Wisconsin Tax Appeals Commission Docket No. 99-I-160

STATE OF WISCONSIN

TAX APPEALS COMMISSION

ERIC W. MILLER

1016 S. Spring Street

Port Washington, WI 53074,

Petitioner,

and

TERI L. MILLER

P.O. Box 262

Newburg, WI 53060,

Petitioner,

vs.

WISCONSIN DEPARTMENT OF REVENUE

P.O. Box 8907

Madison, WI 53708-8907,

Respondent.

DOCKET NO. 99-I-154-SC DOCKET NO. 99-I-160

DECISION AND ORDER

DON M. MILLIS, COMMISSIONER:

These matters come before the Commission on stipulated facts. Respondent and petitioner Eric W. Miller have each filed a brief in support of their positions. Each petitioner appears pro se. Respondent is represented by Attorney Sheree Robertson.

FINDINGS OF FACT

The Commission hereby adopts as its Findings of Fact the stipulations of the parties, with minor revisions for form, consistency, relevancy, and redundancy, and incorporating facts from exhibits but otherwise omitting references to exhibits.

1. Petitioner Eric W. Miller ("Eric") and petitioner Teri L. Miller ("Teri") were married on or about March 15, 1991 in Port Washington, Wisconsin. Petitioners have two minor children.

2. Teri filed for divorce from Eric in Ozaukee County, Wisconsin.

3. The Circuit Court in Ozaukee County entered an Order, dated November 15, 1995 ("1995 Order"), providing that Eric shall pay 36% of his gross income as support to Teri, and a wage assignment was to commence on November 23, 1995.

4. The 1995 Order was a form with boxes and spaces that were checked or filled in. The series of boxes and spaces dealing with payments from Eric to Teri provided an option to describe a portion of each payment for "Maintenance" and a portion for "Support." On the 1995 Order, the box for "Maintenance" was left blank; in the box for "Support" was typed: "36% of gross income."

5. The 1995 Order awarded Teri temporary primary physical placement of petitioners' two minor children. The 1995 Order found that Eric's gross income was $2,506 per month ($1,802 net) and that Teri's only income was $346 per month in child support for the children of a prior marriage.

6. On or about March 8, 1996, the Family Court Commissioner for the Circuit Court in Ozaukee County issued an amended Order ("1996 Order"), directing Eric to pay "family support" in the amount of 25% of his gross income plus $150.

7. The 1996 Order left the "Maintenance" box blank. In the "Support" box, the word "Family" was typed above "Support" and the phrase "25% of gross plus $150.00" was added.

8. Under the 1996 Order Teri continued to have temporary physical placement of petitioners' two minor children.

9. The 1996 Order also found that Eric's gross income was still $2,506 per month ($1,802 net), but that Teri's monthly gross income was $900 plus the $346 per month in child support for the children of a prior marriage. The 1996 Order concluded that Teri's net income was $1,050 per month.

10. Both Orders provided that all "maintenance and/or family support payments shall terminate upon the death of the payee."

11. There is no indication that the Commissioner who signed both Orders made any additional findings on the record.

12. In accordance with the 1995 and 1996 Orders, Eric paid $11,330.18 to Teri in 1996 and $10,087.34 in 1997.

13. On or about March 6, 1998, a Marital Settlement Agreement was entered in Eric and Teri's divorce action. In the Marital Settlement Agreement, under the heading "CHILD SUPPORT", Eric was ordered to pay 25% of his gross income from all sources, which first payment was to be made with the first paycheck following the final hearing. The Marital Settlement Agreement also provided that maintenance to each petitioner was denied, and each petitioner waived any right to claim or receive maintenance payments pursuant to section 767.32(1) of the Statutes.

14. Teri filed Wisconsin income tax returns for 1996 and 1997 claiming head of household status. Teri reported $18,153.00 as income in 1996, but did not include the $11,330.18 that she received from Eric. Teri reported $20,519.00 as income in 1997, but did not include the $10,087.34 that she received from Eric.

15. Eric filed Wisconsin income tax returns for 1996 and 1997 claiming a single filing status, which was incorrect. His correct filing status should have been married filing separately, since his divorce was not final until 1998. Eric reported $24,480.53 as income on his 1996 return, and he deducted as alimony or separate maintenance the payments he made to Teri in the amount of $11,330.18. Eric reported $28,286.10 as income on his 1997 return, and he deducted as alimony or separate maintenance the payments he made to Teri in the amount of $10,087.34.

16. On January 18, 1999, respondent issued assessments in the alternative against both petitioners for 1996 and 1997. Respondent assessed Eric additional income tax in the amount of $2,372.67, disallowing the amounts that Eric claimed as a deduction for alimony or separate maintenance on his 1996 and 1997 tax returns. Respondent assessed Teri additional income tax in the amount of $2,672.60 adding to her income the amounts received from Eric. The assessments in the alternative were issued because of a disagreement between petitioners concerning the taxability/deductibility of the payments.

17. The parties have stipulated that in the event the amounts Eric paid to Teri constitute deductible alimony, then, based on the Commission's decision in Knoblauch v. Dep't of Revenue, Wis. Tax Rep. (CCH) ¶ 400-192 (WTAC 1996), Eric would be limited in the amount of alimony or separate maintenance he may claim as a deduction. These calculations are based on the following premises:

1996 1997

Teri's Marital Income $18,153.00 $20,519.00

Eric's Marital Income $35,810.71 $38,373.44

Total Marital Income $53,963.71 $58,892.44

½ of Total Marital Income $26,981.85 $29,446.22

APPLICABLE LAW

Internal Revenue Code

Sec. 71 (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 deductible 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 maintenance, 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.

(1) IN GENERAL.--Subsection (a) shall not apply to that part of any payment which the terms of the divorce or separation instrument fix (in terms of an amount of money or a part of the payment) as a sum which is payable for the support of children of the payor spouse.

Wisconsin Statutes

767.23 Temporary orders for support of spouse and children; ....

* * *

(1g) Notwithstanding 1987 Wisconsin Act 355, section 73, as affected by 1987 Wisconsin Act 364, the parties may agree to the adjudication of a temporary order under this section in an action affecting the family that is pending on May 3, 1988.

* * *

(1n) Before making any temporary order under sub. (1), the court or family court commissioner shall consider those factors which the court is required by this chapter to consider before entering a final judgment on the same subject matter. If the court or family court commissioner makes a temporary child support order that deviates from the amount of support that would be required by using the percentage standard established by the department under s. 49.22(9), the court or family court commissioner shall comply with the requirements of s. 767.25(1n). ...

767.25 Child support.

* * *

(1j) Except as provided in sub. (1m), the court shall determine child support payments by using the percentage standard established by the department under s. 49.22(9).

* * *

(1n) If the court finds under sub. (1m) that use of the percentage standard is unfair to the child or the requesting party, the court shall state in writing or on the record the amount of support that would be required by using the percentage standard, the amount by which the court's order deviates from that amount, its reasons for finding that use of the percentage standard is unfair to the child or the party, its reasons for the amount of the modification and the basis for the modification.

CONCLUSION OF LAW

While a portion of the payments made by Eric to Teri--$2,108.38 in 1996 and $1,800 in 1997--was separate maintenance under section 71 of the Internal Revenue Code, it is not deductible because, when added to Teri's share of the marital income, the resulting sum is less than one-half of their total marital income for each year.

OPINION

The resolution of each docket boils down to whether any or all of the payments made by Eric to Teri were alimony or separate maintenance under section 71 of the Internal Revenue Code. To the extent that these payments were alimony or separate maintenance, then, in general, they must be included in Teri's income and may be deducted from Eric's income. However, because petitioners were still married in 1996 and 1997, Eric may deduct and Teri must include only that alimony or separate maintenance that, when added to Teri's share of the marital income, exceeds one-half of total marital income. Knoblauch, supra, at 30,635.

Alimony or Separate Maintenance vs. Child Support

The payments made by Eric to Teri meet all of the requirements of section 71(b)(1) of the Internal Revenue Code. However, it appears from the terms of the Orders that a portion of these payments were made for the support of petitioners' minor children and, therefore, to that extent were not alimony or separate maintenance. See, IRC § 71(c)(1). We conclude that payments equal to 25% of Eric's gross income were support for petitioners' minor children and that the remainder of the payments constituted alimony or separate maintenance.

Under Wisconsin divorce law, temporary orders such as those at issue must comply with the child support guidelines established pursuant to section 49.22(9) of the Statutes. Wis. Stat. §§ 767.25(1j) & 767.23(1n). In 1996 and 1997, these guidelines provided that child support for a marriage with two minor children equaled 25% of gross income of the parent without primary physical placement. HSS 80.03(1)(b), Wis. Adm. Code now codified at DWD 40.03(1)(b), Wis. Adm. Code. When an order departs from these guidelines, a court commissioner or judge must state on the record or in writing: (1) the amount of support required by using the guidelines, (2) the amount by which the order departs from the amount required under the guidelines, (3) the reasons for finding that use of the guidelines is unfair, (4) the reasons for the departure and (5) the basis for the departure. Wis. Stat. §§ 767.23(1n) and 767.25(1n). Neither Order contains any of these recitations required by the statute, nor is there any evidence that the court commissioner recited the same on the record. Therefore, we conclude that, of the payments made by Eric, an amount equal to 25% of his gross earnings is child support and the remainder is alimony or separate maintenance.

Other aspects of the Orders at issue buttress this conclusion. First, the 1996 Order explicitly mandates payments equal to 25% of Eric's gross income plus $150 per month. This formula is consistent with the conclusion that the child support component of the payments were equal to 25% of Eric's gross income.

The 1995 Order did not break out these elements. Rather, it simply mandated payments equal to 36% of Eric's gross income. However, when read in conjunction with each Order's findings of income, it is apparent that only a portion of each payment was intended to be alimony or separate maintenance that would equalize the net income for each party.

The following table shows how petitioners' relative monthly incomes were equalized under the 1995 Order:

Eric Teri

Net Income 1,802 346

Deduct Child Support (25%)⁽¹⁾ -627 -0

Transfer Maintenance (11%) -276 +276

Net Available 899 622

The following table shows how petitioners' relative monthly incomes were equalized under the 1996 Order:

Eric Teri

Net Income 1,802 1,050

Deduct Child Support (25%) -627 -225

Transfer Maintenance (11%) -150 +150

Net Available 1,025 975

While not producing complete equity, considering only 25% of the payments as child support leads to a much more equitable division of income than if the entire payments were child support.

Finally, the fact that the Marital Settlement Agreement set a final child support level at 25% of Eric's gross income reinforces the notion that from the beginning the court intended child support to equal 25% of Eric's income.

Limitations on Deductibility of Alimony or Separate Maintenance

As indicated above, because petitioners were married in 1996 and 1997, there are limits on the extent to which the maintenance payments at issue are deductible by Eric and included in Teri's income. After doing the math, we conclude that Eric is not entitled to deduct any of the maintenance payments he made in 1996 and 1997.

For 1997, the amount of maintenance paid by Eric is easy to calculate: $150/month multiplied times 12 months = $1,800.

For 1996, the calculation is a little more challenging. The calculation for the last nine months of 1996 is straightforward: $150/month multiplied times 9 months = $1,350. Since the 1996 order was effective on March 13, 1996 and maintenance was set at $69.23 biweekly, we conclude that the amount of maintenance for the last half of March equaled $69.23. For the first 2½ months of 1996, we conclude that the amount of maintenance equaled 11% of Eric's gross income for this period ($2,506/month x 2.5 months = $6,265) or $689.15. Thus, total maintenance for 1996 equals $1,350 plus $69.23 plus $689.15 or $2,108.38.

When adding the amount of maintenance to Teri's income, we find that the total does not exceed one-half of the total marital income:

1996 1997

Teri's Marital Income $18,153.00 $20,519.00

Maintenance $2,108.38 $1,800.00

Total $20,261.38 $22,319.00

½ Total Marital Income $26,981.85 $29,446.22

Therefore, despite the fact that Eric actually paid nearly $4,000 in maintenance in 1996 and 1997, he is not entitled to deduct any of these payments, nor must Teri include these payments in her income.

ORDER

Respondent's action on the petition for redetermination in Docket No. 99-I-154-SC is affirmed.

Respondent's action on the petition for redetermination in Docket No. 99-I-160 is reversed.

Dated at Madison, Wisconsin, this 15th day of September, 2000.

WISCONSIN TAX APPEALS COMMISSION

Mark E. Musolf, Chairperson

Don M. Millis, Commissioner

Thomas M. Boykoff, Commissioner

ATTACHMENT: "NOTICE OF APPEAL INFORMATION"

¹ Child support represents an expense for both the payor and payee based on the theory that each parent will contribute 25% of their respective gross incomes to the care of the minor children of the marriage. Chapter HSS 80 Preface, Wis. Adm. Code now found at Chapter DWD 40 Preface.