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.
Rule 2: Don’t think you can sort out the tax consequence later. The IRS is suspicious and there is substantial federal tax case law indicating that nunc pro tunc state court orders cannot alter tax consequences. You have to do it right the first time.
Note that North Carolina family law statutes do not have in them the concept of family support. North Carolina has three types of support: 1) child support; 2) alimony; 3) post separation support. CPAs in North Carolina need to be particularly alert to mislabeling as “family support”.
See how Mr. Baur lost most of his “alimony” deduction by violating Rules 1 and 2 above.
Baur v. Comm’r, T.C. Memo. 2014-117, 2014 WL 2619658 (2014)
(a) Facts: A divorce settlement agreement, incorporated into an Illinois divorce decree, required the husband to pay to the wife $3,750 per month in unallocated alimony and child support, plus 45% of any net bonuses received from his employer. The payments terminated upon the wife’s remarriage or cohabitation, or upon the death of either party. If the children were emancipated and living without assistance from the wife, the payments dropped to $1,800 per month. The agreements were to constitute alimony for federal tax purposes.
The husband paid support under the agreement, and claimed an alimony deduction on his federal income tax return. The IRS disallowed a portion of the alimony deduction and assessed a deficiency. The husband appealed to the Tax Court.
After the IRS assessed a deficiency, the Illinois state court issued a nunc pro tunc order stating that all payments made under the agreement were intended as maintenance and not as child support. The order further provided that the provision reducing the payments upon emancipation of the children was the result of a scrivener’s error, and was stricken from the order.
(b) Issue: Was the husband entitled to a full 100% alimony deduction for all of the payments made?
(c) Answer to Issue: No.
(d) Summary of Rationale: The payments were not expressly fixed as child support and stopped upon death. But payments are implicitly fixed as child support if they are reduced upon a child-related event. The emancipation provision clearly involved a child-related event, so the key issue was the effect of the nunc pro tunc state court order.
The court rejected the state court order, and held that the inclusion of the emancipation provision was not the result of a scrivener’s error. Therefore, the husband was not entitled to an alimony deduction for the amount of the reduction.
Comment: The IRS was not a party to the state court proceedings, so it was not bound by the state court order, finding a scrivener’s error. Attempts to fix tax problems with after-the-fact state court orders are likely to be viewed with suspicion by the IRS.
by Carolyn J. Woodruff, JD, CPA, CVA