Monday, July 13, 2009

Deductibility of Alimony

An issue that is frequently the subject of tax court litigation is the tax treatment of alimony payments. For alimony to be deductible it must truly be alimony - as opposed to child support or property division and, for purposes of I.R.C. § 71 and I.R.C. § 215, the support must terminate on ex-wife’s death.

Recent cases that focus on this issue include:

In Sperling v. Commisioner, T.C. Summary Opinion 2009-141 (June 16, 2009) the Court held that the former spouse’s payments for his ex-wife’s attorney’s fees and condominium fees were not deductible because his liability for the payments did not terminate upon her death. The parties’ settlement agreement failed to provide for termination of husband’s liability for the payments upon wife’s death. The mere fact that husband made the payments before entry of the final judgment and decree of divorce and prior to execution of the settlement agreement was not dispositive. The Court stated that the determining factor is the survival of husband’s liability for making payments after former spouse’s death, not when the payments are actually made.

The Court in Swening v. Commissioner, T.C. Summary Opinion 2009-7 (Jan. 8, 2009) held that ex-husband's unallocated support payments were not deductible because they lacked the essential terms required by §§71 and 215, and the state's divorce statutes did not supply the missing terms.

A recent tax court opinion notes that, in order to take the deduction, the obligated party must have actually paid the alimony. In Jonas v. Commissioner, T.C. Memo 2009-49 (March 5, 2009) the former spouse was ordered to pay support to his ex-wife. Despite not making those payments for two years, he did take deductions for alimony. The court upheld the disallowance of those by the IRS, ruling that ex-husband had not made a "payment" by virtue of the fact that his property, which had been subject to a lien to secure the alimony, was sold and the proceeds placed in a trust securing the alimony.

Finally, a California court addressed the issue arising when one party agrees to pay the other’s tax liability associated with the receipt of alimony payments. Specifically, when a settlement agreement, incorporated into a divorce decree, requires ex-husband to pay half of ex-wife's tax liability attributable to receipt of alimony, does ex-wife have a duty to select the filing status that will result in the lowest tax liability? The California Court of Appeals, holding that it would not imply such a requirement, ruled there was not an implied contractual duty of fair dealing in a settlement agreement incorporated into a final judgment and decree of divorce. Corona v. Corona, (California Court Appeals April 7, 2009)

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