Tax Court Rules on Alimony Deductions
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Increasingly, the Tax Court is addressing cases about alimony deductions. The outcome of these cases frequently depend on whether payments made are properly characterized as alimony under IRC §71. The Tax Court looks to the divorce decree or court order in making this determination. One recent case, Joshua Henry Wish v. Comm’r, TC Summ. Op. 2015-25 (Apr. 6, 2015) is outlined below. |
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Alimony deductions is just one of the many tax update topics covered in a complimentary live webcast on December 16 at 8:00am PT.
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Facts: Joshua Wish, a California teacher, was divorced. He and his former wife had one child. During the time they were married, they decided to homeschool their child, who had learning disabilities. After the couple divorced, they agreed to continue with the homeschooling.
Homeschooling the child prevented Mr. Wish’s ex-wife from working. In addition to paying child support, Mr. Wish agreed to pay alimony until she could resume working. As part of the divorce proceedings, Mr. Wish and his ex-wife agreed that in January 2009, Mr. Wish would start paying $1,200 child support per month and $3,800 alimony per month until she either went to work or remarried.
In 2009, some payments were withheld from Mr. Wish’s paycheck and distributed to his ex-wife, and the remainder was paid via personal check or cash. The amount of the alimony decreased to $1,900 in September 2009 when his ex-wife returned to the workforce and discontinued homeschooling.
Mr. Wish deducted $39,900 as alimony on his 2009 tax return. The IRS disallowed $30,200 of the deduction after determining that only $9,700 was an allowable deduction. An accuracy-related penalty was also assessed.
Issues: Whether Mr. Wish may deduct alimony amounts paid to his former wife during 2009 / Whether Mr. Wish is liable for the IRC §6662(a) accuracy-related penalty.
Analysis: IRC §215(a) and (b) allows a deduction for alimony or separate maintenance payments made during the payor’s taxable year that are includable in the recipient’s gross income under IRC §71(a). Under IRC §71(c), if the terms of a divorce agreement reduce the amount of money received because of a contingency relating to a child (e.g., child attains a specific age), an amount equal to the reduction is treated as child support and does not qualify as alimony.
In court, Mr. Wish believed he was entitled to a $38,000 alimony deduction. The IRS contended that the contingency in the spousal support agreement related to the child. Mr. Wish contended that the contingency related to when his ex-wife would return to work and would no longer homeschool the child. The court noted a clear and direct relationship between the amount of spousal support payments and his former wife’s choice to work. There was no contingency that depended on the child. The court further observed that the amount of spousal support was reduced after the former wife went back to work but the amount of child support remained the same. Evidence from Mr. Wish’s paycheck and payments made directly to his ex-wife supported the $38,000 alimony deduction.
Holding: The court determined that Mr. Wish was entitled to most of his claimed alimony deduction except for $900 he erroneously included in the deduction. Mr. Wish was not liable for an accuracy-related penalty, because he acted with reasonable cause and in good faith in claiming the alimony deduction.
