If the parties intend to have one spouse receive alimony, they should be advised to consider its tax treatment. Alimony is deductible for the payor under IRC § 215 and includible in the gross income of the payee under section 71(a). For payments to be classified as alimony, they must satisfy all the criteria in section 71(b). They must:
- Be made in cash (not property).
- Be made pursuant to a divorce or separate maintenance decree or written instrument, or a written separation agreement.
- Not be designated anything other than alimony (such as child support).
- Be made between people living in separate households.
- Terminate at the death of the payee.
The importance of a written instrument or agreement must not be overlooked, as shown last year in a Tax Court case, Randall L. Sindelir v. Commissioner (TC Summary Opinion 2007-136).
Randall and Diana Sindelir, who lived in Colorado, had been married 23 years when they decided that “happily ever after” had come to an end. When the couple separated in 2001, they orally agreed for Randall to pay Diana $1,500 a month in temporary maintenance. They later drafted a written separation agreement that included $2,000 monthly payments, but they never signed or executed it.
Randall Sindelir deducted as alimony $18,000 on his 2002 tax return. While it was clear that the Sindelirs intended for the payments to serve as alimony, the Tax Court sustained the IRS’s denial of the deduction for lack of a written instrument or agreement.
FORMALITY NOT REQUIRED
The writing need not be formal, however, as shown by Leventhal v. Commissioner (TC Memo 2000-92). Hermine and Harvey Leventhal of Staten Island, N.Y., separated in late 1987. Divorce proceedings began in 1988 but were not completed until 1992. The record showed their attorneys corresponded with each other several times during 1988 concerning terms and details of the couple’s separation, which included payments from Harvey Leventhal directly to his wife and on her behalf.
Harvey Leventhal deducted as alimony $66,275 on his 1990 return and $62,999 on his 1991 return. The IRS disallowed the amounts, noting there was no court decree of divorce or separate maintenance and no formal separation agreement in effect during those years.
The Tax Court, however, determined that the attorneys’ correspondence indicated a meeting of the minds and represented a written agreement that complied with section 71(b). Some payments were disallowed, but others were classified as alimony. Harvey Leventhal was entitled to deduct alimony payments of $23,867 for 1990 and $23,877 for 1991. These amounts were to be included as gross income by Hermine Leventhal.
IMPLICIT LINK TO ORAL AGREEMENT
In some cases, writing that only implicitly embodies an oral agreement has been accepted. In Ralph F. Osterbauer (TC Memo 1982-266), Osterbauer and his wife, Dorothy, separated in 1967 and the following year executed a written agreement for Ralph to pay Dorothy $500 a month.
Later in 1968, Dorothy sustained severe head injuries in an auto accident and remained hospitalized or in convalescent care until her death in 1978. In 1973, Osterbauer verbally agreed with his by then ex-wife’s court-appointed conservator to pay her medical expenses, which exceeded the support agreement by thousands of dollars a year. The IRS allowed as alimony only the $6,000 a year stipulated in the 1968 written agreement.
The Tax Court, however, ruled that a 1973 letter from the conservator to the convalescent home advising it to send Dorothy’s bills to Ralph Osterbauer was sufficient to satisfy the requirement, even though it was not signed by Ralph and did not expressly say he had agreed to pay the bills.
In each of these cases, however, the parties could have saved themselves contested tax returns simply by recording the proper amount of alimony in an enforceable document that met other requirements of section 71(b).
Therefore, whether a divorce is amicable or not, don’t forget the writing. Regardless of how sincere the parties’ intentions might be, no less than with a marriage license, a piece of paper can make all the difference.
By Mary Recor , CPA, assistant professor of accounting and taxation at the College of Staten Island, N.Y. She can be reached at email@example.com .