Cologne v. Commissioner

MEMORANDUM OPINION

*122 [1] COHEN, CHIEF JUDGE: Respondent determined a deficiency in petitioner's Federal income tax in the amount of $ 11,032 for the taxable year 1994. By amendment to the answer, respondent asserts an increased deficiency in the amount of $ 14,297. The issue for decision is whether petitioner is entitled to deduct as alimony certain amounts paid in accordance with a marital settlement agreement.

[2] This case was submitted fully stipulated under Rule 122. Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the year in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure. The stipulated facts are incorporated herein by this reference. Petitioner's brief contains statements and attachments that were not stipulated and are not evidence. See Rule 143(b). We disregard these in making our decision.

BACKGROUND

[3] Petitioner resided in La Quinta, California, at the time he filed the petition in this case. *123 Petitioner formerly was married to Patricia R. Cologne (Ms. Cologne). Petitioner and Ms. Cologne separated on March 21, 1993. On November 19, 1993, petitioner and Ms. Cologne entered into a marital settlement agreement (the agreement), which was filed with the Superior Court of the State of California for the County of San Diego on December 29, 1993.

[4] Pertinent portions of the agreement are as follows:

RECITALS

               * * * * *

     6. Husband is presently the sole proprietor of Gordon

   Cologne and Associates. This business has an estimated pre-tax

   net income of $ 19,500.00 per month. Wife is presently unemployed

   and has no earned income. Husband will retire on or about

   September 1, 1994, after reaching the age of 70, and anticipates

   receiving no earned income after that date.

               * * * * *

DIVISION OF COMMUNITY PROPERTY

               * * * * *

     12. The real property commonly known as * * * Rancho Santa

   Fe, California, shall be disposed of according to the following

   terms:

     A. The residence shall*124 be listed for sale * * * on or

   before February 1, 1994. * * * The residence shall remain listed

   until sold. * * *

               * * * * *

     C. Wife may have the use and possession of the residence on

   the condition that she maintain the residence and yard in

   satisfactory condition, normal wear and tear excepted. Husband

   shall have the right to occupy the residence for principal

   residential use purposes, including sleeping, cooking and eating

   and attending to his personal hygiene needs. In case of any

   dispute, Wife shall have the first right to occupy the premises.

   Husband shall also have the right to store any items of personal

   property awarded to him in the premises until the sale is

   consummated.

               * * * * *

     E. Until the sale of the residence is consummated or until

   September 1, 1994, whichever first occurs, Husband shall pay on

   a current basis, without the right to reimbursement, real

   property taxes, principal and interest payments on the notes

   secured by deeds of trust on the residence and fire and

   liability insurance for the residence. *125 In addition, Husband

   shall pay on a current basis all charges for trash pickup, the

   water bill, and the gardener for one day a week, and pool

   maintenance. If the house is not sold by September 1, 1994, and

   the Wife continues to reside in the house, the Wife shall pay

   all the aforesaid taxes, principal and interest on the notes,

   insurance and maintenance costs as and for reasonable rental for

   such use or the actual fair rental value, whichever is less. If

   the sale of the residence is not consummated on or before

   September 1, 1994, the court shall have the jurisdiction to make

   further orders regarding occupancy and the payment of the

   mortgages, real property taxes, insurance, trash pickup, water,

   gardener and pool maintenance * * *.

               * * * * *

     H. The net proceeds of sale, * * * shall be held in escrow

   and disbursed as follows:

        (1) Husband shall be paid a sum equal to all payments

     made by him on or after April 1, 1993, on * * * [certain

     charge, credit card, and loan balances, except for

     purchases made by petitioner after April 1, 1993];

*126         (2) The Wife shall be paid a sum equal to all payments

     made by her on or after April 1, 1993, on * * * [certain

     charge, credit card, and loan balances, except for

     purchases made by Ms. Cologne after April 1, 1993].

        (3) Any remaining balance due on the obligations

     described in paragraphs (1) and (2) above shall be paid in

     full.

        (4) Any balance remaining shall be paid one-half to

     each party and Wife shall pay to Husband from her one-half,

     her share of the 1993 income tax obligation as set forth in

     Paragraph 16.

                * * * *

     13. The real property in Blue River, Wisconsin, shall be

   disposed of according to the following terms:

     A. The parties shall continue to hold such property as

   joint tenants with right of survivorship. Either party may

   terminate the joint tenancy at any time. At such time both

   parties shall make testamentary provisions so that the property

   will pass to the children of this marriage if a party should die

   prior to its sale.

               * * *127 * * *

     C. Both parties shall have the right of use and possession

   of the residence. In case of a conflict, Wife shall have the

   first right to any two-week period she chooses upon providing

   Husband thirty days' advance written notice.

               * * * * * *

     E. Wife shall pay on a current basis, without the right to

   reimbursement, principal and interest payment on the note

   secured by the first deed of trust. Husband shall pay on a

   current basis, without the right to reimbursement, real property

   taxes on the residence, fire and liability insurance for the

   residence, utilities, maintenance and repairs. All income

   received on account of the property shall be applied to the

   obligation owed to W. Southard and any remaining balance shall

   be paid one-half by each party. Any earnings remaining after

   payment to W. Southard shall be divided equally between the

   parties.

               * * * * *

     15. The Husband's interest in the Judge's Retirement Plan

   and in the Legislator's Retirement Plan shall be divided equally

   between the parties. * * * Pending*128 each plan's direct payment of

   benefits to Wife, Husband shall allow the Wife to receive for

   deposit in a joint account the entire retirement benefits in

   lieu of the division of these benefits and the spousal support

   as provided in paragraph 34 of this agreement. She may withdraw

   all such sums for her personal use as an assignment in

   satisfaction of spousal support.

               * * * * * *

     16. The parties shall file joint federal and state tax

   returns for the calendar year ending 1993. * * * Any tax

   liability due and unpaid upon the filing of the tax return shall

   be paid by the Husband, and the Wife shall reimburse the Husband

   her share of the tax based on the net income (retirement income

   actually received) received by her during the year. * * *

               * * * * *

DEBTS

             *   *   *   *   *

     30. Husband and Wife shall each pay fifty percent (50%) of

   all liabilities and expenses (including accounting and legal

   fee) relating to any tax liabilities asserted by Federal, State

   or local taxing authorities*129 arising out of any review of the

   parties' personal income tax returns for any period when they

   filed joint returns except for tax year 1993 which is governed

   by paragraph 16. Each party shall, however, be solely

   responsible for the liabilities and expenses resulting from

   income known only to and solely benefiting said party.

               * * * * *

SPOUSAL SUPPORT

     34. Husband shall pay Wife * * *, as and for spousal

   support the sum of $ 3,000.00 per month on the 1st day of each

   month commencing November 1, 1993, and continuing until Husband

   dies, Wife dies, Wife remarries, Wife commences residing with an

   unrelated member of the opposite sex, or until Husband retires

   on September 1, 1994, whichever shall first occur.

   During 1994, petitioner made the following payments pursuant to

   the agreement:

*130 Petitioner deducted $ 71,273 as alimony on his 1994 Federal income tax return.

[5] The parties have stipulated that an alimony deduction is allowed for the following payments totaling $ 36,465: Spousal support of $ 25,950, life insurance premiums of $ 1,920, waste management of $ 1,804, and January and February pension payments of $ 6,791. Remaining in dispute are the payments of Ms. Cologne's half of the 1993 Federal and State income taxes and payment of the utilities for the Wisconsin property.

DISCUSSION

[6] Section 215 allows as a deduction an amount equal to the alimony or separate maintenance payments paid during the year. For purposes of section 215, the term "alimony or separate maintenance payment" means any alimony or separate maintenance payment (as defined in section 71(b)) that is includable in the gross income of the recipient under section 71. See sec. 215(b). Section 71(a) provides that gross income generally includes amounts received as alimony or separate maintenance payments. Section 71(b)(1) defines alimony or separate maintenance payment as any payment in cash if --

     (A) such payment is received by (or on behalf of) a spouse

   under a divorce or *131 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.

California Family Code section 4337 (West 1994) provides: "Except as otherwise agreed by the parties in writing, the obligation of a party under an order for the support of the other party terminates upon the death of either party or the remarriage of the other party."

[7] The parties dispute whether the payments at issue meet the requirement of section 71(b)(1)(D). The parties agree that the agreement does not provide*132 any conditions for the termination of these payments. Respondent's position is that petitioner's obligations to pay Ms. Cologne's share of their 1993 income taxes and for the utilities for the Wisconsin property survive her death. Petitioner argues that petitioner's liability for the payments terminates at her death pursuant to California Family Code section 4337.

FEDERAL AND STATE INCOME TAX PAYMENTS

[8] Because the income tax liabilities are joint and several, if Ms. Cologne died, petitioner would remain liable for the full amount of their taxes to the respective tax collectors. See sec. 6013(d)(3). Normally, however, petitioner would be entitled to the right of contribution for Ms. Cologne's half of the taxes. Petitioner, through the agreement, has given up that right (beyond the limited share specified). The question we must decide is whether, if Ms. Cologne died, petitioner would still be obligated for Ms. Cologne's half of the joint liabilities without the right of contribution (beyond the share specified). As this question is not answered by the agreement and the payment of taxes is not the usual type of support expense, such as food, shelter, or medical care, that necessarily*133 ends with the payee spouse's death, we look to State law.

[9] California Family Code section 4337 (West 1994) serves to terminate spousal support at the payee spouse's death, where the parties have not otherwise agreed. California law distinguishes payments for support from those for property settlement. In setting spousal support, the California court considers, among other factors, each party's earning capacity, the needs of each party based on the standard of living during the marriage, the payor spouse's ability to pay, the obligations and assets of each party, the duration of the marriage, and the age and health of the parties. See Cal. Fam. Code sec. 4320 (West 1994).

[10] Division 7 of the California Family Code governs the division of debts and liabilities and that of property. See Cal. Fam. Code sec. 2500-2660 (West 1994). Both assets and liabilities are considered in dividing the community estate. See Cal. Fam. Code sec. 2552 (West 1994).

[11] The allocation of the liability for the 1993 income taxes between petitioner and Ms. Cologne was based on their relative incomes for the year. Petitioner has not shown that the allocation was based on their relative needs, standards*134 of living, or earning capacities when the taxes would be paid or on any other factors normally taken into consideration in determining support. The agreement provided that petitioner would be reimbursed for Ms. Cologne's smaller share out of the net proceeds, if any, of the sale of the residence remaining after other debts were paid. The division of the couple's tax liabilities is in the nature of a property settlement, rather than a provision for the future support of Ms. Cologne. Accordingly, section 4337 of the California Family Code (West 1994) does not operate to terminate these payments at Ms. Cologne's death, and the requirement of section 71(b)(1)(D) is not met. Petitioner is not entitled to an alimony deduction for the payments of his former spouse's 1993 Federal and State income tax liabilities.

PAYMENT OF UTILITIES FOR WISCONSINPROPERTY

[12] Pursuant to the agreement, petitioner and Ms. Cologne owned the Wisconsin property as joint tenants with right of survivorship. Both had the right of use and possession of the property, and his liability for utility bills would be continued after her death. While she occupied the property, however, the utility charges related to her*135 use of it. We have allowed alimony deductions for utilities. See Graham v. Commissioner, 79 T.C. 415 (1982); Zampini v. Commissioner, T.C. Memo 1991-395. We hold that petitioner is entitled to deduct half of the amount paid, or $ 610.77.

[13] To reflect the above holdings and the parties' stipulations,

[14] Decision will be entered under Rule 155.