Monday, April 13, 2009

Case Law Update: Tax Time and Divorce

Tax day is around the corner and you and your students may be turning your syllabus to tax issues upon divorce. 

One often-litigated issue is the tax treatment of alimony payments. The tax code provides that alimony will be deductible to the payor and taxable to the payee. 

Characterization issues are the most commonly litigated issue in this area.  For alimony to be deductible it must truly be alimony - as opposed to child support or property division and, for purposes of I.R.C. § 71 and I.R.C. § 215, the support must terminate on ex-wife’s death.  So for example, the tax court in Swening v. Comm'r,  T.C. Summary Opinion 2009-7 (Jan. 8, 2009) held that an ex-husband's unallocated support payments were not deductible because they lacked these essential terms and the state's divorce statutes did not suppy the missing terms.

A recent tax court opinion notes that, in order to take the deduction, the payor must have actually paid the alimony.  In Jonas v. Comm'r, T.C. Memo 2009-49 (March 5, 2009) the ex husband was ordered to pay support to the ex-wife.  While he did not make those payments for two years, he did take deductions for alimony paid.  The IRS disallowed those deductions and it's decision was upheld by the court.  The court held that husband had not made a "payment" by virtue of the fact that husband's property, which had been subject to a lien to secure the alimony, was sold and the proceeds placed in a trust securing the alimony.

Finally, the California court recently addressed a couple's attempt to transfer some of the payee's liability for taxes on alimony: When a marital settlement agreement, which has been incorporated into a divorce decree, requires that Husband pay half of Wife's tax liability resulting from marital support, does the ex-wife have a duty to choose the filing status that will result in the lease tax liability?   The California Court of Appeals recently held that there was not an implied contractual duty of fair dealing in an agreement that has been incorporated into a divorce decree and that it would not imply such a requirement into the decree. Corona v. Corona, (California Court Appeals April 7, 2009)  (all websites last visited April 12, 2009 bgf)


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