by Chris Moss CPA
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While it is hard to believe that a divorcing spouse in the 21st century would need or want Alimony, it is even harder for many to understand why Alimony is so often litigated by divorced taxpayers in United States Courts. Furthermore, since Alimony is taxable usually to the wife, and tax deductible usually to the husband, IRS Alimony audits Whipsaw a husband or wife against each other with the Government very often winning by default. So if you are paying or receiving alimony and not aware of the danger ahead please stay with us here on TaxView with Chris Moss CPA Tax Attorney to see where IRS Alimony Audits are trending in 2015 so you can make sure tax return is safe and protected if an IRS agent comes knocking on your door.
Alimony also known as spousal support or maintenance derives from ancient ecclesiastical laws requiring husbands to continue to support their wives. Eventually when “fault” divorce became legal it was the party “at fault” usually the husband, who would be required to pay Alimony, particularly because until recently, women could not own real estate.
I was surprised to find that in 2015 alone to date there were already nine (9) Alimony US Tax Court Opinions and hundreds of Alimony audits commenced around the country this year, many of which will end up in IRS Appeals and US Tax Court years from now. In the last 10 years there have been probably thousands of IRS Alimony Audits. Why is there so much litigation over Alimony? Is Alimony tax law that complex? Let’s ask the Court this question as we review hot off the press last week, Crabtree v IRS US Tax Court 2015.
The facts in Crabtree are simple. Crabtree (formerly Mrs. Girard) was married to Donald Girard until 2006. The Girard’s petitioned the Delaware Family Court in an uncontested proceeding “without a hearing”. The Divorce Agreement required “unallocated alimony/child support for 8 years”. Crabtree filed her 2010 tax return and did not report this money as taxable Alimony. The IRS audited Crabtree requiring her to be taxed on what the Government concluded to be Alimony. Crabtree appealed to US Tax Court in Crabtree v IRS US Tax Court 2015.
Judge Lauber notes that IRS Code Section 71(a) provides that gross income includes amounts received as Alimony subject to 4 conditions as per 71(b). First the payment must be received by wife under a divorce agreement. Second the agreement does not include the payment as a property settlement. Third the husband and wife must be living in separate households, and fourth, the payment must terminate upon death of the wife.
It is fourth condition, termination at death of recipient that the Court found ambiguous because the Divorce Agreement was silent on whether Mr. Girard’s Alimony obligation terminated upon Crabtree’s death. The IRS argued that Delaware law Title 13 Section 1512(g) controls in this case. The IRS further argued that with these facts Delaware recognizes these payments as Alimony.
The Court however found for Crabtree who argued that the Delaware “order” was entered without a hearing and “agreed by the parties in writing” as required by Del. Code section 1519(b) and could have been construed as not terminating upon death. Judge Lauber in a very close call opines that both the Divorce Agreement and Delaware law are unclear and finds for Crabtree in that “Delaware law does not unambiguously provide for automatic termination in the event of death.” Crabtree wins IRS loses.
The next case Iglicki v IRS US Tax Court April 27 2015 involves a Maryland divorce in 1999. The Agreement required Iglicki to pay $1000 a month in spousal support “but only if he would default.” After the divorce the Iglicki moved to Colorado and defaulted. The ex-wife Stultz sued in Colorado for spousal support and won a judgement against the Iglicki. In a post-judgement proceeding Stultz obtained a Court ordered garnishment of Iglicki’s wages. Iglicki deducted the garnished wages on his tax return as Alimony. The IRS audited and disallowed the deduction. Iglicki appealed to US Tax Court Iglicki v IRS US Tax Court April 27 2015.
The question presented to the Court was whether or not the Iglicki’s financial obligation terminated upon death of Stultz. The Court recognized, as the Court did in Crabtree, that when a divorce agreement is silent as to the existence of a post-death obligation, the requirements of section 71(b)(1)(D) may still be satisfied if the payments terminate upon the payee’s death by operation of State law in this case Colorado, citing. Johanson v. Commissioner, 541 F.3d at 973.
Judge Kerrigan finds that Colorado law, unlike Delaware law in Crabtree, very clearly requires future spousal support obligations to terminate at the death of either spouse unless otherwise agreed in writing or expressly provided in the decree. But also under Colorado law after Stultz received a judgement against Iglicki the obligation of Iglicki previously considered Alimony was legally converted to a “past due” judgement. Under Colorado law an Estate can enforce a judgement even after the death of the debtor. Therefore spousal support obligations that have converted to a judgement in Colorado fail to qualify as Alimony under Federal tax law. IRS wins, Iglicki loses.
Our final case again involves simple facts in Muniz v IRS US Tax Court July 9, 2015. Muniz husband and wife Filippini divorced in Palm Beach Florida in 2009. Muniz was required to pay $45,000 to Filippini and deducted Alimony on his 2011 return. IRS audited and claimed the $45,000 was a nondeductible property settlement. Muniz appealed to US Tax Court in Muniz v IRS US Tax Court July 9, 2015.
The Government argued that even though the $45,000 was a lump-sum alimony payment, it could not be Alimony because under Code 61.08 of the Florida Code the Filippini’s estate upon her death would continue to have a vested right to collect the $45,000 lump sum. Judge Nega agreed with the Government concluding that under Florida law, lump-sum alimony constitutes a property settlement for Federal income tax purposes and therefore is not deductible as Alimony. IRS wins, Muniz loses.
By now you all can see why on very simple facts Alimony payments could easily become nondeductible after commencement of an IRS Alimony audit.
What can you all do now? First, if you are going through a divorce and have moved to a new State, or you are experiencing Alimony collection issues in your current State, make sure you have tax attorney confer with your divorce attorney to make sure you are protected in the very likely event of an IRS Alimony audit commencing shortly after Court action. Second, require whoever prepares your tax return to give you a written opinion on whether your Alimony payments are tax deductible or not and include this contemporaneously created document in your tax return before you file. This evidence will prove invaluable if and when an Alimony audit comes your way. Finally be prepared for the Whipsaw and hopefully with a properly prepared tax return you will be the one that wins.
Thank you for joining us here on TaxView with Chris Moss CPA Tax Attorney.
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Chris Moss CPA Tax Attorney