Taxpayer Allowed to Deduct Payment of Court-Ordered Alimony Arrearages

(Parker Tax Publishing March 2019)

The Tax Court held that a taxpayer who was ordered by a state court to pay approximately $225,000 in alimony arrearages could deduct the full amount of the payment because it satisfied the definition of alimony in Code Sec. 71(b). The Tax Court found that the state court's order was not a money judgment but a contempt order which gave the taxpayer's ex-spouse no means of enforcing the order; therefore, the payment qualified as alimony because the taxpayer would not have remained liable for making the payment after the death of his ex-spouse. Siegel v. Comm'r, T.C. Memo. 2019-11.

Background

Jeffrey Siegel and Belinda Johnson were married in 1989 and have two daughters. Siegel and Johnson were divorced in 2003. Siegel was required to make monthly spousal maintenance payments to Johnson of $10,110 per month and child support payments of $5,000 per month.

After the divorce, Siegel's business went into bankruptcy and he fell behind in making the maintenance and child support payments. In 2004, Johnson obtained an order for entry of a money judgment of approximately $228,000 against Siegel. In 2006, the Family Court of New York found Siegel to be in arrears of approximately $253,600. In 2007, the Family Court issued a money judgment of approximately $216,600 against Siegel (the 2007 money judgment).

In 2008, Johnson filed a motion in the Supreme Court of New York to hold Siegel in contempt and to enforce the financial provisions of the judgment of divorce. Siegel filed a motion seeking (1) to reduce his child support and obtain other relief and (2) to consolidate those requests with his ex-spouse's contempt petition. The Supreme Court of New York issued a report in November 2010.

From the entry of the 2007 money judgment until the issuance of the November 2010 report, Siegel made 92 child support and alimony payments to Johnson totaling approximately $255,400. The special referee recommended that the Supreme Court of New York grant Siegel's motion to reduce the amount of the child support payments and also concluded that Siegel had willfully failed to comply with a lawful support order. Taking into account the reduction of Siegel's support obligations, the special referee calculated that from July 2006 to August 2010 Siegel owed his ex-house approximately $567,000 in child support, alimony and attorney's fees. Taking into account the payments Siegel made from July 2006 to August 2010, the total remaining arrearages were approximately $242,100. The referee also recommended an award of attorney's fees of $156,000 to Johnson. Finally, the special referee found that Siegel owed $25,000 to a financial account held by one of his daughters.

In a February 2012 order, the Supreme Court of New York found Siegel to be in contempt and sentenced him to 150 days in jail unless he paid $25,000 to his daughter's account and $225,000 to his former spouse (the 2012 order). Siegel submitted a check for $250,000 to the attorneys for his ex-spouse in June 2012. The Office of Child Support Enforcement applied $225,000 of this payment to arrearages Siegel owed to Johnson. On his 2012 federal income tax return, Siegel deducted as alimony the $225,000 he paid in response to the 2012 order. The IRS disallowed the deduction, and Siegel petitioned the Tax Court to review the resulting deficiency.

Analysis

Payments of alimony made before 2019 are generally deductible under Code Sec. 215. Code Sec. 71(b) defines alimony as any payment in cash if (1) the payment is received under a divorce decree, (2) the divorce or separation agreement does not designate the payment as a payment which is not includible in income and not allowed as a deduction, (3) the spouses are not living in the same household at the time of the payment, and (4) there is no liability to make the payments after the death of the payee spouse.

Observation: The Tax Cuts and Jobs Act of 2017 provides that, 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.

Siegel and the IRS agreed that Siegel's $225,000 payment under the court order met the first three elements of the definition of alimony. The IRS argued, however, that the payment did not meet the fourth requirement because the 2012 order was a money judgment to enforce the payment of alimony arrearages, enforceable by Johnson. The IRS contended that under New York law, upon a finding of a failure by a party to comply with a lawful support order, a judge "shall" enter a money judgment. Therefore, the 2012 order was, or should be treated as, a money judgment, according to the IRS. Siegel responded that the order was a contempt order, not a judgment in favor of Johnson. As a result, Johnson had no power to enforce the order and Siegel's liability to make the payments therefore would have ended on her death, according to Siegel. For that reason, the payment satisfied the fourth requirement under Code Sec. 71(b), according to Siegel.

The Tax Court agreed with Siegel and held that the $225,000 payment was deductible. First, the court noted that lump-sum payments of alimony arrearages generally retain their character as alimony for tax purposes. The court also observed that the 2012 order found Siegel in contempt and gave him two options: go to jail for 150 days or pay the arrearages relating to his divorce; it did not require any payment if Siegel decided to accept the jail term.

Next, the Tax Court contrasted the 2012 contempt order with the 2007 money judgment. The court found that the 2007 money judgment stated that it was entered in favor of Johnson against Siegel and provided that a copy of the judgment may be filed in the county clerk's office in accordance with the New York Family Court Act. The court noted that the 2012 order entered no judgment in favor of Johnson and by its terms provided her with no means of enforcing the order. In the view of the Tax Court, the 2012 order was clearly not a money judgment but rather a contempt order to achieve the payment of alimony arrearages.

For a discussion of the tax treatment of alimony payments 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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