In Siskind v. Siskind, in addition to awarding the wife $65,000 per year in nontaxable maintenance until the wife reached her 65th birthday, J.H.O. Gartenstein equitably distributed the parties’ assets, awarded child support and a $340,000 counsel fee, and secured the husband’s support obligations with a $4 million life insurance policy (reduced on appeal to $3 million).
In its November, 2011 modification of that award, the Second Department recognized the presumption that spousal maintenance should be taxable income to the recipient spouse, and deductible to the payor. The appellate court stated:
. . . there was insufficient evidence justifying the Supreme Court’s direction that maintenance be nontaxable to the plaintiff, which is “a departure from the norm envisioned by current Internal Revenue Code provisions.”
In 2007, in Grumet v. Grumet, the Second Department had modified J.H.O. Gartenstein’s award to the wife of non-taxable maintenance, declaring that in the absence of a stated rationale for a departure from the norm envisioned by the Internal Revenue Code provisions, a maintenance award should be taxable.
Maintenance is appropriately taxable income to the recipient. Baron v. Baron (2nd Dept. 2010), Markopulous v. Markopulos, 274 A.D.2d 457, 710 N.Y.S.2d 636 (2nd Dept. 2000) ; see also Taverna v. Taverna (2008), where the Second Department modified the trial court award by making maintenance taxable. Such may have been the holding because the trial court properly declined to consider the husband’s tax liabilities resulting from the liquidation and distribution of investment accounts incident to equitable distribution, as the husband had failed to offer any competent evidence concerning the liabilities which would be incurred. See Fleishmann v. Fleischmann (2010 Supreme Westchester Co., Lubell, J.)
Nonetheless, the Second Department in 2010 affirmed an award of non-taxable maintenance in Giokas v. Giokas; and see Zaretsky v. Zaretsky (the Second Department in 2010 affirming without comment on the tax issue, a non-taxable maintenance award of $10,000 per month for seven years). See also F.M.C. v. F.A.C.(2010, Supreme Nassau Co., Ross, J.), awarding the wife $1,000 per week in maintenance, of which $600 per week, taxable, was awarded for three years to enable the wife to become self-supporting, and $400 per week, non-taxable, was permanent maintenance awarded in light of the wife’s contributions to the husband’s career.
In Maggi v. Maggi, 303 A.D.2d 650, 756 N.Y.S.2d 789 (2003), the Second Department made it seem that non-taxability was a simple choice which the trial court was free to make. In that case, the appellate court modified the trial court by declaring that the $2500 per month in permanent maintenance should have been made non-taxable to the former wife, and non-deductible to the former husband. There, it may have been determinative that the husband failed to declare more than $200,000 in income over the years under review. The court was not going to award a substantial tax deduction to a spouse who failed to declare all of his income.
When it comes to temporary (pendente lite) spousal support (awarded while the divorce action is pending), it had been common for such to be non-taxable to the recipient. Miller v. Miller (2005); Rubin v. Rubin (1st Dept. 2009 [post decree maintenance taxable, but retroactive maintenance, presumably for the period the action was pending, was non-taxable]); Fuegel v. Fuegel, 232 A.D.2d 608, 648 N.Y.S.2d 695 (2nd Dept. 1996); Kesten v. Kesten, 234 A.D.2d 427, 650 N.Y.S.2d 807 (2nd Dept. 1996). Indeed, particularly where parties were living together, there was a presumption of non-taxability in the absence of an express award to the contrary. Zizza v. Zizza, 306 A.D.2d 126, 762 N.Y.S.2d 590 (2nd Dept. 2003).
Note: Internal Revenue Code §71(b)(1)(C) makes support payments after the divorce non-taxable to the recipient and non-deductible to the payor if the parties are still living together [presumably to prevent a fraud on the IRS], that rule does not apply before the divorce judgment is entered; such payments my be taxable/deductible, unless the court declares the contrary.
However, recent temporary maintenance awards under the 2010 amendment have declared such awards taxable to the recipient. A.C. v. D.R. (2011 Supreme Nassau Co., Falanga, J.), discussed in April 6, 2011 blog; S.B. v. G.B. (2011 Supreme NY Co., Gesmer, J.).
It is noted that after the divorce, the parties may file single, if not head of household. Until the divorce, whether the couple will continue to file jointly or whether a party will be relegated to “married filing separately” status is often a matter of gamesmanship.
Federal and State combined tax brackets of 35-40% are not uncommon. Thus, in Siskind, the appellate ruling may have effectively reduced the out-of-pocket cost to the ex-husband from $65,000 to $40,000 per year. Conversely, J.H.O. Gartenstein may have determined that the ex-wife needed and was entitled to receive $65,000 per year. The appellate court left her with substantially less; and never discussed the after-tax impact.
The Internal Revenue Code’s flexibility on “alimony” tax issue is an important tool for matrimonial lawyers to use when fashioning divorce settlement agreements. Parties may take advantage of deductibility to lower the out-of-pocket cost to the payor, particularly in light of the often lower tax bracket of the recipient.
Trial courts should have that same flexibility. Appellate decisions have been inconsistent and have not clarified the circumstances under which the “norm” recognized by the Second Department may be varied.