# 81 - When it is alimony? And when is it not?
Monograph # 81 January, 2010 -- ver. 2.2
WHEN IS IT ALIMONY? AND WHEN IS IT NOT?
WELL, IT ALL DEPENDS......
© Lawrence D. Gorin, Attorney at Law, Portland, Oregon
Introduction
Marital settlement agreements and dissolution judgments typically include provisions establishing obligations for the payment of money by one spouse to the other. Such obligations usually fall into one of three classifications: Child support, spousal support or property division. How such obligations will be treated for purposes of Oregon domestic relations law is a matter for state law determination. In contrast, how such obligations will be treated for income tax purposes is a matter controlled by federal law. This article focuses on the classifications of spousal support and property division and the treatment of such obligations for income tax purposes.
Under Oregon domestic relations law, as explained in Moak and Moak, 64 Or App 487, 668 P2d 1249 (1983), spousal support may be modified on a change of circumstances, ORS 107.135(1)(a), but a division of property may not. The distinction between spousal support and property division is not always clear. And when that occurs, the court will determine the appropriate classification based on the underlying facts of the case. Horesky and Horesky, 30 Or App 941, 569 P2d 34 (1977), rev den 281 Or 1 (1978). The labels used by the parties are not decisive. Schaffer v. Schaffer, 57 Or App 43, 643 P2d 1300 (1982). Rather, the controlling issue is "the nature and purpose of the award." State ex rel Carrier v. Carrier, 40 Or App 407, 411, 595 P2d 827 (1979).
However, regardless of the classification made by the state court, a payment of money from one spouse to the other under the terms of a dissolution judgment or marital settlement agreement, whether labeled as spousal support or property division, will be deemed and treated by the Internal Revenue Service (IRS) as “alimony” for federal income tax purposes unless, under the criteria of Internal Revenue Code (IRC) § 71(a), 26 USC § 71(a), the payment is disqualified from such treatment. If deemed and treated under federal law as “alimony,” the payment will be tax deductible for the payor and taxable income to the payee, in accord IRC §§ 71 and 215 (26 USC §§ 71 and 215).
Thus, money paid to a former spouse pursuant to a court-ordered obligation deemed as “spousal support” for state law purposes (and therefore subject to future modification) may or may not end-up being treated by the IRS as “alimony” for income tax purposes. And the same is true for money paid to a former spouse as “property division” for state law purposes (and therefore not subject to future modification). As lawyers are prone to say when answering tough legal questions, “Well, it all depends.......”
Consequently, when drafting marital dissolution judgments and settlement agreements that establish money payment obligations, problems will be avoided if the intentions of the parties (and the court) regarding the payment classification for state divorce law purposes, as well as the intended income tax treatment and effect, are clearly expressed by the language used in the controlling document. Failure to do so may result in consequences unintended or undesired by the parties and the court.
Uncle Sam says.......
Under federal income tax law, Internal Revenue Code (IRC) § 71(b)(1), a payment to or for the benefit of a spouse or former spouse under a divorce or separation instrument will qualify and be deemed and treated by the Internal Revenue Service (IRS) as “alimony” for income tax purposes and thus will be tax deductible from the payor’s gross income, IRC § 215, and taxable income to the payee, IRC § 71, if all of the following requirements are met:
As declared by the U.S. Tax Court: "If a payment satisfies all of these factors then the payment is alimony; if it fails to satisfy any one of these factors then the payment is not alimony." Baker v. Comm., 79 TCM 2050 (2000).
“Spouse” as used in IRC § 71 includes a former spouse. See IRC § 71(d).
“Divorce or separation instrument” means a decree of divorce or separate maintenance or a written instrument incident to such a decree, or a written separation agreement, or a decree requiring a spouse to make payments for the support or maintenance of the other spouse. See IRC § 71(b)(2).
Spousal support vs. property division
So far as the Internal Revenue Service is concerned (with the exception of a payment specifically designated as “child support”), the label, designation or classification, if any, given to a court-ordered money payment obligation (be it “spousal support,” “property division” or “alimony”), without more, is not necessarily controlling or determinative as to the tax consequences of the obligation. Indeed, while it may be inferred from the labels used that the court and the parties had tax considerations in mind, such labels alone do not “clearly, explicitly and expressly” say anything, one way or the other, as to the tax treatment to be accorded by the IRS to the payment obligation. Richardson v. Commissioner, 125 F3d 551, 556 (7th Cir. 1997).
It is therefore important when drafting marital dissolution judgments and settlement agreements that establish money payment obligations to use specific language, in accord with the criteria set forth in IRC § 71, to “clearly, explicitly and expressly” convey the actual tax treatment and tax effect that is intended to be accorded by the IRS to payments made pursuant to the court-ordered obligation.
Further, under the federal income tax code, the phrase "nondeductible alimony" is an oxymoron. A payment received by the payor’s spouse that meets the test of "alimony" under IRC § 71 is -- per se -- tax deductible for the payor, IRC § 215, and taxable income to the payee, IRC § 71. Careful draftsmanship requires careful attention to the criteria of IRC § 71.
Spousal support intended to be “alimony” for income tax purposes
If a “spousal support” obligation made pursuant to ORS 107.105(1)(d) is intended to qualify and be treated as “alimony” for income tax purposes, as is typically the case, a carefully drafted dissolution judgment should (1) expressly declare the intended tax effect and (2) should also include appropriate “termination on death” language. The qualifying "magic words" should be included both in the main text of the judgment document as well as the "money award" section at the end of the document. One possible format:
Spousal support NOT intended to be “alimony” for income tax purposes
Spousal support as allowed under ORS 107.105(1)(d) is not required to be “alimony” for income tax purposes. If it is intended that the payments, even though labeled in the judgment as “spousal support,” not be treated as “alimony” for income tax purposes, appropriate disqualifying language will do the trick. Consider the following:
Lump-sum awards requiring the payment of money
ORS 107.105(1)(d) allows for an award of spousal support “in gross.” An in gross spousal support award typically refers to a lump-sum fixed dollar amount, due and payable upon entry of the dissolution judgment or by a specified susbsequent due date.
In contrast, ORS 107.105(1)(f) authorizes the court to divide property between the parties “as may be just and proper in all the circumstances.” Property division often involves the use of an “equalizing money award,” typically being a lump-sum fixed dollar amount, due and payable upon entry of the dissolution judgment or by a specified subsequent due date.
Family law practitioners generally have no problem in distinguishing between an award of in gross spousal support and an equalizing property division money award, and in understanding the differing tax consequences intended for each. Not so, however for the IRS. A survey of decisions for the U.S. Tax Court reveals a number of cases in which a property division money award was deemed as tax deductible “lump-sum alimony,” as well as other cases in which a limp-sum spousal support award was determined as being a tax-free division and transfer of property.
Again, in drafting dissolution judgments that provide for an in gross spousal support award or a property division money award, appropriate language should be included so as to let IRS know in clear an explicit terms how the payment is to be treated for income tax purposes. The problem that most often arises involves a lump-sum money payment obligation that, although labeled as a property division equalizing or equitable payment, nonetheless satisfies the IRS requirements for alimony under IRS code §§ 71(b)(1)(A), (B) and (C) but leaves unanswered is the critical element of IRS code § 71(b)(1)(D) regarding “no liability to make any payment (in cash or property) * * * after the death of the payee spouse.” Husband then pays the money and claims it as tax deductible alimony on his tax return. Wife files her tax return and does not include the payment in her gross income. Because of the omission of any language in the dissolution judgment regarding the critical question of post-death liability for payment, IRS is put into the position of having to make the determination, much to the dismay, usually, of one party or the other.
Consequently, whether the payment obligation (or any part thereof) is intended to survive the death of the recipient spouse (payee), or whether it is intended to terminate upon the death of the recipient spouse, language expressing the intent should be included in the judgment provision that establishes the obligation. Don’t leave it to IRS to engage in a guessing game as to the parties’ intent. More often than not, it seems, when IRS guesses, it guesses wrong.
Other payments not intended to be “alimony” for income tax purposes.
Court-ordered money payment obligations established by dissolution judgments come in all shapes and sizes. Obligations labeled as “spousal support” are typically intended to have tax consequences, while obligations designated as “child support” or classified as “property division” are intended to be “tax-free,” being neither deductible for the payor nor taxable to the payee. Examples of the latter include money awards intended to equalize the division of marital property (payable either as a lump sum or in a series of payments), as well as provisions requiring one spouse to pay the other spouse's rent or mortgage, or pay debt obligations that are owed by the other spouse, or pay the premiums on a life insurance policy that is owned by the other spouse.
All too often the specific tax consequences of such obligations are not considered at the time of the dissolution proceeding and the dissolution judgment fails to include any language that expresses the parties’ intent regarding the tax treatment and tax effect to be given to the obligation. Unintended or undesired consequences may result.
For example, a cash payment from one spouse to the other (or to a third party on the other's behalf) that is made pursuant to a dissolution judgment (“divorce instrument” in IRS parlance) may qualify as "alimony" for income tax purposes, and thus be deductible for the payor and taxable to the payee, even though not so intended, if, inter alia, the payment obligation terminates upon the death of the recipient (payee) spouse, with no liability to make any payment (in cash or property) thereafter, 26 USC § 71(b)(1)(D), AND the divorce instrument “does not designate such payment as a payment that is not includable in gross income [for the payee] under section 71 and not allowable as a deduction [for the payor] under section 215.” 26 USC § 71(b)(1)(B). Words matter. It is important to use them, wisely and correctly.
Avoiding unintended alimony
To guard against “unintended alimony,” it is advisable to include a "cover all the bases" provision in the dissolution judgment that will disqualify the payment from being treated as alimony for income tax purposes. Consider the following language:
Requirement for termination on death of payee spouse
To qualify as “alimony” under IRC § 71(b)(1)(D), there must be no liability
to make any payment (in cash or property) after the death of the recipient (payee) spouse. This requirement will be deemed as satisfied if (1) the dissolution judgment expressly so declares or (2) the payor's payment liability ceases upon the death of the payee spouse by operation of law. Either or both.
The general rule of Oregon domestic relations law is that an obligation to pay spousal support is a personal debt that does not survive the debtor. See Schaffer v. Schaffer, 57 Or App 43, 643 P2d 1300 (1982). Further, under Oregon law spousal support is deemed to terminate upon death of payee spouse absent a provision in the judgment providing otherwise. Kemp v. Dept. of Rev., OTC-RD No 4241, WL 477958 (July 27, 1998) (unpublished opinion). Further, “a hallmark of spousal support is that the beneficiary's death terminates the obligation.” Miller and Miller, 207 Or App 198, 203, 140 P3d 1172 (2006). This appears to be quite reasonable, given that the underlying function and purpose of spousal support is to support a spouse (or former spouse), not to support a former spouse’s estate. Once deceased, there is generally no further need for spousal support.
Given Oregon case law, it is apparent that the obligation of payment of court-ordered spousal support terminates by operation of law upon the death of the payor or the payee, whichever death first occurs. Nonetheless, if a spousal support award is intended to be alimony for income tax purposes, better practice for Oregon divorce purposes is to expressly declare in the dissolution judgment (both in the main body of the document as well as the “money award” section as the end of the document) that the obligation terminates on the death of either payee or payor, whichever first occurs.
Conversely, if a money payment obligation created by a dissolution judgment --- whether designated a spousal support or otherwise --- is not intended to be alimony for income tax purposes, practitioners need to consider whether the obligation is one that will terminate upon the payee’s death by operation of law even though “termination on death” language is intentionally omitted for the judgment document. If such would occur, the obligation may end up being deemed as alimony for income tax purposes even though not so intended. To avoid such a result, precautions need to be taken, such as inclusion of language in the dissolution judgment expressly designating the payment obligation as “not includible in gross income under IRC § 71 and not allowable as a deduction under IRC § 215.”
Will it be alimony or will it be not? Examples to consider
In Proctor v. Comm., 129 TC No. 12 (2007), the parties’ divorce decree awarded wife a portion of husband’s military pension, referring to the payment obligation as a division of the marital property. Husband thereafter made payments to wife in compliance with the court’s property division award. (Wife did not qualify for direct payments from DFAS (the military’s payroll agency) because of the marriage was of less than ten years’ duration.) Husband then filed a tax return, claiming the amount paid to wife as tax deductible alimony (thus resulting in taxable income for wife). Deeming the payments to wife as property division, in accord with the divorce decree, and therefore not alimony under IRC § 71, the IRS rejected husband tax deduction claim. Husband appealed. The U.S. Tax Court agreed with husband and upheld the husband’s tax deduction claim.
Although the divorce decree referred to the payment obligation as part of a division of the marital property, that classification, without more, did not amount to a "clear, explicit and express direction" designating the payment obligation as not includable as income to wife and not allowable as a deduction for husband. “Labels attached to payments mandated by a decree of divorce or marriage settlement agreement are not controlling.” The requirement of IRC § 71(b)(1)(B) (that the payment not be designated as not taxable to the payee and not deductible for the payor) was satisfied. Further, as to termination on death of the payee, the court cited 10 USC § 1408(c)(2), the provision of the Uniformed Services Former Spouses' Protection Act (USFSPA) the says that a divorce court’s division and award of a military pension to a retiree’s former spouse “does not create any right, title, or interest which can be sold, assigned, transferred, or otherwise disposed of (including by inheritance) by a spouse or former spouse.” Thus, by operation of law, wife’s right to receive the court-awarded share of husband’s military retirement will terminate upon her death, with husband thereafter having no further liability. Consequently, the payments husband made directly to wife while she was alive met the “termination upon payee’s death” requirement of IRC § 71(b)(1)(D) and therefore qualified as tax deductible alimony.
NOTE and COMMENT: In Proctor, the IRS went after a former husband, claiming that the portion of his military pension that he paid to his former wife pursuant to the parties’ divorce decree was property division, not alimony, and therefore not deductible from his gross income. The IRS demanded that husband pay the tax due on the money he had paid to his former wife. In contrast, seven years earlier, in Baker v. Comm., 79 TCM 2050 (2000), also involving military pension benefits paid by husband to wife pursuant to the parties’ divorce decree, the IRS went after a former wife, claiming that the money she received from her former husband was alimony, not property division, and therefore includable in her gross income. The IRS demanded that wife pay the tax due on the money she had received from her former husband. (So if you’re looking for a good collection agency, try the IRS!)
In Aday v. Dept. of Rev., ____ OTC-MD_____ (1/17/2006), the parties’ property settlement agreement, incorporated into a dissolution judgment, specifically recited that neither party shall pay spousal support. The agreement also provided that husband pay wife monthly payments ($706 per month) for 25 years but with the obligation to make payments ending with wife’s death. Wife did not include and report as “alimony received” the payments received from husband. The Oregon Dept. of Revenue then assessed a deficiency for unpaid taxes. Wife appealed. HELD: The payments received by wife were alimony for income tax purposes. “The payments to Plaintiffs satisfied all the requirements of IRC section 71(b)(1). They were made under a divorce or separation instrument. The instrument did not designate the payments as not includible in gross income. The payor and payee were not members of the same household at the time the payments were made. A provision in the instrument expressly provides for the termination of payments upon the death of the payee spouse. The payments to Plaintiffs are therefore alimony.” As for the provision in the agreement specifically declaring that the payments are not spousal support? No problem. “This court has previously held that the labels the parties attach to the payments are not as compelling as their characteristics, and that the court must apply the current version of the Internal Revenue Code.” (Citing Kemp v. Dept. of Rev., ____OTC____ (July 27, 1998) (unpublished opinion holding that under Oregon law spousal support is deemed to terminate upon death of payee spouse absent a provision in the judgment providing otherwise).
Other examples
There are many other types of court-awarded payment obligations that will terminate upon the payee’s death by operation of law, thus allowing payments made pursuant to the obligation to be treated as alimony for income tax purposes (assuming the payment otherwise qualifies as alimony under the tax code).
For example, as security for a child support obligation payable to wife, husband may be ordered to pay the cost of a life insurance policy on his life, with wife being the owner of the policy. As explained in IRS Publication 504, "Alimony [for federal income tax purposes] includes premiums you must pay under your divorce or separation instrument for insurance on your life to the extent your spouse or former spouse owns the policy." Upon wife’s death, husband's obligation to pay the premiums for a life insurance policy on his life that is owned by wife, as security for his child support obligation owing to her, would terminate by operation of law. (Once dead, wife would no longer be entitled to child support from husband and would no longer need the life insurance protection; nor would she any longer be the owner of the policy.) If husband claims the premium payments as deductible “alimony paid” on this tax return, wife would be required to report the payments on her tax return as “alimony received” and pay any resulting income tax.
Another situation: Husband is ordered to pay the balance due on wife's federally insured student loan. Under 20 USC § 1087dd(c)(1)(F), the liability for repayment of such a loan is automatically canceled upon the death of the borrower. Thus, husband’s court-ordered payment obligation would terminate upon wife’s death by operation of law. Husband makes monthly payments on the loan and claims the payments on his federal tax return as “alimony paid.” Wife ends up having to report the payments on her income tax return as “alimony received” and pay income taxes thereon.
Another situation: Dissolution judgment requires husband is provide health insurance for wife and pay the cost thereof. Obviously, once wife dies, there would be no need or basis to continue to provide health insurance for her benefit, so the obligation would therefore terminate upon her death by operation of law.
In all such situations, unless appropriate precautions are taken, payments made pursuant to the divorce instrument may qualify as tax deductible alimony for the payor under the Internal Revenue Code. And if tax deductible alimony for the payor, the payments become tax includable income for the payee.
Not, not & not: Requirement that divorce instrument not designate the payment as not deductible for the payor and not taxable for the payee
A cash payment will satisfy the “alimony” criterion of 26 USC § 71(b)(1)(B) if the dissolution judgment requiring the payment does not designate the payment as “a payment that is not includable in gross income under 26 USC § 71 and not allowable as a deduction under 26 USC § 215.” (Note the "double negative" language.)
To satisfy this statutory requirement and disqualify the payment obligation from being treated as alimony for income tax purposes, the language used in the divorce instrument must “clearly, explicitly and expressly” designate (or “make known directly”) that a spouse's payments are not to be treated as income. Richardson v. Commissioner, 125 F3d 551, 556 (7th Cir. 1997), cited and followed by the US Tax Court in Dato-Nodurft v. Comm., 2004 TC Memo 119 (2004); Maloney v. Comm., 80 TCM 53 (2000) (instrument must contain a clear and explicit designation that the payment is not includable in the recipient's income under section 71 or deductible by the payor under section 215, although it need not refer expressly to section 71 or section 215); Baker v. Comm., 79 TCM 2050 (2000) (designation of payment as "property settlement" with no further clarification would be a “designation by uncertain implication” rather than by “clear, explicit, and express direction”); Estate of Goldman v. Comm., 112 TC 317 (1999) (statutory requirement satisfied by designating monthly $20,000 payments as “transfers of property subject to the provisions of Section 1041”).
In Baker v. Comm., 79 TCM 2050 (2000), the tax court rejected a former wife’s claim that the payments received by her from her former husband from his military pension, paid to her pursuant to a divorce judgment that specifically designated the payments as a “property settlement,” should be treated as “nonalimony” and thus not taxable income under IRC § 71(b)(1)(B). The tax court noted that the statutory language of IRC § 71 (b)(1)(B) does not allow designations by “attenuated implication.” Citing Richardson v. Commissioner, 125 F3d 551, 556 (7th Cir. 1997), and prior tax court cases, the court declared that the dissolution judgment must contain a “clear, explicit and express direction" that the payments are not to be treated as income for income tax purposes. The court concluded that labeling the payments as a “property settlement,” with nothing more, was not a “clear, explicit, and express direction that the payments are not includable in petitioner's gross income and are not deductible by Mr. Baker.”
To be on the safe side (whichever side that may be), it is advisable when establishing a money payment obligation, whether designated as spousal support or otherwise, to expressly declare the parties' intent regarding the tax treatment and tax effect to be to accorded to the obligation, using the statutory verbiage of IRC § 71(b)(1)(B). If the obligation is intended to be tax deductible for the payor under IRC § 215 and taxable income for the payee under IRC § 71, say so. And if it is not so intended, say that too. (“Payments made pursuant to this obligation are hereby expressly designated as not includible in gross income of the payee under IRC § 71 and not allowable as a deduction for the payor under IRC § 215.”)
If it’s child support, it’s not alimony
Unlike alimony payments, child support payments are not tax deductible for the payor (obligor) nor taxable income for the payee (obligee). While the label given to a particular payment obligation (e.g., “property division” or “spousal support”) is generally by itself not controlling or determination as to the tax treatment to be accorded, “child support” is an exception. Pursuant to IRC § 71(c)(1), if a divorce or separation instrument expressly designates a payment obligation as “child support” it will automatically disqualify the payment from being deemed or treated as alimony for income tax purposes.
Further, a payment obligation that might otherwise qualify as alimony under IRC § 71 will be disqualified as alimony if the payment is “treated as child support.” A payment obligation will be “treated as child support” if the obligation will be reduced (A) on the happening of a contingency specified in the instrument relating to a child (such as attaining a specified age, marrying, dying, leaving school or a similar contingency) or (B) at a time that can “clearly be associated” with such a contingency. IRC § 71(c)(2)(A) and (B). The amount of the reduction would be treated as child support and therefore not as alimony.
IRC Regulation 1.71-1T (26 CFR § 1.171-1T), at Q&A 18, sets forth the two situations that will “clearly be associated” with a contingency relating to a child. The first situation occurs when “the payments are to be reduced not more than six months before or after the date the child is to attain the age of 18, 21, or the local age of majority.” The second situation occurs when “the payments are to be reduced on two or more occasions which occur not more than one year before or after a different child of the payor spouse attains a certain age between the ages of 18 and 24, inclusive. The certain age referred to in the preceding sentence must be the same for each such child, but need not be a whole number of years.”
If the parties to a dissolution proceeding are contemplating an award of spousal support pursuant to ORS 107.105(1)(d) and they have children, care needs to be taken so as to avoid alimony disqualification due to the application of IRC § 71(c). For further discussion and illustration of the problem, see Linder v. Dept. of Rev., 18 OTR_____ (9/1/2004) (Dissolution court awarded “stepped-down” spousal support, with reductions to occur when the parties’ eldest daughter attained age 21 and again when the middle daughter attained age of 18; Oregon Tax Court ruled the payments as child support and denied husband’s tax deduction claim).
Practicality vs. legality
As a matter of practicality, the strict application of the alimony rules of IRC §§ 71 and 215 will arise only in the event a dispute arises when a payor spouse claims a deduction for “alimony paid” (see IRS Form 1040, line 31a) and a corresponding amount is not reported by the payee spouse as “alimony received” (see IRS Form 1040, line 11). So long as the two tax returns are “in sync” with one another, the IRS processing computer will be happy and, absent other problems, both returns will be accepted and not questioned.
On the other hand, if the payor claims a deduction for “alimony paid” that is not correspondingly reported by the payee as “alimony received,” it will inevitably cause a problem the requires IRS resolution. And in doing so, IRS will strictly apply the Internal Revenue Code statutes, 26 USC §§ 71 and 215, and the IRS Regulations, 26 CFR §§ 1.71-1, 1.71 1T, 1.215-1 and 1.215.1-T.
Conclusion (and word of advice to Oregon practitioners)
Many if not most of the problems, real or potential, involving the tax consequences of court-ordered money payment obligations can and will be avoided if the parties and their attorneys, and the court, reach a clear understanding and agreement, at the time the marital dissolution proceeding is occurring, as to the intended tax treatment and tax effect of each payment obligation being established, and include in the dissolution judgment or separation agreement appropriate language expressing that intent, in compliance with applicable IRS statutes and regulations. Failure to do so may result in an unwanted tax obligation for one spouse or the other and, for the attorney involved, an unwanted “Personal and Confidential” letter from the PLF.
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LAWRENCE D. GORIN
Attorney at Law
521 S.W. Clay St., Suite 205
Portland, Oregon 97201
Phone: 503-224-8884
Fax: 503-226-1321
E-mail: LDGorin@pcez.com
Website: http://ldgorin.justia.net/index.com
WHEN IS IT ALIMONY? AND WHEN IS IT NOT?
WELL, IT ALL DEPENDS......
© Lawrence D. Gorin, Attorney at Law, Portland, Oregon
Introduction
Marital settlement agreements and dissolution judgments typically include provisions establishing obligations for the payment of money by one spouse to the other. Such obligations usually fall into one of three classifications: Child support, spousal support or property division. How such obligations will be treated for purposes of Oregon domestic relations law is a matter for state law determination. In contrast, how such obligations will be treated for income tax purposes is a matter controlled by federal law. This article focuses on the classifications of spousal support and property division and the treatment of such obligations for income tax purposes.
Under Oregon domestic relations law, as explained in Moak and Moak, 64 Or App 487, 668 P2d 1249 (1983), spousal support may be modified on a change of circumstances, ORS 107.135(1)(a), but a division of property may not. The distinction between spousal support and property division is not always clear. And when that occurs, the court will determine the appropriate classification based on the underlying facts of the case. Horesky and Horesky, 30 Or App 941, 569 P2d 34 (1977), rev den 281 Or 1 (1978). The labels used by the parties are not decisive. Schaffer v. Schaffer, 57 Or App 43, 643 P2d 1300 (1982). Rather, the controlling issue is "the nature and purpose of the award." State ex rel Carrier v. Carrier, 40 Or App 407, 411, 595 P2d 827 (1979).
However, regardless of the classification made by the state court, a payment of money from one spouse to the other under the terms of a dissolution judgment or marital settlement agreement, whether labeled as spousal support or property division, will be deemed and treated by the Internal Revenue Service (IRS) as “alimony” for federal income tax purposes unless, under the criteria of Internal Revenue Code (IRC) § 71(a), 26 USC § 71(a), the payment is disqualified from such treatment. If deemed and treated under federal law as “alimony,” the payment will be tax deductible for the payor and taxable income to the payee, in accord IRC §§ 71 and 215 (26 USC §§ 71 and 215).
Thus, money paid to a former spouse pursuant to a court-ordered obligation deemed as “spousal support” for state law purposes (and therefore subject to future modification) may or may not end-up being treated by the IRS as “alimony” for income tax purposes. And the same is true for money paid to a former spouse as “property division” for state law purposes (and therefore not subject to future modification). As lawyers are prone to say when answering tough legal questions, “Well, it all depends.......”
Consequently, when drafting marital dissolution judgments and settlement agreements that establish money payment obligations, problems will be avoided if the intentions of the parties (and the court) regarding the payment classification for state divorce law purposes, as well as the intended income tax treatment and effect, are clearly expressed by the language used in the controlling document. Failure to do so may result in consequences unintended or undesired by the parties and the court.
Uncle Sam says.......
Under federal income tax law, Internal Revenue Code (IRC) § 71(b)(1), a payment to or for the benefit of a spouse or former spouse under a divorce or separation instrument will qualify and be deemed and treated by the Internal Revenue Service (IRS) as “alimony” for income tax purposes and thus will be tax deductible from the payor’s gross income, IRC § 215, and taxable income to the payee, IRC § 71, if all of the following requirements are met:
- The payment is received by (or on behalf of) a spouse under a divorce or separation instrument. IRC § 71(b)(1)(A).
- The divorce or separation instrument does not designate the payment as “a payment that is not includible in gross income under IRC § 71 and not allowable as a deduction under IRC § 215.” IRC § 71(b)(1)(B).
- The spouses are not members of the same household at the time the payment is made. IRC § 71(b)(1)(C).
- There is no liability to make any payment (in cash or property) after the death of the recipient (payee) spouse. IRC § 71(b)(1)(D).
- The payment must be in cash (or check or money order) [rather than property or services].
- The spouses do not file a joint return with each other.
- The payment is not designated as or treated as child support.
As declared by the U.S. Tax Court: "If a payment satisfies all of these factors then the payment is alimony; if it fails to satisfy any one of these factors then the payment is not alimony." Baker v. Comm., 79 TCM 2050 (2000).
“Spouse” as used in IRC § 71 includes a former spouse. See IRC § 71(d).
“Divorce or separation instrument” means a decree of divorce or separate maintenance or a written instrument incident to such a decree, or a written separation agreement, or a decree requiring a spouse to make payments for the support or maintenance of the other spouse. See IRC § 71(b)(2).
Spousal support vs. property division
So far as the Internal Revenue Service is concerned (with the exception of a payment specifically designated as “child support”), the label, designation or classification, if any, given to a court-ordered money payment obligation (be it “spousal support,” “property division” or “alimony”), without more, is not necessarily controlling or determinative as to the tax consequences of the obligation. Indeed, while it may be inferred from the labels used that the court and the parties had tax considerations in mind, such labels alone do not “clearly, explicitly and expressly” say anything, one way or the other, as to the tax treatment to be accorded by the IRS to the payment obligation. Richardson v. Commissioner, 125 F3d 551, 556 (7th Cir. 1997).
It is therefore important when drafting marital dissolution judgments and settlement agreements that establish money payment obligations to use specific language, in accord with the criteria set forth in IRC § 71, to “clearly, explicitly and expressly” convey the actual tax treatment and tax effect that is intended to be accorded by the IRS to payments made pursuant to the court-ordered obligation.
Further, under the federal income tax code, the phrase "nondeductible alimony" is an oxymoron. A payment received by the payor’s spouse that meets the test of "alimony" under IRC § 71 is -- per se -- tax deductible for the payor, IRC § 215, and taxable income to the payee, IRC § 71. Careful draftsmanship requires careful attention to the criteria of IRC § 71.
Spousal support intended to be “alimony” for income tax purposes
If a “spousal support” obligation made pursuant to ORS 107.105(1)(d) is intended to qualify and be treated as “alimony” for income tax purposes, as is typically the case, a carefully drafted dissolution judgment should (1) expressly declare the intended tax effect and (2) should also include appropriate “termination on death” language. The qualifying "magic words" should be included both in the main text of the judgment document as well as the "money award" section at the end of the document. One possible format:
Spousal support as alimony. Payments herein designated as spousal support are intended to qualify and be treated as “alimony” for income tax purposes pursuant to Internal Revenue Code §§ 71 and 215 and shall therefore be deductible from the gross income of the payor and includable in the gross income of the payee. Further, the obligation for the payment of spousal support designated by this judgment shall terminate upon the death of husband or wife, whichever death first occurs, and the payor spouse shall have no liability to make any such payment for any period after the death of the payee spouse nor any liability to make any payment (in cash or property) as a substitute for such payments after the death of the payee spouse.
Spousal support NOT intended to be “alimony” for income tax purposes
Spousal support as allowed under ORS 107.105(1)(d) is not required to be “alimony” for income tax purposes. If it is intended that the payments, even though labeled in the judgment as “spousal support,” not be treated as “alimony” for income tax purposes, appropriate disqualifying language will do the trick. Consider the following:
Spousal support not treated as alimony. Payments herein designated as spousal support are NOT intended to qualify and be treated as “alimony” for income tax purposes pursuant to Internal Revenue Code §§ 71 and 215. Accordingly, payments of spousal support made pursuant to the obligation established by this paragraph [or provision] are hereby expressly designated as payments that are not includable in gross income of the payee under IRC § 71 and not allowable as a deduction for the payor under IRC § 215.
Lump-sum awards requiring the payment of money
ORS 107.105(1)(d) allows for an award of spousal support “in gross.” An in gross spousal support award typically refers to a lump-sum fixed dollar amount, due and payable upon entry of the dissolution judgment or by a specified susbsequent due date.
In contrast, ORS 107.105(1)(f) authorizes the court to divide property between the parties “as may be just and proper in all the circumstances.” Property division often involves the use of an “equalizing money award,” typically being a lump-sum fixed dollar amount, due and payable upon entry of the dissolution judgment or by a specified subsequent due date.
Family law practitioners generally have no problem in distinguishing between an award of in gross spousal support and an equalizing property division money award, and in understanding the differing tax consequences intended for each. Not so, however for the IRS. A survey of decisions for the U.S. Tax Court reveals a number of cases in which a property division money award was deemed as tax deductible “lump-sum alimony,” as well as other cases in which a limp-sum spousal support award was determined as being a tax-free division and transfer of property.
Again, in drafting dissolution judgments that provide for an in gross spousal support award or a property division money award, appropriate language should be included so as to let IRS know in clear an explicit terms how the payment is to be treated for income tax purposes. The problem that most often arises involves a lump-sum money payment obligation that, although labeled as a property division equalizing or equitable payment, nonetheless satisfies the IRS requirements for alimony under IRS code §§ 71(b)(1)(A), (B) and (C) but leaves unanswered is the critical element of IRS code § 71(b)(1)(D) regarding “no liability to make any payment (in cash or property) * * * after the death of the payee spouse.” Husband then pays the money and claims it as tax deductible alimony on his tax return. Wife files her tax return and does not include the payment in her gross income. Because of the omission of any language in the dissolution judgment regarding the critical question of post-death liability for payment, IRS is put into the position of having to make the determination, much to the dismay, usually, of one party or the other.
Consequently, whether the payment obligation (or any part thereof) is intended to survive the death of the recipient spouse (payee), or whether it is intended to terminate upon the death of the recipient spouse, language expressing the intent should be included in the judgment provision that establishes the obligation. Don’t leave it to IRS to engage in a guessing game as to the parties’ intent. More often than not, it seems, when IRS guesses, it guesses wrong.
Other payments not intended to be “alimony” for income tax purposes.
Court-ordered money payment obligations established by dissolution judgments come in all shapes and sizes. Obligations labeled as “spousal support” are typically intended to have tax consequences, while obligations designated as “child support” or classified as “property division” are intended to be “tax-free,” being neither deductible for the payor nor taxable to the payee. Examples of the latter include money awards intended to equalize the division of marital property (payable either as a lump sum or in a series of payments), as well as provisions requiring one spouse to pay the other spouse's rent or mortgage, or pay debt obligations that are owed by the other spouse, or pay the premiums on a life insurance policy that is owned by the other spouse.
All too often the specific tax consequences of such obligations are not considered at the time of the dissolution proceeding and the dissolution judgment fails to include any language that expresses the parties’ intent regarding the tax treatment and tax effect to be given to the obligation. Unintended or undesired consequences may result.
For example, a cash payment from one spouse to the other (or to a third party on the other's behalf) that is made pursuant to a dissolution judgment (“divorce instrument” in IRS parlance) may qualify as "alimony" for income tax purposes, and thus be deductible for the payor and taxable to the payee, even though not so intended, if, inter alia, the payment obligation terminates upon the death of the recipient (payee) spouse, with no liability to make any payment (in cash or property) thereafter, 26 USC § 71(b)(1)(D), AND the divorce instrument “does not designate such payment as a payment that is not includable in gross income [for the payee] under section 71 and not allowable as a deduction [for the payor] under section 215.” 26 USC § 71(b)(1)(B). Words matter. It is important to use them, wisely and correctly.
Avoiding unintended alimony
To guard against “unintended alimony,” it is advisable to include a "cover all the bases" provision in the dissolution judgment that will disqualify the payment from being treated as alimony for income tax purposes. Consider the following language:
Tax treatment of money payments. Except and unless otherwise specifically and expressly so provided by the terms of this judgment, all payments of money by either party to the other, or to third parties on behalf of the other, pursuant to this judgment are NOT intended to qualify and be treated as “alimony” for income tax purposes pursuant to Internal Revenue Code §§ 71 and 215, and such payments are hereby designated as not includible in gross income of the payee under IRC § 71 and not allowable as a deduction for the payor under IRC § 215. Further, the party making any such payment(s) shall NOT claim such payment(s) as “alimony paid” on said party’s federal income tax return.
Requirement for termination on death of payee spouse
To qualify as “alimony” under IRC § 71(b)(1)(D), there must be no liability
to make any payment (in cash or property) after the death of the recipient (payee) spouse. This requirement will be deemed as satisfied if (1) the dissolution judgment expressly so declares or (2) the payor's payment liability ceases upon the death of the payee spouse by operation of law. Either or both.
[NOTE: For several years prior to 1987, IRC § 71(b)(1)(D) required the qualifying factor of “no liability for payment after payee’s death” to be specifically stated in the divorce or separation instrument. Omission of such an express declaration from the divorce or separation instrument effectively disqualified the payment obligation from being deemed as alimony, thus eliminating the payments from being tax deductible to the payor. However, section 1843(b) of the Tax Reform Act of 1986, Pub L 99-514, amended 26 USC § 71(b)(1)(D) so as to delete from the statute the words “and the divorce or separation instrument states that there is no such liability.” Under present IRC § 71(b)(1)(D), all that is required is that there be “no liability to make any such payment for any period after the death of the payee spouse and there is no liability to make any payment (in cash or property) as a substitute for such payments after the death of the payee spouse.”]
The general rule of Oregon domestic relations law is that an obligation to pay spousal support is a personal debt that does not survive the debtor. See Schaffer v. Schaffer, 57 Or App 43, 643 P2d 1300 (1982). Further, under Oregon law spousal support is deemed to terminate upon death of payee spouse absent a provision in the judgment providing otherwise. Kemp v. Dept. of Rev., OTC-RD No 4241, WL 477958 (July 27, 1998) (unpublished opinion). Further, “a hallmark of spousal support is that the beneficiary's death terminates the obligation.” Miller and Miller, 207 Or App 198, 203, 140 P3d 1172 (2006). This appears to be quite reasonable, given that the underlying function and purpose of spousal support is to support a spouse (or former spouse), not to support a former spouse’s estate. Once deceased, there is generally no further need for spousal support.
Given Oregon case law, it is apparent that the obligation of payment of court-ordered spousal support terminates by operation of law upon the death of the payor or the payee, whichever death first occurs. Nonetheless, if a spousal support award is intended to be alimony for income tax purposes, better practice for Oregon divorce purposes is to expressly declare in the dissolution judgment (both in the main body of the document as well as the “money award” section as the end of the document) that the obligation terminates on the death of either payee or payor, whichever first occurs.
Conversely, if a money payment obligation created by a dissolution judgment --- whether designated a spousal support or otherwise --- is not intended to be alimony for income tax purposes, practitioners need to consider whether the obligation is one that will terminate upon the payee’s death by operation of law even though “termination on death” language is intentionally omitted for the judgment document. If such would occur, the obligation may end up being deemed as alimony for income tax purposes even though not so intended. To avoid such a result, precautions need to be taken, such as inclusion of language in the dissolution judgment expressly designating the payment obligation as “not includible in gross income under IRC § 71 and not allowable as a deduction under IRC § 215.”
Will it be alimony or will it be not? Examples to consider
In Proctor v. Comm., 129 TC No. 12 (2007), the parties’ divorce decree awarded wife a portion of husband’s military pension, referring to the payment obligation as a division of the marital property. Husband thereafter made payments to wife in compliance with the court’s property division award. (Wife did not qualify for direct payments from DFAS (the military’s payroll agency) because of the marriage was of less than ten years’ duration.) Husband then filed a tax return, claiming the amount paid to wife as tax deductible alimony (thus resulting in taxable income for wife). Deeming the payments to wife as property division, in accord with the divorce decree, and therefore not alimony under IRC § 71, the IRS rejected husband tax deduction claim. Husband appealed. The U.S. Tax Court agreed with husband and upheld the husband’s tax deduction claim.
Although the divorce decree referred to the payment obligation as part of a division of the marital property, that classification, without more, did not amount to a "clear, explicit and express direction" designating the payment obligation as not includable as income to wife and not allowable as a deduction for husband. “Labels attached to payments mandated by a decree of divorce or marriage settlement agreement are not controlling.” The requirement of IRC § 71(b)(1)(B) (that the payment not be designated as not taxable to the payee and not deductible for the payor) was satisfied. Further, as to termination on death of the payee, the court cited 10 USC § 1408(c)(2), the provision of the Uniformed Services Former Spouses' Protection Act (USFSPA) the says that a divorce court’s division and award of a military pension to a retiree’s former spouse “does not create any right, title, or interest which can be sold, assigned, transferred, or otherwise disposed of (including by inheritance) by a spouse or former spouse.” Thus, by operation of law, wife’s right to receive the court-awarded share of husband’s military retirement will terminate upon her death, with husband thereafter having no further liability. Consequently, the payments husband made directly to wife while she was alive met the “termination upon payee’s death” requirement of IRC § 71(b)(1)(D) and therefore qualified as tax deductible alimony.
NOTE and COMMENT: In Proctor, the IRS went after a former husband, claiming that the portion of his military pension that he paid to his former wife pursuant to the parties’ divorce decree was property division, not alimony, and therefore not deductible from his gross income. The IRS demanded that husband pay the tax due on the money he had paid to his former wife. In contrast, seven years earlier, in Baker v. Comm., 79 TCM 2050 (2000), also involving military pension benefits paid by husband to wife pursuant to the parties’ divorce decree, the IRS went after a former wife, claiming that the money she received from her former husband was alimony, not property division, and therefore includable in her gross income. The IRS demanded that wife pay the tax due on the money she had received from her former husband. (So if you’re looking for a good collection agency, try the IRS!)
In Aday v. Dept. of Rev., ____ OTC-MD_____ (1/17/2006), the parties’ property settlement agreement, incorporated into a dissolution judgment, specifically recited that neither party shall pay spousal support. The agreement also provided that husband pay wife monthly payments ($706 per month) for 25 years but with the obligation to make payments ending with wife’s death. Wife did not include and report as “alimony received” the payments received from husband. The Oregon Dept. of Revenue then assessed a deficiency for unpaid taxes. Wife appealed. HELD: The payments received by wife were alimony for income tax purposes. “The payments to Plaintiffs satisfied all the requirements of IRC section 71(b)(1). They were made under a divorce or separation instrument. The instrument did not designate the payments as not includible in gross income. The payor and payee were not members of the same household at the time the payments were made. A provision in the instrument expressly provides for the termination of payments upon the death of the payee spouse. The payments to Plaintiffs are therefore alimony.” As for the provision in the agreement specifically declaring that the payments are not spousal support? No problem. “This court has previously held that the labels the parties attach to the payments are not as compelling as their characteristics, and that the court must apply the current version of the Internal Revenue Code.” (Citing Kemp v. Dept. of Rev., ____OTC____ (July 27, 1998) (unpublished opinion holding that under Oregon law spousal support is deemed to terminate upon death of payee spouse absent a provision in the judgment providing otherwise).
Other examples
There are many other types of court-awarded payment obligations that will terminate upon the payee’s death by operation of law, thus allowing payments made pursuant to the obligation to be treated as alimony for income tax purposes (assuming the payment otherwise qualifies as alimony under the tax code).
For example, as security for a child support obligation payable to wife, husband may be ordered to pay the cost of a life insurance policy on his life, with wife being the owner of the policy. As explained in IRS Publication 504, "Alimony [for federal income tax purposes] includes premiums you must pay under your divorce or separation instrument for insurance on your life to the extent your spouse or former spouse owns the policy." Upon wife’s death, husband's obligation to pay the premiums for a life insurance policy on his life that is owned by wife, as security for his child support obligation owing to her, would terminate by operation of law. (Once dead, wife would no longer be entitled to child support from husband and would no longer need the life insurance protection; nor would she any longer be the owner of the policy.) If husband claims the premium payments as deductible “alimony paid” on this tax return, wife would be required to report the payments on her tax return as “alimony received” and pay any resulting income tax.
Another situation: Husband is ordered to pay the balance due on wife's federally insured student loan. Under 20 USC § 1087dd(c)(1)(F), the liability for repayment of such a loan is automatically canceled upon the death of the borrower. Thus, husband’s court-ordered payment obligation would terminate upon wife’s death by operation of law. Husband makes monthly payments on the loan and claims the payments on his federal tax return as “alimony paid.” Wife ends up having to report the payments on her income tax return as “alimony received” and pay income taxes thereon.
Another situation: Dissolution judgment requires husband is provide health insurance for wife and pay the cost thereof. Obviously, once wife dies, there would be no need or basis to continue to provide health insurance for her benefit, so the obligation would therefore terminate upon her death by operation of law.
In all such situations, unless appropriate precautions are taken, payments made pursuant to the divorce instrument may qualify as tax deductible alimony for the payor under the Internal Revenue Code. And if tax deductible alimony for the payor, the payments become tax includable income for the payee.
Not, not & not: Requirement that divorce instrument not designate the payment as not deductible for the payor and not taxable for the payee
A cash payment will satisfy the “alimony” criterion of 26 USC § 71(b)(1)(B) if the dissolution judgment requiring the payment does not designate the payment as “a payment that is not includable in gross income under 26 USC § 71 and not allowable as a deduction under 26 USC § 215.” (Note the "double negative" language.)
To satisfy this statutory requirement and disqualify the payment obligation from being treated as alimony for income tax purposes, the language used in the divorce instrument must “clearly, explicitly and expressly” designate (or “make known directly”) that a spouse's payments are not to be treated as income. Richardson v. Commissioner, 125 F3d 551, 556 (7th Cir. 1997), cited and followed by the US Tax Court in Dato-Nodurft v. Comm., 2004 TC Memo 119 (2004); Maloney v. Comm., 80 TCM 53 (2000) (instrument must contain a clear and explicit designation that the payment is not includable in the recipient's income under section 71 or deductible by the payor under section 215, although it need not refer expressly to section 71 or section 215); Baker v. Comm., 79 TCM 2050 (2000) (designation of payment as "property settlement" with no further clarification would be a “designation by uncertain implication” rather than by “clear, explicit, and express direction”); Estate of Goldman v. Comm., 112 TC 317 (1999) (statutory requirement satisfied by designating monthly $20,000 payments as “transfers of property subject to the provisions of Section 1041”).
In Baker v. Comm., 79 TCM 2050 (2000), the tax court rejected a former wife’s claim that the payments received by her from her former husband from his military pension, paid to her pursuant to a divorce judgment that specifically designated the payments as a “property settlement,” should be treated as “nonalimony” and thus not taxable income under IRC § 71(b)(1)(B). The tax court noted that the statutory language of IRC § 71 (b)(1)(B) does not allow designations by “attenuated implication.” Citing Richardson v. Commissioner, 125 F3d 551, 556 (7th Cir. 1997), and prior tax court cases, the court declared that the dissolution judgment must contain a “clear, explicit and express direction" that the payments are not to be treated as income for income tax purposes. The court concluded that labeling the payments as a “property settlement,” with nothing more, was not a “clear, explicit, and express direction that the payments are not includable in petitioner's gross income and are not deductible by Mr. Baker.”
“In making our determination, we note that in divorce instruments parties may characterize payments in different ways, such as alimony, periodic alimony, alimony in gross, property settlement, division of property, etc. The meaning of these terms may vary from State to State. Moreover, the effect that such classifications may have in each State may be dependent upon the intent of the parties or other factual circumstances. As we noted above, Congress specifically revised section 71 in order to eliminate the subjective inquiries into the nature of payments. * * * The label of "property settlement", with no further clarification, does not clearly inform us that the parties considered the Federal income tax consequences of the payments under sections 71, 215, and/or 1041.” Baker v. Comm., 79 TCM at 2053.
To be on the safe side (whichever side that may be), it is advisable when establishing a money payment obligation, whether designated as spousal support or otherwise, to expressly declare the parties' intent regarding the tax treatment and tax effect to be to accorded to the obligation, using the statutory verbiage of IRC § 71(b)(1)(B). If the obligation is intended to be tax deductible for the payor under IRC § 215 and taxable income for the payee under IRC § 71, say so. And if it is not so intended, say that too. (“Payments made pursuant to this obligation are hereby expressly designated as not includible in gross income of the payee under IRC § 71 and not allowable as a deduction for the payor under IRC § 215.”)
If it’s child support, it’s not alimony
Unlike alimony payments, child support payments are not tax deductible for the payor (obligor) nor taxable income for the payee (obligee). While the label given to a particular payment obligation (e.g., “property division” or “spousal support”) is generally by itself not controlling or determination as to the tax treatment to be accorded, “child support” is an exception. Pursuant to IRC § 71(c)(1), if a divorce or separation instrument expressly designates a payment obligation as “child support” it will automatically disqualify the payment from being deemed or treated as alimony for income tax purposes.
Further, a payment obligation that might otherwise qualify as alimony under IRC § 71 will be disqualified as alimony if the payment is “treated as child support.” A payment obligation will be “treated as child support” if the obligation will be reduced (A) on the happening of a contingency specified in the instrument relating to a child (such as attaining a specified age, marrying, dying, leaving school or a similar contingency) or (B) at a time that can “clearly be associated” with such a contingency. IRC § 71(c)(2)(A) and (B). The amount of the reduction would be treated as child support and therefore not as alimony.
IRC Regulation 1.71-1T (26 CFR § 1.171-1T), at Q&A 18, sets forth the two situations that will “clearly be associated” with a contingency relating to a child. The first situation occurs when “the payments are to be reduced not more than six months before or after the date the child is to attain the age of 18, 21, or the local age of majority.” The second situation occurs when “the payments are to be reduced on two or more occasions which occur not more than one year before or after a different child of the payor spouse attains a certain age between the ages of 18 and 24, inclusive. The certain age referred to in the preceding sentence must be the same for each such child, but need not be a whole number of years.”
If the parties to a dissolution proceeding are contemplating an award of spousal support pursuant to ORS 107.105(1)(d) and they have children, care needs to be taken so as to avoid alimony disqualification due to the application of IRC § 71(c). For further discussion and illustration of the problem, see Linder v. Dept. of Rev., 18 OTR_____ (9/1/2004) (Dissolution court awarded “stepped-down” spousal support, with reductions to occur when the parties’ eldest daughter attained age 21 and again when the middle daughter attained age of 18; Oregon Tax Court ruled the payments as child support and denied husband’s tax deduction claim).
Practicality vs. legality
As a matter of practicality, the strict application of the alimony rules of IRC §§ 71 and 215 will arise only in the event a dispute arises when a payor spouse claims a deduction for “alimony paid” (see IRS Form 1040, line 31a) and a corresponding amount is not reported by the payee spouse as “alimony received” (see IRS Form 1040, line 11). So long as the two tax returns are “in sync” with one another, the IRS processing computer will be happy and, absent other problems, both returns will be accepted and not questioned.
On the other hand, if the payor claims a deduction for “alimony paid” that is not correspondingly reported by the payee as “alimony received,” it will inevitably cause a problem the requires IRS resolution. And in doing so, IRS will strictly apply the Internal Revenue Code statutes, 26 USC §§ 71 and 215, and the IRS Regulations, 26 CFR §§ 1.71-1, 1.71 1T, 1.215-1 and 1.215.1-T.
Conclusion (and word of advice to Oregon practitioners)
Many if not most of the problems, real or potential, involving the tax consequences of court-ordered money payment obligations can and will be avoided if the parties and their attorneys, and the court, reach a clear understanding and agreement, at the time the marital dissolution proceeding is occurring, as to the intended tax treatment and tax effect of each payment obligation being established, and include in the dissolution judgment or separation agreement appropriate language expressing that intent, in compliance with applicable IRS statutes and regulations. Failure to do so may result in an unwanted tax obligation for one spouse or the other and, for the attorney involved, an unwanted “Personal and Confidential” letter from the PLF.
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LAWRENCE D. GORIN
Attorney at Law
521 S.W. Clay St., Suite 205
Portland, Oregon 97201
Phone: 503-224-8884
Fax: 503-226-1321
E-mail: LDGorin@pcez.com
Website: http://ldgorin.justia.net/index.com