                   T.C. Summary Opinion 2004-120



                      UNITED STATES TAX COURT



                  ROBERT L. TOVAR, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent


     Docket No. 19073-02S.               Filed September 2, 2004.


     Robert L. Tovar, pro se.

     Laura A. McKenna, for respondent.



     COUVILLION, Special Trial Judge:    This case was heard

pursuant to section 7463 in effect at the time the petition was

filed.1   The decision to be entered is not reviewable by any

other court, and this opinion should not be cited as authority.

     Respondent determined a deficiency of $5,992 in petitioner's

Federal income tax for 2000.



     1
          Unless otherwise indicated, subsequent section
references are to the Internal Revenue Code in effect for the
year at issue.
                                - 2 -


     The sole issue for decision is whether a payment of $20,977

by petitioner to his former wife during 2000 constitutes alimony

deductible under section 215(a).    That issue is resolved by

whether the $20,977 payment satisfies the definition of "alimony

or separate maintenance payment" under section 71(b)(1)(D).2

     Some of the facts were stipulated.    Those facts, with the

annexed exhibits, are so found and are incorporated herein by

reference.   At the time the petition was filed, petitioner was a

legal resident of Cordova, Tennessee.

     Petitioner was formerly married to Cynthia Lima, from

January 14, 1995, until their divorce on July 19, 2000.    There

were no children of the marriage.    During their marriage,

petitioner and Ms. Lima were residents of the State of Florida;

they were married in the State of Florida; their matrimonial

domicile was in the State of Florida; and their divorce was

rendered by a Florida State court.

     At the time of their divorce, petitioner and Ms. Lima

entered into a Mediated Settlement Agreement (the agreement)

dated June 16, 2000.    That agreement was incorporated into the

divorce decree entitled Final Judgment Dissolving of Marriage

(the divorce decree).




     2
          Another adjustment in the notice of deficiency, a
decrease in itemized deductions, is computational and will be
resolved by the Court's holding on the principal issue.
                                 - 3 -


     The agreement essentially dealt with a division of property

between petitioner and Ms. Lima.    There were provisions with

respect to "Past Debts and Obligations", designation of the

marital home to petitioner, a division of their personal

belongings, etc.   Paragraph 17 of the agreement provided:

"WAIVER OF ALIMONY.   Each party waives the right to receive

alimony or spousal support from the other party."    Paragraph 27

stated: "This agreement is and shall be deemed to be a Florida

agreement, and shall be governed and construed in all respects by

and in accordance with the laws of the State of Florida."

     Finally, the agreement provided:


          6. AGREEMENT IN EVIDENCE/AVOIDANCE OF MERGER. The
     parties contemplate the dissolution of their marriage. This
     Agreement is intended to be a full settlement of all matters
     in any dissolution of marriage action, and if accepted by
     the Court, shall be incorporated by reference in the
     Judgment that may be rendered. However, notwithstanding
     future incorporation in the Judgment, this Agreement shall
     not be merged in the judgment, but shall survive the
     judgment, and shall be binding on the parties for all time.


     During his marriage, including the year of the divorce,

petitioner was employed as an inventory manager for a national

retailer, Best Buy, Inc. (Best Buy).     He commenced his employment

with Best Buy in 1995.   At the time of trial, petitioner was

still an employee of Best Buy.

     As an employee of Best Buy, petitioner earned stock options

that entitled him to purchase stock in Best Buy at a set price of
                               - 4 -


$3 per share, regardless of the current market price of the

stock.   In the agreement, it was recognized that Ms. Lima was

entitled to one-half of these options, including one-half of the

proceeds from some of the options petitioner had exercised a few

months earlier (during 2000), and, as to which, petitioner had

elected to take cash in lieu of stock.   After the agreement was

executed, petitioner exercised additional options and remitted

the net entire proceeds from both transactions to Ms. Lima, even

though he was required to remit only one-half to her.   For our

purposes here, the stock purchased in both transactions cost

$6,817 (at $3 per share), and the gross proceeds from sale of the

stock were $27,794, resulting in a gain and net proceeds of

$20,977, all of which petitioner paid to Ms. Lima.

     On his Federal income tax return for 2000, petitioner

claimed an alimony deduction of $20,977.   In the notice of

deficiency, respondent disallowed the deduction and made no other

adjustments (except for the computational adjustments on the

itemized deductions).

     The sole issue is whether petitioner is entitled to a

$20,977 deduction for alimony under section 215(a).3




     3
          The Court decides this case without regard to the
burden of proof under sec. 7491(a), since the facts are not in
dispute and the issue is a question of law.
                              - 5 -


     Section 215(a) provides generally that alimony payments are

deductible by the payor spouse.   Under section 215(b), "alimony"

means any alimony, as defined in section 71(b), which is

includable in the gross income of the recipient under section 71.

Under section 71(b), the term "alimony or separate maintenance

payment" is defined in section 71(b)(1) as any payment in cash

meeting the following four criteria:


          (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.


Petitioner's deduction for alimony is allowable only if the four

criteria of section 71(b)(1) are met.   Jaffe v. Commissioner,

T.C. Memo. 1999-196.

     The Court first notes that, in the agreement, Ms. Lima was

recognized as owner of one-half of all unexercised stock options

of her husband, petitioner, and, additionally, a substantial
                               - 6 -


portion of stock options petitioner had exercised prior to the

divorce.   On this record, the Court is satisfied that a portion

of the $20,977 gain from the exercise of the options included the

options owned by Ms. Lima.   That portion of the distribution to

her, therefore, was not alimony but was simply an accounting, a

payment, or a distribution to petitioner of property she already

owned.   With respect to the remainder of the $20,977,

respondent's position is that it is not alimony under section

71(b)(1)(D).4

     Section 71(b)(1)(D) requires, as a condition to qualify as

alimony, that the obligation to pay terminate upon the death of

the former spouse.   If the payer is liable for even one otherwise

qualifying payment after the recipient's death, none of the

related payments required before death will be alimony.   Sec.

1.71-1T(b), Q&A-13, Temporary Income Tax Regs., 49 Fed. Reg.

34456 (Aug. 31, 1984).   Whether such obligation exists may be

determined by the terms of the applicable instrument, or if the

instrument is silent on the matter, by looking to State law.

Morgan v. Commissioner, 309 U.S. 78, 80 (1940); Gilbert v.


     4
          The Court recognizes that, because, in the agreement,
the parties expressly waived the right to alimony, it is
plausible to conclude that the transfer or payment of the
remainder of the net proceeds from exercise of the stock options
to Ms. Lima was voluntary and, perhaps, a gift and, therefore,
not deductible. Respondent, however, did not make such a
contention, and, since the parties framed the issue as alimony,
the Court decides the case on that basis.
                              - 7 -


Commissioner, T.C. Memo. 2003-92, affd. sub nom. Hawley v.

Commissioner, 94 Fed. Appx. 126 (3d Cir. 2004); Kean v.

Commissioner, T.C. Memo. 2003-163.

     The Court agrees with respondent that the payment at issue

is not alimony under section 71(b)(1)(D) because, under the terms

of the agreement and under Florida law, petitioner's obligation

to make the payment would have continued if Ms. Lima had died

prior to payment of the stock option proceeds.   In Canakaris v.

Canakaris, 382 So.2d 1197, 1201 (Fla. 1980), the Florida Supreme

Court stated:


          Although the award of lump sum alimony is not dependent
     upon a finding of a prior vested right, there does arise
     upon the entry of a final judgment of a lump sum award a
     vested right which is neither terminable upon a spouse's
     remarriage or death nor subject to modification. It may
     consist of real or personal property, or may be a monetary
     award payable in installments. Jurisdiction may be
     expressly retained, however, to terminate lump sum alimony
     installment payments upon a spouse's remarriage or death
     when the parties agree to such a provision in a property
     settlement agreement. Further, jurisdiction may be retained
     to enter periodic alimony if found necessary after such
     termination of lump sum alimony installment payments. * * *


Not only did the agreement and the divorce decree fail to provide

that petitioner's obligation for payment of the stock option

proceeds would terminate upon the prior death of Ms. Lima, there

were also no reservations that would have allowed the parties

thereafter to incorporate such a condition upon petitioner's
                                - 8 -


liability.    Moreover, the agreement specifically states that each

party waived the right to alimony.

     Petitioner argues that the $20,977 was included as income on

his 2000 income tax return, and, therefore, if he was required to

report the stock option proceeds as income, he should be entitled

to an alimony deduction.    The Court rejects that argument for two

reasons.    First, a payment as alimony qualifies as a deduction

only if it meets the criteria of section 71(b)(1).    As discussed

earlier, petitioner's payments to Ms. Lima failed to satisfy

section 71(b)(1)(D).    Secondly, in arguing that he included the

stock option proceeds as income on his 2000 income tax return,

petitioner implies that he paid taxes on that income and,

therefore, is entitled to a deduction for payment of that income

to Ms. Lima.    That argument fails because petitioner did not pay

income taxes on the sales proceeds of the stock options as he

infers.    The option proceeds are not identified by the issuance

of any information returns filed by the payor, and, moreover,

petitioner did not compute a tax on the option proceeds he

received.    Petitioner's return includes a Schedule D, Capital

Gains and Losses, on which he reported a short-term capital gain

transaction.    On Part I of the schedule, he listed the Best Buy

options, listed a gross sales price of $27,794, a cost/basis of

$27,794, and a zero gain or loss.    Petitioner, therefore, paid no
                               - 9 -


income tax on this transaction, contrary to his argument.5     The

Court, therefore, rejects petitioner's argument that he should be

allowed a deduction for payment of an amount he reported as

income.   Respondent is sustained on this issue.

     Reviewed and adopted as the report of the Small Tax Case

Division.



                                            Decision will be entered

                                       for respondent.




     5
          As noted earlier, petitioner's basis in the stock
options was $6,817, and, theoretically, that amount should have
been listed on Schedule D as the "Cost or other basis", which
would have resulted in a gain of $20,977. Respondent made no
adjustments in the notice of deficiency to reflect such a gain,
presumably in deference to the terms of the agreement between
petitioner and his former spouse, which provides that each party
was responsible for income taxes on their respective returns.
Petitioner's former wife did not testify at trial, her income tax
return was not offered in evidence, and counsel for respondent
did not indicate to the Court how the former spouse treated the
stock option proceeds on her return. Since the proceeds were all
distributed to the former wife, the tax, if any, on those
proceeds rested with her. Sec. 1041.
