (1957); Demirjian v.

Commissioner, 457 F.2d 1, 6-7 (3d Cir. 1972), affg. 54 T.C. 1691

(1970).    Under certain circumstances, however, equitable estoppel

will bar the Government where there has been affirmative

misconduct resulting in a misrepresentation to the taxpayer which

the taxpayer relied upon to the taxpayer’s detriment.     United

States v. Asmar, 827 F.2d 907, 912 (3d Cir. 1987); Wilkins v.

Commissioner, 120 T.C. 109, 112-113 (2003).     The burden of proof

is on the party claiming estoppel.      United States v. Asmar, supra

at 912.

     Petitioner has not argued that there was affirmative

misconduct by respondent.   Furthermore, petitioner has not argued

that he relied on respondent’s no-change letter for 2005.

Petitioner cannot show reliance, because the no-change letter was

sent in February 2008, 3 months after petitioner was notified

that his 2006 Federal income tax return was being examined.

     Once an issue has been litigated, collateral estoppel may

apply.    In Monahan v. Commissioner, 109 T.C. 235, 240 (1997), we

stated:
                              - 6 -

          The doctrine of issue preclusion, or collateral
     estoppel, provides that, once an issue of fact or law
     is “actually and necessarily determined by a court of
     competent jurisdiction, that determination is
     conclusive in subsequent suits based on a different
     cause of action involving a party to the prior
     litigation.” Montana v. United States, 440 U.S. 147,
     153 (1979) (citing Parklane Hosiery Co. v. Shore, 439
     U.S. 322, 326 n.5 (1979)). * * *

     Under the doctrine of collateral estoppel, (1) the issue to

be decided in the second case must be identical in all respects

to the issue decided in the first case; (2) a court of competent

jurisdiction must have rendered a final judgment in the first

case; (3) a party may invoke the doctrine only against parties to

the first case or those in privity with them; (4) the parties

must have actually litigated the issue and the resolution of the

issue must have been essential to the prior decision; and (5) the

controlling facts and legal principles must remain unchanged.

See Jean Alexander Cosmetics, Inc. v. L’Oreal USA, Inc., 458 F.3d

244, 249 (3d Cir. 2006); see also Hi-Q Pers., Inc. v.

Commissioner, 132 T.C. __, __ (2009) (slip op. at 16).

     Petitioner argues that respondent should be collaterally

estopped from challenging the deduction of the PSA payment in

2006 because the stipulated decision in Rodkey I already

adjudicated the issue for 2005.   Respondent contends that the

issue was never actually litigated.   Respondent relies on the

discussion in United States v. Intl. Bldg. Co., 345 U.S. 502

(1953), where the Supreme Court held that the Government was not
                               - 7 -

collaterally estopped from rearguing a position it had conceded

in a previous year, even if the concession was the basis of a

court order.   The Supreme Court concluded that the Government’s

position had not been fully litigated in the earlier proceeding

and that the prior decision of this Court based on the

Government’s concession was “only a pro forma acceptance by the

Tax Court of an agreement between the parties to settle their

controversy for reasons undisclosed.”   Id. at 505.    The Supreme

Court’s rationale and holding apply equally to this case.    See

Frank Sawyer Trust v. Commissioner, 133 T.C. __, __ (2009) (slip

op. at 34-36); Green v. Commissioner, T.C. Memo. 2008-130, affd.

per curiam without published opinion 322 Fed. Appx. 412 (5th Cir.

2009).

     Petitioner also argues that respondent’s notice of

deficiency mailed to petitioner’s former wife based on her

failure to include the PSA payment in taxable income in 2005

provides further evidence of respondent’s concession that the

payment should be deductible to petitioner in 2006.    But the

Commissioner may take inconsistent positions to protect the

public fisc.   Kean v. Commissioner, 407 F.3d 186, 189 (3d Cir.

2005), affg. T.C. Memo. 2003-163.   Moreover, the correct tax

treatment of the payments includes the alimony portion in the

payee’s taxable income, so a notice of deficiency is

appropriately sent to her as well as to him.
                                 - 8 -

Alimony Deduction

     Petitioner contends that he is entitled to deduct in full

the $38,400 he paid to his former wife in 2006 pursuant to the

PSA because those payments were alimony, and alimony is a

deductible expense.   Section 215 permits taxpayers to deduct

alimony or separate maintenance payments includable in the gross

income of the recipient under section 71.   Section 71(b)(1)

defines alimony or separate maintenance payment as a payment in

cash if:   (1) The payment is received by a spouse under a divorce

or separation instrument; (2) the divorce or separation

instrument does not designate the payment as nondeductible for

the paying spouse and not includable in the gross income of the

payee spouse; (3) in the case of an individual legally separated

from his spouse under a decree of divorce or of separate

maintenance, the spouses are not members of the same household

when the payment is made; and (4) there is no liability to make

any payment for any period after the death of the payee spouse.

A divorce or separation instrument is either a decree of divorce

or separate maintenance, or a written instrument incident to such

a decree; a written separation agreement; or a decree requiring a

spouse to make payments for the support or maintenance of the

other spouse.   Sec. 71(b)(2).   Use of the word “alimony” in the

decree of divorce or separate maintenance, or in the written

separation agreement, will not necessarily result in a payment’s
                               - 9 -

being characterized as alimony for Federal income tax purposes.

Kean v. Commissioner, supra at 189-190; Okerson v. Commissioner,

123 T.C. 258, 264 (2004).

     The first three requirements of the section 71(b)(1) alimony

definition are satisfied.   First, the PSA payment was made under

a divorce or separation instrument because the payment was made

pursuant to the PSA, and the PSA was incorporated into the

divorce decree.   Second, the PSA does not designate the PSA

payment as nondeductible for petitioner nor as not includable in

the gross income of his former wife.    Third, petitioner and

petitioner’s former wife were not members of the same household

during the year in issue.

     The only remaining issue is whether petitioner is liable to

make any payment for any period after the death of his former

wife.   The first sentence of section 9.c. of the PSA states

unconditionally that “the parties agree that the allocation,

* * * is $1,700.00 child support and $1,500.00 alimony.”      But the

second sentence says that “If Wife proceeds to file a child

support modification action prior to the termination of the

alimony obligation in June of 2006, or should either of the

parties die, the entire $3,200.00 payment shall be deemed

allocated”, implying that if the condition is not met, the

payment will not be deemed allocated.    The third sentence

supports that interpretation, stating that “If Wife does not
                              - 10 -

receive child support in excess of $1,700.00 per month, the

$3,200.00 payment shall remain unallocated.”   The second and

third sentences of the section seem to contradict the first

sentence.

     Ultimately it is not necessary to determine whether the

payments are currently allocated.   It is necessary to determine

only which payments would continue upon petitioner’s former

wife’s death and which would terminate.   See sec. 71(b)(1)(D).

According to the second sentence of section 9.c. of the PSA, upon

the death of petitioner’s former wife the payment is allocated

$1,700 per month to child support and $1,500 per month to alimony

and the alimony portion terminates.    Thus, we conclude that the

payment of up to $18,000 a year is alimony and anything greater

does not satisfy the requirement of section 71(b)(1)(D), and is

therefore not deductible.

     Respondent alternatively argues that part of the PSA payment

should be excluded under section 71(c), which provides that “any

payment which the terms of the divorce or separation instrument

fix (in terms of an amount of money or a part of the payment) as

a sum which is payable for the support of children of the payor

spouse” is not alimony includable to the payee spouse under

section 71(a).   Thus it is not deductible to the payor under

section 215.
                              - 11 -

     It appears that the parties to petitioner’s divorce created

a deliberate ambiguity in order to achieve two purposes, one

relating to child support and one relating to tax treatment.      It

has long been the rule, however, that the labels attached by the

parties to a marital settlement agreement or decree are not

controlling for Federal tax purposes.    See, e.g., Benedict v.

Commissioner, 82 T.C. 573, 577 (1984).    Even if the language

categorizing child support payments as alimony taxable to

petitioner’s former wife had been unambiguous, the $1,700 per

month portion would fail the test for deductibility under section

71(b).   As the Court said in Okerson v. Commissioner, supra at

264-265:

     Here, the applicable Federal law is set forth in
     section 71, which, in its present form, provides the
     exclusive means by which a taxpayer may deduct a
     payment as alimony for Federal income tax purposes.
     * * * [Hoover v. Commissioner, 102 F.3d 842, 844-845
     (6th Cir. 1996), affg. T.C. Memo. 1995-183]. Through
     that section, Congress eliminated any consideration of
     intent in determining the deductibility of a payment as
     alimony in favor of a more straightforward, objective
     test that rests entirely on the fulfillment of explicit
     requirements set forth in section 71. Id.; see also
     Rosenthal v. Commissioner, T.C. Memo. 1995-603
     (“Whether or not the parties intended for the payments
     to be deductible to petitioner, we must focus on the
     legal effect of the agreement in determining whether
     the payments meet the criteria under section 71.”). As
     the House Committee on Ways and Means articulated in
     its report on section 71 in discussing the need for
     such an objective test:

          “The committee believes that a uniform Federal
     standard should be set forth to determine what
     constitutes alimony for Federal tax purposes. This
     will make it easier for the Internal Revenue Service,
                                - 12 -

     the parties to a divorce, and the courts to apply the
     rules to the facts in any particular case and should
     lead to less litigation. 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. [H. Rept. 98-432 (Pt. 2), at
     1495-1496 (1984).]” [alteration in original.]

          Although the parties to a divorce proceeding may
     intend that certain payments be considered alimony for
     Federal income tax purposes, and a court overseeing
     that proceeding may intend the same, Congress has
     mandated through section 71(b)(1)(D) that payments
     qualify as alimony for Federal income tax purposes only
     when the payor’s liability for those payments, or for
     any payments which may be made in substitute thereof,
     terminates upon the payee spouse’s death. * * *

We need not decide, therefore, whether the terms of the agreement

fixed a portion of the payments as child support nondeductible

under section 71(a) and (c).

Section 6662 Accuracy-Related Penalty

     Petitioner contests the imposition of an accuracy-related

penalty for the tax year in issue.       Section 6662(a) and (b)(1)

and (2) imposes a 20-percent accuracy-related penalty on any

underpayment of Federal income tax attributable to a taxpayer’s

negligence or disregard of rules or regulations, or substantial

understatement of income tax.    Section 6662(c) defines negligence

as including any failure to make a reasonable attempt to comply

with the provisions of the Internal Revenue Code and defines

disregard as any careless, reckless, or intentional disregard.

Disregard of rules or regulations is careless if the taxpayer
                               - 13 -

does not exercise reasonable diligence to determine the

correctness of a return position that is contrary to the rule or

regulation.   Sec. 1.6662-3(b)(2), Income Tax Regs.   Disregard of

rules or regulations is reckless if the taxpayer makes little or

no effort to determine whether a rule or regulation exists.     Id.

     Under section 7491(c), the Commissioner bears the burden of

production with regard to penalties and must come forward with

sufficient evidence indicating that it is appropriate to impose

penalties.    See Higbee v. Commissioner, 116 T.C. 438, 446 (2001).

However, once the Commissioner has met the burden of production,

the burden of proof remains with the taxpayer, including the

burden of proving that the penalties are inappropriate because of

reasonable cause or substantial authority.   See Rule 142(a);

Higbee v. Commissioner, supra at 446-447.

     Respondent has satisfied the burden of production by showing

that petitioner deducted the entire PSA payment in disregard of

the plain language of section 71.   See, e.g., Stedman v.

Commissioner, T.C. Memo. 2008-239; Tiley v. Commissioner, T.C.

Memo. 2003-132.

     The accuracy-related penalty under section 6662(a) is not

imposed with respect to any portion of the underpayment as to

which the taxpayer acted with reasonable cause and in good faith.

Sec. 6664(c)(1); Higbee v. Commissioner, supra at 448.    The

decision as to whether a taxpayer acted with reasonable cause and
                              - 14 -

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

account all of the pertinent facts and circumstances.    See sec.

1.6664-4(b)(1), Income Tax Regs.   “Circumstances that may

indicate reasonable cause and good faith include an honest

misunderstanding of fact or law that is reasonable in light of

all of the facts and circumstances, including the experience,

knowledge, and education of the taxpayer.”   Id.

     Petitioner asserts that he acted with reasonable cause and

in good faith.   He argues that in deducting the entire PSA

payment in 2006 he was just repeating what was ultimately

determined by respondent to be permitted in 2005.   Furthermore,

petitioner points out that although he is an attorney, his

practice does not include tax law.

     We are not persuaded by petitioner’s arguments.    What

respondent did in 2008 regarding the deduction in 2005 has no

bearing on whether petitioner acted with reasonable cause and in

good faith in 2006.   The statute forbidding a deduction for

payments where, as in this case, there is no liability after the

death of the payee spouse, is clear.   Petitioner’s explanations

do not demonstrate an honest misunderstanding of fact or law that

is reasonable in light of his experience, knowledge, and

education.
                              - 15 -

     In reaching our decision, we have considered all arguments

made by the parties.   To the extent not mentioned or addressed,

they are irrelevant or without merit.

     For the reasons explained above,


                                        Decision will be entered

                                 under Rule 155.
