SCOTUS Reports

Tag: Tax Deductibility

  • Monon Railroad v. Commissioner, 54 T.C. 364 (1970): Debt vs. Equity Classification for Tax Deductibility of Interest

    Monon Railroad v. Commissioner, 54 T. C. 364 (1970)

    Income debentures can be classified as debt for tax purposes if they exhibit characteristics of debt over equity, allowing for interest deductions.

    Summary

    Monon Railroad exchanged its Class A stock for 6% income debentures and Class B stock to simplify its capital structure. The key issue was whether these debentures should be classified as debt, allowing interest deductions, or equity. The court held that the debentures were debt due to their fixed maturity, redemption provisions, and the fact that they altered the relationship between the railroad and its shareholders. The court also allowed the deduction of ‘preissue interest’ paid on these debentures, following precedent that such payments were deductible in the year paid.

    Facts

    Monon Railroad, after reorganization under bankruptcy, sought to simplify its capital structure by exchanging its Class A common stock for new 6% income debentures and Class B stock. The exchange was voluntary and aimed to retire Class A stock, which had voting control over the company. The debentures were to mature in 50 years, with interest payable out of available net income. By March 1958, nearly 88% of Class A stock was exchanged. Monon claimed deductions for interest, including preissue interest for 1957 and 1958, which was challenged by the Commissioner.

    Procedural History

    The Tax Court reviewed the case after the Commissioner determined deficiencies in Monon’s income tax for 1953-1956 and redetermined its income for 1957-1959. The court had to decide whether the debentures were debt or equity and if preissue interest was deductible.

    Issue(s)

    1. Whether the 6% income debentures issued by Monon Railroad represent debt or equity?
    2. If they are debt, whether Monon Railroad can deduct the preissue interest paid on these debentures?

    Holding

    1. Yes, because the debentures exhibit characteristics of debt over equity, including a fixed maturity date, redemption provisions, and they significantly altered the relationship between Monon and its shareholders.
    2. Yes, because the preissue interest is deductible in the year paid, following precedent established in similar cases.

    Court’s Reasoning

    The court applied a substance-over-form approach to determine if the debentures were debt or equity. Key factors included the fixed maturity date, the provision for redemption, the absence of voting rights for debenture holders, and the fact that the exchange altered the shareholders’ relationship with the company. The court noted that the debentures were treated as debt by all parties, including the ICC and the New York Stock Exchange. The court also rejected the Commissioner’s argument that the exchange was solely for tax benefits, finding a bona fide business purpose in simplifying the capital structure. Regarding preissue interest, the court followed precedents such as Commissioner v. Philadelphia Transportation Co. , allowing the deduction in the year paid, as it was seen as equivalent to a higher initial interest rate.

    Practical Implications

    This decision provides guidance on distinguishing debt from equity for tax purposes, emphasizing the importance of the substance of the instrument over its label. For legal practitioners, it underscores the need to carefully structure financial instruments to achieve desired tax outcomes. Businesses, particularly in the railroad industry, can use this case to structure their capital in ways that allow interest deductions. The ruling also impacts how similar cases involving preissue interest are analyzed, affirming that such interest can be immediately deductible. Subsequent cases have referenced Monon Railroad to determine the debt vs. equity classification of financial instruments.

  • Arkansas Best Corp. v. Commissioner, 56 T.C. 890 (1971): Deductibility of Interest Expenses for Municipal Bond Dealers

    Arkansas Best Corp. v. Commissioner, 56 T. C. 890 (1971)

    Interest expenses incurred by municipal bond dealers to purchase and carry tax-exempt bonds are not deductible under section 265(2) of the Internal Revenue Code.

    Summary

    Arkansas Best Corp. , a municipal bond dealer, sought to deduct interest expenses incurred on loans used to purchase and hold tax-exempt bonds until resale. The Tax Court ruled that these expenses were not deductible under section 265(2), which disallows deductions for interest on indebtedness incurred to purchase or carry tax-exempt obligations. The court rejected the dealer’s argument that the primary purpose of its business was to resell bonds at a profit, emphasizing that the purpose of the loans was to purchase and carry the bonds, thus falling squarely within the statute’s scope. This decision aligns with prior rulings that consistently applied section 265(2) to municipal bond dealers.

    Facts

    Arkansas Best Corp. was involved in the business of dealing in municipal bonds. To finance the purchase and holding of these bonds until resale, the company borrowed money from banks. The interest expenses on these loans, which were substantial and related to the period before the bonds were resold, were the subject of the dispute. The company argued that these expenses should be deductible as business expenses since the ultimate goal of its business was to profit from the resale of the bonds.

    Procedural History

    The case was brought before the Tax Court to determine the deductibility of the interest expenses under section 265(2) of the Internal Revenue Code. The Tax Court reviewed prior cases and legislative history before making its decision.

    Issue(s)

    1. Whether interest expenses incurred by a municipal bond dealer to purchase and carry tax-exempt bonds until resale are deductible under section 265(2) of the Internal Revenue Code.

    Holding

    1. No, because the interest expenses fall within the disallowance provisions of section 265(2), which specifically prohibits deductions for interest on indebtedness incurred to purchase or carry tax-exempt obligations.

    Court’s Reasoning

    The Tax Court applied section 265(2) of the Internal Revenue Code, which clearly states that no deduction shall be allowed for interest on indebtedness incurred to purchase or carry tax-exempt obligations. The court rejected Arkansas Best Corp. ‘s argument that its primary business purpose was to resell bonds at a profit, stating that the purpose of the loans was to purchase and carry the bonds, thus falling within the statute’s scope. The court relied on previous cases such as Prudden, Denman, and Wynn, which consistently applied section 265(2) to municipal bond dealers. The court also distinguished cases like Leslie, where a ‘purpose test’ was applied due to the lack of direct traceability between loans and tax-exempt securities, noting that in the present case, the loans were directly used to purchase and carry the bonds. The court emphasized that the statute’s language was clear and made no exception for dealers in municipal bonds, as stated in Prudden: “There is no occasion. . . for the application of the rules of statutory construction. The language of the statute is clear and makes no exception. “

    Practical Implications

    This decision solidifies the application of section 265(2) to municipal bond dealers, making it clear that interest expenses incurred to purchase and carry tax-exempt bonds are not deductible. Legal practitioners advising clients in the municipal bond industry must ensure that clients understand the non-deductibility of such interest expenses. This ruling impacts the financial planning and tax strategies of bond dealers, who must account for these non-deductible expenses in their business operations. Subsequent cases have continued to apply this principle, reinforcing the court’s stance that the purpose of the loan, rather than the ultimate business goal, determines the deductibility of interest expenses under section 265(2).

  • Baker v. Commissioner, 33 T.C. 703 (1959): Distinguishing Alimony from Property Settlement Payments for Tax Deductibility

    Baker v. Commissioner, 33 T. C. 703 (1959)

    Periodic payments under a separation agreement may be partially deductible as alimony and partially non-deductible as a property settlement based on the intent and terms of the agreement.

    Summary

    In Baker v. Commissioner, the Tax Court had to determine whether payments made by the petitioner to his wife under a separation agreement were deductible as alimony or non-deductible as a property settlement. The court found that the payments were intended to serve both purposes, with 43% being for support (alimony) and thus deductible, and 57% for property rights, hence non-deductible. This decision was based on the specific terms of the agreement, including provisions for payments to continue or cease upon the wife’s remarriage or death, highlighting the dual nature of the payments. The case underscores the importance of clearly distinguishing between alimony and property settlements in legal agreements for tax purposes.

    Facts

    The petitioner made periodic payments to his wife pursuant to a separation agreement. The agreement stipulated that payments would continue regardless of the wife’s divorce and remarriage, except for a portion that would cease upon her remarriage. Some payments were to continue to the wife’s son after her death. The total payments amounted to $58,516. 65, with $33,516. 65 payable regardless of remarriage and $25,000 subject to forfeiture upon remarriage.

    Procedural History

    The Commissioner determined a deficiency in the petitioner’s tax, presuming the payments were non-deductible property settlement. The petitioner contested this in the Tax Court, arguing the payments were alimony and thus deductible.

    Issue(s)

    1. Whether the periodic payments made by the petitioner to his wife under the separation agreement were entirely for her support and thus deductible as alimony under sections 71(a)(2) and 215(a)?

    2. If not, what portion of the payments can be classified as alimony and thus deductible?

    Holding

    1. No, because the court found that the payments served dual purposes of support and property settlement.

    2. 43% of the payments were deductible as alimony because they were made “because of the marital or family relationship” and satisfied the wife’s support rights, while 57% were non-deductible as they were made in satisfaction of the wife’s property rights.

    Court’s Reasoning

    The court analyzed the separation agreement to determine the intent behind the payments. It relied on the fact that some payments were to cease upon the wife’s remarriage, indicating support, while others were to continue regardless, suggesting a property settlement. The court cited Soltermann v. United States for the principle that payments can be segregated into alimony and property settlement portions. The court used the specific terms of the agreement to calculate the deductible portion, emphasizing that the burden of proof lay with the petitioner to show the deductible nature of the payments. The court noted the lack of clear testimony from both parties on the intent of the payments but based its decision on the agreement’s terms.

    Practical Implications

    This decision requires attorneys drafting separation agreements to clearly delineate between payments intended for support (alimony) and those for property settlement, as this affects their tax treatment. It emphasizes the importance of the terms of the agreement, such as provisions related to remarriage or death, in determining the nature of payments. For tax practitioners, it highlights the need to carefully analyze such agreements to advise clients on the deductibility of payments. Subsequent cases have followed this principle, often citing Baker when addressing similar issues of mixed payments under separation agreements.

  • McLaughlin v. Commissioner, 51 T.C. 233 (1968): Tuition Payments Not Deductible as Charitable Contributions

    McLaughlin v. Commissioner, 51 T. C. 233 (1968)

    Tuition payments to educational organizations are not deductible as charitable contributions if made in exchange for services received.

    Summary

    In McLaughlin v. Commissioner, the U. S. Tax Court ruled that tuition payments made by the McLaughlins to the Sisters of Divine Providence for their children’s education at Sacred Heart School were not deductible as charitable contributions. The court found that these payments were not gifts but rather payments for services received, thus not qualifying under Section 170(c)(2)(B) of the Internal Revenue Code. The decision emphasized the importance of the taxpayer’s motive, distinguishing between payments made for personal benefit and true charitable contributions, and reinforced the precedent set by Harold DeJong.

    Facts

    James A. and Katherine E. McLaughlin paid $1,526 in tuition to the Sisters of Divine Providence, a qualified educational organization under Section 170(c)(2)(B), for the education of their five children at Sacred Heart School in Kingston, Massachusetts during the 1964 tax year. The McLaughlins claimed this amount as a charitable deduction on their tax return, which the Commissioner of Internal Revenue disallowed.

    Procedural History

    The McLaughlins filed a petition with the U. S. Tax Court contesting the Commissioner’s disallowance of their charitable contribution deduction. The court proceeded to trial, where the McLaughlins conceded a separate casualty loss issue. The only remaining issue was the deductibility of the tuition payments as charitable contributions.

    Issue(s)

    1. Whether the McLaughlins’ tuition payments to the Sisters of Divine Providence qualify as deductible charitable contributions under Section 170(c)(2)(B) of the Internal Revenue Code.

    Holding

    1. No, because the payments were made in exchange for educational services received by the McLaughlins’ children, and thus were not considered gifts or contributions within the meaning of the statute.

    Court’s Reasoning

    The court applied the principle that for a payment to qualify as a charitable contribution, it must be a gift or contribution made without consideration of a direct benefit to the donor. The court cited Harold DeJong, emphasizing that tuition payments are generally not deductible if they are motivated by the anticipated benefit of education for the taxpayer’s children. The McLaughlins’ payments were clearly intended to secure their children’s enrollment at Sacred Heart School, thus failing to meet the criteria for a charitable contribution. The court rejected the McLaughlins’ arguments regarding the religious nature of the school and the availability of public education, focusing instead on the motive behind the payments. The court’s decision reaffirmed the distinction between payments for personal or family expenses and true charitable contributions.

    Practical Implications

    This decision clarifies that tuition payments to educational institutions, even those qualifying as charitable organizations, are not deductible as charitable contributions when made in exchange for educational services. Legal practitioners should advise clients that such payments are considered personal or family expenses under Section 262, not deductible contributions. This ruling impacts how taxpayers claim deductions for payments to educational institutions and underscores the importance of examining the payer’s intent. Subsequent cases have consistently followed this precedent, reinforcing the narrow interpretation of what constitutes a charitable contribution under the tax code.

  • Lincoln Sav. & Loan Asso. v. Commissioner, 51 T.C. 82 (1968): Capitalization of Mandatory Prepayments for Insurance Coverage

    Lincoln Sav. & Loan Asso. v. Commissioner, 51 T. C. 82 (1968)

    Payments required by law to be made to a reserve fund, which provide future benefits, are capital expenditures and not currently deductible as expenses.

    Summary

    Lincoln Savings & Loan Association contested a tax deficiency arising from the IRS’s disallowance of a deduction for a payment made to the Federal Savings and Loan Insurance Corporation (FSLIC). The payment was characterized by law as a “prepayment” for future insurance premiums. The Tax Court ruled that such payments, required under 12 U. S. C. § 1727(d), were capital expenditures to be deducted only when used for actual premiums or losses, not as current expenses. The decision highlighted the distinction between these payments and regular annual premiums, emphasizing the capital nature of the prepayments.

    Facts

    Lincoln Savings & Loan, a California institution, insured its depositors’ accounts with the FSLIC since 1938. Since 1962, it was required to make additional annual payments to the FSLIC, described as “prepayments” under 12 U. S. C. § 1727(d), equal to 2% of the net increase in insured accounts, offset by any required Federal Home Loan Bank stock purchase. These prepayments were credited to the FSLIC’s Secondary Reserve, which provided Lincoln with a pro-rata interest and annual returns, and were to be used for future regular insurance premiums once the combined reserves reached a certain level.

    Procedural History

    The IRS disallowed Lincoln’s deduction of the 1963 prepayment of $882,636. 86, asserting it was a capital expenditure. Lincoln petitioned the U. S. Tax Court for a redetermination of the deficiency. The court upheld the IRS’s position, ruling that the prepayment was not deductible in the year paid.

    Issue(s)

    1. Whether the payment made by Lincoln Savings & Loan under 12 U. S. C. § 1727(d) to the FSLIC in 1963 was an ordinary and necessary expense of that year, or a capital expenditure?

    Holding

    1. No, because the payment was a capital expenditure, deductible only in future years when used to discharge the obligation to pay regular annual premiums or to meet actual losses.

    Court’s Reasoning

    The court distinguished the prepayment from regular premiums, noting that the former was credited to the Secondary Reserve, not treated as income, and available only after other resources were exhausted. The court applied the principle that expenditures creating assets with utility beyond the tax year are not deductible currently. It emphasized that the prepayment’s future utility in covering regular premiums or potential losses, along with its treatment as an asset on financial statements, indicated its capital nature. The court also noted the legislative intent to strengthen the FSLIC’s capital structure through these payments, further supporting the capital expenditure classification. The decision referenced Rev. Rul. 66-49, which treated similar payments as capital expenditures.

    Practical Implications

    This ruling necessitates that savings and loan associations capitalize payments to reserve funds like the FSLIC’s Secondary Reserve, affecting their tax planning and financial reporting. It clarifies that such payments, despite being labeled as “prepayments,” are not deductible until utilized for premiums or losses. The decision impacts the treatment of similar mandatory contributions to insurance or reserve funds in other sectors, reinforcing the principle that future benefit payments are capital expenditures. It also underscores the importance of regulatory accounting standards in tax contexts, despite their non-controlling nature.

  • Falstaff Beer, Inc. v. Commissioner, 37 T.C. 451 (1961): Payments for Business Acquisition as Capital Expenditures

    Falstaff Beer, Inc. v. Commissioner, 37 T. C. 451 (1961)

    Payments made to acquire a business, even if structured as per-unit sales payments, are capital expenditures and not deductible as ordinary and necessary business expenses.

    Summary

    In Falstaff Beer, Inc. v. Commissioner, the Tax Court ruled that payments made by a new beer distributor to its predecessor, structured as 3 cents per case sold until a total of $65,000 was paid, were not deductible as ordinary business expenses. The court held these payments were for the acquisition of the business and thus capital in nature. The case highlights the distinction between expenditures for business acquisition and those for ongoing business operations, with significant implications for how businesses structure payments for goodwill and other intangibles in acquisition scenarios.

    Facts

    William A. Heusinger was the original distributor of Falstaff beer in Bexar County, Texas, under an oral agreement with Falstaff Brewing Corporation that was terminable at will. Due to declining sales and health issues, Heusinger agreed to relinquish his distributorship to John J. Monfrey, who then formed a partnership and later the petitioner corporation, Falstaff Beer, Inc. As part of the transition, Monfrey entered into a contract with Heusinger to pay $65,000 at the rate of 3 cents per case of beer sold. The payments were claimed as ordinary and necessary business expenses by the petitioner, but the Commissioner of Internal Revenue disallowed these deductions.

    Procedural History

    The Commissioner determined deficiencies in the petitioner’s income tax for the years 1954 through 1957, disallowing the deductions for the payments to Heusinger. The petitioner appealed to the United States Tax Court, which heard the case and issued its opinion on December 18, 1961.

    Issue(s)

    1. Whether the payments made by the petitioner to Heusinger, pursuant to the contract of July 22, 1953, are deductible as ordinary and necessary business expenses under sections 23(a)(1)(A) of the Internal Revenue Code of 1939 and 162(a) of the Internal Revenue Code of 1954.

    Holding

    1. No, because the payments were capital expenditures made in connection with the acquisition of a new business, rather than ordinary and necessary expenses in the operation of the petitioner’s business.

    Court’s Reasoning

    The Tax Court reasoned that the payments were made in exchange for the transfer of Heusinger’s business, including goodwill and other intangible assets, as stated in the contract. The court rejected the petitioner’s argument that the payments were for a “peaceable market,” finding instead that they were for the acquisition of the business. The court cited Welch v. Helvering, where similar payments were deemed closer to capital outlays than ordinary expenses. The court also noted that the benefits from these payments were not limited to the years in which they were made, making them ineligible for amortization under sections 23(l) of the 1939 Code and 167(a)(1) of the 1954 Code. The court emphasized that the method of payment (3 cents per case) was merely a convenient way to pay the agreed-upon $65,000, and did not change the capital nature of the expenditure.

    Practical Implications

    This decision clarifies that payments structured as per-unit sales, when made for the acquisition of a business, are capital expenditures and not deductible as ordinary business expenses. Businesses must carefully consider how they structure payments for goodwill and other intangibles to avoid misclassifying them as deductible expenses. The ruling impacts how similar cases are analyzed, emphasizing the need to distinguish between expenditures for business acquisition and those for ongoing operations. It also affects legal practice in tax law, requiring practitioners to advise clients on proper accounting for acquisition costs. The decision has broader implications for business transactions involving the transfer of intangible assets, influencing how such deals are structured and reported for tax purposes.

  • Baker v. Commissioner, 17 T.C. 161 (1951): Determining Periodic vs. Installment Payments in Divorce Settlements

    Baker v. Commissioner, 17 T.C. 161 (1951)

    The “principal sum” of a divorce settlement obligation can be considered specified even if payments are contingent upon events like death or remarriage, as long as those contingencies haven’t occurred during the tax year in question, thus payments are considered installment payments and not deductible.

    Summary

    The Tax Court addressed whether payments made by the decedent to his former wife, pursuant to a property settlement agreement incident to their divorce, were “periodic” or “installment” payments under Section 22(k) of the Internal Revenue Code. The court held that the payments were installment payments, not periodic, and thus not deductible by the decedent under Section 23(u). The ruling hinged on the interpretation of “obligation” and “principal sum” within the context of the agreement, even though the total amount was contingent upon the wife’s death or remarriage.

    Facts

    The decedent entered into a property settlement agreement with his wife as part of their divorce. The agreement stipulated payments of $125 per week for 104 weeks. The obligation to make these payments was contingent upon the wife not dying or remarrying during that 104-week period. The decedent sought to deduct these payments from his gross income for tax purposes, arguing they were periodic payments.

    Procedural History

    The Commissioner of Internal Revenue disallowed the deduction claimed by the decedent. The case was then brought before the Tax Court to determine whether the payments qualified as deductible “periodic payments” or non-deductible “installment payments.”

    Issue(s)

    1. Whether payments made under a divorce settlement agreement, where the total amount payable is contingent upon the death or remarriage of the recipient spouse, constitute “periodic payments” or “installment payments” under Section 22(k) of the Internal Revenue Code.

    Holding

    1. No, the payments are considered installment payments because the principal sum was specified in the agreement, notwithstanding the contingencies.

    Court’s Reasoning

    The Tax Court relied on its previous decision in J.B. Steinel, 10 T.C. 409, stating that the word “obligation” in Section 22(k) should be construed broadly to include obligations subject to contingencies like death or remarriage, as long as those contingencies haven’t occurred during the tax years in question. The court emphasized that a “principal sum” can be “specified” even if the obligation is subject to being cut short by such events. The court dismissed the argument that the need to multiply the weekly payments by the number of weeks to arrive at a total sum was significant, finding it a “formal difference” from decrees where the total was explicitly stated. The court distinguished the cases of Roland Keith Young, 10 T.C. 724, and John H. Lee, 10 T.C. 834, noting that the terms of the agreements in those cases were different.

    The court stated, “We believe that the principal sum must be regarded as specified until such time as the contingencies actually arise and avoid the obligation.”

    Practical Implications

    This case clarifies that the presence of contingencies like death or remarriage in a divorce settlement does not automatically classify payments as “periodic” for tax purposes. Attorneys drafting settlement agreements must consider this when structuring payment plans and advising clients on the tax implications. The ruling emphasizes the importance of clearly specifying the principal sum, even if contingencies exist. Later cases have cited this decision to reinforce the principle that the mere possibility of a contingency does not negate the characterization of payments as installment payments, provided the contingency has not occurred during the relevant tax year. This affects how divorce settlements are structured and how taxes are planned for both parties involved. The ruling provides a framework for determining tax deductibility in situations where payments are subject to certain conditions.

  • Budd v. Commissioner, 7 T.C. 413 (1946): Determining Tax Deductibility of Alimony Payments

    7 T.C. 413 (1946)

    When a divorce agreement provides a single payment for both spousal and child support, the portion specifically earmarked for child support is not deductible by the payor spouse.

    Summary

    This case concerns whether a taxpayer can deduct the full amount of payments made to his former wife under a separation agreement. The agreement, incorporated into a divorce decree, provided for a single payment covering both the wife’s personal support and the support of their children. The Tax Court held that only the portion of the payment allocated to the wife’s support was deductible, while the portion earmarked for child support was not. The court emphasized that the agreement must be construed as a whole to determine the true nature of the payments.

    Facts

    Robert W. Budd entered into a separation agreement with his wife in contemplation of divorce. The agreement was subsequently ratified and adopted by the divorce court. The agreement stipulated a single payment covering both the wife’s personal support and the support and maintenance of their children. The Commissioner of Internal Revenue argued that a portion of the payment was specifically for child support and, therefore, not deductible by Budd.

    Procedural History

    The Commissioner of Internal Revenue assessed a deficiency against Budd, disallowing a portion of the deduction claimed for alimony payments. Budd petitioned the Tax Court for a redetermination. The Tax Court upheld the Commissioner’s determination, finding that a portion of the payment was earmarked for child support and not deductible. The Court of Appeals affirmed the Tax Court’s decision.

    Issue(s)

    1. Whether a single payment made pursuant to a divorce agreement, which covers both spousal and child support, is fully deductible by the payor spouse under Section 22(k) of the Internal Revenue Code.
    2. If not fully deductible, whether the portion of the payment attributable to child support can be determined from the agreement.

    Holding

    1. No, because Section 22(k) only allows the deduction of payments made for the support of the spouse, not for the support of children.
    2. Yes, because the court can examine the agreement as a whole to determine if a specific portion of the payment is “earmarked” for child support.

    Court’s Reasoning

    The Tax Court reasoned that determining the deductibility of payments requires a careful construction of the separation agreement as a whole, reading each paragraph in light of all others. The court found that $2,400 of the payment was “earmarked” for the support of the children. The court relied on Sections 22(k) and 23(u) of the Internal Revenue Code, which allow a deduction for alimony payments but not for child support. The court cited previous cases such as Dora H. Moitoret, 7 T.C. 640, where the amount for child support was not identifiable, leading to a different result. In this case, however, the agreement allowed for the portion for the children to be determined. As the court stated, “an adequate consideration of the problem here presented requires a construction of the agreement as a whole, and the reading of each paragraph in the light of all the other paragraphs thereof.”

    Practical Implications

    This case emphasizes the importance of clearly delineating spousal support from child support in divorce agreements to ensure proper tax treatment. Attorneys drafting these agreements should be explicit about the intended use of the funds. If an agreement lumps payments together, it increases the likelihood that the IRS will challenge the deductibility of the entire payment. The case provides a rule that family law practitioners must understand and apply when negotiating and drafting separation agreements. Later cases have used Budd as a basis to determine whether specific language creates a fixed amount for child support. It further illustrates that the substance of the agreement, rather than its form, will govern the tax consequences.