Articles Posted in Alimony Tax

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Leslie v. Comm’r, 725 F. App’x 597 (9th Cir. 2018) (unpublished)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

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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Anderson v. Comm’r, T.C. Memo. 2016-47, 2016 WL 976816 (2016)

Facts: An Alabama court entered a pretrial order in a divorce case, requiring both parties to “[m]aintain status quo as to payment of house note or rent, utilities, food, necessities, fixed credit obligations, ” 2016 WL 976816, at *1. After the order was entered, the husband transferred at least $1,000 each month to the wife “for her spending money and other things that I had previously paid for.” Id.

The husband took an alimony deduction for the amounts paid. When the IRS did not allow the deduction, the husband then appealed to the Tax Court.

Issue: Were the payments alimony for federal tax purposes?

Answer to Issue: Summary of Rationale: The first requirement in the federal definition of alimony states that it must be received under a “divorce or separation ” I.R.C. § 71(b)(1)(A). A “divorce or separation instrument” includes “a decree of divorce or separate maintenance or a written instrument incident to such a decree.” Id. § 71(b)(2)(A). A pretrial order is not a divorce decree, but it is a written instrument incident to such a decree. Thus, the premarital order was a divorce or separation instrument.

The pretrial order directed the husband to maintain the status quo. The husband testified that the payments were intended to cover things he had previously paid for. He was therefore maintaining the status quo, as required by the order, so that the payments were received under a court order. There is no requirement that the divorce or separation instrument list the specific exact amount of support required.

The pretrial order did not specify whether the payments stopped upon death. But the payments occurred periodically, so they were periodic alimony, and Alabama case law stated clearly that periodic alimony ceases upon the death of the payee. Because the payments stopped upon death, they were alimony for purposes of federal tax law.

Lesson: Temporary support, alimony pendente lite, or postseparation support can all constitute alimony under federal tax law, so long as it is clear from the language of the agreement or the order, or from state law if the order is silent, that the obligation terminates upon death of the payee.

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Wolens v. United States, 125 Fed. Cl. 422 (2016)

Facts: The parties married in New York, but divorced in England. Their English divorce decree provided for a large initial payment to be made by the husband to the wife, followed by annual payments of £441,667 in 2007, 2008, and 2009. (The 2009 payment was one pound less.)The husband’s initial tax return did not claim the 2007 payment as alimony. He later filed an amended return which did claim the 2007 payment as alimony. The IRS disallowed this return and refused to issue a refund.

The husband then filed suit in the Court of Federal Claims to obtain the refund. The IRS then moved to dismiss the action, arguing that the husband could not establish that the 2007 payment terminated upon death of the payee. The husband filed a motion for summary judgment, arguing that the payments clearly did terminate.

Issue: Was the 2007 payment alimony?

Answer to Issue: The answer depends upon material issues of fact; the motion to dismiss and motion for summary judgment are therefore denied.

Summary of Rationale: If the 2007 payment did not terminate upon death of the payee, it clearly could not be alimony for federal tax purposes. The agreement itself was silent on this point. The key question was therefore whether the payment automatically terminated at death under the controlling domestic relations law. “[A]lthough the government has shown that the term ‘lump sum’ is typically associated in the United Kingdom with a division of marital assets, it has not established that this is the only reasonable interpretation” of the agreement. 125 Fed. Cl. at 430. In particular, the annual payments might be construed together as a periodic obligation, instead of being construed separately as individual lump-sum obligations. The IRS’s motion to dismiss was therefore denied.

The husband’s motion for summary judgment was also denied, for essentially the same reason; the decree was ambiguous, and its construction was therefore an issue for trial. Continue reading →

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By: Dana M. Horlick, Attorney, Woodruff Family Law Group

 

Muniz v. Comm’r, T.C. Memo. 2015-125, 2015 WL 4126356 (2015)

(a) Facts: A Florida separation agreement provided that the husband would pay wife $1,000 per month in alimony. The husband did not pay on time, and the court entered an enforcement order directing the husband to pay $6,000 in alimony due under the agreement. The husband paid this amount.

The parties then entered into a second agreed order, which required the husband to pay the wife $45,000 in settlement of all obligations under the separation agreement. “[The wife] testified at trial that the $45,000 payment was a settlement for attorney’s fees and the division of marital assets and was not intended to be alimony.” 2015 WL 4126356, at *1.

The husband paid the $45,000 and took an alimony deduction. 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: The $6,000 payment made by the husband under the first agreed order was a full payment of all alimony. Also, the amount of the $45,000 payment did not match in any discernible way the amount of alimony required by the agreement. The $45,000 appears to be a property settlement.

Also, even if the $45,000 were intended as alimony, it would not be alimony for federal tax purposes unless liability ends upon death of the payee. Nothing in the agreed order or Florida law suggests that liability for the $45,000 would terminate upon death. On the contrary, Florida law provides that lump-sum alimony survives death. Thus, even if the $45,000 were intended as lump-sum alimony, the husband would still not be entitled to an alimony deduction.

 

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