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.
(b) Issue: Did the payments received by the wife constitute alimony for tax purposes?
(c) Answer to Issue: The amount of the three automatic reductions was fixed as child support. The remaining amount constituted alimony.
(d) Summary of Rationale: The wife argued that the payments could not be alimony, because the decree did not state that they terminate upon death, so that the fourth requirement in the definition of alimony, I.R.C. § 71(b)(1)(D), was not met. But Ohio law provides that alimony terminates upon death, even if the agreement or decree is silent, so long as the agreement or decree does not expressly state that the alimony will not terminate. Ohio Rev. Code Ann. § 3105.18(B). The alimony, therefore, would terminate upon death, and all four requirements of the federal definition of alimony were met.
The question then became whether any portion of the obligation was fixed as child support under I.R.C. § 71(c). In particular, under § 71(c)(2), the amount of any automatic reduction in alimony is fixed as child support if the reduction is tied to a child-related event. The reductions upon emancipations of the children were tied to child-related events, so the amounts of the reductions were fixed as child support.
The wife argued that the termination of alimony after the six-year stated duration was also a child-related event, so that the entire obligation was fixed as child support. Under Treas. Reg. § 1.71-1T, Q&A (18), a reduction that occurs within six months of the date on which the children reach a stated age is presumed to be child-related. But a complete cessation of alimony after six years is presumed not to be child-related. In addition, the parties had three minor children, but there were four reductions (the three partial reductions, and then complete termination). Since the first three reductions closely matched the emancipation of the three children, there was no remaining child-related event to which the fourth reduction could attach.
The amount of the three automatic reductions was, therefore, fixed as child support. The remainder of the obligation was alimony, and the wife should have reported it as taxable income.
Lessons: Automatic reductions in alimony, occurring upon or close in time to the emancipation of the children, are likely to be treated as child support. But there is ordinarily only one child-related event per child, so when the total number of reductions exceeds the total number of children, there is a materially smaller chance that the excess reductions will be child-related.