Is It Necessary to Have a Court Decree Ordering Alimony To Take An Income Tax Deduction?
I recently agreed to meet with a man who explained that the IRS was threatening to disallow his tax deduction taken for payments he had made to his wife pursuant to a home-made separation agreement. Taxpayer Charlie told me that he had filed tax returns for the last three years taking a deduction for what he called “alimony” paid to his separated wife.
As part of its report of audit findings, the Service was making a request for additional information concerning the Taxpayer’s Separation Agreement. The letter advised that the Service intended to disallow the Taxpayer’s deduction for Alimony unless Taxpayer Charlie had a “decree” so-ordering that alimony be paid. The word “decree” assumes the intervention of a Court having jurisdiction over such matters. Only Courts have the authority to hear argument and to issue “decrees.” However, we note that the Income Tax Law does not require that a Separation Agreement “be decreed.”
Charlie’s separation agreement with his wife was a single-page, type-written, signed, notarized document which was duly recorded in the local County Clerk’s Office. It was as far from a court decree that one could imagine.
We are fortunate that we can look at Example (1) under Treas Reg. Section 1.71-1(b)(6) as an useful example of how the Service should treat Charlie’s Tax situation:
W files suit for divorce from H. In consideration of W’s promise to relinquish all marital rights and not to make public H’s financial affairs, H agrees in writing to pay $200. a month to W during her lifetime if a final decree of divorce is granted without any provision for alimony. Accordingly, W does not request alimony and no provision for alimony is made under a final decree of divorce entered into a year later. After the divorce, H pays W $200. a month, pursuant to the promise. The $2,400. thus received by W is includible in her gross income under the provisions of section 71(a)(1). Under section 215, H is entitled to a deduction of $2,400 from his gross income.
Further, Treasury Regulation Section 1.71-1.(b)(i) provides that, in the case of divorce or legal separation, . . . gross income of the recipient spouse includes periodic divorce or separate maintenance payments. Such periodic payments must be made in discharge of a legal obligation imposed upon or incurred by the payer spouse because of the marital or family relationship under a court order or decree divorcing or legally separating the husband and wife or a written instrument incident to such divorce status or legal separation status. Here, the terms of the separation agreement entered into by Charlie with ex-wife were carried over into their subsequent divorce decree.
The Service in IRS Tax Topics 452 – Alimony Paid provides further guidance to taxpayers, as follows:
- Amounts paid under divorce or separate maintenance decrees or written separation agreements entered into between you and your spouse or former spouse will be considered alimony for federal tax purposes if:
- You and your spouse or former spouse do not file a joint return with each other;
- You pay in cash (including checks or money orders);
- The payment is received by (or on behalf of) your spouse or former spouse;
- The divorce or separate maintenance decree or written separation agreement does not say that the payment is not alimony;
If legally separated under a decree of divorce or separate maintenance, you and your former spouse are not members of the same household when you make the payment;
- You have no liability to make the payment (in cash or property) after the death of your spouse or former spouse; and
Your payment is not treated as child support or a property settlement.
Clearly, it has been a long-established rule that the separation agreement between a married couple does not have to be by court decree. Charlie’s Separation Agreement with his Ex-Spouse was a one (1) page long document.
After some follow-up discussion, the IRS reversed its decision and sustained the yearly deductions for alimony he took on his individual income tax return.
Mark A. Krohn, a partner, is in charge of the Business Law Team and is also a member of the Trust & Estates Team. He can be reached by phone at our Walden, NY office at 866-303-9595 toll free or 845-764-9656 and by email.