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Newsletter
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Alimony Deduction
Timing is Everything
Ray, TC Summary Opinion
2006-110
Alimony is deductible by the payer and income to the recipient. Non-
alimony payments generally aren’t deductible. Payments to an ex-spouse must
meet several tests to be considered alimony for tax. Once of those tests
requires that the payments be made under a divorce or separation instruction.
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Facts. John and Jennie separated in 2001
(after which the couple’s children lived with this wife). On July 25, 2001,
Jennie filed for divorce. While they were separated, John paid Jennie about
$6,500 a month.
On March 13, 2002, John and Jennie entered into an arbitration
agreement that contained the terms of the divorce. The agreement required John
to pay Jennie $20,000 in alimony. Five monthly installments of $4,000 each were
scheduled, with the first payment due in April 2002. The agreement also
required him to pay child support. On April 22, 2002, the state court entered a
divorce decree containing alimony provisions identical to those in the
arbitration agreement.
During 2002, John transferred $41,000 to Jennie. Of that
amount, $23,000 was paid after March 13, 2002 (the date of the arbitration
agreement). John deducted $41,000 as alimony on his 2002 return.
IRS Position.
The IRS disallowed John’s entire alimony deductions, saying he failed to prove
that any of the payments to Jennie qualified. It also determined that Jennie
had received $41,000 of alimony and increased her taxable income accordingly.
Court’s Ruling. When the case was tried, John conceded that payments made
before the March 13 arbitration agreement date were not deductible alimony.
However, he continued to argue that of the $23,000 paid to Jennie after March
13, $20,000 was deductible alimony. After examining the cancelled checks, the
court found that $2,000 of that $20,000 had been paid on March 22.
John argued
that the $2,000 paid on March 22 was paid under his divorce instrument because
it was paid in accordance with the arbitration agreement. The arbitration
agreement had been merged, under state law, into his divorce decree. John also
testified that he intended for the march 22 payment to be applied against his
alimony obligation and that he paid it before April 1 because he knew the
amount (from the arbitration agreement) and he “just wanted to get it over
with”. Also, it was a good time to make the payment because it was near the
time he was paid by his employer.
The Court agreed that the arbitration
agreement had, under state law, become part of the divorce decree, and that a
payment under the arbitration agreement would be “under a divorce instrument”.
But, even though it was fairly clear that John intended the March 22 payment to
count toward his alimony obligation, the payment was not “under the divorce
instrument” because it was made before the date that John’s alimony obligation
existed (April 1). Thus, it was a voluntary payment, which is not deductible as
alimony. In the end, John was allowed an $18,000 deduction for alimony, which
was taxable income to Jennie.
Conclusion. Even if a payment is required by a
divorce instrument, it will not be made “under” the agreement (and thus qualify
as alimony) if it is made before the date that the agreement specifies the
alimony obligation to first exists. Also, not the IRS’s strategy of disallowing
alimony deductions by the payer while arguing that the same payments are
taxable alimony income to the recipient. This almost guarantees that former
spouses will have an adversarial party attempting to argue against them when
they try to make their case.
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