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Tax Litigation: The Week of May 16th, 2022, through May 20th, 2022
Ibrahim v. Commissioner, TC Summary Opin. 2022-7| May 16, 2022 | Weiler, J. | Dkt. No. 10750-20S
Summary: Dr. Jihad Y. Ibrahim (“Ibrahim”) and his wife, Cheryl Edington (“Edington”) separated in year 2016 and ultimately divorced in 2017. As part of the separation agreement that was approved by a state court during the divorce proceeding, Ibrahim agreed to pay Edington $50,000 to assist in her relocation and legal fees. The amount was payable in monthly installments, but the balance was to be paid in full at the time a final decree was entered. The marital agreements and the judgment each contained statements indicating that neither Ibrahim nor Edington would pay maintenance to the other. Ibrahim paid $1,200 to Cheryl in 2016 and $48,800 in 2017. On his 2017 Form 1040, and pursuant to 26 U.S.C. § 215(a) (repealed), Ibrahim claimed a $50,000 deduction for “Alimony paid.” Upon examination of that return, the IRS disallowed the claimed $50,000 alimony or separate maintenance deduction and assessed an accuracy-related penalty. Ibrahim challenged that determination.
- Whether the $50,000 paid, or portion thereof, was deductible by Ibrahim pursuant to section 215(a) of the Internal Revenue Code?
- Whether the accuracy-related penalties were properly assessed against Ibrahim?
- The applicable marital agreements and court orders stated that neither Ibrahim nor Edington would pay maintenance to the other, and thus, Ibrahim could not deduct the $50,000 for relocation and legal fees as alimony, as defined in the I.R.C. And, Ibrahim failed to demonstrate that the payments of $50,000 were made because of an “obligation to pay future statutory maintenance,” as defined by state law.
- The IRS showed it complied with the requirements of section 6751(b) for assessing accuracy-related penalties and that Ibrahim “did not act with reasonable cause or in good faith, by claiming a deduction for maintenance payments when the agreement, amended agreement, and judgment clearly stated that neither party in the divorce was entitled to receive maintenance from each other.”
Key Points of Law:
- Repeal of 26 U.S.C. §§ 62(a)(1), 71, and 215. Congress repealed sections 62(a)(10), 71, and 215 for all divorce or separation agreements executed or modified after December 31, 2018. See IRS Topic No. 452 Alimony and Separate Maintenance. The marital agreements in Ibrahim were not affected by Congress’s repeal.
- As a general rule, the IRS’s determination of a taxpayer’s liability in a notice of deficiency is presumed correct, and the taxpayer bears the burden of proving that the determination is incorrect. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). Deductions are a matter of legislative grace, and the taxpayer bears the burden of proving entitlement to any deduction claimed. Rule 142(a); INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992); New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934). The burden of proof may shift to the IRS when the taxpayer has introduced credible evidence with respect to any factual issue relevant to ascertaining the liability of the taxpayer for any tax. 26 U.S.C. § 7491(a)(1)-(2).
- Deduction of Alimony. Generally, if a taxpayer pays alimony or separate maintenance as defined in section 71(b), then the taxpayer may deduct those payments from gross income if the amounts are includible in the gross income of the recipient under section 71. I.R.C. §§ 62(a)(10), 215(a) and (b).
- Definition of Alimony for Deduction Purposes. “Alimony or separate maintenance payment” is defined as any payment in cash that satisfies each of the following four requirements: (A) the payment is received by a spouse under a divorce or separation instrument; (B) the divorce or separation instrument does not designate the payment as a payment that is not includible in gross income under section 71 and not allowable as a deduction under section 215; (C) in the case of an individually legally separated from his or her spouse under a decree of divorce or of separate maintenance, the payee spouse and the payor spouse are not members of the same household when the payment is made; and (D) there is no liability to make the 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. I.R.C. §§ 71(b), 215(b); Okerson v. Commissioner, 123 T.C. 258, 263–64 (2004).
- To satisfy requirement (B), it is not necessary for the divorce instrument to use the exact statutory text of sections 71 and 215. Rather, that requirements will generally be met if there is no “clear, explicit and express direction” in the divorce decree stating that the payment is not to be treated as an alimony or separate maintenance payment. Proctor v. Commissioner, 129 T.C. 92, 96 (2007).
- To satisfy requirement (D) there must be no liability for the payor to make such payments, or for the payor to make substitute payments, after the death of the payee spouse. This is determined by evaluation of the termination provisions in the applicable divorce instrument or, if the instrument is silent on the issue, by evaluation of state law. If state law is ambiguous as to the termination of payments upon the death of the payee, the Tax Court will look solely to the divorce instrument to determine whether the payments would terminate at the payee’s death. Logue v. Commissioner, T.C. Memo. 2017-234, at *8–9. A taxpayer may rely upon state law to comply with section 71(b)(1)(D). See Johanson v. Commissioner, 541 F.3d 973, 976–77 (9th Cir. 2008), aff’gC. Memo. 2006-105; Kean v. Commissioner, 407 F.3d 186, 191 (3d Cir. 2005), aff’g T.C. Memo. 2003- 163.
- Accuracy-Related Penalties and Burdens of Proof. Section 6662(a) and (b)(2) imposes a penalty equal to 20% of any portion of an underpayment of tax required to be shown on a return that is attributable to a substantial understatement of income tax. An understatement is “substantial” if it exceeds the greater of 10% of the tax required to be shown on the return for the taxable year or $5,000. I.R.C. § 6662(d)(1)(A). The IRS has the burden of production with respect to any penalty asserted against an individual. See id. at § 7491(c); Higbee v. Commissioner, 116 T.C. 438, 446–47 (2001). The IRS’s initial burden of production under section 7491(c) includes producing evidence of compliance with the procedural requirements of section 6751(b). Frost v. Commissioner, 154 T.C. 23, 34 (2020). After the IRS has satisfied this initial burden, the taxpayer must come forward with any contrary evidence. See alsoR.C. § 7491(c); Graev v. Commissioner, 149 T.C. 485, 492–93 (2017), supplementing and overruling in part 147 T.C. 460 (2016). Once the IRS meets his burden of production, the taxpayer bears the burden of proving that the IRS’s determination is incorrect. Higbee, 116 T.C. at 446–47.
- No penalty shall be assessed unless “the initial determination” of the assessment was “personally approved (in writing) by the immediate supervisor of the individual making such determination.” I.R.C. § 6751(b)(1).
- Reasonable Cause and Good Faith. A taxpayer may avoid a section 6662(a) penalty by showing that there was reasonable cause for the underpayment and that the taxpayer acted in good faith. 26 U.S.C. § 6664(c)(1). The determination of whether a taxpayer acted with reasonable cause and in good faith is made on a case-by-case basis, taking into account all of the pertinent facts and circumstances, including the taxpayer’s efforts to assess the proper tax liability and the taxpayer’s knowledge, experience, and education. Reg. § 1.6664-4(b)(1). The taxpayer bears the burden of showing that the underpayment was due to reasonable cause or that some other exception to the imposition of the penalty applies. Higbee, 116 T.C. at 446.
- Reliance on Authority for Tax Position. If a taxpayer relies upon authority for a particular tax position taken, the taxpayer must show that the weight of the authorities supporting the tax return treatment of an item is substantial in relation to the weight of authorities supporting contrary treatment. Antonides v. Commissioner, 91 T.C. 686, 702 (1988), aff’d, 893 F.2d 656 (4th Cir. 1990); Treas. Reg. § 1.6662-4(d)(3)(i).
Insights: Congress repealed sections 62(a)(10), 71, and 215 for all divorce or separation agreements executed or modified after December 31, 2018. For divorce or separation agreements that are not affected by the repeal, and before claiming a deduction on what is believed to be alimony, a taxpayer should closely evaluate all applicable divorce decrees and separation agreements to ensure that each of the four requirements of I.R.C. §§ 71(b) and 215(b) are met.