July 13, 2009
NANCY L. MCGOLDRICK, F/K/A NANCY L. NIEVES, PLAINTIFF-APPELLANT,
DIRECTOR, DIVISION OF TAXATION, DEFENDANT-RESPONDENT.
On appeal from the Tax Court of New Jersey, Docket No. 1074-07.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
Argued June 2, 2009
Before Judges Skillman and Grall.
This is an appeal from a final judgment of the Tax Court, which upheld a deficiency notice issued by defendant, Director, Division of Taxation, imposing an additional liability upon plaintiff for gross income tax plus a late payment penalty and interest on alimony payments plaintiff received during 2004.
Plaintiff was divorced in April 2004. The property settlement agreement incorporated in the judgment of divorce, dated April 11, 2004, provides for payment to plaintiff of $100,000 per year of alimony for a period of ten years. The agreement provides that this limited duration alimony will terminate upon the death of either party.
The agreement also provides for payment to plaintiff of what the parties characterize as "additional alimony," which consists of 34% of the money plaintiff's former husband receives from Acosta, Inc., under a "master brokerage agreement" he and his partner entered into in connection with the sale of their business to Acosta. The property settlement agreement sets forth the following schedule for monthly payments of this additional alimony:
a. April 2004-December 2004 $10,649.72
b. January 2005 - December 2005 $9,898.47
c. January 2006 - March 2011 $10,443.89 The agreement also provides that this additional alimony "shall be taxable to the Wife and deductible to the Husband on all future independently filed federal and state income taX returns[,]" and that "the payments shall not terminate upon the remarriage of the Wife or death of either party, nor her cohabitation with an unrelated male."
Plaintiff failed to report the payments she received from her former husband under this part of the property settlement agreement as "alimony" on her 2004 New Jersey Gross Income Tax return. On March 17, 2006, the Division of Taxation sent plaintiff a deficiency notice regarding this alleged underpayment of taxes.
Plaintiff disputed her liability for the payment of income taxes on the "additional alimony" she received under the property settlement agreement with her former husband, and on November 20, 2006, she participated in an informal administrative conference with the Division of Taxation. However, the Division rejected plaintiff's arguments regarding her tax liability for these payments, and on December 13, 2006, the Division issued a final deficiency notice to plaintiff.
Plaintiff brought this action in the Tax Court challenging the Division's determination. The Tax Court denied plaintiff's motion for summary judgment and subsequently granted defendant's motion for summary judgment.*fn1
The Division of Taxation's determination that plaintiff is required to pay New Jersey gross income taxes on the additional alimony she receives under the property settlement agreement with her former husband was based on N.J.S.A. 54A:5-1(n), which provides that a taxpayer must pay income tax on "alimony and separate maintenance payments to the extent that such payments are required to be made under a decree of divorce or separate maintenance but not including payments for support of minor children."
The Legislature has delegated substantial authority to the Director of the Division of Taxation for administration of the State's tax laws. Therefore, the Director's interpretation of those laws "is entitled to prevail, so long as it is not plainly unreasonable." Metromedia, Inc. v. Dir., Div. of Taxation, 97 N.J. 313, 327 (1984); see also Oberhand v. Dir., Div. of Taxation, 193 N.J. 558, 568 (2008); Koch v. Dir., Div. of Taxation, 157 N.J. 1, 8 (1999). In particular, our courts "recognize 'the Director's expertise . . . when exercised in the specialized and complex area covered by the provisions' of the Gross Income Tax Act." Reck v. Dir., Div. of Taxation, 345 N.J. Super. 443, 446 (App. Div. 2001) (quoting Metromedia, supra, 97 N.J. at 327), aff'd o.b., 175 N.J. 54 (2002).
The Gross Income Tax Act provides that alimony is includable in the income of the recipient, N.J.S.A. 54A:5-1(n), and deductible from the income of the payor, N.J.S.A. 54A:3-2. However, unlike the Internal Revenue Code, which includes a definition of "alimony," 26 U.S.C.A. § 71, the Gross Income Tax Act does not contain any definition of this term. Therefore, the Director must look outside the Act itself to determine whether money received by a taxpayer constitutes alimony.
Plaintiff entered into a property settlement agreement with her former husband which characterized his payments to her out of his share of the payments from the master brokerage agreement with Acosta as "additional alimony" and further provided that those payments "shall be taxable to the Wife and deductible to the Husband on [their] state income tax returns." Although the Director is not bound by a taxpayer's own characterization of money received from a former spouse as "alimony," it is within the Director's authority to accept that characterization so long as such tax treatment will not undermine the sound administration of the State's tax laws.
Plaintiff argues that the Director was required to reject the parties' characterization of the payments she receives from her former husband out of his share of the payments from Acosta under the master brokerage agreement as "additional alimony" because the obligation to make those payments will continue even if plaintiff or her former husband dies, and alimony, by its very nature, must terminate upon death. The basis for termination of the obligation to pay alimony upon death is N.J.S.A. 2A:34-25, which provides in pertinent part:
If after the judgment of divorce or dissolution, a former spouse shall remarry . . . permanent and limited duration alimony shall terminate as of the date of remarriage . . . except that any arrearages that have accrued prior to the date of remarriage . . . shall not be vacated or annulled.
Alimony shall terminate upon the death of the payer spouse . . . except that any arrearages that have accrued prior to the date of the payer spouse's . . . death shall not be vacated or annulled.
Nothing in this act shall be construed to prohibit a court from ordering either spouse . . . to maintain life insurance for the protection of the former spouse, . . . in the event of the payer spouse's . . . death. [Emphasis added.]
In Ehrenworth v. Ehrenworth, 187 N.J. Super. 342 (App. Div. 1982), we held that N.J.S.A. 2A:34-25 only imposes limitations upon the terms of alimony that can be ordered by a court; it does not limit the duration of the payment of alimony to which the parties to a divorce may voluntarily agree. The issue in Ehrenworth was whether the parties could agree that the obligation to pay alimony would continue after the supported spouse's remarriage even though N.J.S.A. 2A:34-25 provides that alimony shall terminate upon that occurrence. Despite his agreement to continue paying alimony even if his former wife remarried, the former husband sought by post-judgment motion to be relieved of this obligation on the ground that N.J.S.A. 2A:34-25 precludes continuation of the payment of alimony upon remarriage of the supported spouse. In affirming the trial court's denial of this relief, we stated:
N.J.S.A. 2A:34-25 explicitly neither precludes nor permits parties to vary its terms. Yet it seems quite clear that the statute was intended to deal with cases in which alimony was determined in an adversary proceeding by a court . . . . Thus, N.J.S.A. 2A:34-25 is intended to provide that if the court has awarded alimony, then upon the wife's remarriage the alimony must cease. . . . . [N.J.S.A. 2A:34-25] simply [does] not deal with a situation in which the parties made an agreement not compatible with its terms.
We see no reason in public policy why the agreement should not be enforced. The parties voluntarily agreed upon its terms in proceedings of the greatest formality. If the payments were to be treated by the parties as installments on a fixed obligation as opposed to alimony, it cannot be doubted that defendant would be denied relief since N.J.S.A. 2A:34-25 deals only with alimony. We do not see why the fact that for perceived tax advantages the parties preferred to call the payments alimony should have a bearing on the outcome of this litigation. [Id. at 348-49.]
Although we have not located any case dealing with the enforceability of a settlement agreement providing for the continuation of alimony after the death of either the supporting or supported spouse, the reasoning in Ehrenworth would appear to be equally applicable in this context. N.J.S.A. 2A:34-25 expressly authorizes a court to order "either spouse to maintain life insurance for the protection of the former spouse . . . in the event of the payer spouse's death." It may be extremely expensive, if not impossible, for some parties to a divorce to secure life insurance due to poor health or other circumstances adversely affecting life expectancy. Consequently, we see no reason why a party confronted with such circumstances would be precluded from voluntarily agreeing to the payment of alimony out of his or her estate or a testamentary trust instead of being required to secure life insurance.
In any event, the issue in this appeal is not whether an agreement to pay alimony post-mortem would be enforceable, but rather whether the Director of the Division of Taxation can treat payments that the parties to a divorce have themselves characterized as "alimony" as alimony for tax purposes even though those payments are required to continue even if one of the parties dies. We are satisfied that it was well within the Director's broad discretionary authority in the administration of the Gross Income Tax Act to treat such payments as "alimony" within the intent of N.J.S.A. 54A:5-1(n).