Appeal from the United States Tax Court. Nos. 28363-92 & 26019-93 William M. Fay, Judge.
Before EASTERBROOK, RIPPLE and MANION, Circuit Judges.
DECIDED SEPTEMBER 12, 1997
Irene Richardson failed to report as income on her 1988-90 federal income tax returns payments made to her by her husband, Edward Richardson. The Commissioner of Internal Revenue believed that she should have because, in the view of the IRS, the payments qualify as alimony or separate maintenance payments. The Commissioner sent Irene a notice of deficiency. The Commissioner also sent Edward a notice because he had deducted the payments to Irene on his 1988-90 returns; if the Commissioner turned out to be wrong and the payments were not properly classified as alimony, Edward would owe tax on them. The Tax Court agreed with the Commissioner and held that the payments made by Edward to Irene were includible in her gross income and deductible by Edward. Irene now appeals. For the following reasons, we affirm the Tax Court's judgment.
The facts are stipulated. Edward and Irene were married in 1963. They separated in 1980 but continued to live together off and on until 1983. On March 17, 1983, they signed a separation agreement. It provided, inter alia, that Edward would pay Irene about $10,000 a month and some of her other expenses. The agreement also provided that, if Edward and Irene filed separate tax returns, Irene's payments would be includible in her gross income and deductible by Edward. In November 1987, Edward filed for divorce. In the divorce proceedings, Irene claimed that the 1983 agreement was unconscionable because it had been procured by fraud and duress.
In December 1988, Edward stopped making all payments to Irene. In January 1989, Irene filed a petition for temporary maintenance and other emergency relief. The Illinois circuit court, by orders dated October and December 1989, determined that Edward should pay Irene $29,000 per month (later the figure was revised to $26,700), retroactive to February 1, 1989. On December 4, 1990, the circuit court entered a judgment of dissolution of marriage and found that the 1983 separation agreement was valid. In September 1992, the Appellate Court of Illinois reversed the latter judgment; it determined that the separation agreement was "procedurally and substantively unconscionable." In re Marriage of Richardson, 606 N.E.2d 56, 68 (Ill. App. Ct. 1992).
Edward and Irene filed joint federal income tax returns from 1980 through 1987. By a letter dated April 10, 1989, Edward informed Irene that he would be filing his 1988 tax return as a married person filing separately. Irene received this letter on April 14, 1989. She did not timely file her 1988 return, nor did she request an extension. Rather, she finally filed her 1988 return in October 1990. For taxable years 1988, 1989 and 1990, Edward and Irene filed separate returns. On her tax returns, Irene did not include in her gross income the payments that Edward had made to her. Edward, on the other hand, deducted them as alimony payments. The Commissioner sent a notice of deficiency to Edward stating that the payments to Irene were not deductible and a notice of deficiency to Irene stating that the payments were taxable income to her. *fn1
B. Decision of the Tax Court
The Tax Court held that the payments Edward made in 1988 were pursuant to a "written separation agreement" under the version of I.R.C. sec. 71(a)(2) in effect at the time of the making of the 1983 agreement. Under sec. 71(a)(2), because the payments were made pursuant to such an agreement, they were included in Irene's gross income. The court held that it was immaterial that the agreement was later held invalid by the Illinois appellate court. Treasury Regulation sec. 1.71-1(b)(2)(i) provides that "payments are includible in the wife's gross income whether or not the agreement is a legally ...