Pay On Time and in Cash or You Can Forget About that Alimony Deduction (Muniz v. Comm’r)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.
Mehriary v. Comm’r, T.C. Memo. 2015-126, 2015 WL 4126354 (2015)
(a) Facts: A separation agreement required the husband to pay the wife $4,000 per month in nonmodifiable periodic alimony. The payments were to take the form of payments on the mortgage on the wife’s home. If the mortgage was paid in full before the alimony ended, remaining payments were to be made to the wife.
The parties later agreed to waive $80,000 of the alimony, in return for transfer of the home back to the husband. The wife claimed a loss deduction of $80,000 for transfer of the home. The IRS disallowed the deduction and assessed a deficiency.
(b) Issue: Was the wife entitled to the loss deduction?
(c) Answer to Issue: No.
(d) Summary of Rationale: Under 1041, no gain or loss is generally recognized on a transfer of property incident to divorce. A transfer is incident to divorce if it is made within one year after the end of the marriage. The home was transferred back to the husband within the year.
“Because the transfer of the Sweet Briar property was pursuant to petitioner’s and Mr. Williams’ modification agreement and occurred within one year of petitioner’s divorce from Mr. Williams, the transfer was related to the cessation of their marriage. As such, the transfer was incident to their divorce in all respects. ” 2015 WL 4126354, at *2. The wife therefore could not claim a loss on the transfer.
In the alternative, the wife argued that the transfer of the home was a payment of alimony. But a payment is not alimony for federal tax purposes unless it is made “in cash.” I.R.C. § 71(b)(1). The transfer of the home was therefore not alimony.
Observation: While § 1041 is usually used by taxpayers to avoid payment of taxes on gains, it can also be used by the IRS to prevent taxpayers from obtaining the tax benefit of a loss.