Taxpayer Can't Deduct Back-Alimony Paid Pursuant to State Court's Final Judgement.

(Parker Tax Publishing May 20, 2015)

The Tax Court held that because a taxpayer's spousal support payments were made pursuant to a state court's final money judgement, his liability for the payments would persist after his death and therefore could not be considered alimony. Iglicki v. Comm'r, T.C. Memo. 2015-80.

Background

David Iglicki and his wife Christie separated in 1999. Their separation agreement required Iglicki to pay $735 per month in child support to his former wife, but did not require him to pay any alimony to her unless he defaulted on his obligations under the agreement. If he defaulted, he would become obligated to pay $1,000 per month in alimony.

Iglicki moved to Colorado in 2002. Shortly thereafter, he defaulted on his obligations under the separation agreement and began incurring alimony obligations. In 2003, Iglicki's former wife filed suit in the District Court of El Paso County, Colorado, to enforce the separation agreement and divorce decree. In 2008, she filed a verified entry of judgment with the El Paso district court, declaring that Iglicki owed her $22,838 in child support arrears and a total of $64,156 in spousal support arrears.

In 2010, Iglicki made $50,606 in payments to his former wife. The payments, which were garnished from his wages, included $11,256 for child support. Iglicki claimed a deduction for $39,350 of alimony payments on his 2010 return, but his ex-wife reported only $13,441 of alimony income on her 2010 return. In 2012, the IRS determined a deficiency of $10,479 and assessed an accuracy-related penalty.

Analysis

Code Sec. 215(a) allows a taxpayer a deduction for alimony or separate maintenance payments paid during the tax year. Code Sec. 71(b)(1) sets forth a four-pronged test to determine if a payment is alimony:

(1) the payment must be received pursuant to a divorce instrument;

(2) the divorce instrument must not designate the payment as one that is not includible in income;

(3) the payor and payee must not still live together; and

(4) there must not be a liability to continue making payments after the payor's death. All four of the requirements must be met for the payment to be considered deductible alimony.

The IRS conceded that Iglicki's payments to his ex-wife met the second and third requirements of Code Sec. 71(b)(1), but argued that the payments did not meet the first and fourth requirements, and thus could not be considered alimony payments.

The Tax Court noted Colorado law treats payments made to satisfy future alimony obligations differently from payments made to satisfy alimony arrears. Future alimony obligations terminate at the death of either spouse unless otherwise agreed in writing or expressly provided in the decree. By contrast, an order enforcing alimony arrears becomes a final money judgment, which is not affected by the death of either the payor or the payee.

The court found that since the verified entry of judgment was issued to assist the ex-wife in collecting past due but unpaid alimony, it was treated as a final money judgment against Iglicki. As such, under Colorado law, Iglicki's liability would not be affected by the death of either himself or his former wife.

Because Iglicki's liability was based on a judgement under which he would remain liable for the unpaid alimony arrears after his death, the Tax Court determined that the payments failed the fourth requirement under Code Sec. 71(b) and could not be considered alimony. The court thus held Iglicki was not entitled to an alimony deduction under Code Sec. 215(a) for the payments, sustaining the IRS's deficiency determination and imposing an accuracy-related penalty.

For a discussion of taxation of alimony and separate maintenance payments, see Parker Tax ¶ 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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