West v. Dep't of Revenue, TC-MD 160254N

CHARLES T. WEST, JR., Plaintiff, v. DEPARTMENT OF REVENUE, State of Oregon, Defendant.

TC-MD 160254N

OREGON TAX COURT MAGISTRATE DIVISION Income Tax

May 2, 2017

FINAL DECISION¹

Plaintiff appeals Defendant's Conference Decision Letter and Notice of Assessment, dated April 8, 2016, for the 2012 tax year. The parties submitted cross-motions for summary judgment and responses. The matter is now ready for decision.

I. STATEMENT OF FACTS

Plaintiff alleges that he is entitled to deduct as alimony two payments made to SELCO Credit Union (SELCO). The parties have stipulated to certain facts and exhibits, which are incorporated herein.

Plaintiff divorced his spouse in Lane County, Oregon in October, 2012. (Ex A at 1.) After a trial, the Lane County Circuit Court issued a General Judgment of Dissolution of Marriage (Judgment of Dissolution) dissolving the marriage and ordering Plaintiff to, among other things, assume two debts owed to SELCO. (Id. at 4.) The first was a "line of credit debt in the sum of approximately $370," and the second was a debt "due to [SELCO] Visa with a balance of approximately $4,700." (Id. at 1.) Plaintiff's ex-spouse was the sole "authorizedsigner" on both SELCO accounts. (Stip Facts at 1.)

The section of the Judgment of Dissolution ordering Plaintiff to assume the two SELCO debts was entitled "Debts and Liabilities." (Ex A at 4.) That section is notably distinct from other sections in the Judgment of Dissolution entitled "Property Division" and "Spousal Support."² (Ex A at 2-5.) The section entitled "Spousal Support" ordered Plaintiff to make monthly support payments to his ex-spouse and includes the following provision: "[p]ayments shall terminate upon Husband's death or Wife's death, whichever shall first occur." (Id. at 5.) The section entitled "Debts and Liabilities" includes no such provision.

During the trial, the judge explained the court's distribution of the "marital debts" as follows: "Wife is ordered to assume the $[16,000],³ roughly, in the second mortgage, and Husband is ordered to assume the $4,727 in the [SELCO] Visa, * * * and the $369 line of credit." (Ex B at 12.) The judge later explained, "The second mortgage is her debt. That's why he got all the other debt." (Id. at 20.)

Plaintiff paid both debts in full during the 2012 tax year, charging each to his personal SELCO Visa account. (Stip Facts at 1.) Plaintiff included both payments in calculating his alimony deduction for tax year 2012. (Ex C at 3.) Defendant issued a Notice of Deficiency for tax year 2012, stating that Plaintiff's payment of the SELCO debt was not deductible under IRC section 71(b)(1) because the obligations listed under the "Debts and Liabilities" heading in Plaintiff's Judgment of Dissolution are "a nontaxable division of marital property." (Ex C at 3.) Plaintiff appealed to the Department of Revenue, where a conference officer reached the sameconclusion and upheld the adjustment. (Ex E at 3.)

II. ANALYSIS

The only issue before the court is whether Plaintiff may claim an alimony deduction for his 2012 payment of the SELCO debt.

The burden of proof falls up the party seeking affirmative relief. ORS 305.427.⁴ Plaintiff is the party seeking affirmative relief and must prove his claim by a preponderance of the evidence, which "means the greater weight of evidence, the more convincing evidence." Feves v. Dept. of Rev., 4 OTR 302, 312 (1971). Deductions are "a matter of legislative grace" and taxpayers bear the burden of proving their entitlement to the deductions claimed. INDOPCO, Inc. v. Comm'r, 503 US 79, 84, 112 S Ct 1039, 117 L Ed 2d 226 (1992). The parties filed cross-motions for summary judgment. Summary judgment is appropriate when "the pleadings, depositions, affidavits, declarations, and admissions on file show that there is no genuine issue as to any material fact and that the moving party is entitled to prevail as a matter of law." Tax Court Rule (TCR) 47 C.

In analyzing the law governing allowable deductions for alimony payments, the court is guided by the legislature's expressed intent "to make the Oregon personal income tax law identical in effect to the provisions of the Internal Revenue Code (IRC) relating to the measurement of taxable income of individuals * * *." ORS 316.007. Generally, transfers of property between spouses incident to a divorce are not taxable events and do not give rise to deductions or recognizable income. Estate of Goldman v. Comm'r, 112 TC 317, 322 (1999), aff'd sub nom Shutter v. Comm'r, 242 F3d 390 (10th Cir 2000); IRC § 1041; ORS 107.105(3)("This transfer by judgment * * * is not a taxable sale or exchange").⁵ However, amounts received as alimony are taxable to the recipient and deductible by the payor in the year paid. IRC §§ 71, 215(a).

Plaintiff's Judgment of Dissolution lists the SELCO debts in the section entitled "Debts and Liabilities" among other equitable distributions of the couple's marital debt. The Judgment of Dissolution has an altogether separate section governing alimony payments entitled "Spousal Support." The document thus "reflects the substance of a nonalimony designation" for the SELCO debts. Goldman, 112 TC at 318. The characterization of payments in a divorce or separation instrument is not dispositive. See Baker v. Comm'r, 79 TCM (CCH) 2050 (2000), 200 WL 656708 at *4 (US Tax Ct) (finding that "the labeling of the payments as a 'property settlement,' with nothing more, is not a clear, explicit, and express direction that the payments * * * are not deductible"); cf. Goldman, 112 TC at 323 (considering the heading "Further Payments for Property Division" relevant to the character of payments in a divorce instrument.) As Plaintiff correctly asserts, "[t]his court has previously held that the labels the parties attach to the payments are not as compelling as their characteristics." (Ptf's Cross-Mot Summ J at 3) (quoting Aday v. Dept. of Rev., TC-MD 050739A, WL 167494 at *1 (Or Tax M Div Jan 17, 2006). However, the way the Judgment of Dissolution is organized indicates, at a minimum, that the SELCO debts are not in the same category as spousal support.

Further, during the divorce trial, the judge ordered Plaintiff to assume the SELCO debts, explaining that these marital debts would be distributed to Plaintiff in order to offset an otherwise unequal debt of a second mortgage on real property awarded to Plaintiff's ex-spouse. The equation is thus made clear: on one side of the exchange is the encumbered home, a piece ofmarital property, while on the other side are the marital debts, distributed to offset the second mortgage on the property. "The second mortgage is her debt. That's why he got all the other debt." (Ex B at 20.) That explanation shows that the SELCO debts more closely resemble part of an equitable property division than alimony.

IRC section 71 sets an objective standard for distinguishing the two types of payments frequently made pursuant to divorce settlements: property division payments (which are not deductible) and spousal support or alimony payments (which are deductible). Goldman, 112 TC at 322. Alimony is defined as "any payment in cash if—

"(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."

IRC § 71(b)(1). Each of those elements must be satisfied before a payment qualifies as alimony. See Sa'd v. Comm'r, 104 TCM (CCH) 784 (2012), 2012 WL 6599015 at *3 (US Tax Ct).

A. Payment Received By or On Behalf Of Spouse

Plaintiff's payments to SELCO satisfy the first prong of the section 71(b)(1) test because they were made to a third party "on behalf of" Plaintiff's ex-spouse. The Ninth Circuit has held that, "[g]enerally, a transfer is considered to have been made 'on behalf of' someone if it satisfied an obligation or a liability of that person." Ingham v. U.S., 167 F3d 1240, 1244 (9th Cir 1999), quoting Arnes v. U.S., 981 F2d 456, 459 (9th Cir 1992). Plaintiff's payment to SELCOsatisfied his ex-spouse's obligation to pay SELCO the debt in her name.

Payments made to a third party on behalf of a spouse may qualify as alimony payments if the payments are made pursuant to a divorce instrument and meet all the other requirements under IRC section 71(b)(1). Treas Reg § 1.71-1T (1984).⁶ However, such payments may also qualify as non-taxable transfers under IRC section 1041, which covers transfers "incident" to divorce. The Treasury Department has issued a temporary regulation providing that, in certain circumstances, "transfers of property to third parties on behalf of a * * * former spouse" qualify for nonrecognition under section 1041(a)(2). Temp Treas Reg § 1.1041—1T at Q-9, A-9 (2003). The regulation supplies an example in which the transfer to a third party, like the one in this case, is required by a divorce or separation instrument. Such a transfer "will be treated as made directly to the nontransferring spouse (or former spouse) and the nontransferring spouse will be treated as immediately transferring the property to the third party." Temp Treas Reg § 1.1041-1T, A-9 (2003); see also Treas Reg 1.71-1T, Q&A #6⁷; see, e.g., Blatt v. Comm'r, 102 TC 77, 80 (1994). The fact that Plaintiff made the payments on behalf of his former spouse is not conclusive on the question of whether those payments were alimony.

B. Designation of...