Is it alimony as defined in I.R.C. s. 71?

• Author: Frumkes, Melvyn B.

Common Errors as to Whether a Stream of Payments Are Taxable/Deductible Part I

Alimony and separate maintenance payments can be deductible from income by the payor under I.R.C. [sections] 215 and includable in the income of the payee under I.R.C. [sections] 71[1] if structured properly, although such payments need not necessarily be taxable/deductible.[2]

Since the support requirement of I.R.C. [sections] 71 is eliminated,[3] if all other rules of the present Internal Revenue Code alimony requirements are met, it makes no difference whether the payments are for support or for the payment of property rights. Also, the present definitions of alimony and separate maintenance payments eliminate the requirement that payments must be "periodic."[4]

For "alimony" to be deductible to the payor and taxable to the payee, the payments must meet all of the elements of I.R.C. [sections] 71. Just to meet the criteria for alimony under a state statute is not enough if any of the Internal Revenue Code required elements are missing.[5]

Summary of Provisions of I.R.C. [sections] 71 (the Seven Ds)

To be taxable/deductible adherence to the following rules must be observed:

1) Dollars: Cash received by or on behalf of a spouse.

2) Documents: Under a divorce or separation instrument.

3) Designation: Payments must not be designated as not includible in gross income under [sections] 71 and not allowable as a deduction under [sections] 215.

4) Distance: Where the status of the marriage is changed, i.e., where the parties are separated under a judgment of dissolution or legal separation, the spouses or former spouses are not members of the same household.

5) Death: Payments must cease upon the death of the payee.

6) Dependents: Payment may not be fixed as child support.

7) Dumping: The alimony payments cannot be front loaded in excess of the permissible amounts, otherwise the alimony will be subject to recomputation in the third post-separation year.[6]

Common Errors

Notwithstanding that the current system for taxable/deducible alimony under the Internal Revenue Code has been in existence since January 1, 1985, there are regretfully still many misunderstandings and misconceptions.

* If payments are made from one spouse or ex-spouse to the other for property (equitable distribution, a special equity, or otherwise), not for spousal support, it cannot be deducted from income tax as "alimony" by the payor.

Answer: Wrong.

The labeling of a payment or a stream of payments as "alimony" will not determine its legal effect either under state law or federal law governing income taxes.

Florida cases have held that when examining a clause awarding alimony, no matter what label is given to the award, its legal effect is determined not by what it is called, but by what it does.[7] The mere use of the word "alimony" does not affect the tax consequences of payments.[8]

Florida courts, particularly in modification cases, have made a distinction between payments for alimony[9] on one hand, and for property settlement on the other hand. If for property settlement, the payments are not subject to modification. If for spousal support, the payments are modifiable pursuant to F.S. [sections] 61.14.[10]

When in 1978 the Fourth DCA noted that a settlement agreement between the parties recited that "all payments provided in this paragraph shall be taxable to the wife and deductible by the husband," and it opined that "such tax treatment would be allowable only if the payments were alimony and not part of a property settlement agreement,"[11] it was correct from an income tax perspective.

The statement was correct because from 1942 to 1984 payments were taxable/deductible "alimony" only if they were "periodic," or were made in the discharge of a legal obligation of the payor to support the payee arising out of a marital or family relationship.

The Deficit Reduction Act of 1984, which created the new "alimony rules" under the Internal Revenue...