TO DEDUCT OR NOT TO DEDUCT: WHEN ALIMONY IS A LEGITIMATE TAX DEDUCTION
The client took a deduction for the alimony paid to his ex-spouse and found himself under audit by IRS for that deduction. The client’s divorce decree stated and was agreed upon by both parties that the client would receive a deduction for the alimony paid and that the ex-wife would be required to claim that money as income.
IRS stated that alimony was only deductible under certain circumstances and claimed that the client had not met those requirements. IRS insisted that alimony could only be deducted if:
For tax years beginning after December 31,1984, alimony must meet the following requirements;
(1) The payment is in cash
(2) The parties do not designate that the payment is not alimony
(3) If the parties are separated under a decree of divorce or separate maintenance, the parties are not members of the same household when the payments are made
(4) There is no liability to make any payment (in cash or property) after the death of the recipient spouse, and
(5) The payment is not treated as child support
IRS went on further to state in its determination letter “to the client that:
“Please refer to (4). It also states in your divorce documentation that “This alimony shall not be modifiable or Terminable for any reason”. This indicates that it would not cease on the death of either party and is not eligible for the Federal Alimony Deduction.”
IRS sought to collect over $18,000 in taxes from the client and to assess him with interest and penalties over this alleged debt. In addition, the client faced possible audit and assessment for subsequent years if IRS prevailed on rejecting his deduction for alimony paid for the year under the IRS Notice of Deficiency determination letter.
The client contacted our firm to assist him with disputing the taxes, penalties and interest that were about to bury him over several years of taking the deduction for the alimony paid. Tax Law Center filed a petition in the U.S. Tax Court on behalf of the client and pointed out to the Court that a previous decision had already determined that alimony was in fact deductible under the client’s situation.
Davidson v. Comm’r, T.C. Memo 2018-38 states in part:
“To determine whether the payor has liability to continue payments after they payee’s death, we apply the following sequential approach: (1) the Court first looks for an unambiguous termination provision in the applicable divorce instrument; (2) if there is no unambiguous termination provision, then the Court looks to whether payments would terminate at the payee’s [***8] death by operation of State law; and (3) if State law in ambiguous as to the termination of payments under upon the death of the payee, the Court will look solely to the divorce instrument to determine whether the payments would terminate at the payee’s death”.
Tax Law Center was able to provide the Court with the Nevada statute that supported the client’s right to deduct the alimony as written in his divorce decree.
Nevada Revised Statutes 125.150 (6) states:
“In the event of the death of either party or the subsequent remarriage of the spouse to whom specified periodic payments were to be made, all the payments required by the decree must cease, unless it was otherwise ordered by the court.”
The client was clearly in the right and IRS erroneously attempted to assess him taxes, penalties and interest in the tens of thousands with risk of doing the same to him in subsequent years. Upon receipt of Tax Law Center’s petition, IRS counsel reviewed the legal argument and immediately conceded the case, reversing all the attempted charges to the client.
Tax Law Center has an excellent track record in defending our clients in Tax Court. Many of the tax resolution firms flooding the airways with advertisements do not have attorneys on staff and would not be able to defend a client should a case need to go to Tax Court. Start with the best first and choose Tax Law Center to help you fight IRS.