In Uncategorized on 08/16/2011 at 16:44

Readers of E. M. Forster’s 1924 classic novel “A Passage to India” will remember the chant of the Indians outside the courtroom, where Dr. Aziz’s trial for attempted assault on Miss Quested proceeds, without what they believe is the ultimately exculpatory evidence. They are certain that the testimony of Mrs. Moore, mother of Magistrate Heaslop, would clear their beloved compatriot of this cruel and baseless charge. But Mrs. Moore lies dead at sea, having died on her passage back to England.

So they chant “Esmiss Essmoore, Essmiss Essmoore,” invoking the spirit of the one they believe will bring the truth and justice to light.

Now Judge Vasquez finds that another Essmiss Essmoore, this time a divorced and living spouse, got a final payment from her former husband that was not alimony; but IRS magnanimously concedes the Section 6662(a) accuracy penalty, in James F. Moore, 2011 T.C. Memo. 200, filed 8/16/11.

Jim and Mrs Moore split in 1996. The divorce decree provided that Jim would make all mortgage payments on the marital residence back home in Indiana, possession of which was awarded to Mrs Moore. Jim got the deductions for the periodic payments of interest and taxes. If, as and when Mrs Moore sold, she would pay off the mortgage and Jim would pay her back whatever principal and accrued interest she paid to the lender. The decree said Jim would hold Mrs Moore harmless from any tax consequences. Most importantly, the decree said nothing about payments ceasing with the death of Mrs Moore.

Mrs Moore sold and paid off the mortgage, but Jim appealed (grounds not stated; probably meant petitioned the Court to amend the earlier decree and had to appeal the denial below). He settled with Mrs Moore, only having to pay her $20K and not the $74K she paid to the mortgagee on the sale.

Jim claims alimony and takes a Section 215 deduction. IRS says no; in the first place, the decree states that Mrs Moore has no income tax obligations with respect to any payments. Jim argues that means only periodic installments of principal, interest and taxes, not the final payoff, but Judge Vasquez doesn’t rule on the point.

The IRS’s second “no” is what decides the case; Section 71(b)(1)(D), the “no payment after death of payee” provision, sinks Jim. No use in chanting “Essmiss Essmoore”.

Here’s Judge Vasquez’s unpacking of the law: “If the divorce instrument is silent as to the existence of a postdeath obligation, the requirements of section 71(b)(1)(D) may still be satisfied if the payments terminate upon the payee spouse’s death by operation of State law. If State law is ambiguous in this regard, however, a ‘federal court will not engage in complex, subjective inquiries under state law; rather, the court will read the divorce instrument and make its own determination based on the language of the document.’

“The divorce decree is silent as to whether petitioner’s obligation to reimburse Ms. Moore terminates in the event of Ms. Moore’s death. Thus, we consider whether the obligation to make payments terminates upon Ms. Moore’s death by operation of Indiana law.

“Indiana statutory law is silent as to whether the obligation to make maintenance payments terminates on the death of the payee spouse. The parties point us to no caselaw, and we have discovered none, that expressly states whether the obligation of maintenance terminates upon the death of the payee spouse. Therefore, we conclude that Indiana law is ambiguous.

“Finally, faced with a silent divorce decree and no State law resolution of the question, we independently review the decree to make our own determination as to the satisfaction of the section 71(b)(1)(D) requirement. We do not read the decree as requiring the termination of payments in the event of Ms. Moore’s death. Under the decree, petitioner’s obligation is terminated only by satisfaction of the mortgage or reimbursement to Ms. Moore of the mortgage payoff amount. In fact petitioner stated that the termination of the payments was tied to the mortgage payoff period and not a particular need of Ms. Moore.” 2011 T.C. Mem. 200, at pp. 5-8. [citations and footnotes omitted.]

So no deduction for Jim.

Note to matrimonial lawyers: unless there’s a reason to continue payments after death of payee spouse, state that all payments to payee spouse cease upon death of said spouse. Otherwise you’ll be standing outside Tax Court, disconsolately chanting “Esmiss Essmoore, Esmiss Essmoore”.

Edited to add, 9/11/21: Jim sought rearugment, and lost, in 2011 T.C. Memo. 265, 11/8/11. See also my blogpost “Same Again?” 11/8/11.


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