Appeal from a judgment entered in the United States Tax Court, Fay, J., holding taxpayer-appellant liable for deficiencies in federal income taxes resulting from deductions taken in earlier years. The tax court held that the deductions of amounts paid pursuant to a divorce decree were improper under sections 71 and 215 of the Internal Revenue Code, 26 U.S.C. §§ 71, 215, and under Treas. Reg. § 1.71-1(d). Reversed.
Oakes, Meskill and Pierce, Circuit Judges.
This appeal presents us with questions arising out of the interaction of sections of the Internal Revenue Code (Code) that outline the deductibility of certain alimony payments with state law concepts that define the duration and effect of the terms of a divorce decree. Specifically, we must decide whether, under Connecticut law, alimony payments are presumed to cease upon the death of the payor spouse and are thus, in the absence of any express provisions to the contrary, sufficiently "contingent" to be deductible from the payor spouse's taxable income pursuant to sections 71 and 215 of the Code, 26 U.S.C. §§ 71, 215,*fn1 and Treas. Reg. § 1.71-1(d), 26 C.F.R. § 1.71-1(d) (1987). The United States Tax Court, Fay, J., held that the payments at issue in this case were not sufficiently contingent and ordered the taxpayer to pay back taxes owed by virtue of improper deductions in previous years. See Kimball v. Commissioner, 1987 T.C. Memo 462, 54 T.C.M. (CCH) 513 (1987). For the following reasons, we now reverse.
The facts are not in dispute. In May 1980, taxpayer-appellant Justin H. Kimball was divorced from his former wife, Barbara Kimball, by a consent decree entered in a Connecticut state court. The decree provided that Mr. Kimball would pay Mrs. Kimball alimony in the amount of $18,000 per year for six years and that "there shall be no motion to reduce the alimony based upon [a] material change in circumstances for a period of three (3) years from the date of this judgment." See J. App. 44-45. The decree further provided that either party could seek a modification in the alimony payments on the basis of "a material change in circumstances" during the last three years of the six year payment period. See id. at 45.
On the day the divorce decree was agreed upon and entered, the Kimballs appeared in Connecticut Superior Court before Judge Novack. Mrs. Kimball asked the judge to explain the provisions regarding modification of the alimony. Judge Novack said:
You filed a financial affidavit, and your husband has. That will be the base for the determination by the court at a later time if a motion is brought by you or your husband, as to whether or not there is a material change of circumstances. You'll each be required to file a financial statement at that time if either party makes a motion. And the court at that time will compare to see what the circumstances are, to see if there has been a change.
Id. at 54-55. Mrs. Kimball asked further questions and Judge Novack, apparently attempting to provide an example, said:
Your husband could die and that would be a material change in circumstances, and it could be extinguished. And it would not be an expense of his estate. But he's got insurance for that purpose. And he's agreeing to carry insurance.
Acting pursuant to the divorce decree, Mr. Kimball thereafter paid his ex-wife $10,500 in alimony in 1980 and $19,930 in 1981. When he completed his federal income tax returns for those years, he entered deductions in those amounts pursuant to section 215 of the Code. Subsequently, the Commissioner of the Internal Revenue Service (the Commissioner) disallowed the deductions, claiming that the payments made by Mr. Kimball to Mrs. Kimball did not constitute properly deductible alimony under sections 71 and 215 of the Code and regulations promulgated thereunder. The Commissioner increased Mr. Kimball's taxable income accordingly in both tax years--also making resulting adjustments in other deductions--and filed notices of deficiency totaling $15,447.70.
The taxpayer then petitioned the tax court for relief pursuant to 26 U.S.C. § 6213 (1982 & Supp. IV 1986). The tax court, however, upheld the Commissioner's determination, holding that the payments at issue were not properly deductible. In sum, the tax court held that the payments could not constitute deductible alimony because the decree itself precluded any changes in the payments for the first three years. Thus, the court held, the agreement did not contemplate adjustments for such contingencies as death, remarriage or a change in economic ...