Tax Court: Support Payments Contingent on Homeschooling Child Treated as Alimony.

(Parker Tax Publishing April 13, 2015)

The Tax Court held that a provision in a separate maintenance agreement making support payments contingent upon the taxpayer's ex-wife homeschooling the couple's child did not disqualify the payments from being treated as alimony. Wish v. Comm'r, T.C. Summary 2015-25.

Background

Joshua Wish, who worked as a schoolteacher, and his wife decided to homeschool their child because of the child's learning disabilities. Because of their decision to homeschool, Wish's wife was not able to work. In January of 2009, Wish and his wife divorced and agreed that their child should continue to be homeschooled. They agreed that Wish would, in addition to paying $1,200 per month child support, pay alimony during a four-year transitional period to provide her with financial independence. In their separation agreement, Wish and his former wife agreed that she would receive $3,800 per month in alimony, but if she discontinued homeschooling their child, then her alimony would be reduced to $1,900 per month.

Wish's ex-wife continued homeschooling the child until September of 2009, at which point she enrolled him in a local school and returned to work. As a result, Wish reduced his support payments.

On his 2009 return, Wish reported alimony deductions of $38,000. The IRS audited his return, claiming that because the payments were conditional on the child's being homeschooled, they were non-deductible child support, not alimony, and disallowed the majority of Wish's claimed alimony deductions.

Analysis

In general, Code Sec. 215(a) allows deductions for alimony or separate maintenance payments. In contrast, child support payments are not deductible (Code Sec. 71(c)(1)). Under Code Sec. 71(c), if support payments agreed to in the divorce instrument will be reduced because of a contingency relating to a child, the amount of the reduction will be treated as child support, as opposed to alimony, and therefore will not be deductible.

The Tax Court analyzed the contingency to determine whether it related to the former wife, and therefore was properly characterized as alimony, or whether it was related to the child, and therefore was child support.

The IRS argued that the contingency in the alimony agreement related to the child. The IRS supported its argument by referencing Hammond v. Comm'r, T.C. Memo. 1998-53, where the alimony ended when the child turned 18, and Johnson v. Comm'r, T.C. Memo. 2014-67, where the alimony ended when the last child graduated from school. However, the court noted that in those cases, unlike in Wish's divorce agreement, the language clearly called for the cessation of the payments upon a specific event relating to a child.

In contrast to the IRS's cases, the court noted that Wish and his former wife entered into the agreement that she would homeschool their child with the explicit understanding that their decision would cause financial hardship for her because she would not be able to work while performing the schooling. Wish agreed to pay $3,800 of alimony with the understanding that his ex-wife would homeschool their child, and that the alimony was to be reduced to $1,900 if his ex-wife chose to return to work and no longer homeschooled their child.

The court reasoned that there was a clear and direct relationship between the amount of alimony and Wish's ex-wife's choice to work and there was no contingency under Code Sec. 71(c) that depended on the child, who continued to be educated, albeit at a public school rather than at home. Thus, the court concluded, the contingency did not rest on whether the child discontinued homeschooling, but on whether Wish's ex-wife was willing to make financial sacrifices. The court noted that it was her choice to go back to work and discontinue homeschooling after she was unable to obtain increased alimony payments.

Accordingly, the court found that the payments to Wish's ex-wife were properly treated as alimony, and allowed Wish's $38,000 alimony deduction for 2009.

For a discussion of taxation of alimony and separate maintenance payments, see Parker ¶ 14,220. (Staff Editor Parker Tax Publishing)

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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