Two recent Tax Court opinions highlight the danger of ignoring the Internal Revenue Code 71 when handling spousal support issues.
Christina Mehriary v. Commissioner, T.C. Memo 2015-126, issued July 9, 2015
Taxpayer tried to deduct the transfer of the home she was given in the divorce as an investment loss. In the divorce she owed a substantial amount of alimony to her ex-spouse and he agreed to accept the home in lieu of cash payments of alimony. Ultimately the Tax Court found that the transfer was a transfer incident to divorce and thus no loss can be recognized; additionally, the court found that the transfer was not considered alimony because it was not cash payments as required under IRC 71. This was in spite of the ex-spouse’s agreement to accept it as alimony. “[T]he intent of the parties does not determine the deductibility of a payment as alimony under section 71.”
Michael Muniz v. Commissioner, T.C. Memo 2015-125, issued July 9, 2015.
Taxpayer tried to deduct a lump-sum alimony payment on his tax return. Under Florida law, lump sum alimony payments are payable to the ex-spouse’s estate if the ex-spouse dies before receipt. This fact alone converted the alimony payment into a transfer incident to divorce and therefore not deductible. IRC 71 is very clear that a payment obligation to the recipient’s estate is not alimony.
Both opinions make clear that intent of the parties and labeling of the payments do not override the Code. I am not sure if either taxpayer spoke about the tax consequences with either their divorce attorney, accountant, or tax attorney (though Muniz was formerly an attorney and CPA), though they should have.