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Technicalities on “Death Termination” for Alimony Deduction

North Carolina alimony statutes and state case law make technicalities on the “death” element of alimony under federal tax law difficult, and one needs to exercise extreme care when drafting a private alimony agreement or contract in North Carolina.

Unlike many states, all alimony awards in North Carolina are not court orders.  For legitimate strategic reasons, alimony awards are frequently private contracts in North Carolina.  Generally, one cannot modify a contractual award of alimony, but court orders for alimony may be modifiable upon a change in circumstances.  That scares many payors in North Carolina, so they negotiate for a private contract.

The trick is that North Carolina’s alimony statutes provide that court ordered alimony terminates upon the death of the recipient spouse, a requirement for deductibility of alimony under Section 71 of the Internal Revenue Code.  The problem is that the North Carolina alimony statutes do not necessarily apply to private contracts for alimony, so one should specify that the alimony should terminate on the death of the payee spouse.  Let’s see what happened in Wignall.  Note that Wignall is a court decree, not a private contract.

 

I.R.C. § 71(b)(1), (c)(1)-(2).

 Wignall v. Comm’r, T.C. Memo. 2014-22, 2014 WL 303375 (2014)

(a) Facts: An Oregon divorce decree required the husband to pay the wife $1,900 per month from July 2006 through December 2011.  The decree did not expressly state whether the payments stopped upon the wife’s death.

The husband paid the alimony and claimed a deduction.  The IRS disallowed the deduction, and the husband appealed to the Tax Court.

(b) Issue: Was the husband entitled to an alimony deduction?

(c) Answer to Issue: Yes.

(d) Summary of Rationale: The key issue was whether the obligation to pay alimony stopped upon the wife’s death.  Since the decree was silent, the court looked to Oregon state law.

“The right to receive alimony and the corresponding duty to pay it are generally considered to have terminated on the death of either of the two parties, at least where no statute to the contrary exists, and the judgment or decree is silent on the subject.”  Prime v. Prime, 172 Or. 34, 139 P.2d 550, 557 (1943).

The IRS argued that the above quotation was dicta, apparently because it had been described as such in Fithian v. United States, 45 F. App’x 700, 701 (9th Cir. 2002).  But Fithian was unpublished and lacked precedential value.  Even worse, it was decided before January 1, 2007, when the Ninth Circuit began allowing citation of unpublished opinions.  See 9th Cir. R. 36-3(a), (c).  Thus, not only was Fithian not controlling, it could not even properly be cited.  The payments at issue terminated upon the wife’s death, and the husband was allowed to take an alimony deduction.

Comment: The IRS’s argument against the deduction was uncommonly weak.  But the IRS is run by tax experts, not by family law experts.

Lesson: Do not take the risk that the IRS will misread the law of your state and disallow an alimony deduction.  If you intend that payments be deductible as alimony, state directly in the decree or agreement that the payments terminate upon death.

by Carolyn J. Woodruff, JD, CPA, CVA