Articles Posted in Tax

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Logue v. Comm’r, T.C. Memo. 2017‑234, 2017 WL 5713945 (2017)

 

(a) Facts: The parties entered into a premarital agreement.  The agreement provided, among other things, that the wife would receive, upon divorce, a lump sum of $100,000, plus $10,000 for each year the parties were married.

 

The parties married but divorced after four years.  A separation agreement required the husband to pay the wife $140,000, exactly the amount that the above provision would require for a four-year marriage.  The agreement further provided:

 

The parties each acknowledge that this agreement, and each provision of it, is expressly made binding upon the heirs, assigns, executors, administrators, representatives and successors in the interest of each party.

 

2017 WL 5713945, at *4.

 

A modified separation agreement then reduced the payment from $140,000 to $117,970.97 on the ground that the husband had already paid $22,029.03 in expenses for the wife.  The husband’s total liability, including the expenses, remained at exactly $140,000.  The modified agreement was incorporated into a Texas divorce decree.

 

The husband paid the wife the $117,970.97.  On his next tax return, he took an alimony deduction of $170,000.  Of this amount, $32,000 was for alimony paid to a prior spouse, and $140,000 was for the payments made to the wife.

 

The IRS disallowed the deduction above the $32,000 paid to the former spouse, and the husband petitioned for relief in the Tax Court.

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Leslie v. Comm’r, 725 F. App’x 597 (9th Cir. 2018) (unpublished)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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Hexum v. Comm’r, 721 F. App’x 512 (7th Cir. 2018) (unpublished)

(a) Facts: The parties were divorced in Illinois.  The wife remained in the former marital home, and the husband was ordered to pay the mortgage.  Upon an eventual sale of the home, the parties were to split the net proceeds.

The home was sold as planned, and the husband paid the wife her one-half of the sale proceeds.  He took an alimony deduction for the amount paid.  The IRS disallowed the deduction, and the husband petitioned for relief in the Tax Court.  The Tax Court held for the IRS, and the husband appealed to the Seventh Circuit.

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

(c) Answer to Issue: No.

(d) Summary of Rationale: The payment to the wife met the first three requirements in § 71(b)(1).  It was made under a divorce instrument, and the instrument did not say that the payment was not includible in gross income, and the parties were not members of the same household.

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by Carolyn Woodruff, attorney, CPA

As has been widely reported, Congress has repealed I.R.C. §§ 71 and 215, thereby eliminating the federal tax reduction for alimony.  In addition, Congress has repealed former I.R.C. § 61(a)(8), which expressly defined alimony as taxable income.

In tax years governed by the new law, alimony will be taxable income to the payor, and will not be taxable income to the payee.

The effective date of the change is as follows:

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Carolyn Woodruff, J.D., C.P.A, C.V.A.

Dear Carolyn:

My ex and I share the children fifty-fifty.  We have three children.  I make approximately $25,000 more than the other parent.  I pay child support even though I have them half the time.  Our child support order says nothing about who gets the dependency exemptions, and I get in a fight with my ex every year over the dependency exemptions.  Who should get the three dependency exemptions?

Carolyn Answers….

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Carolyn Woodruff, J.D., C.P.A, C.V.A.

Forget it!

Forget about the alimony deduction for all new decrees or instruments post-2019. (See Part I for modification of pre-2019 alimony orders and agreement, as modification has a separate set of rules.) The deduction is gone absent a congressional miracle. That means on December 31, 2018, or before you must have alimony that qualifies under IRC Section 71 before it is repealed. The alimony must meet the terms of Section 71, pre-TCJA and pre-2019, which are as follows:

a. You must have a qualifying decree or instrument;

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Carolyn Woodruff, J.D., C.P.A, C.V.A.

Previously, we examined the paragraph and subparagraphs defining “divorce or separation instruments.” Now let’s take a look at which sections of TCJA incorporate these subparagraphs.

Sections incorporating all three subparagraphs of the definition of divorce or separation instrument Post-2018.

The two sections of TCJA that adopt all three subparagraphs of the definition of divorce or separation instrument post-2018 are as follows:

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Carolyn Woodruff, J.D., C.P.A, C.V.A.

The repeal of the alimony tax sections for the inclusion of income and deduction has an ancillary impact on other divorce tax issues. The effective date for all ancillary issues discussed in this article is December 31, 2018, the same as the alimony repeal. These December 31, 2018, changes shall be referred to herein as “post-2018” changes.

The law before TCJA will be referred to as “pre-2019.”

In this first section, we’ll look at what a divorce or separation instrument is.

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Carolyn Woodruff, J.D., C.P.A, C.V.A.

Divorce was hard enough, and now alimony tax reform. Do you feel good or bad about alimony? No matter your answer, this alimony tax reform revolutionizes the divorce arena, and you need to know how it may affect you and your clients. Judges need to know how it might affect those whose appear before them as litigants. So let’s dig in.

This article is Part I of three parts. Part I deals with the basics of the alimony taxation changes under the Tax Cuts and Jobs Act (“TCJA”), referred to herein as the “new Alimony Statute.” Multiple sections of the Internal Revenue Code related to alimony are changed under the TCJA. The new Alimony Statute is contained in Section 110151 named “Repeal of Deduction for Alimony Payments” in PL 115-97, HR1, December 22, 2017, 131 Stat 2054.  When I refer from now on to the “old Alimony Statute,” I am referring mainly to Internal Revenue Codes Sections 71 and 215 as they existed before the TCJA.

Part II will deal with ancillary federal tax considerations of the new Alimony Statute, of which there are many.  Part III will discuss considerations of the new Alimony Statute under North Carolina domestic relations law and explore creative possibilities for the use of the new Alimony Statute.

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Yancey v. Comm’r, T.C. Memo. 2017-59, 2017 WL 1289451 (2017)

Facts: A husband and wife filed joint returns. The returns were prepared by the wife. The returns understated the amount of tax due, mostly because they wrongly double-counted certain gambling losses incurred by the husband.

The IRS assessed a deficiency. The wife filed a petition for innocent spouse relief, the IRS denied it, and the wife appealed to the Tax Court.