Alimony Payments Must Terminate at Death

IRC section 215(a) says an individual who makes alimony payments may deduct them and the recipient must include them in his or her gross income. Under IRC section 71(b)(1), payments must meet four requirements to be considered alimony:

1. They must be made pursuant to a divorce agreement.
2. The agreement must not specify different tax treatment.
3. The spouses must not be members of the same household.
4. The payor must not be liable to make additional or substitute payments after the payee spouse dies.

Richard Hawley and Jane Gilbert entered into an agreement and order of support that required Hawley to pay biweekly amounts to support Gilbert and their three children. The separation agreement did not specify the allocation of payments between alimony to Gilbert and child support.

On their individual 1993 to 1995 tax returns, Hawley deducted the payments and Gilbert did not include them in her gross income. To avoid being “whipsawed”—having different tax treatments for each party result in its collecting no tax—the IRS inconsistently determined that Hawley could not deduct the payments and that Gilbert must include them in her gross income. Hawley and Gilbert petitioned the Tax Court, challenging the IRS assessments.

The Tax Court consolidated the two cases and held the payments were not alimony, meaning Hawley could not deduct them. He appealed the decision to the Third Circuit Court of Appeals. To again avoid a whipsaw situation where Hawley could deduct the payments but Gilbert would not be required to include them in her income, the IRS also appealed the Gilbert decision.

Result. For the IRS. Hawley and Gilbert met the first three requirements for the payments to be considered alimony. The fourth requirement of section 71(b)(1)—that alimony payments cease with a payee’s death—was the only one in dispute. Hawley argued the Pennsylvania Supreme Court had decided an unallocated support order terminates upon the death of the ex-spouse by relying on a Pennsylvania rule of civil procedure. That meant state law would end Hawley’s payments if Gilbert died.

The Third Circuit judge pointed out the ruling came too late to help the taxpayers for tax years 1993 to 1995—the Pennsylvania decision wasn’t converted into legal procedure until 2000 and there was no clear evidence of retroactive application. Therefore, the new procedure had no impact on this case.

The judge also said that although the technical obligation to make payments to Gilbert would have ended at her death, the obligation to make substitute payments would have continued because Hawley still would have been required to support his children. Consequently, he still would have had to make substitute payments—violating the fourth requirement of section 71(b)(1)—if Gilbert died. The payments, therefore, were not alimony.

Individuals involved in a divorce should make certain the divorce and separation agreements carefully specify the amounts to be considered alimony and child support. Arguments to treat a portion of unallocated payments as alimony are almost impossible to support.

Hawley v. Commissioner, 93 AFTR2d 2004-1821, 4/16/2004.

Prepared by Sharon Burnett, CPA, PhD, assistant professor of accounting, and Darlene Pulliam, CPA, PhD, professor of accounting, both of the T. Boone Pickens College of Business, West Texas A&M University, Canyon.