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Deduction of Payments
to an Ex-Spouse as Alimony

Copyright 1996 - The New York Law Publishing Company

IT HAS BEEN more than 10 years since the changes in the tax rules for the alimony deduction were enacted. Still many taxpayers, including attorneys, do not pay close attention to these rules, with the result that payments intended to be alimony are simply not deductible by the payor-spouse.

In order to be treated as deductible alimony to the payor-spouse and taxable to the payee-spouse (or former spouse), payments in post-1984 matrimonial actions must meet certain requirements (Code 71):

1. Payments must be made under a decree of divorce or legal separation agreement or decree of support.
 
2. Payments must be in cash.
3. Divorced or legally separated couples must live in separate households.
4. The payor-spouse's obligation to make payments must end on the death of the payee-spouse.
5. The payment is not for child support (which is nondeductible). Payments to a former spouse are treated as child support if they can be reduced on a contingency related to the child (such as the child's attaining majority).
6. The payment is not a property settlement (which is governed by Code 1041).

Oral Agreement

In one recent case, an attorney and his wife separated. He made payments to her before a written separation agreement was finalized. Still he deducted the payments as alimony, making several arguments for his position. First, the payments reflected the ex-spouse's expenses that he orally agreed to pay. These expenses were later put in writing. They were also reflected in letters exchanged by the couple's attorneys. Finally the checks carried the notation that the payments were alimony.

The Tax Court rejected these arguments and held that the payments were not deductible (Ewell Jr., TC Memo 1996-253). The fact that there was an oral agreement between the parties does not make the payments alimony. The attorney in this case failed to satisfy the first requirement that payments be made pursuant to a legal separation agreement, decree of support or decree of divorce. A legal separation agreement must be in writing. The notation on the checks did not prove that the payments were for the former spouse's support.

In another recent case, a husband's payments to his former spouse again failed to pass muster as deductible alimony. The husband was ordered by a California state court to pay his former spouse ''family support.'' This represents payments on behalf of both the former spouse and child support.

Again the Tax Court held that the payments were not deductible (Murphy, TC Memo 1996-258; see also Ambrose, TC Memo 1996-128). The taxpayer in this case failed to satisfy requirement No. 4 and show that the payments would end with the death or remarriage of the former spouse.

Of course, the portion of the payments relating to child support at not deductible in any event.

Payments Taxable to Recipient

Sometimes payments do, in fact, satisfy all requirements set forth above and are treated as alimony. This result is not desirable for all concerned, since it means that the recipient-spouse must include the payments in income. In the case, an ex-husband made payments to the taxpayer. The payments were reduced to zero within six months of the 18th birthday of the couple's daughter.

The wife argued that the payments were subject to a contingency and so were child support (and not taxable to her). She relied on a presumption in the regulations that payments were child support (Temp. Reg. 1.71-IT[c], Q&ampA 18). The Internal Revenue Service successfully rebutted the presumption.

The Tax Court agreed with the IRS that the reduction of payments in this case was independent of the child's reaching the age of majority and, so, was not a contingency related to the child (Hill, TC Memo 1996-179). The parties had agreed to a reduction at that particular time to facilitate the taxpayer's remarriage. It was only coincidental that this occurred six months before the daughter's 18th birthday. The daughter's birthday did not come up during negotiations to reduce payments to the taxpayer.

The payments satisfied all of the requirements for alimony treatment. They were made in cash and received under a divorce or separation agreement, the couple lived apart, the original terms were not modified to alter the provision that the payments would terminate upon the taxpayer's or the husband's death and the payments were not child support. Thus, the ex-wife had to report them as income; the ex-husband could deduct them.


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