Taxing Lessons From Court Decisions

Decisions — A Bird in the Alimony

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Image source: Published by the Religious Tract Society of Great Britain [Public domain], via Wikimedia Commons
Image source: Published by the Religious Tract Society of Great Britain [Public domain], via Wikimedia Commons

Bird nesting is a custody arrangement where the children continue to live in the marital home and the parents trade places throughout the year. The arrangement minimizes disruption to the lives of the children in a divorce.

In Docket No. 10885-14 (Francher), a bird nesting custody arrangement complicated the question of excludable alimony.

The taxpayer owned a condo titled solely in his name. He lived in the condo for two months during the year under the bird nesting custody arrangement. A 2010 court-ordered divorce decree required the taxpayer to make payments to his ex-spouse for all her living expenses plus cash at a total of $4,750 a month. The $4,750 consisted of $1,675 in cash and $3,075 for specified expenses (spousal maintenance).

The specified expenses called for in the decree were estimated living expenses, not documented payments. Also, under the decree, the taxpayer could reduce the alimony by a percentage in the increase in the post-divorce income of his wife. The taxpayer took advantage of this provision, which reduced the $57,000 he would have had to pay to $56,163.

The taxpayer claimed an exclusion from income of the $56,163 in alimony on his 2011 federal income tax return. That amount included $20,100 paid to his wife in checks ($1,675 per month x 12 months). In addition, the taxpayer identified $37,000 of payments of expenses. Along with others, the $37,000 included $4,500 of condo fees which were not part of the divorce decree, $16,828.80 of mortgage payments, and $6,192.65 of tuition payments for the taxpayer’s two children.

The I.R.S. disallowed $12,828 of the alimony claimed.

Here are the relevant tax rules for excludable alimony payments.

From Internal Revenue Code section 71(b)(2): Allows an exclusion for alimony and defines the term alimony or separate maintenance payment to mean “any payment in cash if (a) such payment is received by or on behalf of a spouse under a divorce or separation instrument.”

From Treasury Regulation 1.71-3 1T, Q-2, A-2: Requires that to be excludable from income there has to be a divorce decree, the payment has to be in cash, the payment has to be not designated as a payment which is excludable from the gross income of the payee and non-deductible by the payor. The payor has to have no liability to make a payment after the death of the payee and the divorce agreement must state that there is no such liability, and the payment must not be treated as child support.

From Treasury Regulation 1.71-1T(b), Q-6: The regulation states, “…make payments of cash to a third party on behalf of the spouse qualifies as alimony…?” The regulation then goes on to say, “yes, for example, cash payments of rent, mortgage, checks or tuition liabilities that the payee spouse made under the terms of the divorce or separation instrument will qualify as alimony or separate maintenance payments. Any payments to maintain property owned by the payor spouse and used by the payee spouse including mortgage payments, rent, real estate taxes and insurance premiums are not payments on behalf of the spouse even if those payments are made pursuant to the terms of the divorce or separation instrument.”

Question 1

Are the condo fees excludable as alimony? Why or why not?

or

Question 2

Is the full amount of the mortgage payments excludable as alimony? Why or why not?

or

Question 3

Are the tuition payments excludable as alimony? Why or why not?

or

Question 4

Why did the bird nesting custody arrangement complicate the question of excludable alimony?

or

Bonus question

Can the judge increase the amount disallowed by the IRS?

or

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This information should not be considered legal, investment or tax advice. Taxing Lessons and Top Drawer Ink Corp. do not provide legal, investment or tax advice. Always consult your legal, investment and/or tax advisor regarding your personal situation.

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Sorry, wrong answer :(
Right answer!

The condo fees were not part of the divorce decree and don’t count as alimony.

Sorry, wrong answer :(
Right answer!

The mortgage payments were not fully excludable as alimony because they benefitted the taxpayer in two ways. One, he was a co-obligor on the mortgage and so he would have owed them anyway. And secondly, he was actually living in the marital home for at least two months of the year. The court denied one-half ($8,414.40) of the payments.

Sorry, wrong answer :(
Right answer!

The tuition payments were not excludable as alimony because they benefitted the taxpayer’s children.

Sorry, wrong answer :(
 Right answer!
Sorry, wrong answer :(
Right answer!

The tax court has jurisdiction to increase the amount of the deficiency only “if claim therefore is asserted by the Secretary at or before the hearing or rehearing” (internal revenue code section 6214(a)). To assert an increased deficiency the Commissioner must formally plead a claim for an increase in either the answer or an amended answer.

The Commissioner did not do so in this case. The Commissioner’s pretrial memorandum listed $4,169 as the deficiency. That is the ceiling beyond which the deficiency can’t go in this case.

The government disallowed only $12, 828 from the $56,163 exclusion the taxpayer claimed. The code would have required much less in alimony but the government did not ask for an increase in the deficiency. Because the taxpayer would have been entitled to even less in alimony than he claimed, the court’s decision is entirely in favor of the IRS in this case.

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