Monday, December 27, 2010

Grandma's Wedding - Grandpa Celebrates

Michael Walter Bragg v. Commissioner, TC Summary Opinion 2010-172

In some recent posts, I've taken to rooting for one side or the other.  As I was reading the facts in this one, I was definitely with the taxpayer.  He was in tax court representing himself over a $937 deficiency.  At issue was an alimony deduction of $6,340 (which locates Mr. Bragg right in the 15% bracket I guess).

Here is the story.  Michael Bragg was divorced from Rosalie Bragg in 2002.  Although the decree called for him to pay $9,600 per year she had informally agreed to accept a lesser amount.  After the informal agreement they probably didn't communicate all that much.  At some point in 2006, she remarried.  She did not mention that to her ex-husband.  Finally, in December 2007, her grandson ratted her out (The court didn't put it that way, but I think it adds to the drama).  Mr. Bragg ceased making payments.
Under the law in the state of Washington, the obligation to make spousal support payments automatically ceases when the spouse being supported remarries (I think that that may be true in all states).

The IRS disallowed Mr. Bragg's alimony deduction for the year 2007, because he was not under any legal obligation to make the payments.  There isn't any mention of whether they issued the former Mrs. Bragg a refund (Of course maybe she wouldn't be entitled to one.  Much as we accountants like everything to balance, the tax law does admit of asymmetrical results.) So how would you rule ?  I want you to share the suspense for a moment.  This one had me on the edge of my seat.

The IRS argument was :

Despite the fact that petitioner falls within the provisions of the applicable Federal statute, respondent argues that because Ms. Bragg remarried in 2006, petitioner's legal obligation to pay spousal maintenance terminated as a matter of Washington State law; thus, respondent contends that the payments were not received under a divorce instrument as required by section 71(b)(1)(A).

The Tax Court found for Mr. Bragg :

Respondent's (IRS) legal argument has as its foundation old law and does not reflect amendments to the statute. Although there certainly have been cases holding that voluntary payments made outside a written instrument incident to divorce are not alimony, those cases have generally dealt with situations where there was no proper divorce decree or separation agreement, where a payment was made before the operative document went into effect, or where the older version of section 71 applied to the particular case.

The more recent regulation requires only that alimony payments meet the following requirements: (a) That payments be made in cash; (b) that payments not be designated as excludable from the gross income of the payee and nondeductible by the payor; (c) that payments be made between spouses who are not members of the same household;

The court's finale is beautiful:

More than 25 years after the enactment of the amended statute, there is no reason to assume that Congress meant anything other than what it said in enacting the present version  Equip. Corp. v. Commissioner, 98 T.C. 141, 149 (1992). of section 71. It is not the Court's place to support respondent's attempt to include language Congress itself did not.

We have no way of knowing whether the former Mrs. Bragg is still speaking to her grandson. For the life of me, I can't figure out why the IRS bothered with this case. 

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