Originally published on Forbes.com April 29th, 2014
The rules that prevent alimony deductions for what is essentially child support or a property settlement are a little complicated. Nonetheless, they are not rocket science. So it kind of amazes me how often they get blown. The latest example is the case of Allen H. Johnson. The Tax Court decision denying Mr. Johnson’s deduction of $70,848 in spousal maintenance payments for the year 2008 came out on April 14.
The Tax Court gave a summary of Mr. Johnson’s divorce decree.
A divorce decree entered on September 19, 2006, required Mr. Johnson to pay spousal maintenance of $6,068 per month. In addition to the spousal maintenance payments, the divorce decree also required Mr. Johnson to pay 40% of his gross bonus to his ex-wife. Both the periodic spousal maintenance payments and the additional payment terminate upon the occurrence of any one of the following events:
(a) the graduation from high school of the youngest child;
(b) the remarriage of Mr. Johnson’s ex-wife, or
(c) the death of either Mr. Johnson or his ex-wife. The divorce decree states that the spousal maintenance should be deductible to Mr. Johnson under section 215 and includible in his ex-wife’s gross income under section 71.
The divorce decree further obligated Mr. Johnson to pay $500 per month, adjusted for cost of living, for the support of his minor children until any one of a series of events occurs (including graduation from high school).
The Tax Court noted that Mr. Johnson’s ex-spouse reported the amounts that he paid as support on her return.
The Decision
Here is the problem with that agreement.
Section 71(c)(2), however, provides that the amount of any payment that is subject to “contingencies involving child” must be considered payment made for the support of the child. The Code specifically lists “ leaving school” as an example of such a contingency.
There it is right in the Code. There is nothing at all subtle. You put that contingency in the agreement, then it is child support.
We have previously decided that even if there are separately allocated child support payments, other monthly payments made pursuant to a decree will still qualify as child support if the decree contains an explicit contingency related to a child.
In this case, the divorce decree clearly states that the support payments will terminate upon the graduation of the youngest child. With this kind of contingency, the statute compels us to characterize the payments as child support. The fact that the divorce decree specifies that the payments are to be deducted by Mr. Johnson is not controlling. The Court does not rely on the intent of the parties when defining alimony for Federal income tax purposes but applies the explicit requirements laid out in section 71. Therefore, Mr. Johnson’s argument that the graduation of the youngest child from high school was intended as a mere reference point for the termination of spousal support holds no value.
Accordingly, we hold that Mr. Johnson is not entitled to an alimony deduction regarding the support payments made to his ex-wife.
On the bright side, the Court did not uphold the IRS fairly reflexive accuracy-related penalty.
We are satisfied on this record, however, that Mr. Johnson reasonably relied on the professional advice of his return preparer. Mr. Johnson hired a C.P.A. to prepare his 2008 tax return and provided his C.P.A. with a copy of the divorce decree, which was necessary for the completion of the tax return. The record does not indicate that the C.P.A. was incompetent or inexperienced. It was reasonable for Mr. Johnson to rely on his C.P.A., and he was not required to second-guess his C.P.A.’s advice.
I would hope that Mr. Johnson’s ex-spouse has a protective refund claim in so that they don’t get totally whipsawed. I still have a hard time getting how this happens. The divorce decree includes a contingency that denies alimony treatment under the Code but then states that Mr. Johnson can take the deduction. In other words, the decree which was approved by a probate judge contradicts itself.
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