Milbourne v. Comm’r, T.C. Memo. 2015-13, 2015 WL 393040 (2015)
(a) Facts: A husband and his wife separated. She proposed a separation agreement, which required him to pay $6,000 per month in alimony. The husband refused to sign this agreement, as he did not want to pay more than $2,500 per month in alimony.
The parties could not agree upon an amount of support and no agreement was initially signed. While the parties were negotiating, the husband paid the wife $36,000 in monthly payments of varying amounts, usually $2,000 but sometimes $4,000 or $5,000. After a total $36,000 had been paid, the parties signed an agreement calling for support of $4,500 per month, with certain possible future reductions.
The husband took an alimony deduction for the $36,000 he paid before the agreement was signed. The IRS disallowed the deduction and assessed a deficiency.
(b) Issue: Was the husband entitled to an alimony deduction?
(c) Answer to Issue: No.
(d) Summary of Rationale: Payments are alimony only if they are paid under “a divorce or separation ” I.R.C. § 71(b)(1)(A). A “divorce or separation instrument” means a divorce decree or a written separation agreement. Id. § 71(b)(2).
The parties did not sign a separation agreement before the payments at issue were made, “because they failed to reach an agreement on a crucial term: the monthly amount of alimony to be paid by petitioner to Ms. Marshall. The draft MDA was simply the beginning of a negotiating process between petitioner and Ms. Marshall.” Milbourne, 2015 WL 393040, at *5. “[T]here was no meeting of the minds between petitioner and Ms. Marshall with respect to alimony until the parties signed the final [agreement].” Id. Because there was no enforceable agreement, the husband’s payments were not made pursuant to a “divorce or separation instrument,” and they did not meet the federal tax law definition of alimony.
Lesson: Don’t take an alimony deduction unless the payments at issue are required by either (1) a court order, or (2) an actual written agreement signed by both parties. If your client insists upon paying support without a court order or a signed agreement, warn the client not to take an alimony deduction on his federal tax return.
Hampers v. Comm’r, T.C. Memo. 2015-27, 2015 WL 679415 (2015)
(a) Facts: A New Hampshire divorce decree required the husband to pay the wife’s attorney’s fees. The husband paid the fees and took alimony deductions for the amounts paid. The IRS disallowed the deductions and assessed deficiencies.
(b) Issue: Was the husband entitled to deduct the amounts paid for the wife’s attorney’s fees as alimony?
(c) Answer to Issue: No.
(d) Summary of Rationale: The IRS argued that the payments were not alimony because liability did not stop upon the death of the payee, as required by I.R.C. § 71(b)(1)(D). The divorce decree was silent on this point, so the issue turned upon New Hampshire state law. “If the payor is liable for even one otherwise qualifying payment after the payee’s death, none of the related payments required before death will qualify as alimony.” 2015 WL 679415, at *2.
“[W]e conclude that New Hampshire law does not plainly show that petitioner’s liability for future attorney’s fees of Carney would terminate upon her death.” Id. at *4. Therefore, the payments at issue were not alimony for federal tax purposes.
Lesson: Obligations to pay attorney’s fees generally do not terminate upon the death of the payee. The payee’s attorney is entitled to be paid regardless of whether the payee lives or dies. Payments of attorney’s fees are therefore unlikely to meet the federal tax law definition of alimony.