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Making amends…and arrears.

Siegel v. Comm’r, T.C. Memo. 2019 11, 2019 WL 643186 (2019)

(a) Facts: Husband and wife were divorced in New York. The final decree ordered the husband to pay to the wife spousal maintenance of $10,110 per month. The husband failed to pay, and the wife filed enforcement proceedings. The court found the husband in contempt and threatened to imprison him unless he paid $225,000 to the wife.

The husband paid the sum required and then deducted it as alimony on his 2012 tax return. The IRS assessed a deficiency on the basis that the $225,000 was not alimony, and the husband appealed to the Tax Court.

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

(c) Answer to Issue: Yes.

(d) Summary of Rationale: “Lump sum payments of alimony or child support arrearages generally retain their character as alimony or child support for Federal tax purposes.” 2019 WL 643186, at *8.

A payment is alimony for federal tax purposes only if it terminates upon the payee’s death. I.R.C. ยง 71(b)(1)(D). The IRS argued that the $225,000 could not be alimony because the obligation to make the payment would not terminate if the wife died. It relied particularly upon Iglicki v. Commissioner, T.C. Memo. 2015-80, 2015 WL 1886010 (2015), which was discussed and criticized in the 2015 version of this outline. Iglicki held that a judgment for arrears was not alimony under federal tax law because it did not terminate upon the wife’s death.

But the judgment for arrears in Iglicki was a money judgment. The Siegel court held that the obligation to pay the $225,000 was not a money judgment. Rather, it was a condition in a contempt judgment. Iglicki was therefore distinguishable, and the obligation to pay $225,000 was alimony.

Observations:

1. Siegel held that Iglicki applies only where the arrears obligation was a money judgment, but the issue is whether the obligation terminates upon the payee’s death, not whether the obligation is a money judgment. It is unclear why the presence of a money judgment should be the key point.

2. “Having decided that the 2012 order was not a money judgment . . . we need not consider Iglicki.” Siegel, 2019 WL 643186, at *8. Siegel therefore stopped short of criticizing Iglicki directly. But the court certainly showed zero interest in expanding Iglicki beyond its very specific facts.

3. As the 2015 version of this outline noted, if Iglicki is correct, then the entry of the judgment for arrears converted the obligation at issue from alimony to not-alimony. It seems odd that the time of payment should cause such a fundamental change in the nature of the obligation.

4. Moreover, the issue is whether the original support obligation ceased upon the payee’s death. If so, the obligation is alimony. When alimony is paid late, the court knows that the payee did not die, and, therefore, the obligation to pay arrears does not terminate upon death because death did not happen. But the obligation would have terminated upon death if death had happened. The fact that the original underlying support obligation was terminable upon death should make any judgment for arrears alimony for federal tax purposes. Siegel reached the right result; Iglicki did not.

5. Nevertheless, the IRS seems determined to try to take the position that judgments for alimony arrears are not alimony because they do not terminate upon the payee’s death. As long as the IRS continues to take this position, there will continue to be an unfortunate element of risk to taking an alimony deduction based upon any post-due payment.