The Tax Court held that spousal support payments received by a taxpayer from her ex-husband prior to the fourth and final support reduction were alimony payments, not child support, since the final reduction was not clearly associated with a contingency related to a child.
Generally, cash payments received by a taxpayer for spousal support are taxable alimony to the recipient unless the payments are designated as child support or continue after the death of the recipient. However, Sec. 71(c)(2) states that reductions in spousal support due to the occurrence of a contingency related to a child or at a time that can be clearly associated with a contingency will be treated as nontaxable child support. Temp. Regs. Sec. 1.71-1T provides two examples where reductions to spousal support are presumed to be “clearly associated with” a contingency related to a child. The first is where the payments are reduced not more than six months before or after the date the child attains the age of 18, 21, or the local age of majority; however, if all spousal payments end in the sixth post-separation year, the payments are alimony under a minimum-term rule. The second situation is where the payments are reduced two or more times, where each reduction occurs not more than one year before or after a different child attains a certain age between the ages of 18 and 24, inclusive.
Sharon Schilling and her ex-husband, parents of three minor children then still living with them, separated in March 2003 and divorced in October 2003. Under the separation/divorce agreement, the taxpayer, Schilling, was to receive from her ex-husband monthly spousal support for six years, starting in 2003 and ending in 2009. The payments were initially set at $2,450 per month but were reduced to $2,325 in 2003, $2,125 in 2004, and $1,925 in September 2006, as each minor child turned 18 or left for college, whichever occurred later. Schilling reported no income from the spousal payments on her 2006 federal income tax return; however, the IRS classified $23,100 (12 payments of $1,925) as taxable alimony, while conceding that the first three reductions were qualifying contingencies.
The court held that the taxpayer received alimony of $23,100 in 2006 because the final reduction occurring in 2009 that completely eliminated the spousal support did not satisfy either of the two situations of Temp. Regs. Sec. 1.71-1T that are presumed to be clearly associated with a contingency related to a child. According to the court, the first situation was inapplicable because the complete termination (the 2009 reduction) of the spousal payments occurred in the sixth post-separation year, which disqualified it as a contingency related to a child. The court also found that the second situation was inapplicable because each reduction must occur within a specified time relative to a different child. Since the last reduction was the fourth, the second situation could apply only if the taxpayer had four children.
Schilling, T.C. Memo. 2012-256
By Charles J. Reichert, CPA, instructor of accounting, University of Minnesota–Duluth.