STATE OF WISCONSIN
TAX APPEALS COMMISSION
DAVID E. BIRREN
4710 Keating Terrace
Madison, WI 53711,
WISCONSIN DEPARTMENT OF REVENUE
P.O. Box 8907
Madison, WI 53708-8907,
|DOCKET NO. 01-I-10
DECISION AND ORDER
RICHARD F. RAEMISCH, COMMISSIONER:
The above-entitled matter comes before the Commission on stipulated facts, exhibits, and briefs. Petitioner was represented by Attorney Michael J. Collins, of Collins Law Office, S.C., Madison, Wisconsin, and he now represents himself. Respondent ("the Department") is represented by Attorney Sheree Robertson, Madison, Wisconsin.
Based on the entire record before it, including stipulated facts, exhibits, and briefs of the parties, the Commission finds, concludes, and orders as follows:
FINDINGS OF FACT
The Commission finds the following facts based upon the Stipulation of Facts, omitting references to exhibits and making non-substantive changes.
1. Petitioner was domiciled in and a resident of the state of Wisconsin in 1996, 1997, and 1998.
2. Petitioner filed Wisconsin income tax returns for 1996, 1997, and 1998, and claimed head of household as his filing status.
3. Petitioner deducted from his reported income on his 1996 and 1997 income tax returns family support payments he paid in the amounts of $15,204.02 and $13,756.11, respectively.
4. Petitioner claimed his son Arnold Birren ("Arnold") as a dependent on his 1996, 1997, and 1998 income tax returns, and claimed a credit in the amount of $50.00 in each of those years.
5. On his Wisconsin income tax returns for 1996, 1997, and 1998, petitioner claimed rent/property tax credit in the amount of $200.00, $200.00, and $317.00, respectively.
6. The Department audited petitioner's Wisconsin income tax returns for 1996, 1997, and 1998, and adjusted those returns as follows:
a. Changed petitioner's filing status to married filing separately for 1996 and 1997 and single for 1998;
b. Disallowed family support payments petitioner paid and deducted on his 1996 and 1997 income tax returns, because the amount of marital income received by petitioner's estranged wife, Susan Birren ("Susan"), including the family support payments and Susan's earnings, was less than one-half of the total marital income for those years; and
c. Disallowed the dependent credit petitioner claimed for Arnold, because petitioner and Susan both claimed that they maintained a household for Arnold for more than one-half of the year.
7. The Department issued to petitioner a Notice of Amount Due, dated March 27, 2000, for years 1996, 1997, and 1998 for additional income tax plus interest in the total amount of $3,543.69.
8. Petitioner filed a timely petition for redetermination with the Department, dated May 25, 2000.
9. In a letter dated September 21, 2000, Marie Romero ("Ms. Romero"), a Department Resolution Officer, advised petitioner of the reasons for the adjustments to his 1996, 1997, and 1998 Wisconsin income tax returns.
10. In a letter to Ms. Romero dated October 17, 2000, petitioner conceded the rent/property tax credit adjustment, but continued to object to the Department's determination regarding his tax filing status, dependent child credit, and deductibility of family support payments.
11. In a letter dated January 18, 2001, petitioner enclosed a $200.00 check to the Department for payment of the rent/property tax credit issue.
12. Under date of November 20, 2000, the Department issued to petitioner its Notice of Action letter, granting in part and denying in part his petition for redetermination. Petitioner was informed he was allowed credit for Arnold for 1996, 1997, and 1998 because Susan released the exemption per I.R.S. Form 8332. An updated Notice of Amount Due was also attached to the Notice of Action letter.
13. Petitioner filed a petition for review with the Commission on January 18, 2001.
14. The Department withdrew the adjustment for the filing status of petitioner for 1996 through 1998 because it was no longer at issue.
15. Petitioner and Susan were married on June 25, 1977, in Milwaukee, Wisconsin.
16. On March 5, 1994, petitioner and Susan filed a Joint Petition for Divorce in Dane County Family Circuit Court Branch 3 (the "Court"), Case No. 94 FA 0436.
17. The Court issued a Stipulation and Temporary Order (the "Temporary Order") in the divorce case to petitioner and Susan, dated August 1994.(1)
18. Petitioner represents that the original Temporary Order was signed by the Court, and that it ordered "that the following terms and conditions (of the Stipulation) shall be entered as and for a Temporary Order during the pendency of this action: . . .".
19. Per the Temporary Order, the parties were awarded temporary joint legal custody of their minor children: Genevieve Frances Ebert Birren ("Genevieve"), born 5/7/79, and Arnold Cornelius Ebert Birren, born 8/21/82. The Temporary Order further provided that :
Joint petitioner Susan . . . shall have primary physical placement of Genevieve . . ., subject to joint petitioner David('s) . . . right to liberal periods of physical placement with her, but not less than two days per week. The parties will share physical placement of the parties' other minor child, Arnold . . ., with physical placement transferred on a weekly basis. (Emphasis added in Stipulation of Facts.)
20. Per the Temporary Order, beginning August 18, 1994, petitioner was ordered to pay $1,267.00 per month or $584.77 bi-weekly to Susan as and for family support.
21. The Temporary Order found that petitioner's gross income earnings were $3,804.00 per month, plus $60.00 per month in dividends and interest, for a total gross monthly income of 3,864.00, and that Susan had the ability to work at the rate of $10.15 per hour. There was no finding or agreement as to the number of hours Susan was capable of working.
22. On July 23, 1998, the Court entered its Findings of Fact (the "Findings"), Conclusions of Law and Judgment of Divorce (the "Judgment") in Case No. 94 FA 0436.
23. According to the Findings, Susan was employed as a substitute teacher with the Madison Metropolitan School District, was also a part-time fire inspector, and had a total gross monthly income of $1,688.00.
24. According to the Findings, petitioner was employed by the State of Wisconsin Department of Natural Resources, and had a gross monthly income from all sources of $4,274.34.
25. At the time the Judgment was entered in petitioner's divorce action, Genevieve was an adult and Arnold was still a minor.
26. Petitioner and the Department stipulated to total income for petitioner and Susan for 1996 and 1997 as follows:
|Madison Metropolitan School||$ 1,380.02|
|Village of Shorewood Hills||1,500.10|
|State of Wisconsin||50,006.06|
|Total Marital Income Per Spouse||$ 36,913.87||$ 23,183.33|
|Madison Metropolitan School||$ 10,123.09|
|Village of Shorewood Hills||2,597.74|
|State of Wisconsin||53,592.74|
|$ 40,057.58||$ 26,489.74|
27. The Findings found that the Marital Settlement Agreement (the "Agreement") petitioner and Susan agreed to was fair and reasonable, and it was attached to and incorporated as part of the Judgment.
28. According to the Findings, the Court awarded petitioner and Susan joint legal custody, stating:
Susan and David shall share physical placement of the minor child according to the following schedule, which is currently in place: Arnold will spend alternating weeks with each parent. Arnold's schedule may be changed on the mutual consent of all concerned, but such changes will not result in adjustments to the amount of Section 71 payments (unless Arnie's time with the other parent significantly drops below 50%) except by written agreement.
29. Petitioner and Susan were granted a divorce effective March 1, 1998.
30. The Findings denied maintenance to petitioner or Susan.
31. The Findings provided that:
B. Effective January 15, 1998, David shall pay the sum of $900.00 per month to Susan as and for § 71 payments. Payments shall be paid in the bi-weekly amount of $415.38, and shall continue for a period of twelve (12) months. Thereafter, David shall pay the sum of $600.00 per month ($276.92 bi-weekly) to Susan as and for § 71 payments for a period of twenty-four (24) months.
C. Pursuant to the Internal Revenue Code § 71, said payments shall be included as income on Susan's income tax returns. Such payments shall be a deduction on David's income tax returns pursuant to Internal Revenue Code § 215.
D. Payments shall be made to Susan pursuant to the terms and conditions contained in the Marital Settlement Agreement, attached hereto.
32. According to the Agreement, if Susan died before the § 71 payments were to end, such payments would automatically terminate upon her death.
33. The Findings also stated, at Section III, A.:
No child support shall be payable by either party. Consideration is being given to the establishment of § 71 payments from David to Susan, the relatively equal periods of placement each party shall have with the minor child, and that any ordered child support payments would be rather nominal. Except as provided in the Marital Settlement Agreement, both parties waive any further child support in consideration of the other terms and conditions contained herein . . . .
Is petitioner entitled to the family support deduction he claimed on his 1996 and 1997 income tax returns if his then-wife's share of marital income, including family support, was less than one-half of the total marital property income?
APPLICABLE WISCONSIN STATUTES
71.01 Definitions. In this chapter in regard to natural persons and fiduciaries, . . . .
* * *
(4) "Federal taxable income" and "federal adjusted gross income" of natural persons and fiduciaries mean taxable income or adjusted gross income as determined under the internal revenue code or, if redetermined by the department, as determined by the department
under the internal revenue code or as may be determined on final appeal therefrom.
* * *
(16) "Wisconsin taxable income" of natural persons means Wisconsin adjusted gross income less the Wisconsin standard deduction, less the personal exemption described under s. 71.05(23), with losses, depreciation, recapture of benefits, offsets, depletion, deductions penalties, expenses and other negative income items determined according to the manner that income is or would be allocated, except that the negative income items on individual or separate returns for net rents and other net returns which are marital property attributable to the investment, rental, licensing or other use of nonmarital property shall be allocated to the owner of the property.
766.31 Classification of property of spouses.
(1) All property of spouses is marital property except that which is classified otherwise by this chapter and that which is described in sub. (8).
(2) All property of spouses is presumed to be marital property.
(3) Each spouse has a present undivided one-half interest in each item of marital property, . . . .
(4) Except as provided under subs. (7)(a), (7p) and (10), income earned or accrued by a spouse or attributable to property of a spouse during marriage and after the determination date is marital property.
APPLICABLE INTERNAL REVENUE CODE
Sec.71. ALIMONY AND SEPARATE MAINTENANCE PAYMENTS
(a) GENERAL RULE.Gross income includes amounts received as alimony or separate maintenance payments.
(b) ALIMONY OR SEPARATE MAINTENANCE PAYMENTS DEFINED.For purposes of this section
(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 allowable as a deduction under section 215,
(C) in the case of an individual legally separated from his spouse under a decree of divorce or of separate main-tenance, 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.
CONCLUSION OF LAW
The family support payments petitioner made to his spouse during the years 1996 and 1997, when added to his spouse's marital income, did not exceed 50% of the marital income and are, therefore, not deductible by him.
Section 766.31(2) of the Wisconsin Statutes provides that "(a)ll property of spouses is presumed to be marital property", and 766.31(4) states, "Except as provided under subs. (7)(a), (7p) and (10), income earned or accrued by a spouse or attributable to property of a spouse during marriage and after the determination date is marital property." The Commission has found nothing within petitioner's Temporary Order under Dane County Family Court Branch 3, Case No. 94 FA 436, that would infer that petitioner and his spouse had opted out of Wisconsin's Marital Property Law as it pertains to their income. Therefore, the Commission concludes that income earned during the years 1996 and 1997 by petitioner and his spouse was marital property.
There is no dispute between the parties as to whether the family support paid by petitioner to his spouse for 1996 and 1997 constituted alimony as defined under I.R.C. § 71(b)(1)(A) through (D). The dispute is whether the "alimony" may be deducted based on Wisconsin's Marital Property Law. A similar case has been decided by the Commission in the past.
In the case of James E. Knoblauch and Bonnie E. Knoblauch v. Wis. Dep't of Revenue, CCH Wis. Tax Rptr. ¶400-192 (1996), the issue was whether, under a Temporary Order requiring James Knoblauch to pay alimony to Bonnie Knoblauch, James could deduct the alimony and Bonnie should declare the alimony as income. As is the case here, the Knoblauchs did not enter into any income reclassification agreement pursuant to the Wisconsin Marital Property Law during the period the Temporary Order was in effect. In Knoblauch, the Commission ruled that monies James paid to Bonnie was alimony and, as such, deductible by James and reportable as income by Bonnie for the amount received by Bonnie "in excess of her reported one-half share in the marital income of petitioners." Id. (Emphasis added.) The Commission in Knoblauch also cited Rev. Rul. 74-562:
[A]gain recognizing that each spouse has a vested one-half interest in marital income in a community property state, the I.R.S. ruled that
"the wife is liable for Federal income taxes on her equal share of the . . . community income, and the monthly payments received . . . by her are not alimony payments within the meaning of section 71 of the Code to the extent they did not exceed her share of the community income that she did not otherwise receive. However, to the extent such payments did exceed her interest in the income of the marital community, the payments in excess of her interest are includible in her gross income as alimony within the meaning of section 71 and are deductible by the husband . . . ." Id. (Emphasis in original.)
Conversely, in the instant case petitioner is only able to deduct the family support payments from his income if the amount he paid to his spouse, when added to her income, exceeds her 50% share of marital income. That is not the case here. In 1996, petitioner's total marital income was $36,913.87, and his spouse's was $23,183.33. In 1997, petitioner's total marital income was $40,057.58, and his spouse's was $26,489.74. Even when petitioner's family support payments were added to his spouse's marital income, it fell short of 50% of the total marital income and, therefore, is not deductible by petitioner.
Finally, there is guidance in this area for couples who enter into separation agreements prior to a finalized divorce. TheDepartment's Publication 109, entitled Tax Information for Married Persons Filing Separate Returns and Persons Divorced in 2001 (also available during the years in question),describes how separated persons who are still legally married can have their income classified as individual income. Part B., Income Under the Marital Property Law, states:
3. Income Earned By Separated or Divorced Spouses
Separated spouses. Even if you are separated from your spouse, you and your spouse must treat both of your incomes as marital property income. Income you earn after your separation but before a final decree of divorce is granted continues to be marital property income. However, you and your spouse may enter into a marital property agreement providing that income earned by either of you is your individual income. Income earned by either of you after the effective date of such an agreement is treated as the individual income of the spouse earning the income, not as marital property income. You can't use a marital property agreement to reclassify income earned prior to the agreement for income tax purposes.
Publication 109 also explains what portion of alimony is deductible if there is no marital property agreement in effect. Part C., Losses, Expenses, Deductions, and Credits, provides:
You can deduct qualifying alimony payments that you are required to make to your spouse during your marriage only to the extent that the payments plus the marital property income over which your spouse had control exceed your spouse's share of marital property income to which he or she would be entitled.
Examples are then given to further explain how alimony is reportable or deductible under Wisconsin's Marital Property Law.
Here, petitioner had no marital property agreement in effect which would have treated his income as individual income during the time he was separated from, but not divorced from, his spouse. His family support payments to his spouse during the years in question, when added to his spouse's marital income, did not exceed 50% of the marital income share and are not deductible.
IT IS ORDERED
That the Department's action on petitioner's petition for redetermination is affirmed.
Dated at Madison, Wisconsin, this 1st day of August, 2002.
WISCONSIN TAX APPEALS COMMISSION
Don M. Millis, Chairperson
Thomas M. Boykoff, Commissioner
Richard F. Raemisch, Commissioner
ATTACHMENT: "NOTICE OF APPEAL INFORMATION"