Vince Nardone: Tax and Controversy

Deferred Payments by Husband, not Alimony - Income Tax

In Richard v. Commissioner, TC Memo 2008-207, the United States Tax Court ruled that the taxpayer's (husband's) payments were not alimony and therefore not deductible.  See full case below.  It is not surprising that another case has been decided where the parties in a domestic relation case have failed to properly plan for the tax implications of the payments or receipt there of.  But, in this instance,one of the parties was a lawyer, so maybe you would have thought that things would be different and thus somewhat surprising.  

To put this case into context, property settlements incident to a divorce generally are not a taxable event.  That is, the receipt of property does not give rise to taxable income and the transfer of property does not give rise to a deduction for the transferring party.  On the other hand, amounts received as alimony or separate maintenance payments are taxable to the recipient anddeductible by the payor in the year paid.  The phrase "alimony or separate maintenance payments" is defined as any cash payments meeting four criteria: 

(i)   such payment is received by or on behalf of a spouse under a divorceor seperation instrument;

(ii)  the divorce or separation instrument does not designate suchpayment as a payment, which is not includible in gross income and not allowable as a deduction;

(iii)in the case of an individual legally separated from his spouse under a decree of divorce or of separate maintenance, the payee spouse and the payor spouse are not members of the same household at the time such payment is made; and

(iv) there is no liability to make any such payment for any period after the death of the payee spouse and there is no liability to make any payment (in cash or property) as a substitute for such payments after the death of the payee spouse.

The parties, agreed that (i) and (iii) existed and therefore favored alimony treatment.  The parties, disagreed, however, that (ii) and (iv) existed.  The payments at issue dealt with certain deferred payments required to be made, which were evidenced by a promissory note and secured by an irrevocable letter of instruction requiring the husband's/taxpayer's law firm to make the payments in the event of the taxpayer's default.  The settlement further required that the taxpayer maintain a decreasing term life insurance policy on his life,of which the taxpayer's wife was to be the beneficiary and owner until the note was satisfied.  The court ultimately concluded that the payments constituted a marital asset division, as opposed to spousal support, and not to be included in the gross income of the taxpayer's wife or deductible by the taxpayer.  Again, another case where the taxpayer(s) failed to obtain the necessary tax advise prior to the settlement being finalized, and in this instance, at the very costly expense of the taxpayer. 

See the full case text below.  

Download alimony_tax_blog.pdf

Deferred Payments by Husband, not Alimony - Income Tax

In Richard v. Commissioner, TC Memo 2008-207, the United States Tax Court ruled that the taxpayer's (husband's) payments were not alimony and therefore not deductible.  See full case below.  It is not surprising that another case has been decided where the parties in a domestic relation case have failed to properly plan for the tax implications of the payments or receipt there of.  But, in this instance,one of the parties was a lawyer, so maybe you would have thought that things would be different and thus somewhat surprising.  

To put this case into context, property settlements incident to a divorce generally are not a taxable event.  That is, the receipt of property does not give rise to taxable income and the transfer of property does not give rise to a deduction for the transferring party.  On the other hand, amounts received as alimony or separate maintenance payments are taxable to the recipient anddeductible by the payor in the year paid.  The phrase "alimony or separate maintenance payments" is defined as any cash payments meeting four criteria: 

(i)   such payment is received by or on behalf of a spouse under a divorceor seperation instrument;

(ii)  the divorce or separation instrument does not designate suchpayment as a payment, which is not includible in gross income and not allowable as a deduction;

(iii)in the case of an individual legally separated from his spouse under a decree of divorce or of separate maintenance, the payee spouse and the payor spouse are not members of the same household at the time such payment is made; and

(iv) there is no liability to make any such payment for any period after the death of the payee spouse and there is no liability to make any payment (in cash or property) as a substitute for such payments after the death of the payee spouse.

The parties, agreed that (i) and (iii) existed and therefore favored alimony treatment.  The parties, disagreed, however, that (ii) and (iv) existed.  The payments at issue dealt with certain deferred payments required to be made, which were evidenced by a promissory note and secured by an irrevocable letter of instruction requiring the husband's/taxpayer's law firm to make the payments in the event of the taxpayer's default.  The settlement further required that the taxpayer maintain a decreasing term life insurance policy on his life,of which the taxpayer's wife was to be the beneficiary and owner until the note was satisfied.  The court ultimately concluded that the payments constituted a marital asset division, as opposed to spousal support, and not to be included in the gross income of the taxpayer's wife or deductible by the taxpayer.  Again, another case where the taxpayer(s) failed to obtain the necessary tax advise prior to the settlement being finalized, and in this instance, at the very costly expense of the taxpayer. 

See the full case text below.  

Download alimony_tax_blog.pdf