Stanley T. JOHNSON; Constance Johnson, Petitioners-Appellants, v. COMMISSIONER of INTERNAL REVENUE, Respondent-Appellee., United States Court of Appeals, Ninth Circuit., 441 F.3d 845, No. 04-72322., Filed March 28, 2006
Stanley T. JOHNSON; Constance Johnson, Petitioners-Appellants, v. COMMISSIONER of INTERNAL REVENUE, Respondent-Appellee.
United States Court of Appeals, Ninth Circuit.
441 F.3d 845
Filed March 28, 2006.
Argued and Submitted Feb. 15, 2006.
Filed March 28, 2006.
Heidi Parry Stern, Daniel F. Polsen╜berg, Beckley Singleton, Chtd., Las Vegas, NV, for the petitioners-appellants.
John Schumann, United States Depart╜ment of Justice, Tax Division, Washington, DC, for the respondent-appellee.
Appeal from a Decision of the United States Tax Court. Tax Ct. No. 7415-02.
Before PROCTER HUG, JR., ARTHUR L. ALARCON, and M. MARGARET McKEOWN, Circuit Judges.
ALARCON, Circuit Judge.
Stanley T. Johnson and his present wife, Constance Johnson ("Appellants"), appeal from the United States Tax Court's deci╜sion that there is a deficiency in income tax due from them for the taxable year 1997. The court has jurisdiction pursuant to 26 U.S.C. ╖ 7482. The gravamen of Appellants' argument is that Internal Rev╜enue Code ("I.R.C.") ╖ 71, as amended in 1984 ("new ╖ 71" or the "new law"), should apply to Mr. Johnson's deduction for ali╜mony in the 1997 tax year, rather than the version of I.R.C. ╖ 71 that existed prior to the amendment ("old ╖ 71" or the "old law"). We disagree and affirm the deci╜sion of the Tax Court.
Stanley Johnson was formerly married to Joyce J. Johnson ("Joyce"). Joyce was issued a decree of divorce on May 14, 1976. Mr. Johnson was required to pay alimony to Joyce in amounts ranging from $1,250 per month at the outset to $2,400 per month. On March 16, 1993, Mr. Johnson filed a Motion To Modify The Terms of the Divorce and Terminate Alimony Payments in the Family Division of the Clark County Nevada District Court. Joyce responded by filing a Countermotion to Increase Ali╜mony Payments. On April 14, 1997, the district court released its Findings of Fact and Conclusions of Law. Mr. Johnson then filed a Notice of Appeal to the Supreme Court of the State of Nevada and was granted his Application for Stay Re: In╜crease in Alimony.
Prior to oral argument in the Supreme Court of Nevada, Mr. Johnson and Joyce entered into a Settlement and Release Agreement ("the 1997 Agreement"). It provided that (1) Joyce would dismiss with prejudice her counterclaim to increase ali╜mony payments, (2) the Nevada District Court would not retain jurisdiction over any further claims in the case, 1 and (3) Mr. Johnson would pay $400,000 in one lump-sum no later than Thursday, July 10, 1997. The 1997 Agreement specified that the payment "shall be Stanley's final ali╜mony payment to Joyce and constitute to╜tal and complete liquidation and discharge of all debts Stanley owes to Joyce." The agreement makes no reference to I.R.C. ╖ 71. On July 15, 1997, after Mr. Johnson made the payment pursuant to the 1997 Agreement, Joyce's Countermotion was dismissed with prejudice by the Family Division of the District Court for Clark County, Nevada. The dismissal order also stated that Mr. Johnson had "discharged any and all obligations to pay Joyce alimo╜ny" by the terms of the 1997 Agreement.
1. ═ We express no opinion as to the validity of the clause specifying that the family court is to be deprived of any further jurisdiction over this case.
On their tax return for the 1997 tax year, Appellants claimed a deduction for their alimony payments from their income in the amount of $424,000. The Commis╜sioner disallowed $400,000 of that deduc╜tion, and issued a notice of deficiency de╜termination. Appellants filed a petition in the Tax Court seeking a redetermination of the deficiency. In response to the par╜ties' cross-motions for summary judgment, the Tax Court granted partial summary judgment in favor of the Appellee. 2 The Tax Court determined that "new section 71 is applicable only to divorce instruments executed after December 31, 1984, or mod╜ified after December 31, 1984, where the modified instrument states that the amended version of section 71 will apply." Johnson v. Commissioner , No. 7415-02, slip. op. at 5 (quoting Marten v. Commis╜sioner, 78 T.C.M (CCH) 584, 585 (1999), aff'd sub nom. Commissioner v. Lane, 40 Fed.Appx. 385 (9th Cir.2002)). The Tax Court found "the 1997 Agreement, taken together with the stipulation and dismissal order, constituted a modification of the divorce decree." Id . Accordingly, the Tax Court held that the law applicable to di╜vorce instruments executed before Decem╜ber 31, 1984 applies to the instant case. Id . In its final decision-the Tax Court held that there is a deficiency in tax due from Appellants in the amount of $153,167. The Tax Court's conclusions of law, includ╜ing construction of the tax code, are re╜viewed de novo. Frontier Chevrolet Co. v. Commissioner, 329 F.3d 1131, 1134 (9th Cir.2003).
2. ═ The Tax Court found a triable issue of mate╜rial fact remained "as to what portion, if any, of the $400,000 alimony paid constitutes ar╜rearage." Id . The parties entered into a stipulation providing that $13,750 of the $400,000 payment is deductible as "arrearag╜es" for past due alimony.
Payments are deductible as "alimo╜ny" pursuant to I.R.C. ╖ 215(a). The term "alimony" is defined under I.R.C. ╖ 71. The pertinent part of ╖ 71(b)(1) provides:
(1) In general. The term "alimony or separate maintenance payment" means 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 allow╜able as a deduction under section 215.
(C) in the case of an individual legally separated from his spouse under a de╜cree of divorce or of separate mainte╜nance, 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.
Section 71 was amended by Congress in 1984 as part of the Deficit Reduction Act (DEFRA). The old ╖ 71 provides that payments are only deductible if they are made periodically. I.R.C. of 1954 ╖ 71(a)(1) (current version at 26 U.S.C. ╖ 71 (2006)). 3 However, the language re╜quiring that payments be periodic in order to be deductible is absent in new ╖ 71. I.R.C. ╖ 71. Accordingly, if the old law applies, the $400,000 payment to Joyce is not deductible. It would be deductible under the new law.
3. ═ The old law states:
If a wife is divorced or legally separated from her husband under a decree of divorce or separate maintenance, the wife's gross income includes periodic payments (wheth╜er or not made at regular intervals) re╜ceived after such decree in discharge of (or attributable to property transferred, in trust or otherwise, in discharge of) a legal obli╜gation which, because of the marital or family relationship, is imposed on or in╜curred by the husband under the decree or under a written instrument incident to such divorce or separation.
I.R.C. of 1954 ╖ 71(a)(1) (current version at 26 U.S.C. ╖ 71 (2006)) (emphasis added).
Appellants argue that the new ╖ 71 ap╜plies because the 1997 Agreement is a divorce or separation instrument according to ╖ 71(b)(2)(A). Pursuant to ╖ 71(b)(2), the term "divorce or separation instru╜ments" is defined as:
(A) a decree of divorce or separate maintenance or a written instrument in╜cident to such a decree,
(B) a written separation agreement, or
(C) a decree (not described in subpara╜graph (A)) requiring a spouse to make payments for the support or mainte╜nance of the other spouse.
However, Appellants' argument is not per╜suasive because the most important ques╜tion before the court is not whether the 1997 Agreement, standing alone, satisfies the requirements of the new law. Rather, the Court must determine whether the 1997 Agreement is merely a modification of the 1976 divorce decree, or a separate stand alone instrument of divorce.
This case turns on the relationship be╜tween I.R.C. ╖ 71, and ╖ 422(e) of DE╜FRA. Section 422(e) of DEFRA defines the date on which the new law became effective, and provides guidance as to whether the new law applies to instru╜ments of divorce created prior to the effec╜tive date of the legislation. It provides inter alia:
(1) In general. Except as otherwise provided in this subsection, the amend╜ments made by this section [amending 26 U.S.C. ╖╖ 71, 215, 219, 682, 6676, and 7701] shall apply with respect to divorce or separation instruments (as defined in section 71(b)(2) of the Internal Revenue Code of 1954 , as amended by this section) executed after December 31, 1984.
(2) Modifications of instruments execut╜ed before January 1, 1985. The amend╜ments made by this section shall also apply to any divorce or separation in╜strument (as so defined) executed before January 1, 1985, but modified on or after such date if the modification expressly provides that the amendments made by this section shall apply to such modifi╜cation.
DEFRA, ╖ 422(e), Pub.L. 98-369, 98 Stat. 494, 798 (emphasis added).
Relying on the language of ╖ 422(e)(2), the Commissioner argues that the Tax Court was correct in determining that the old law applies. The parties agree that new ╖ 71 would apply by its own terms if the 1997 Agreement is construed to be a new written instrument "incident to a di╜vorce," and not a further modification of the original 1976 decree, because the rule expressed in ╖ 422(e)(1) of DEFRA would then govern. If, however, the 1997 Agree╜ment is merely a modification of the 1976 divorce decree, as the Commissioner con╜tends, the old law governs. DEFRA, ╖ 422(e)(2), 98 Stat. at 798.
Appellants maintain the first paragraph of DEFRA, ╖ 422(e) is independent of the second paragraph. They argue that the first paragraph of the statute controls this case and it is unnecessary to look at the second paragraph. However, Appellants argument is not persuasive because the first part of the statute begins with the phrase "except as otherwise provided in this subsection." DEFRA, ╖ 422(e), Pub.L. 98-369, 98 Stat. at 798. This lan╜guage indicates that the first and second paragraph of the statute should be read together.
Appellants also contend any instru╜ment, including the 1997 Agreement, that materially alters the timing or amount of alimony payments is a new stand-alone instrument of divorce and not therefore subject to the second paragraph of DE╜FRA ╖ 422(e). They cite Treasury Regulation ╖ 1.71-1T 4 to support that conten╜tion. This Court will normally "defer to an agency's construction of a statute it administers" provided that its interpreta╜tion is not contrary to congressional intent. Miller v. Commissioner, 310 F.3d 640, 644 (9th Cir.2002) (quoting Cornejo-Barreto v. Seifert , 218 F.3d 1004, 1014 (9th Cir.2000)). The Tax Court was correct in determining that the cited regulation is inapposite pur╜suant to Tax Decision 7973, which states:
4. ═ The regulation is set forth in the form of questions and answers. It provides in perti╜nent part:
Q-26 When does section 71, as amended by the Tax Reform Act of 1984, become effective?
A-26 Generally, section 71, as amended, is effective with respect to divorce or separa╜tion instruments (as defined in section 71(b)(2)) executed after December 31, 1984. If a decree of divorce or separate mainte╜nance executed after December 31, 1984, incorporates or adopts without change the terms of the alimony or separate mainte╜nance payments under a divorce or separa╜tion instrument executed before January 1, 1985, such decree will be treated as execut╜ed before January 1, 1985. A change in the amount of alimony or separate mainte nance payments or the time period over which such payments are to continue, or the addition or deletion of any contingen╜cies or conditions relating to such payments is a change in the terms of the alimony or separate maintenance payments. For ex╜ample, in November 1984, A and B execut╜ed a written separation agreement. In Feb╜ruary 1985, a decree of divorce is entered in substitution for the written separation agreement. The decree of divorce does not change the terms of the alimony A pays to B. The decree of divorce will be treated as executed before Jan uary 1, 1985 and hence alimony payments under the decree will be subject to the rules of section 71 prior to amendment by the Tax Reform Act of 1984. If the amount or time period of the alimony or separate maintenance payments are not specified in the pre-1985 separation agree╜ment or if the decree of divorce changes the amount or term of such payments, the de╜cree of divorce will not be treated as exe╜cuted before January 1, 1985, and alimony payments under the decree will be subject to the rules of section 71, as amended by the Tax Reform Act of 1984. Section 71, as amended, also applies to any divorce or separation instrument executed (or treated as executed) before January 1, 1985 that has been modified on or after January 1, 1985, if such modification expressly pro╜vides that section 71, as amended by the Tax Reform Act of 1984, shall apply to the instrument as modified. In this case, sec╜tion 71, as amended, is effective with re╜spect to payments made after the date the instrument is modified.
Treas. Reg. ╖ 1.71-1T, Q. & A. 26.
These temporary regulations are pre╜sented in the form of questions and an╜swers. The questions and answers are not intended to address comprehensively the issues raised by sections 1041, 71, 215 and 152(e). Taxpayers may rely for guidance on these questions and an╜swers, which the Internal Revenue Ser╜vice will follow in resolving issues aris╜ing under sections 1041, 71, 215 and 152(e). No inference, however, should be drawn regarding questions not ex╜pressly raised and answered.
T.D. 7973, 1984; 49 Fed.Reg. 34451. The cited regulation applies only to the narrow example given therein-a pre-amendment separation agreement that is substituted by a post-amendment divorce decree that makes no substantive changes to the agreement. Treas. Reg. ╖ 1.71-1T, Q. & A. 26.
Appellants also argue that any post-1984 instrument of divorce that mate╜rially alters the timing or amount of alimo╜ny payments is automatically governed by the new law by operation of ╖ 422(e)(1). They contend it was not necessary to pro╜vide in the 1997 Agreement that the new law applies pursuant to ╖ 422(e)(2). It follows from Appellants' interpretation that the second part of the statute, DE╜FRA ╖ 422(e)(2), applies to instruments that do not materially alter the terms of the alimony payments defined by pre-1984 instruments. If this court were to accept Appellants' construction of the statute, the second part of the statute would have no effect, as it would apply only where a new instrument left the terms of the previous instrument unchanged. "[W]e are hesitant to adopt an interpretation of a congres╜sional enactment which renders superflu╜ous another portion of that same law." Kawaauhau v. Geiger, 523 U.S. 57, 62, 118 S.Ct. 974, 140 L.Ed.2d 90 (1998) (quoting Mackey v. Lanier Collection Agency & Service, Inc., 486 U.S. 825, 837, 108 S.Ct. 2182, 100 L.Ed.2d 836 (1988)). Appellants have failed to persuade us that Congress would enact a statute governing the deduc╜tion of alimony payments that would only apply in cases where the parties drafted a document that has no material impact on the timing or amount of alimony payments.
A more sensible reading of ╖ 422(e)(2) would allow the parties to negotiate the allocation of tax liability for any agreement that materially alters the timing or amount of alimony payments. Contrary to Appel╜lants' suggestion, it seems likely that the term "[m]odifications of instruments exe╜cuted before January 1, 1985" in ╖ 422(e)(2) refers to modifications of pre 1985 instruments by post-1985 instru╜ments that govern the amount and timing of alimony payments.
Nevertheless, Appellants would still pre╜vail in the instant case if the 1997 Agree╜ment could be construed as a new stand╜alone instrument of divorce as opposed to a modification of the 1976 divorce decree. However, there was only one divorce de╜cree in the instant case and it was modified several times. In their response to the Commissioner's requests for admissions, Appellants state "[p]ursuant to a number of court orders, commencing August 3, 1976, and continuing through June 27, 1997, petitioner paid alimony to Joyce Johnson in amounts ranging from $1,250 per month at the outset to $2,400 per month." Moreover, the motion filed by Appellants that gave rise to the instant litigation was styled a "Motion to Modify Decree of Divorce and to Modify or Termi╜nate Alimony Payments." Joyce filed a "Countermotion to Increase Alimony." The 1997 Agreement therefore stems from a controversy over the proposed modifica╜tion of alimony provisions of the 1976 di╜vorce decree.
The Settlement and Release Agreement provides that the payment was made in contemplation of Mr. Johnson's Motion and Joyce's Countermotion to alter the alimony terms of the 1976 decree. The final Stipulation and Order for Dismissal entered by the district court also provides that Joyce agrees to dismiss her Counter╜motion for an increase in her alimony pay╜ments. It further provides that "Stanley have no further remaining obligation to pay Joyce any additional alimony, support or other sums whatsoever, Stanley having fully discharged [his obligations under the separate Settlement and Release Agree╜ment]." It follows that the 1997 Agree╜ment, and the $400,000 payment, settled a dispute over the modification of the alimo╜ny provisions of the 1976 divorce decree. It was not a separate stand-alone agree╜ment. Rather, it was a modification of a divorce decree created prior to 1984. Be╜cause it was a modification of a pre-1984 divorce decree, the parties needed to spec╜ify in their agreement that the new law applies pursuant to DEFRA ╖ 422(e)(2) if Appellants wanted the benefit of the de╜duction for alimony paid to Joyce. DE╜FRA, ╖ 422(e), Pub.L. 98-369, 98 Stat. 494, 798. They did not do so. According╜ly, the Tax Court correctly determined that Appellants are not entitled to deduct the lump sum alimony payment.
We also conclude that there is no merit to Appellants' secondary argument that a portion of the $400,000 payment is deductible pursuant to old ╖ 71(c)(2). The old law states: "installment payments dis╜charging a part of an obligation the princi╜pal sum of which is, either in terms of money or property, specified in the decree, instrument, or agreement shall not be treated as periodic payments." I.R.C. of 1954 ╖ 71(c)(1) (current version at 26 U.S.C. ╖ 71 (2006)). Only periodic pay╜ments are deductible under the old law. I.R.C. of 1954 ╖╖ 71, 215 (current version at 26 U.S.C. ╖╖ 71, 215 (2006)). Subsec╜tion (c)(2) of the old law provides an excep╜tion-that installment payments may be treated as periodic payments provided that the principal "is to be paid or may be paid over a period ending more than 10 years from the date of such decree, instrument or agreement." I.R.C. of 1954 ╖ 71(c)(2) (current version at 26 U.S.C. ╖ 71 (2006)). In such case, ten percent of the principal could be deducted in any one year. Id.
Appellants argue that the lump-sum set╜tlement payment of $400,000 should be construed as a single installment in a set of installments that lasted more than ten years because Mr. Johnson has been mak╜ing payments to Joyce since 1976. But a lump-sum final payment and a periodic payment are mutually exclusive concepts, and appear to be treated as such under old ╖ 71(c)(1). In Lounsbury v. Commission╜ er, 321 F.2d 925 (9th Cir.1963), this court rejected a similar argument. Id. at 926. We held in Lounsbury that "lump sum payments are not deductible as periodic payments." Id. at 927.
Moreover, it is unclear how old ╖ 71(c) could possibly apply because the exception to the old law is based on the premise that the installments discharge a principal sum defined in an instrument of divorce. I.R.C. of 1954 ╖ 71(c) (current version at 26 U.S.C. ╖ 71 (2006)); see also Revenue Rule 78-415. However, no agreement in the instant case provided for a principal sum to be paid in installments. Because the 1976 divorce decree never specked a principal sum of alimony, Appellants' reli╜ance on the old law, and Revenue Rule 78-415, is misplaced.