Leslie v. Comm’r, 725 F. App’x 597 (9th Cir. 2018) (unpublished)
(a) Facts: A husband and wife signed a separation agreement to settle a California divorce case. In a section entitled “Spousal Support,” the agreement awarded the wife $7,000 per month, stating expressly that it would end upon either party’s death.
The agreement further awarded the wife 10% of an attorney’s fee that the husband might receive in the future for representing the plaintiff in a class-action suit against Enron. The agreement provided:
Ms. Leslie’s ten percent (10%) interest in the Enron fee is a spousal support award from a contingent liability, the amount of which could not be definitely set at the time of this agreement, since Mr. Georgiou cannot be certain of the amount of fees that he will receive from the Enron litigation. This ten percent (10%) distribution to Ms. Leslie is taxable to Ms. Leslie and deductible to Mr. Georgiou as spousal support.
Leslie v. Comm’r, T.C. Memo. 2016‑171, 2016 WL 4921026, at *5 (2016) (emphasis added) (case discussed in the 2017 version of this outline).
The husband ultimately received an attorney’s fee of $55 million, and he paid the wife her share in installments as the fee came in. The final installment was due in 2009, and the husband paid that installment into a joint bank account in both parties’ names. The wife “credibly testified that she had no control over [the account]. She was not given any checks to sign from the account, and her impression of the payment was that it wasn’t yet legally hers.” Id. at *7.
On most of the relevant tax returns, which were filed late, the wife reported the attorney’s fee payments as alimony. On her 2009 tax return, however, the wife did not treat that installment as alimony.
The IRS assessed various deficiencies, some not related to domestic relations, and the wife sought relief in the Tax Court. The Tax Court held that the wife’s share of the Enron fee was taxable as alimony but that the 2009 payment was not taxable until the wife actually had control over the money. The wife appealed to the Ninth Circuit, obviously raising only the first question (since she prevailed on the second question).
(b) Issues: Was the wife’s share of the Enron fee taxable as alimony?
(c) Answer to Issue: Yes.
(d) Summary of Rationale: Once again, the key point was whether the payments terminated upon the wife’s death. The agreement was silent, but the Tax Court held yes:
Under California law, “[e]xcept as otherwise agreed by the parties in writing, the obligation of a party under an order for the support of the other party terminates upon the death of either party or the remarriage of the other party.” Cal. Fam. Code sec. 4337 (West 2013). “A written agreement to waive section 4337 ‘must be specific and express.’” Johanson v. Commissioner, 541 F.3d 973, 977 (9th Cir. 2008) (quoting In re Marriage of Thornton, 115 Cal. Rptr. 2d 380, 383 (Ct. App. 2002)), aff’g T.C. Memo. 2006‑105. The parties here have not produced any such agreement. The mere failure to include language terminating support upon death is not enough to constitute a waiver. Id. By operation of California law, then, payments from the Enron settlement would have terminated upon Leslie’s death.
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