Alimony Determined

The doctrine of collateral estoppel did not bar the IRS from assessing a deficiency for an underpayment it had conceded in a Tax Court stipulated decision concerning the same issue in the immediate prior tax year, the Tax Court held. The underpayment stemmed from what the IRS ultimately claimed, and the Tax Court agreed, was an improper alimony deduction.

Joseph and JoAnn Rodkey agreed to a property settlement as part of their 2004 divorce decree. It required Joseph Rodkey to pay his ex-wife $3,200 per month, stating the payment would be deductible by him and taxable to her for federal tax purposes. However, it also stated that $1,700 of the amount was child support and that, if the ex-wife died or remarried, the $1,700 child support would continue but the $1,500 alimony would terminate. Joseph Rodkey claimed an alimony deduction of the full $3,200 a month, or $38,400 annually, in 2005 and 2006. Alimony that meets the tests of IRC § 71 generally is deductible by the payor and includible in income by the recipient, but child support generally is neither deductible nor taxable.

In 2007 the IRS sent Joseph Rodkey a notice of deficiency disallowing the alimony deduction for 2005. He petitioned the Tax Court to determine the amount of alimony. On March 19, 2008, the IRS entered a stipulated decision in the case allowing the full deduction (the opinion doesn’t indicate why). Two days later, the IRS sent him a notice disallowing his 2006 alimony deduction. He filed again with the Tax Court, arguing the Service was barred by collateral estoppel from reasserting its previously conceded position in an adjudication. Under this doctrine, a party may be barred from arguing a position against the same party if the issue has previously been “actually and necessarily determined” by a court, the Tax Court held, quoting Montana v. U.S. (440 U.S. 147). However, Rodkey’s settlement with the IRS did not amount to litigation of the issue, the Tax Court said, citing U.S. v. International Building Co. (345 U.S. 502 (1953)). In that case, the Supreme Court held that a Tax Court order did not bar the government from rearguing an issue where the order had been “only a pro forma acceptance … of an agreement between the parties to settle their controversy for reasons undisclosed.” Therefore, Rodkey’s deduction for 2006 had to be examined on its merits. Because only $1,500 a month of the payment would terminate at JoAnn Rodkey’s death, only that portion of the payment could be deducted, the court held, without examining whether the remainder should have been characterized as child support.

The court also upheld a 20% accuracy-related penalty, saying that Rodkey, an attorney representing himself, had deducted the entire payment “in disregard of the plain language of section 71.”

By Edward J. Schnee, CPA, Ph.D., Hugh Culverhouse Professor of Accounting and director, MTA Program, Culverhouse School of Accounting, University of Alabama, Tuscaloosa.