Articles Posted in Alimony Tax

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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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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.

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Iglicki v. Comm’r, T.C. Memo. 2015-80, 2015 WL 1886010 (2015)

(a)  Facts: A Maryland separation agreement required a husband to pay $735 per month in child support to a wife. If the husband defaulted on child support, he would immediately become liable for $1,000 per month in spousal support. Liability would continue until the wife died, the husband died, or the husband made 36 payments. The agreement was incorporated into a Maryland divorce decree.

The husband defaulted on child support and thereby became liable for spousal support. The husband’s wages were eventually garnished by a Colorado court. He took an alimony deduction for the total amount paid. The IRS disallowed the alimony deduction and assessed a deficiency

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

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Watch out for those hurried, last minute North Carolina agreements that link alimony and child support termination; you could get an unintended tax consequence and the loss of the tax deduction.

While the Johnson case, discussed herein, is not a North Carolina case, it could be.  Guys and gals, you simply cannot link alimony reductions to a child-related event.  It doesn’t work; that is, if you want the deduction.

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It is tempting to lump child support and post separation support/alimony into a bucket of one dollar amount, sometimes referred to as “family support”.  This is particularly tempting in the early part of a case, but it is DANGEROUS.  A couple of tax rules will help:

Rule 1:  Don’t create family support as a way to get 100 percent of support as an alimony deduction as this really doesn’t work.

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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.

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          Schilling v. Comm’r, T.C. Memo. 2012‑256, 2012 WL 3848477 (2012)

(a) Facts: The parties settled their divorce case by signing a separation agreement. The agreement awarded the wife $2,450 per month on spousal support for six years.  It, further, provided that the wife’s spousal support would drop by specified amounts when each of their three remaining minor children reached age 18 or left home for college, whichever occurred first.  Finally, the agreement provided that the husband would pay no child support, justifying this downward deviation from the child support guidelines by pointing to the spousal support provision. The agreement was incorporated into an Ohio divorce decree.

The husband paid support as required.  On her federal tax returns, the wife reported no alimony income.  The IRS determined that the total amount of the payments, minus the total reductions upon emancipation of the children, was actually alimony, and therefore should have been reported as income.  It, therefore, assessed a deficiency.  The wife appealed to the Tax Court. Continue reading →