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Here comes another annoying alimony decision.  This one has a real gotcha to it.  James Chiavacci was paying $500 per month in alimony.  After about 13 years of that he decided to ask for a break, because of changed circumstances.  His ex was opposed to giving him a break, but after some negotiating there was a meeting of the minds:

Mr. Chiavacci and Ms. Charles entered into negotiations and eventually  reached a settlement agreement whereby Mr. Chiavacci would make a one-time  lump-sum payment of $20,000 to Ms. Charles in exchange for a release of his  future  spousal support obligations (2007 settlement agreement). On September 4, 2007,  Mr. Chiavacci purchased a cashier’s check for $20,000. On September 11, 2007,  Mr. Chiavacci’s attorney, Donald F. Brown, mailed the cashier’s check to Ms.  Charles’ attorney, Marth Harris In an attached letter, Mr. Brown stated  that,  during negotiations, Ms.Harris agreed to draft a document asking the  district court  to order that Mr. Chiavacci’s alimony payment obligation had been terminated,  effective immediately. On September 13, 2007, the district court entered an order amending the  divorce judgment (amending order). The amending order contains the following  statement: “By agreement of the parties, Spousal Support is terminated  effective  September 2, 2007. In all other respects, the Divorce Judgment dated January  10,  1994, as amended on August 31, 2001, remains in full force and effect.” The  amending order makes no reference to Mr. Chiavacci’s $20,000 payment to Ms.  Charles.

As you may have already guessed, Mr Chiavacci is in Tax Court, because he thinks the $20,000 is deductible alimony and the IRS thinks it is not.

The Tax Court decided it was not alimony.  Frankly, I find their logic a little troubling:

With respect to the 2007 settlement agreement, the record contains only the letter from Mr. Brown to Ms. Harris. The letter does not expressly state that the payment obligation terminates upon the death of Ms. Charles. Although the divorce decree provides that spousal support would terminate upon Ms. Charles’ death, the district court’s amending order did not incorporate the 2007 settlement agreement into the divorce decree. The district court’s amending order made no reference to the 2007 settlement agreement or the terms thereof. Consequently, we must decide whether the payment obligation would terminate upon the death of Ms. Charles by operation of Maine law. Under Maine law, the obligation to make a spousal support payment “ceases upon the death of either the payee or the payor with respect to any payment not yet due and owing as of the date of death.”

The $20,000 was a one time payment.  If on September 1, 2007, Ms. Charles had been dead, Mr. Chiavacci would have had no further alimony obligation.  How could this have been handled to have assured the deduction ?  Should there have been a note attached to the cashier’s check to the effect that the attorney had to check Ms. Charles’s pulse before depositing the check ?

What really surprised me was that not so much that Chiavacci was hit with an accuracy penalty, but the reason the Court gave:

Petitioners neither argued that they acted nor introduced any evidence to  show that they acted with reasonable cause and in good faith with respect to  the  underpayment.

When I read that, I figured he must have been pro se, but when I looked back I saw he had an attorney. The penalty would have been just a bit over a grand, but, still, I would think it would be worth a shot to say something about it.

You can follow me on twitter @peterreillycpa.

Originally published on Forbes.com on July 4th, 2012