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Friday, March 20, 2015

U.S. Tax Court Alimony Decisions: Five Cases You Should Know

Massachusetts Appellate courts have been busy interpreting the recent changes in alimony law, but they’re not the only courts struggling with legal questions surrounding alimony.  The U.S. Tax Court is tasked with interpreting the treatment of alimony under the I.R.S. Code and this has led to some interesting decisions in 2015.  Yes, I just used “tax” and “interesting” in the same sentence, but trust me if you are paying or receiving alimony, or representing clients who are, you need to know about these decisions.

David H. Goodman, CPA/ABV/CFF, CVA of Gosule, Butkus & Jesson, LLP has been kind enough to provide us with summaries of these recent cases:

U.S. Tax Court Alimony Decisions: 5 Cases You Should Know
Guest Post by David H. Goodman, CPA/ABV/CFF, CVA


Below I have summarized five U.S. Tax Court cases in which the Court ruled against the taxpayer on issues involving deductible alimony. In each of these the taxpayer attempted to deduct a payment as alimony and attribute that income to the recipient, and in each of these five cases the Tax Court found that the payments to or on behalf of an ex-spouse did not meet the statutory requirements for alimony.

Partial payment of a combined order is treated as child support first:
TC Summary Opinion 2015-2, Becker versus The Commissioner

In this case the Court ruled that the taxpayer must consider SEC. 71(c) which states that the rules governing alimony “…do 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.”

IRC 71(c)(3) provides that where payment is less than amount specified in instrument for child support then so much of such payment as does not exceed the sum payable for child support shall be considered a payment for child support, and not, therefore, alimony.

The taxpayer was not allowed to allocate a payment less than the combined alimony and child support amounts to part child support and part alimony. The payment must first reduce child support in full, with any excess being applied to alimony.

Alimony paid under a draft un-signed temporary agreement is not deductible alimony:
In TC Memo. 2015-13, Milbourn versus The Commissioner

The taxpayer sought to deduct as alimony payments made for support prior to a written divorce or separation agreement being signed. The taxpayer made payments based on a draft marital dissolution agreement; however the agreement was not signed at the time the judge issued the divorce because the parties could not agree on the alimony amount. The judge left this to be decided in the future. The ex-husband made the payments under the draft agreement and sought to deduct them as alimony.

The relevant Code section is Section 71(b)(2) which defines the term “divorce or separation instrument” as:
(A) a decree of divorce or separate maintenance or a written instrument incident to such a decree,
(B) a written separation agreement, or
(C) a decree (not described in subparagraph (A)) requiring a spouse to make payments for the support or maintenance of the other spouse.

The Tax Court ruled that the draft marital dissolution agreement did not constitute a written separation agreement. The court cites that the agreement was not signed because the parties could not agree on the amount to be made in alimony and in fact no such agreement existed until the parties finally signed the marital dissolution agreement which included the amount of alimony to be paid going forward.

Alimony cannot be tied to a child-related contingency, even if the contingency doesn’t occur: 
TC Summ. Op. 2015-11, Resnick versus The Commissioner

The U.S. Tax Code is very clear that alimony payments cannot be contingent on an event related to a child, irrespective of the needs of the child.  A couple’s divorce decree stated that the husband would pay 75% of the mortgage payment on the mother's home until their learning-disabled son moved out of his mom’s home.  Resnik argued that the contingent event had not occurred and therefore the payments were deductible alimony.

The Tax Court citing Internal Revenue Code disagreed and found all of the payments to be nondeductible child support. Alimony cannot be tied to a contingency related to a child whether or not the contingency has or is likely to occur.

Legal Fees could not be treated as deductible alimony because the obligation did not terminate on the death of the ex-spouse:
TC Memo. 2015-27, Hampers versus The Commissioner

A divorce decree obligated a taxpayer to pay future legal fees of his ex-spouse, however it did not specify whether the obligation ceased on the death of the ex-spouse. Payment obligations to an ex-spouse must cease on the death of the payee to be alimony; unless state law clearly provides that the liability to make the payment is terminated at the ex-spouse’s death. The Tax Court ruled against the payer that the obligation to pay future legal fees were deductible alimony

A pre-payment of Alimony made by IRA transfer was not deductible alimony because it did not revert upon the death of the ex-spouse:
TC Summ. Op. 2015-12., Ringbloom versus The Commissioner

This case concerns transferring an IRA to an ex-wife. An amended divorce decree provided for a taxpayer to pay his ex-spouse alimony by transferring an IRA to the ex-spouse. Distributions from the IRA by the wife were to pay her support. The taxpayer claimed the value of the IRA transferred to be deductible alimony. Interestingly, the Tax Court did not rule on whether the transfer of an IRA interest was an actual cash payment (alimony must be paid in cash). Rather the Court found that because there was no clear provision for the IRA to return to the taxpayer on the death of the ex-spouse that the transfer did not qualify as alimony.

The Court surmised that on the death of the ex-spouse the IRA would go to her beneficiaries and therefore the “alimony” payments extended beyond the death of the ex-spouse. Rather, it was determined to be a tax-free divorce-related transfer.

Assuming the payer was over the age of 59 ½, the payer could have taken distributions from the IRA, and then paid them to the ex-spouse. The IRA distributions would be taxable income, but offset by an alimony deduction.

David H. Goodman, CPA/ABV/CFF, CVA is the Director of Litigation and Business Valuation at Gosule, Butkus & Jesson, LLP.  David performs business valuations and does work in forensic accounting. David has testified as an expert witness and is also trained in collaborative practice.


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