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:
- the payment is received by a spouse under a divorce or separation instrument;
- the divorce or separation instrument does not state that the payment is neither includible in gross income nor allowable as a deduction;
- the payor and payee spouses are not members of the same household when the payment is made; and
- 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.