The Tax Court held that a taxpayer's payment to his ex-wife was not alimony and therefore was not deductible. According to the court, the payment was made under a divorce order issued under English law, under which the payment would not have terminated upon his ex-wife's death.
Facts: Gary Wolens and his ex-wife were married in New York in 1986 and moved to the United Kingdom about a month later. On Jan. 24, 2006, the taxpayer and his ex-wife were divorced under a divorce order issued under English law. The order required Wolens to make a series of lump-sum payments, the last of which was £441,666, made on April 15, 2009. Wolens deducted $650,088 as a then-equivalent amount in U.S. currency as alimony on his 2009 U.S. federal income tax return. The IRS denied the deduction, assessing a deficiency of $183,864. The taxpayer petitioned the Tax Court for relief.
Issues: Cash payments to an ex-spouse qualify as deductible alimony if they (1) are made under a divorce or separation agreement; (2) are not designated as either child support or a property settlement; (3) are made while the two ex-spouses were not members of the same household; and (4) the payer spouse has no obligation to make the payments after the death of the payee spouse (Sec. 71(b)(1)). (Note that P.L. 115-97, known as the Tax Cuts and Jobs Act, repealed Sec. 71, which provides for inclusion of alimony in gross income of the recipient, and Sec. 215, which provides for its deductibility by the payer, and removed alimony from the Sec. 61(a) list of items includible in gross income, for divorce or separation instruments executed (or modified to expressly provide that the repeal applies to them) after Dec. 31, 2018.)
The Tax Court generally will examine a divorce order to determine whether a payer spouse has a continuing obligation after the death of the payee spouse. If the order is silent, then the court will examine state law to see if a post-death obligation exists. If state law is ambiguous concerning the existence of a post-death obligation, then a court will make its own determination after examining the language of the divorce order.
Both Wolens and the IRS agreed that the order did not address the existence of a post-death obligation; however, Wolens argued that the relevant law was the law of the marital domicile, which he claimed was New York, where he and his wife had been married. The IRS argued the relevant state law was the law of the jurisdiction that issued the divorce decree — English law.
Holding: The Tax Court found that although the parties disputed domicile, neither was challenging the validity of the divorce. Therefore, it concluded that the law of the marital domicile was not the law that it was required to interpret. Rather, under Sec. 71, the court found it was required to interpret the divorce order, and because the order was issued under English law, the court applied English law. Wolens also argued that under Tax Court precedent, "state law" meant the law of one of the 50 states, but the court rejected this argument, citing previous holdings in which it had applied the law of a foreign country in determining the taxability of rights created by a divorce decree issued by the country.
The court examined the applicable English law, the Matrimonial Causes Act of 1973, and found that Section 28 of the Act specifically states that periodic payments terminate upon the death of either ex-spouse but is silent as to whether an obligation for lump-sum payments exists after the death of the payee ex-spouse. The court determined that the omission of lump-sum payments from Section 28 of the Act was intentional, and, as a result, an obligation for lump-sum payments would continue after death, citing English case law in support of this conclusion. Therefore, the court held that Wolens's "obligation to make the 2009 payment would not have terminated by operation of English law at the death of his ex-wife" and therefore was not alimony.
- Wolens, T.C. Memo. 2017-236
— By Charles J. Reichert, CPA, instructor of accounting, University of Minnesota—Duluth.