Deductible Alimony Becomes Non-deductible??

Recently released, TC Memo 2013-166, reiterates the power the tax law has, even over your divorce agreement. In Summary, the tax court held that a taxpayer cannot deduct a lump sum payment to his former spouse as alimony. The lump sum payment was a mediation settlement reached between both parties in question and was in lieu of future deductible alimony payments. So what was the problem?

Code section 215 defines alimony payments as one that meets the following requirements:

  1. The payment must be made under a divorce or separation instrument.
  2. The instrument must not designate the payment as not includable in the recipient spouses gross income and not deductible by the payor spouse.
  3. The two spouses cannot live in the same household!
  4. The payor’s obligation to make payments must end at the payee spouse’s death.

Reading into the details of the case, the language of lump sum payment outlined in the mediation was silent in addressing if the payment would be due upon the death of the recipient spouse. It was determined by the court that absent any language on the issue, under state contract law, the payor’s obligation under the agreement would not terminate if the payee spouse passed away prior to final judgement of the dissolution agreement pending in the court. For that reason, the payment was determined to be taxable.


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