Pension Is Alimony

BY CHARLES J. REICHERT

The Tax Court recently ruled that a taxpayer’s payments to an ex-spouse under the Uniform Services Former Spouse Protection Act (USFSPA) representing her share of his military retirement pay were deductible alimony payments. The court determined the payments satisfied the requirements of IRC § 71 even though they were listed as a division of marital property in the divorce agreement.

Under section 71, cash payments made under a divorce or separation agreement are considered deductible alimony if they are made to an ex-spouse not living in the same household with the payor and are not designated as child support. In addition, the payor must not be liable to make payments after the death of the payee spouse (a continuing payment liability) or payments in their place (substitute payment liability).

Neil Proctor, an active member of the U.S. Navy, and Liza Holdman were divorced in 1993. The divorce decree required Proctor at retirement to pay Holdman 25% of his naval retirement pay under the USFSPA. When Proctor retired from the Navy in 2000, he did not make any payments to Holdman; however, he was compelled under a 2001 court order to do so. In 2002, Proctor paid Holdman $3,387, which he deducted as alimony on his 2002 federal tax return. The IRS disallowed the deduction, and Proctor petitioned the Tax Court for relief.

The IRS argued the payments did not qualify as alimony because they were a property settlement. The Tax Court disagreed. IRC § 71(b)(1)(B) does permit a divorce agreement to specify that certain payments are not alimony, the court stated. But the Proctor-Holdman agreement contained no such statement; thus, the payments would be deductible alimony if the other requirements of § 71(b)(1) were satisfied. Since the divorce agreement required Proctor to make cash payments to Holdman, who was not a member of the same household, the payments would be alimony if they would terminate upon her death. Under the USFSPA, the retirement payments would stop upon the death of either Proctor or Holdman, whichever occurred first, so Proctor was not liable for any payments after Holdman’s death. Also, under the USFSPA, Holdman had no rights in the retirement pay that she could sell, assign or transfer. Therefore, the court concluded, the payments were alimony.

Neil Jerome Proctor v. Commissioner , 129 TC No. 12

Prepared by Charles J. Reichert , CPA, professor of accounting, University of Wisconsin–Superior.

SPONSORED REPORT

How the election may affect taxation of business income

This report summarizes recent proposals to reform the U.S. business income tax system and considers the path to enactment of any such legislation.

VIDEO

How to Excel pivot a general ledger

The general ledger is a vast historical data archive of your company's financial activities, including revenue, expenses, adjustments, and account balances. J. Carlton Collins, CPA, shows how to prepare data for, and mine data with, PivotTables.

QUIZ

Did you follow 2016’s biggest accounting news?

CPAs will remember 2016 as a year of new standards and new faces. How well did you follow the biggest accounting events? The 7 questions in this quiz will help you find out