Support Payments with Child-Related Contingencies Were Not Deductible as Alimony

(Parker Tax Publishing August 2022)

The Tax Court held that payments a taxpayer made to his ex-wife under a divorce decree were not deductible as alimony under pre-TCJA Code Sec. 215 because the divorce instrument provided that the payments continued until the taxpayer's children emancipated or his ex-wife remarried. Because of these child-related contingencies, the court found that the payments were treated as made to support to taxpayer's children under Code Sec. 71(c) and therefore were nondeductible under Code Sec. 215(b). Rojas v. Comm'r, T.C. Memo. 2022-77.

Background

Alejandro and Cristina Rojas married in 1995, separated in 2010, and divorced in 2012. In 2012, the Los Angeles Superior Court (L.A. Superior Court) entered a judgment of dissolution, to which was attached a stipulated judgment. The stipulated judgment stated, in part, that neither party would be required to pay child support or spousal support to the other. In addition, the judgement stated that Alejandro was required to pay Cristina $4,500 per month in family support, continuing until both minor children emancipate or Cristina remarried.

In 2013, Alejandro filed with the L.A. Superior Court a request for order (RFO), seeking a downward modification of child support. In her response, Cristina opposed the granting of the RFO, contending that there was no child support order in place because the stipulated judgment provided only for family support, which she contended should be construed as nonmodifiable spousal support. In 2014, the L.A. Superior Court denied the RFO without prejudice, stating in its order: "The Court makes a finding that there is no current child support order." The L.A. Superior Court further found that the RFO sought to modify the existing family support order, entered by way of stipulated judgment, but had failed to provide the legal authority to warrant such a modification.

During 2016 Alejandro made payments to Cristina totaling $69,888. After the divorce Alejandro married Elena Rojas. On their joint Form 1040, U.S. Individual Income Tax Return, for tax year 2016 the Rojases took a deduction for the alimony payments. The IRS disallowed this deduction, and Alejandro and Elena took their case to the Tax Court.

Before being repealed by the Tax Cuts and Jobs Act, Code Sec. 215(a) generally permitted an individual to deduct from gross income "alimony or separate maintenance payments," as defined in Code Sec. 71(b). However, under Code Sec. 215(b), the deduction was available only if the alimony or separate maintenance payments were includible in the recipient's gross income under Code Sec. 71. As a general rule, alimony or separate maintenance payments were includible in the payee spouse's gross income under Code Sec. 71(a). Under Code Sec. 71(c), this general rule did not apply (and consequently, no deduction was allowable to the payor under Code Sec. 215) if the payments were made, or treated as made, to support the payor spouse's children. Under Code Sec. 71(c)(2)(A), a reduction in a support payment which occurs on the happening of a contingency relating to a child (such as attaining a specified age, marrying, dying, leaving school, or similar contingency), is treated as made to support the payor spouse's children.

Observation: For any divorce or separation instrument executed after December 31, 2018, any alimony paid under the agreement is not deductible and any alimony received under the agreement is not includible in income.

The IRS argued that under the divorce instrument's express terms, Alejandro's payments were subject to a child-related contingency and therefore were nondeductible under Code Sec. 215(b). Alejandro argued that Code Sec. 72(c)(2)(A) did not apply because the divorce instrument contained both a child-related contingency and a spouse-related contingency. He also argued that because the L.A. Superior Court stated in its order that "there is no current child support order," the Full Faith and Credit Act, 29 U.S.C. Section 1738, precluded the Tax Court from characterizing the family support payments as nondeductible child support. Additionally, Alejandro contended that it was inequitable to treat the payments in question as nondeductible child support in light of the L.A. Superior Court's order denying his RFO and rejecting his characterization of the payments as child support.

Analysis

The Tax Court sustained the disallowance of the Rojases' claimed alimony deduction after finding that the provision of the stipulated judgment requiring Alejandro to make family support payments only until both minor children emancipate was a child-related contingency that encompassed types of contingencies expressly specified in Code Sec. 71(c)(2)(A), i.e., "attaining a specified age, marrying . . . or a similar contingency." The existence of this child-related contingency, the court concluded, triggered the application of Code Sec. 71(c)(1) and (2)(A) and made the payments in question nonincludible in Cristina's gross income under Code Sec. 71(a) and hence nondeductible by the Rojases under Code Sec. 215(b).

The court rejected all of the Rojases' arguments. The court found that under the clear terms of Code Sec. 71(c)(2)(A), the statute is triggered by a contingency relating to a child, regardless of the existence of other contingencies. The court also found that Rojas's reliance on the L.A. Superior Court's order and the Full Faith and Credit Act was misplaced. According to the Tax Court, the L.A. Superior Court's order merely reflected that under the express terms of the divorce instrument the payments in question were labeled neither as "child support" nor as "spousal support" but rather as "family support," which under California law represents combined, but unallocated, child support and spousal support. The court also noted that federal law rather than state law governs the federal income tax treatment of such payments and that its holding did not turn upon the labels used either in the divorce instrument or by the L.A. Superior Court. Rather, the outcome depended on the express terms of Code Sec. 71(a) and (c), which made the payments nonincludible in Cristina's gross income and hence nondeductible under Code Sec. 215(b). Finally, the court responded to Rojas's unfairness argument by pointing out that the Tax Court is not a court of equity and that it cannot, in effect, legislate changes in a statute enacted by Congress.

For a discussion of the deductibility of alimony payments made before 2018, see Parker Tax ¶80,105.

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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