The IRS is enhancing processes to address the discrepancies between the deductions taken by alimony payers and the income reported by alimony recipients. This is in response to a report of the Treasury Inspector General for Tax Administration issued March 31, 2014 (TIGTA #2014-40-022).

Alimony is a payment to or for the benefit of a spouse or former spouse under a divorce or separation instrument, including decrees and certain agreements. If classified as alimony under the Internal Revenue Code, the amount is entitled to be deducted by the payor and the same amount must be included in the income of the recipient.

For 2010, a total of 567,887 taxpayers claimed alimony deductions totaling more than $10 billion. For that same year, with 266,190 (47%) of those alimony payors’ tax returns, there was either no alimony income reported, or there was a different amount of income reported on the returns filed by the corresponding alimony recipients. Bottom line: $2.3 billion in total alimony deductions had not been reported as income by the recipients.

The report also noted that IRS processes do not ensure that the taxpayers taking an alimony deduction report the social security number (Taxpayer Identification Number [TIN]) of the recipient. Moreover, the IRS failed to assess penalties totaling $324,900 on alimony payors who did not provide the recipients’ tax identification numbers.

IRS has responded that it has enhanced its examinations. Filters have been improved and the IRS will continue to review and improve its strategy to reduce the compliance gap. In addition, the IRS has revised its procedures to ensure the penalties are assessed when appropriate.

In an April 14, 2014 decision of the United States Tax Court, Judge Ronald L. Buch upheld the disallowance of an alimony deduction where the payments were terminable, among other events, upon the high school graduation of the taxpayer’s youngest child.

After more than 15 years of marriage and 3 minor children, Allen Johnson and his wife were divorced in 2006. Pursuant to their divorce decree, Mr. Johnson made “spousal maintenance” payments to his ex-wife and claimed an alimony deduction on his 2008 Federal income tax return.

Apparently incorporating a settlement agreement, the spousal maintenance payments were subject to a child-related contingency. Specifically, Mr. Johnson’s maintenance obligation would terminate upon the occurrence of any one of the following events:

  • the graduation from high school of the youngest child;
  • the remarriage of Mr. Johnson’s ex-wife, or
  • the death of either Mr. Johnson or his ex-wife.

The divorce decree, itself, stated that the spousal maintenance should be deductible to Mr. Johnson under under Internal Revenue Code §215 and includible in his ex-wife’s gross income under I.R.C. §71.

The divorce decree also 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).

On his 2008 Income Tax Return, Mr. Johnson deducted his spousal maintenance payments as alimony. A certified public accountant prepared the original return based on the divorce decree. Mr. Johnson’s ex-wife reported all of the spousal support payments received from Mr. Johnson as taxable income on her return.

However, the Internal Revenue Service disallowed the alimony deduction and determined a tax deficiency. The I.R.S. also imposed an accuracy-related penalty under I.R.C. §6662(a). Mr. Johnson filed a petition disputing the adjustment and the accuracy-related penalty.

Ruling in Johnson v. Commisioner of Internal Revenue, T.C. Memo-2014-67, 2014 Tax Ct. LEXIS 63, Judge Buch upheld the I.R.S.’s refusal to allow the alimony deduction. However, the Court held that Mr. Johnson would not be liable for the §6662(a) penalty as he acted reasonably and in good faith.

Judge Buch noted that I.R.C. §215(a) allows a deduction to the payor for an amount equal to the alimony paid during the taxable year to the extent it is includible in the recipient spouse’s gross income under §71(a).

Whether a payment constitutes alimony is determined by reference to §71(b)(1), which defines “alimony” as any cash payment if:

  1. the payment is received by a spouse under a divorce or separation instrument;
  2. the divorce or separation instrument does not state that the payment is neither includible in gross income nor allowable as a deduction;
  3. the payor and payee spouses are not members of the same household when the payment is made; and
  4. the payment obligation terminates at the death of the payee spouse and there is no liability to make either a cash or a property payment as a substitute for the payment after the death of the payee spouse.

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 a child leaving school as an example of such a contingency.

Even if there are separately allocated child support payments, payments denominated in a decree as alimony (maintenance) will still be viewed as child support if the decree contains an explicit contingency related to a child. Here, as the divorce decree clearly stated that the support payments would terminate upon the graduation of the youngest child, the Court was compelled to characterize the payments as child support.The fact that the decree specified that the payments were to be deducted by Mr. Johnson was not controlling. The intent of the parties was not controlling.

The required C.S.S.A. recitation in an oral open-court stipulation by which the parties explain why they have agreed to a child support obligation varying from the presumptive C.S.S.A. formula may not have to be as “precise” as that required in a written stipulation. Such appears to be the holding of the Appellate Division, Second Department, in its January 22, 2014 decision in Rockitter v. Rockitter.

On August 9, 2010, the parties had entered two stipulations to settle their divorce action. A written stipulation covered the parties’ joint custody of their two daughters. The second stipulation was oral, made on the record in open court and concerned child support and equitable distribution. Both stipulations were subsequently incorporated, but not merged, into the parties’ judgment of divorce.

Approximately 18 months later, the ex-wife commenced this action seeking to vacate the child support provisions of the oral support stipulation and the judgment of divorce. The ex-wife alleged that the support stipulation failed to comply the Child Support Standards Act because the parties did not make the required recitation of the reasons they chose to deviate from C.S.S.A. guidelines. Nassau County Supreme Court Justice Norman Janowitz granted the ex-husband’s motion to dismiss the complaint. The Second Department affirmed.

The C.S.S.A. requires that any agreement varying its presumptive child support formula contain specific recitals:

  • (1) that the parties have been made aware of the C.S.S.A.;
  • (2) that they are aware that the guidelines would result in the calculation of the presumptively correct amount of support;
  • (3) that in the event the agreement deviates from the guidelines, it must recite the presumptively correct amount of support that would have been fixed pursuant thereto; and
  • (4) the reason for the deviation.

Continue Reading C.S.S.A. Recitiation Requirements Relaxed for In-Court Child Support Sipulation

Whether the payment of union dues is to be deducted for the purpose of determining C.S.S.A. income is to be decided on a case by case basis. Rejecting the deduction in S.H. v. S.H., a June 17, 2013 opinion withdrawn from publication, Supreme Court Clinton County Acting Justice Timothy J. Lawliss held that the father failed to meet his burden to show that those dues did not reduce his personal expenses.

In this divorce action, the father was employed at a union plant and paid monthly union dues to the United Steel Workers.

This opinion concerned only whether or not union dues paid by the father should be deducted from the father’s gross income prior to calculating the father’s income for child support purposes.

Domestic Relations Law §240(1-b) sets forth the methodology the Court must follow to determine the non-custodial parent’s child support obligation. Pursuant to D.R.L. §240(1-b)(b)(5), income for support purposes shall mean, but shall not be limited to, the sum of the amounts determined by the application of clauses (i), (ii), (iii), (iv), (v) and (vi) of that sub-paragraph, reduced by the amount determined by the application of clause (vii) of that sub-paragraph.

Union dues are not a specifically allowed deduction under D.R.L. §240(1-b)(b)(5)(vii), nor does the subsection contain a catch all “other” category leaving deductibility to the Court’s discretion. The question before the Court, then, was whether or not union dues qualify as a deduction under the only possible category: “unreimbursed employee business expenses except to the extent said expenses reduce personal expenditures” (subsection [vii][A]).

Continue Reading Union Dues Do Not, Here, Reduce Income For C.S.S.A. Purposes