                          T.C. Summary Opinion 2017-88



                         UNITED STATES TAX COURT



                   J. DREW KOESTER, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 31028-14S.                          Filed December 4, 2017.



      J. Drew Koester, pro se.

      Martha Jane Weber, for respondent.



                              SUMMARY OPINION


      HALPERN, Judge: This case was heard pursuant to the provisions of

section 7463 of the Internal Revenue Code in effect when the petition was filed.1




      1
       Hereinafter, unless otherwise stated, all section references are to the
Internal Revenue Code of 1986, as amended.
                                        -2-

Pursuant to section 7463(b), the decision to be entered is not reviewable by any

other court, and this opinion shall not be treated as precedent for any other case.

      Respondent determined a deficiency of $4,041 in petitioner's 2012 Federal

income tax. Petitioner had reported his 2012 Federal income tax on Form 1040,

U.S. Individual Income Tax Return. Respondent examined the return and made an

adjustment reducing petitioner's deduction for alimony paid from $51,147 to

$39,600, an adjustment of $11,547. Respondent made the adjustment because he

did not believe that a payment of that amount--equal to a portion of the

employment-related bonus that petitioner received in 2012--constituted deductible

alimony. Petitioner assigned error to the adjustment. The only question for

decision is whether the $11,547 payment is deductible as alimony.

                                    Background

      The parties have stipulated certain facts and the authenticity of certain

documents. The facts stipulated are so found, and documents stipulated are

accepted as authentic. Petitioner bears the burden of proof. See Rule 142(a)(1),
                                        -3-

Tax Court Rules of Practice and Procedure.2 Petitioner resided in Tennessee when

he filed the petition.

      Petitioner's ex-wife filed for divorce with the Chancery Court for the 30th

Judicial District of Memphis (chancery court), Shelby County, Tennessee,

sometime before the year at issue. After the filing, petitioner and his ex-wife

executed a Marital Dissolution Agreement on January 4, 2010 (MDA), providing,

among other things, for the distribution of property and for support. Petitioner's

ex-wife was represented by counsel during the divorce proceedings, but petitioner

was not. Counsel for petitioner's ex-wife drafted the MDA.

      The MDA provides the following:

                     Incorporation, Permanent and Pendente Lite

             All such parts of this Agreement as might be material, except
      those that might be lessened or destroyed, shall be incorporated in the
      Final Decree. Pending the entry of the Final Decree, the parties agree
      to the filing of this Agreement and, by said filing, specifically consent
      to and authorize the entry of a Consent Order binding them to the
      terms of this Agreement. By the signing of this Agreement, the
      parties stipulate to these terms being enforceable as if they were, at
      the moment of signing, an Order of this Court.




      2
       Petitioner has not raised the applicability of sec. 7491(a), which shifts the
burden of proof to the Commissioner in certain situations. We conclude that sec.
7491(a) does not apply here because petitioner has not produced any evidence that
he has satisfied the preconditions for its application.
                                        -4-

      The record does not contain a final decree of divorce from the Chancery

Court. The parties have not argued that the MDA was ineffective for 2012 and

have proceeded on the premise that it was both binding and enforceable in 2012.

      The MDA contains specific provisions regarding the division of the

following property: (1) real estate, (2) personalty, (3) automobiles, (4) section

401(k) plan benefits, (5) brokerage accounts, (6) stocks/profit interest units, and

(7) bank accounts. Petitioner conveyed his interest in the couple's real estate,

which was subject to debt, to his ex-wife. In turn, petitioner's ex-wife was to

refinance the debt on the real estate to remove petitioner from the debt and, within

30 days of doing so, had to pay petitioner $35,000 for his marital interest in the

real estate. Petitioner received 43.9% and his ex-wife received 56.1% of the

aggregate value of the section 401(k) plan benefits, brokerage accounts,

stocks/profit interest units, and bank accounts.

      The MDA also contains specific provisions awarding petitioner's ex-wife

two forms of support. Petitioner was required to pay, and hold his ex-wife

harmless for, three unsecured debts "as non-deductible, non-dischargeable

alimony in solido" because payment of the debts was necessary for his ex-wife's

support. The MDA also contains the following provision regarding petitioner's

obligation to pay what it describes as "transitional alimony" (alimony provision):
                                        -5-

                                      Alimony

            Husband shall pay to Wife as transitional alimony in the
      amount of Three Thousand Three Hundred Dollars ($3,300.00) per
      month on or before the fifth day of each month. Husband agrees to
      pay the transitional alimony beginning the first month immediately
      preceding the entry of the Final Decree of Divorce and each and
      every month thereafter through August 31, 2015.

      Lastly, the MDA contains a specific provision for the division of petitioner's

bonus income (bonus provision):

                               Husband's Bonus Income

             Wife shall be entitled to a portion of Husband's bonus income
      beginning the month immediately preceding the entry of the Final
      Decree of Divorce through August 31, 2015, as a division of marital
      property. The parties agree that fifty (50%) percent [sic] of each
      bonus during said time frame will be applied to the parties' minor
      son's college education fund, and the remainder of each bonus will
      then be split equally between the parties.

      At the time petitioner and his ex-wife executed the MDA, his monthly gross

income was $17,226 and her monthly gross monthly income was zero. Petitioner

agreed to pay his ex-wife monthly child support of $1,547 and to pay for his son's

private school tuition through grade 12. Petitioner and his ex-wife agreed to

divide equally the expense of an automobile for their son and the balance of any

college tuition expenses for their son not covered by an education savings account

established for his benefit.
                                        -6-

      In 2012 petitioner received from his employer a bonus payment, net of taxes

and deductions, of $46,190, and, in that year, in accordance with the bonus

provision, he paid his ex-wife $11,547 (bonus payment). Respondent denied

petitioner the deduction for alimony paid that he claimed on account of the bonus

payment.

                                    Discussion

      Section 215(a) allows a taxpayer a deduction for alimony payments made

during the taxable year. The term "alimony" is defined for purposes of section

215(a) as any payment of alimony that is includible in the income of the recipient

under section 71. See sec. 215(b). In pertinent part, section 71(b)(1) defines an

alimony payment as any payment in cash that satisfies the following four

requirements:

            (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
                                         -7-

            (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.

      The bonus payment was made pursuant to the bonus provision. Respondent

concedes that the bonus payment satisfied the requirements of section 71(b)(1)(A),

(B), and (C). That leaves the question of whether petitioner's obligation to make

payments under the bonus provision would have continued if his ex-wife had died

before August 31, 2015, the scheduled end of petitioner's obligation to make the

payments. If his obligation would have continued, then the bonus provision failed

to satisfy the requirement of section 71(b)(1)(D) that there be no liability to make

a payment for any period after the death of the payee ex-spouse. And if it failed to

satisfy that requirement, then the bonus payment would not qualify as the payment

of alimony within the meaning of section 71.

      On the face of it, the bonus provision is absolute as to the term of the ex-

spouse's entitlement to a share of petitioner's bonus income, viz, "through August

31, 2015," and it does not provide for the earlier termination of petitioner's

obligation to make the payments if the ex-wife should die. Nevertheless, to

determine whether petitioner's obligation to make payments under the bonus

provision would survive the death of petitioner's ex-wife, we must look beyond the
                                        -8-

terms of the bonus provision to the law of the State of Tennessee. See Morgan v.

Commissioner, 309 U.S. 78, 80 (1940) ("State law creates legal interests and

rights. The federal revenue acts designate what interests or rights, so created, shall

be taxed."); Megibow v. Commissioner, T.C. Memo. 1998-455, 98 WL 901532, at

*2.3 Payments that cease upon the payee's death by operation of State law can still

qualify under section 71 for special tax treatment under section 215 "despite the

parties' failure to specify in the divorce instrument that the payments terminate

upon the payee's death." Hoover v. Commissioner, 102 F.3d 842, 846 (6th Cir.

1996), aff'g T.C. Memo. 1995-183.

      The Supreme Court of Tennessee has characterized a marital dissolution

agreement as "a contract entered into by a husband and wife in contemplation of


      3
      The Court noted in Rogers v. Commissioner, T.C. Memo. 2005-50, 2005
Tax Ct. Memo LEXIS 49, at *4-*5:

             Limiting deductibility to obligations that end with the death of
      the payee stops taxpayers from disguising property settlements as
      alimony. But one recurring problem has been how to tell whether a
      particular obligation to pay alimony really would stop at death. For a
      time, the Code had a strict bright-line test: deductibility was denied
      unless there was an express provision in the divorce decree or
      separation instrument itself ending payments upon the death of the
      payee spouse. 26 U.S.C. sec. 71(b)(1)(D) (1984). In 1986, though,
      Congress softened section 71(b) to allow deductibility without such
      an express provision, but only if state law would end the obligation at
      death anyway.
                                        -9-

divorce." E.g., Eberbach v. Eberbach, __ S.W.3d __, 2017 WL 2255582, at *3

(Tenn. May 23, 2017). As such, it "provide[s] a vehicle for divorcing parties to,

among other things, provide 'for the equitable settlement of any property rights

between the parties.'" Altman v. Altman, 181 S.W.3d 676, 680 (Tenn. Ct. App.

2005) (quoting Tenn. Code Ann. sec. 364-103(b) (2001)).

             As a contract, a MDA generally is subject to the rules
      governing construction of contracts. * * * If approved by the trial
      court, the MDA is incorporated into the decree of divorce * * * .
      Once incorporated, issues in the MDA that are governed by statutes,
      such as * * * alimony, lose their contractual nature and become a
      judgment of the court. * * * The trial court retains the power and
      discretion to modify terms contained in the MDA relating to these
      statutory issues upon sufficient changes in the parties' factual
      circumstances. * * *

Eberbach, 2017 WL 2255582, at *3. "However, it is still construed in the same

manner as a contract." In re Estate of Steil, No. M2011-00701-COA-R3-CV, 2012

WL 1794979, at *2 (Tenn. Ct. App. May 16, 2012). And while the domestic

relations law of Tennessee provides for the award of alimony, see Tenn. Code

Ann. sec. 36-5-121, subsection (m) of that section provides that nothing in the

section "shall be construed to prevent the affirmation, ratification and

incorporation in a decree of an agreement between the parties as to support and

maintenance of a party." The Court of Appeals of Tennessee has held: "The

alimony statutes are not applicable where the parties agree in a marital dissolution
                                        - 10 -

agreement to terms different from those set out in the statutes." Vick v. Hicks, No.

W2013-02672-COA-R3-CV, 2014 WL 6333965, at *4 (Tenn. Ct. App. Nov. 17,

2014).

      We assume that the MDA was approved by the chancery court and was

incorporated into petitioner and his ex-wife's divorce decree. There is no evidence

that the MDA has in any way been modified by the chancery court. Nevertheless,

petitioner argues that, as shown by "the nature and intent of the MDA", the bonus

provision obligates him to pay what, had the chancery court made the an award on

the same terms, would have been transitional alimony.

      "Transitional alimony" is a class of alimony that a Tennessee court may

award. See Tenn. Code Ann. sec. 36-5-121(d)(1) through (g)(1). It terminates on

the death of he recipient. Id. sec. 36-5-121(g)(3). It is described as a sum of

money payable by a spouse for a determinate period and awarded "when the court

finds that rehabilitation is not necessary, but the economically disadvantaged

spouse needs assistance to adjust to the economic consequences of a divorce". Id.

sec. 36-5-121(g)(1).

      Petitioner has failed to persuade us that the bonus payment pursuant to the

bonus provision was made to assist his ex-wife to adjust to the economic

consequences of divorce or that such payments were to terminate on her death
                                        - 11 -

before August 31, 2015. We start with the fact that the MDA does, in the alimony

provision, specify monthly payments of $3,300 through August 31, 2015,

described as "transitional alimony". Petitioner and his ex-wife (or, at least, her

attorney) thus apparently knew how to describe a stream of payments for a

determinable period as being unnecessary for her rehabilitation but necessary to

assist her--she being economically disadvantaged--to adjust to the economic

consequences of divorce.4

      Moreover, petitioner has not provided any evidence of his ex-wife's

expected expenses to allow us to find that the stated transitional alimony (under

the alimony provision) was not sufficient for her to adjust to the economic

consequences of her divorce from petitioner. Additionally, other provisions in the

MDA limit any economic disadvantage to her resulting from her divorce from

petitioner. She received more than 50% of the division of the liquid assets--

section 401(k) plan benefits, brokerage accounts, stock/profits interest units, and

bank accounts. Petitioner also paid child support and was obligated to pay certain

unsecured debts.




      4
       Respondent has accepted petitioner's payment in 2012 of $39,600 ($39,600
' $3,300 × 12) to his ex-wife as a payment of alimony deductible under sec.
215(a).
                                         - 12 -

      Petitioner and his ex-wife were in the best position to specify how they

wanted the payment at issue to be classified for Federal income tax purposes. As

the Supreme Court of Tennessee noted in Self v. Self, 861 S.W.2d 360, 364 (Tenn.

1993):

             In addition to the rights and obligations of the parties with
      respect to each other, the liability for taxes, the rights of creditors, and
      other significant consequences may depend upon the preciseness of
      the language employed in the decree. Construction by the courts of
      uncertain and ambiguous language is a poor substitute for careful
      articulation.

      Moreover, the bonus provision is without condition as to the ex-wife's

entitlement to payments through August 31, 2015. Petitioner has not convinced us

that, even were we to find that payments made pursuant to the bonus provision

were made to assist his ex-wife to adjust to the economic consequences of divorce,

a Tennessee court would, on his ex-wife's death before August 31, 2015, allow

petitioner to cease making payments to her estate. See Vick, 2014 WL 6333965,

at *4 (parties may agree in a marital dissolution agreement that a transitional

alimony obligation shall not be modifiable and courts should hold the parties to

their agreement).

      Petitioner has failed to persuade us that his obligation to make payments

under the bonus provision would have ceased if his ex-wife had died before
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August 31, 2015, the scheduled end of his obligation to make those payments.

Therefore, the bonus provision fails to satisfy the requirement of section

71(b)(1)(D) that there be no liability to make such payments for any period after

her death. And because it fails to satisfy that requirement, the bonus payment did

not qualify as the payment of alimony within the meaning of section 71.

Therefore, we sustain respondent's adjustment disallowing petitioner's deduction

of $11,547 as alimony. We sustain in full respondent's determination of a

deficiency in tax for 2012.


                                                      Decision will be entered

                                                for respondent.
