• Property Equalization Payment Was Not Deductible as Alimony
  • April 17, 2014
  • Law Firm: Loeb Loeb LLP - Los Angeles Office
  • In McNealy v. Commissioner (February 2014), another taxpayer tried but failed to obtain an alimony deduction for a payment made to his ex-spouse. Upon their divorce, the taxpayer and his wife each waived spousal support from the other. They agreed to divide their assets equitably as reflected on a schedule they prepared. Part of the equitable division included a cash payment from the taxpayer to his wife in the amount of $40,000, which he deducted as alimony under IRC Section 215.

    The Tax Court held that the payment was not deductible because it was a part of the property division and settlement and was not paid for spousal support. In order to be a deductible alimony payment the payment must be made pursuant to a written agreement or court order and the instrument must not designate the payment as not being includible in income by the recipient and not being deductible by the payor. The payment(s) must also cease upon the death of the recipient.

    While the agreement did not explicitly say that the payment was not included in the wife’s income, the court inferred that it was not because the payment was identified as part of the property settlement and property settlement transfers are not taxed due to IRC Section 1041. In any event, the payment was also disqualified from being deductible because nothing in the agreement said it did not have to be paid if the wife died before receiving the payment. This is a requirement of deductible alimony that is frequently overlooked.

    In another recent alimony case, Wignall v. Commissioner (January 2014), the taxpayer got a better result. While his agreement with his spouse did not provide that the spousal support payments terminated at the spouse’s death, the Tax Court determined that under the applicable Oregon law, support payments do terminate upon the death of the recipient. The best practice is always to put a clear provision in the parties’ agreement providing that support terminates at the recipient’s death. You should not rely on state law to bail you out.