                  T.C. Memo. 1999-196



                UNITED STATES TAX COURT


              IRV C. JAFFE, Petitioner v.
     COMMISSIONER OF INTERNAL REVENUE, Respondent

            ARLENE K. JAFFE, Petitioner v.
     COMMISSIONER OF INTERNAL REVENUE, Respondent


Docket Nos. 24780-97, 2220-98.            Filed June 17, 1999.



Irv C. Jaffe, pro se.

Arlene K. Jaffe, pro se.

George D. Curran, for respondent.


        MEMORANDUM FINDINGS OF FACT AND OPINION
                               - 2 -


     COUVILLION, Special Trial Judge:    These consolidated cases
                                             1
were heard pursuant to section 7443A(b)(3)       and Rules 180, 181,

and 182.

     Respondent determined a deficiency of $2,775 in the 1994

Federal income tax of petitioner Irv C. Jaffe (Mr. Jaffe) and a

deficiency of $3,431 in the 1994 Federal income tax of petitioner

Arlene K. Jaffe (Ms. Jaffe).   In an answer to Mr. Jaffe's

petition, respondent asserted an increased deficiency for

unreported dividend income of $11,497.31 from a money market

account held jointly by Mr. Jaffe and Ms. Jaffe.       Respondent also

asserted, in an answer to Ms. Jaffe's petition, an increased

deficiency for unreported dividend income of $15,543 from the

same money market account.

     The issues for decision are:    (1) Whether $18,500 received

by Ms. Jaffe during 1994 constitutes alimony or separate

maintenance payments includable in her income under section 71

and deductible by Mr. Jaffe under section 215, and (2) what

portion of the dividend income from the jointly owned money

market account for 1994 is includable in the respective gross

income of Mr. Jaffe and Ms. Jaffe.


                        FINDINGS OF FACT


1
      Unless otherwise indicated, section references are to the
Internal Revenue Code in effect for the year at issue. All Rule
references are to the Tax Court Rules of Practice and Procedure.
                                - 3 -



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

annexed exhibits, are so found and are incorporated herein by

reference.    At the time Mr. Jaffe's petition was filed, his legal

residence was Bala Cynwyd, Pennsylvania.    At the time Ms. Jaffe's

petition was filed, her legal residence was Narberth,

Pennsylvania.

     Mr. Jaffe and Ms. Jaffe were married on May 7, 1961.      They

had two children, both of whom are adults.    Mr. Jaffe is a

certified public accountant and is the name partner in an

accounting firm.    He has practiced public accounting for at least

30 years.    In his practice, he has prepared income tax returns

for clients.    For several years, Mr. Jaffe has taught courses as

an adjunct professor in managerial and tax accounting at several

colleges and universities, including Temple University, Penn

State University, La Salle, and Drexel University.    Ms. Jaffe has

a bachelor's degree in education and taught at a junior high

school from 1960 to 1963.    After that, she engaged herself as a

homemaker, raising the children.    She returned to work in 1977,

working 20 hours per week at a gift shop.

     On October 9, 1991, Ms. Jaffe filed suit for divorce against

Mr. Jaffe in the Court of Common Pleas of Montgomery County,

Pennsylvania (Court of Common Pleas).    On February 26, 1992, the

Domestic Relations Court of Montgomery County, Pennsylvania
                              - 4 -


(Domestic Relations Court), issued an order that Mr. Jaffe pay

Ms. Jaffe $250 per week alimony pendente lite.   On June 4, 1992,

the Domestic Relations Court amended that order to provide that

Mr. Jaffe pay Ms. Jaffe $900 per week alimony pendente lite

retroactive to October 22, 1991.   On September 4, 1992, the Court

of Common Pleas vacated the order of June 4, 1992, and issued an

"agreed order" that provided, in pertinent part:


          WHEREAS, the parties have a Vanguard Account,
     account #9841402936, ("Vanguard Account") [Vanguard
     Account] titled in both names as tenants by entireties,
     with an approximate balance of $542,347.95 as of April
     9, 1992;

          NOW, THEREFORE, the parties, through their
     respective attorneys, Charles C. Shainberg, Esquire,
     for Defendant [Mr. Jaffe], and Nancy Akbari, Esquire,
     for Plaintiff [Ms. Jaffe], do hereby STIPULATE and
     AGREE that:

          1.   Effective August 3, 1992, Plaintiff shall be
     permitted to withdraw up to Five Hundred Dollars ($500)
     per week from the Vanguard Account. Of this amount,
     the amount which is ultimately determined to be payable
     as alimony pendente lite, will be credited against
     Defendant's share at equitable distribution. Defendant
     shall be responsible for income taxes due on the amount
     which is ultimately adjudicated to have been his
     alimony pendente lite obligation. As this payment
     shall be made directly from the account established
     pursuant to paragraph 4 hereof, no payments shall be
     payable through the Domestic Relations Section.


Other provisions of the agreed order allowed both Mr. and Ms.

Jaffe to make withdrawals out of the Vanguard account for matters

unrelated to this litigation, such as, for example, payment of
                               - 5 -


their attorneys, payment of the Jaffes' 1991 income taxes, and

insurance, property taxes, and maintenance of the marital home.

The agreed order was signed by the attorneys for Mr. Jaffe, Ms.

Jaffe, and by the judge.   At some point, the date of which is not

evident from the record, it developed that there were no funds in

the Vanguard account No. 9841402936 described in the agreed order

because Mr. Jaffe had surreptitiously closed the account.        Ms.

Jaffe instituted contempt proceedings against Mr. Jaffe, and,

after a period of incarceration of Mr. Jaffe, the funds were

restored.   On May 6, 1993, the restored funds were placed in

another money market reserve account with Vanguard, in the names

of Mr. Jaffe and Ms. Jaffe but with their respective attorneys as
                                                             2
escrow agents.   That account bore the number 09886709322.       As of

January 31, 1993, that account had a balance of $495,157.70.

Pursuant to the agreed order, Ms. Jaffe made withdrawals out of

the aforesaid Vanguard money market reserve account, including,

during 1994, the amount of $18,500, which is at issue in this

case.

     The Vanguard account was owned by Mr. Jaffe and Ms. Jaffe as

tenants by the entirety.




2
     No evidence was offered to establish whether the closed
Vanguard account No. 9841402936 was also a money market reserve
account.
                                - 6 -


     On September 13, 1994, the Court of Common Pleas issued the

following decrees and orders:

     (1) A divorce decree,

     (2) An order with respect to the alimony (the alimony

order),

     (3) A decree with respect to a property settlement (the

property settlement order) between Mr. and Ms. Jaffe, and

     (4) An opinion.

     The alimony order of September 13, 1994, provided, in

pertinent part:


     1)   Mrs. Jaffe's request for Alimony is DENIED.

     2) Mrs. Jaffe's request for Alimony Pendente Lite is
     GRANTED in part and DENIED in part.

          i. The $500.00 per week that Mrs. Jaffe has been
     receiving pursuant to the parties agreement effective
     August 3, 1992, shall be deemed an award of Alimony
     Pendente Lite.

          ii. Any additional request for Alimony Pendente
     Lite is DENIED.

           *      *      *      *       *    *        *

     1) Mrs. Jaffe shall receive the following marital
     assets:

               a. The entire Vanguard Account No.
     9841402936, less $98,000.00 which is husband's
     inheritance.


As reflected in the property settlement order, Mr. Jaffe and Ms.

Jaffe each received various other retirement and investment
                                  - 7 -


assets, contents of the marital home, and automobiles in their

respective possession.      The marital home and other real estate
                                          3
holdings were awarded to Mr. Jaffe.

     As noted earlier, Ms. Jaffe withdrew $18,500 from the

Vanguard money market reserve account during 1994.      She did not

include this amount as income on her 1994 Federal income tax

return.   Mr. Jaffe, on the other hand, claimed an alimony

deduction of $18,500 on his 1994 Federal income tax return.      The

Vanguard money market reserve account earned $15,543.37 in

dividends during 1994.      An IRS Form 1099 was issued by Vanguard

to Mr. Jaffe for this amount; however, neither Mr. Jaffe nor Ms.

Jaffe included such income on their respective returns for 1994.

     In separate notices of deficiency, respondent disallowed Mr.

Jaffe's alimony deduction of $18,500, for the year at issue, and

included $18,500 in alimony income in Ms. Jaffe's gross income
                 4
for that year.       Additionally, respondent made a computational


3
     The Court notes that the alimony order refers to Vanguard
account No. 9841402936. That is an apparent error because, as
noted earlier, Mr. Jaffe had closed that account and later
restored those funds to the escrowed Vanguard money market
reserve account on May 6, 1993. The Court is satisfied that the
reference in the alimony order to the Vanguard account is to the
money market reserve account No. 09886709322. The identity of
the account was not an issue at trial.
4
     The Commissioner may issue conflicting     notices of
deficiencies, for instance, in a case where     payments may or may
not constitute alimony. The Commissioner's      practice of issuing
inconsistent deficiency notices in order to     protect the
                                                       (continued...)
                               - 8 -


adjustment to Ms. Jaffe's itemized deduction for medical and

dental expenses, due to the inclusion of $18,500 alimony in her

gross income for 1994.   As noted earlier, respondent filed

answers in each case asserting increased deficiencies against Mr.

and Ms. Jaffe for the unreported dividend income.



                              OPINION


The Alimony Issue.

     At issue here is the nature of the withdrawals made by Ms.

Jaffe during 1994 out of the jointly held account with Mr. Jaffe.

Amounts received as alimony or separate maintenance are

includable in the recipient's gross income under sections

61(a)(8) and 71(a) and are deductible by the payor under section

215(a) in the year paid.   On the other hand, payments

representing a property settlement are neither deductible to the

payor nor includable in income by the recipient.    See sec. 1041.

     For tax purposes, the term "alimony or separate maintenance

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

meeting the following four criteria:




4
 (...continued)
Government's right to tax revenue is recognized as a valid
practice. See, e.g., Gerardo v. Commissioner, 552 F.2d 549, 555-
556 (3d Cir. 1977), affg. in part and revg. in part on another
ground T.C. Memo. 1975-341.
                               - 9 -


          (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.


Thus, the subject $18,500 received by Ms. Jaffe during 1994

constitutes alimony, deductible by Mr. Jaffe and includable in

Ms. Jaffe's gross income, only if all four criteria of section

71(b)(1) are met.

     Respondent took the position that the $18,500 in withdrawals

by Ms. Jaffe did not constitute alimony, and, therefore, such

amounts were not includable in her gross income and,

correspondingly, were not deductible by Mr. Jaffe.    Respondent

based this position on two grounds.    First, there was no

definitive characterization of the withdrawals in the agreed

order of September 4, 1992.   The agreed order stated that such

amounts "ultimately determined to be payable as alimony pendente

lite will be credited against defendant's [Mr. Jaffe] share at
                              - 10 -


equitable distribution".   As such, respondent contends, the

withdrawals by Ms. Jaffe did not constitute alimony because the

agreed order does not satisfy section 71(b)(1)(A).   Respondent

further argued that, although the later divorce decree did

characterize the withdrawals by Ms. Jaffe as alimony pendente

lite, the divorce decree is dated September 13, 1994, and,

therefore, could not retroactively make or define the prior

withdrawals as deductible alimony.

     Respondent's second position was that the agreed order of

September 4, 1992, provided that Mr. Jaffe "shall be responsible

for income taxes due on the amount which is ultimately

adjudicated to have been alimony pendente lite".   Respondent

argued that this language constituted a designation under section

71(b)(1)(B) that the withdrawals by Ms. Jaffe were not includable

in her gross income and were not deductible by Mr. Jaffe.

     Mr. Jaffe's position, asserted in a pretrial memorandum, as

well as in his testimony at trial, was that the alimony order

dated September 13, 1994, stated unequivocally that the

withdrawals by Ms. Jaffe were alimony pendente lite and that

statement alone entitled him to an alimony deduction.

     Ms. Jaffe argued that the withdrawals were a division of the

marital estate and, therefore, did not constitute alimony.

     The Court notes that the withdrawals by Ms. Jaffe were made

out of the Vanguard account, which constituted marital property
                               - 11 -


of Mr. Jaffe and Ms. Jaffe under Pennsylvania law.    Each party

owned an undivided one-half interest in this asset.    One-half of

the funds being withdrawn, therefore, constituted Ms. Jaffe's

funds.   As such, this was a distribution of her own funds.   That

amount is not deemed to be an award of alimony.    Accordingly,

one-half of the $18,500 in withdrawals is not includable in Ms.

Jaffe's gross income under section 71(a), and that same amount is

not deductible by Mr. Jaffe under section 215(a).

     With respect to the other one-half of the $18,500, the Court

rejects respondent's position that there was no definitive

characterization of the withdrawals in the agreed order of

September 4, 1992.    The alimony order of September 13, 1994,

confirmed that the withdrawals were alimony pendente lite; i.e.,

that they were required for the support and maintenance of Ms.

Jaffe.   The September 13, 1994, alimony order defining the

withdrawals as alimony pendente lite, coupled with the agreed

order of September 4, 1992, satisfied the requirements of section

71(b)(1)(A).

     The agreed order of September 4, 1992, states:    "Defendant

[Mr. Jaffe]    shall be responsible for income taxes due on the

amount which is ultimately adjudicated to have been his alimony

pendente lite obligation."    Respondent takes the position that

this language constitutes a designation under section 71(b)(1)(B)
                              - 12 -


that the withdrawals by Ms. Jaffe are not includable in her gross

income and are not deductible by Mr. Jaffe.

     Under section 71(b)(1)(B), if a divorce or separation

agreement designates that payments by the payor-spouse are not

deductible under section 215, and that such payments are not

includable in the gross income of the payee-spouse under section

71, such amounts are not alimony under section 71(a) and,

therefore, are not includable in the recipient's gross income and

are not deductible by the payor.   In the case here, there was no

such designation.   Although the agreed order of September 4,

1992, provided that Mr. Jaffe "shall be responsible for income

taxes due on the amount which is ultimately adjudicated to have

been his alimony pendente lite obligation", such language, in the

view of the Court, does not suffice to constitute a designation

for purposes of section 71(b)(1)(B).   Cf. Estate of Goldman v.

Commissioner, 112 T.C. ___ (1999); Richardson v. Commissioner,

T.C. Memo. 1995-554, affd. 125 F.3d 551 (7th Cir. 1997).     The

Court, therefore, rejects respondent's argument that the agreed

order of September 4, 1992, constituted a designation within the

purview of section 71(b)(1)(B).    Accordingly, as to one-half of

the withdrawals by Ms. Jaffe during 1994, section 71(b)(1)(B)

does not apply to make those withdrawals nondeductible by the

payor-spouse nor preclude such withdrawals from being included in

the gross income of the recipient spouse, Ms. Jaffe.
                              - 13 -


     The Court finds it unnecessary to pass upon the requisites

of section 71(b)(1)(C) and (D) because no questions were raised

by the parties as to those provisions.   It is the Court's

holding, therefore, that one-half of the $18,500 withdrawn by Ms.

Jaffe from the Vanguard account during 1994 constituted alimony

under section 71(a), and, therefore, such amount is includable in

her gross income for 1994.   Correspondingly, that same amount is

deductible by Mr. Jaffe under section 215(a).

The Dividend Income Issue.

     The dividend income at issue arises from the aforementioned

Vanguard Account.   The dividend income earned by the Vanguard

Account from January 1, 1994, through the close of 1994 totaled

$15,543.   The Vanguard Group issued a Form 1099-DIV (Form 1099)

to "Nancy Akbari and Susan Gantman, Escrow Agents, Irv C. Jaffe

and Arlene Jaffe", for 1994, reporting $15,543.37 in ordinary

dividends earned on the Vanguard Account for 1994.   The Form 1099

referenced Mr. Jaffe's taxpayer identification number.   Neither

Mr. Jaffe nor Ms. Jaffe reported this income on their respective

Federal income tax returns for 1994.   Neither petitioner disputes

that the Vanguard Account earned $15,543 in dividend income

during 1994.

     Section 61(a) provides that gross income includes "all

income from whatever source derived," unless otherwise provided.

More specifically, section 61(a)(7) provides that dividends are
                               - 14 -


included in gross income.   A fundamental principle of tax law is

that income is taxed to the person who earns it, when he earns it

or derives it from property he owns.    See Commissioner v.

Culbertson, 337 U.S. 733, 739-740 (1949); Lucas v. Earl, 281 U.S.

111 (1930).   Moreover, determining the ownership of property is a

question of fact.    See Hang v. Commissioner, 95 T.C. 74, 80

(1990).   The actual control over the property and the enjoyment

of profits from such property are of paramount importance in

establishing ownership.   See Taylor v. Commissioner, 27 T.C. 361,

368 (1956), affd. 258 F.2d 89 (2d Cir. 1958).

     The entire balance of the Vanguard Account, with the

exception of $98,000, was awarded to Ms. Jaffe in the property
                                             5
settlement order dated September 13, 1994.       Consequently, after

the date of divorce, Ms. Jaffe clearly held exclusive ownership,

control, and enjoyment of the Vanguard Account, and, thus, any

income earned by the account after this date is includable in her

1994 gross income.   Accordingly, the Court holds that the

dividend income earned by and paid to the Vanguard Account after




5
     The $98,000 awarded to Mr. Jaffe was removed from the
Vanguard Account shortly after the date of divorce; thus, the
Court does not consider any dividends earned on this $98,000
between the date of divorce and the date of the funds' removal
from the account to be significant. Moreover, any dividends so
earned were paid to the Vanguard Account after the date of
divorce and, thus, were under the exclusive ownership, control,
and enjoyment of Ms. Jaffe.
                                - 15 -


September 13, 1994, i.e., $4,045.69, is includable in the gross

income of Ms. Jaffe for 1994.

      However, until the date of the divorce, the Vanguard

Account was owned by Mr. Jaffe and Ms. Jaffe as tenants by the
                                                        6
entirety, as noted earlier, until September 13, 1994.       Moreover,

until the date of divorce, the Vanguard Account was marital

property subject to equitable distribution by the Court of Common
      7
Pleas.


6
     There is no evidence in the record to indicate that either
Mr. Jaffe or Ms. Jaffe held greater than an undivided one-half
interest in the Vanguard Account due to a disproportionate
contribution of assets.
7
     There is apparently no dispute that the Vanguard account was
"marital property" under Pennsylvania law, which is defined as:

     all property acquired by either party during the marriage,
     including the increase in value, prior to the date of final
     separation, of any nonmarital property acquired pursuant to
     paragraphs (1) and (3), except:

          (1) Property acquired prior to marriage or property
          acquired in exchange for property acquired prior to the
          marriage.

          (2) Property excluded by valid agreement of the parties
          entered into before, during or after the marriage.

          (3) Property acquired by gift, except between spouses,
          bequest, devise or descent.

          (4) Property acquired after final separation until the
          date of divorce, except for property acquired in
          exchange for marital assets. * * *

23 Pa. Cons. Stat. Ann. sec. 3501(a) (West 1991). Further, "All
real or personal property acquired by either party during the
                                                   (continued...)
                             - 16 -


     All dividends earned by the Vanguard Account were credited

to the account on a monthly basis, at the end of each month, and

were therefore available for enjoyment by both account owners,

i.e., Mr. Jaffe and Ms. Jaffe, and subject to equitable
                                               8
distribution, up to the date of the divorce.       On the date of the

divorce, dividends totaling $11,497.31 had been credited to the

Vanguard Account since the beginning of 1994.      Since Mr. Jaffe

and Ms. Jaffe each owned and enjoyed a one-half interest in the

Vanguard Account up to the date of divorce, both Mr. Jaffe and

Ms. Jaffe, equally, earned the subject $11,497.31 in dividends.

Up to the date of the divorce, both Mr. Jaffe and Ms. Jaffe,



7
 (...continued)
marriage is presumed to be marital property regardless of whether
title is held individually or by the parties in some form of co-
ownership such as joint tenancy, tenancy in common or tenancy by
the entirety." Id. sec. 3501(b). This section provides further
that the presumption of marital property may be overcome by
showing that the property was acquired by any of certain methods,
including those listed as (1) through (4) above.
8
     Mr. Jaffe argued that the Vanguard Account was not available
for his enjoyment in 1994 due to the Court of Common Pleas'
freezing the assets of such account. Mr. Jaffe's argument
overlooks the fact that the Vanguard Account was held by him and
Ms. Jaffe as tenants by the entirety, thereby affording each
spouse a right of survivorship over the assets of the account.
Thus, had Ms. Jaffe died prior to the issuance of the divorce
decree, exclusive ownership and enjoyment of the entire balance
of the Vanguard Account would have passed to Mr. Jaffe by
operation of law, and vice versa. Both Mr. Jaffe and Ms. Jaffe
maintained ownership and enjoyment of the Vanguard Account,
despite the freezing of assets by the Court of Common Pleas,
until such time as the tenancy by the entirety was severed by the
divorce decree.
                             - 17 -


through their tenancy by the entirety ownership status, had equal

control over the dividends earned by the Vanguard Account.

     Accordingly, one-half of the $11,497.31 in dividend income

credited to the Vanguard Account from January 1, 1994, through

August 31, 1994, is includable in the gross income of Mr. Jaffe

for 1994, and, likewise, one-half of such dividend income is

includable in the gross income of Ms. Jaffe for 1994.




                                        Decisions will be entered

                                   under Rule 155.
