"Pension" payments made by dissolved corporation in satisfaction of shareholder's alimony obligations were not deductible.

• Author: Fiore, Nicholas J.
• Position: Tax Court memorandum decision

In 1967, W and B founded the WSB Corporation; both W and B worked for WSB. From 1967 until 1983 or 1984, B was WSB's office manager and corporate secretary.

W and B were divorced in 1984. B began working less than full-time and ultimately an unrelated employee took over all her duties. B continued to receive a weekly paycheck from WSB; however, B's presence caused some disruption in WSB's office.

In 1989, B agreed to retire from WSB. She executed two agreements; one was a property settlement agreement between B and W, which specifically referred to a pension agreement that provided that WSB would pay B a weekly amount for life. The settlement agreement provided that the payments were in lieu of alimony.

WSB issued W-2s to B, reporting the pension payments as employee compensation and claiming a deduction for the payments. B reported no alimony income and W claimed no alimony deductions.

In 1997, WSB sold substantially all its assets to an unrelated third party. In connection with this sale, W and B released WSB from its obligations under the pension agreement.

The IRS issued a deficiency notice to WSB, disallowing any deduction for the pension payments to B. WSB argued that the amounts were deductible as business expenses, because they were part of a severance package to B and were made to induce B's retirement.

In a memorandum decision, the Tax Court holds for the Service; the payments were disguised alimony and not deductible as compensation.

Deductibility of Payments

This case raises the question of whether WSB is entitled to deduct payments it made to B after she ceased providing services to WSB. WSB argued that the payments were deductible for two reasons: (1) they were severance payments made in consideration for past services for which B had been undercompensated and (2) they served a business purpose by inducing B's retirement because her presence in the workplace disrupted WSB's operations. The IRS argued that the payments in actuality satisfied a shareholder's personal obligation--W's alimony obligations to B.

WSB relied heavily on the pension agreement to support its position that the payments to B were in the nature of severance or retirement benefits to compensate her for past services for which she was undercompensated. For a payment to be deductible as compensation, it must have been made with the intent to compensate. This is a question of fact decided on the basis of all the facts and circumstances of a given case. Further...