Mark Glenn Hexum v. Commissioner of Internal Revenue

United States Court of Appeals
For the Seventh Circuit
Chicago, Illinois 60604
Submitted February 21, 2018*
Decided February 22, 2018
Before
FRANK H. EASTERBROOK, Circuit Judge
MICHAEL S. KANNE, Circuit Judge
ILANA DIAMOND ROVNER, Circuit Judge
No. 17‐2460
MARK GLENN HEXUM,
Petitioner‐Appellant,
v.
COMMISSIONER OF INTERNAL
REVENUE,
Respondent‐Appellee.
Appeal from the United States
Tax Court.
No. 13994‐16
Joseph Robert Goeke,
Judge.
O R D E R
Mark Hexum paid his ex‐wife Sherri half of the net gain from the sale of their
marital home because the Illinois family court ruled payment was required under their
dissolution (divorce) agreement. Mark had been responsible for the house’s mortgage
and expenses after the divorce, and in his view, the equity accrued before the sale was
not “marital property” that he should have been made to split with Sherri when the
* We have agreed to decide this case without oral argument because the briefs
and record adequately present the facts and legal arguments, and oral argument would
not significantly aid the court. FED. R. A PP. P. 34(a)(2)(C).
NONPRECEDENTIAL DISPOSITION
To be cited only in accordance with Fed. R. App. P. 32.1

-- 1 of 5 --

No. 17‐2460 Page 2
house was sold. He characterized the payment as maintenance (alimony) and deducted
it on his tax return. The Commissioner of Internal Revenue disallowed the deduction
and penalized him for underpayment. The Tax Court agreed with both measures. Mark
challenges the decision, and we affirm the judgment.
Mark and Sherri settled on the terms of their divorce in a dissolution agreement.
As maintenance, Mark agreed to pay Sherri a percentage of his salary and of the
incentive‐based pay that he receives. The agreement provides that “maintenance is
taxable income to Sherri and deductible by Mark [under] Section[s] 71(a) and 215 of the
Internal Revenue Code.” It incorporates Section 510 of the Illinois Marriage and
Dissolution of Marriage Act, which provides that unless the agreement says otherwise,
“the obligation to pay future maintenance is terminated upon the death of either party.”
750 ILCS 5/510(c) (2012).
In a separate paragraph regarding the marital home, Mark and Sherri agreed to
sell the house and divide equally “the net equity of said property,” and they agreed that
Mark would “pay all expenses associated with the . . . property until [then].”
Accordingly, from when the agreement took effect to when the house was sold, Mark
paid the mortgage on the property; he also paid to replace some carpeting. In total, he
paid $25,906. Mark believed that before the gain from the sale was divided, he should
first be reimbursed that sum as non‐marital property. Sherri moved the family court to
hold Mark in civil contempt when he withheld the money. The circuit judge rejected
Mark’s view of the agreement and directed him to pay Sherri half of the net gain.
On his 2013 tax returns, without consulting a lawyer or accountant, Mark told his
tax preparer that he paid alimony in a total amount that included the $12,953 payment
to Sherri, and he claimed a deduction. The Internal Revenue Service determined the
payment was not alimony under 26 U.S.C. § 71 and disallowed the deduction,
see 26 U.S.C. § 215. The IRS concluded that Mark underpaid his taxes, and it imposed a
penalty, see 26 U.S.C. § 6662(a).
Mark sought review in Tax Court. At his hearing, counsel for the Commissioner
asked Mark if he believed he would be liable to pay the “alimony” even if Sherri died,
and Mark responded, “That I would have consulted an attorney on.” He continued:
“That would have went to my sons [sic] and I wouldn’t have a problem with anything
going to my sons.”
The judge ruled for the Commissioner. The judge said that “it is undisputed by
[Mark] that he would have continued to have an obligation to make the payments on

-- 2 of 5 --

No. 17‐2460 Page 3
the gain from the real estate even if his former spouse had passed away before the sale.”
Thus, the judge concluded, the payment did not qualify as alimony. See 26 U.S.C.
§ 71(b)(1)(D). The judge also decided that the penalty was proper because Mark did not
consult a professional before taking the deduction. See 26 U.S.C. §§ 6662, 6664(c)(1).
On appeal Mark argues that the equity accrued in the house after the divorce is
not marital property under Illinois state law, see 750 ILCS 5/503, and thus, he reasons,
his payment of half of its value is necessarily alimony. He also says the payment
qualifies as alimony under § 71(b), as described on the IRS’s website, and so was
properly deducted. Accordingly, he also challenges the penalty as unwarranted. Finally,
as he did in the Tax Court and in the family‐court proceedings, Mark levels accusations
of corruption and incompetence against the family court and his divorce attorneys and
appears to dispute the legitimacy of the dissolution agreement.
We review the Tax Court’s conclusions of law de novo and factual
determinations for clear error, taking the evidence in the light most favorable to the Tax
Court’s ruling. Square D Co. & Subsidiaries v. C.I.R., 438 F.3d 739, 743 (7th Cir. 2006). As
the taxpayer, Mark bears the burden of showing a deduction was rightfully taken.
See INDOPCO, Inc. v. C.I.R., 503 U.S. 79, 84 (1992).
We find unpersuasive Mark’s argument that the payment must be alimony
simply because, according to his reading of Illinois law, the increased equity was his
property rather than marital property. Our job here is not to review the family court’s
ruling that Illinois law requires Mark to transfer half of the net gain on the sale of the
house. “The state law creates legal interests but the federal statute determines when and
how they shall be taxed.” United States v. Mitchell, 403 U.S. 190, 197 (1971) (citation and
quotation omitted). We are concerned only with how the Internal Revenue Code treats
that transfer.
Taxpayers may deduct what they pay as alimony as defined in § 71(b). 26 U.S.C.
§ 215. Section 71(b)(1) lists four criteria for a payment to qualify as alimony, and the
only one at issue here is the requirement that the payor has no obligation to make the
payment after the death of the payee. Id. § 71(b)(1)(D). Mark directs us to IRS Tax
Topic 452 from the IRS’s website because, he argues, its list of the properties of alimony
shows the payment is alimony; but he also acknowledges that the website’s list also
includes the requirement that “alimony” payment obligations cease at the payee’s
death. See https://www.irs.gov/taxtopics/tc452 (visited Feb. 13, 2018).

-- 3 of 5 --

No. 17‐2460 Page 4
The judge of the Tax Court concluded that the payment was not alimony because
Mark did not dispute that it survived Sherri’s death, but that premise is inaccurate.
When asked whether he believed he would be liable to pay half of the net gain from the
sale even after Sherri died, Mark said he would have to consult an attorney, and that the
money “would have went to my sons [sic] and I wouldn’t have a problem with
anything going to my sons.” Saying that he needed to consult an attorney is not a
failure to dispute the point. Nor is his statement that he would not contest a result in a
hypothetical scenario in which Sherri died before the sale and the money went to their
children.
But that inaccuracy does not matter if we determine that Mark’s liability to make
the payment would survive Sherri’s death. Our court has not yet applied § 71(b)(1)(D)
to determine if a payment properly can be deducted as alimony. Other courts of
appeals, however, when applying § 71(b)(1)(D), engage in a three‐step inquiry. First,
they ask whether the divorce order expressly terminates liability upon the death of the
payee. See Johanson v. C.I.R., 541 F.3d 973, 977 (9th Cir. 2008); Lovejoy v. C.I.R., 293 F.3d
1208, 1210 (10th Cir. 2002). Second, if it is silent, they examine whether the applicable
state law unambiguously ends liability at the payee’s death. See Johanson, 541 F.3d at
977. Third, if the state law is unclear, they return to the divorce order and interpret it to
decide whether it terminates the obligation at the payee’s death. See Hoover v. C.I.R.,
102 F.3d 842, 846 (6th Cir. 1996). This sensible approach guides our analysis.
Neither the divorce order (which incorporated the dissolution agreement) nor
the circuit court order requiring Mark to pay half of the net equity says if that obligation
would terminate with Sherri’s death. As for Illinois law, in 2013 it characterized three
types of support payments: periodic maintenance, maintenance in gross, and property
settlements. In re Marriage of DʹAttomo, 2012 IL App (1st) 111670 ¶ 24. Periodic
maintenance requires the supporting spouse to pay regular amounts at regular intervals
for an indefinite time, id., and the obligation terminates at the death of the payee,
see 750 ILCS 5/510(c). Maintenance in gross and property settlements are payments of
fixed amounts; both are vested interests held by the payee, so obligations to make these
payments survive the payee. In re Marriage of Freeman, 478 N.E.2d 326, 328–30 (1985).
The distinction is that maintenance in gross may be paired with periodic maintenance
and a property settlement may not. DʹAttomo, 2012 IL App (1st) 111670 ¶ 24.
Illinois law unambiguously provides that the payment at issue would not
terminate at Sherri’s death. Mark was to transfer half of the net gain from the sale. This
is a fixed amount and so is categorized either as maintenance in gross or a property

-- 4 of 5 --

No. 17‐2460 Page 5
settlement. See In re Marriage of Gallentine, 576 N.E.2d 575, 577 (Ill. App. Ct. 1991). (And
because periodic maintenance was ordered, it must be the former.) Regardless, Mark’s
obligation would not terminate at Sherri’s death. See Freeman, 478 N.E.2d at 330.
Because the payment does not meet the requirement of § 71(b)(1)(D), it is not alimony.
Even if Illinois law were ambiguous, however, we still would conclude the
payment is not alimony under the dissolution agreement. The dissolution agreement
expressly characterizes as “maintenance” only the payments of a percentage of Mark’s
income to Sherri and adds that they are deductible by Mark under 26 U.S.C. §§ 71(a)
and 215. The parties also agreed that Mark’s maintenance obligation terminates with a
change of circumstances listed in 750 ILCS 5/510(c), which includes the death of a party.
The proceeds of the sale of the house, however, are addressed in a separate paragraph
that does not reference modifiability or taxes, suggesting different treatment was
intended. On review of the agreement as a whole, the payment is not alimony.
We also conclude that the Tax Court properly imposed a penalty on Mark for
underpaying his taxes. The IRS may impose a penalty of 20% of the amount underpaid
if the taxpayer was negligent or disregarded rules or regulations. 26 U.S.C. § 6662. No
penalty is imposed under 26 U.S.C. § 6662 if the taxpayer acted with reasonable cause
and in good faith. 26 U.S.C. § 6664(c)(1). Generally a taxpayer seeking to apply this
exception must have obtained an opinion from an accountant or lawyer. Brown v. C.I.R.,
693 F.3d 765, 769 (7th Cir. 2012) (citing United States v. Boyle, 469 U.S. 241, 250–51
(1985)). To justify taking the deduction, Mark says he followed the “very clear” law on
alimony—though he also says that he was “unable to find applicable case law”
confirming his interpretation. He did not consult with a professional before telling his
tax preparer how much total alimony he paid during the tax year. Therefore, the
exception does not apply.
Finally, we note that Mark’s complaints about the Illinois family court system
and his family lawyers are irrelevant. If there is a legal argument hiding in his
comments, we take his point to be that the dissolution agreement is invalid. Even if this
were true, a payment under a dissolution agreement that is later invalidated is still
subject to the alimony provisions of the Code. See Richardson v. C.I.R., 125 F.3d 551, 554
(7th Cir. 1997). Thus the argument does not affect the outcome here.
AFFIRMED

-- 5 of 5 --