No alimony after death of payee spouse.

• Author: Eike, Betsy K.

The Service recently issued Letter Ruling (TAM) 9542001, holding that a lump-sum payment made by a taxpayer to her ex-spouse's attorneys pursuant to a divorce decree did not qualify as alimony under Sec. 71, since the payment did not meet the termination requirement of Sec. 71 (b) (1) (D). This TAM highlights the importance of clearly indicating in a divorce or separation agreement that payments intended to qualify as alimony will terminate on the death of the payee spouse.

Payments of alimony or separate maintenance under Sec. 71(b) are included in the payee spouse's gross income under Sec. 71(a) and deductible by the payor spouse in computing adjusted gross income (i.e., "above the line") under Sec. 215(a). Alimony is a nonbusiness deduction regardless of the source of the payment and whether or not the payor has taxable income, although it cannot generate a net operating loss deduction. The parties can elect to treat payments otherwise qualifying as alimony as though they did not constitute alimony, effectively disregarding the transfer for tax purposes.

Sec. 71 (b) (1) defines alimony or separate maintenance payments as any payment in cash received by (or on behalf of) a spouse under a divorce or separation instrument that does not designate the payment as excludible from gross income under Sec. 71 and not allowable as a deduction under Sec. 215. In the case of couples legally separated under a decree of divorce or separate maintenance, the spouses may not be members of the same household at the time such payment is made (unless one spouse is temporarily living there while seeking alternate living arrangements). Lastly, there can be no obligation to make any such payment (or substitute for such payment) for any period after the death of the payee spouse. It is this last requirement that is the subject of three recent cases and the TAM.

The divorce agreement analyzed in the TAM provided that W was to pay H $2,000 per month for maintenance, to be reviewed after three years, and that petitions for attorneys' fees could be filed within 30 days. After H filed a motion to reconsider and a petition for attorneys' fees and costs, the court ordered an increase in W's maintenance obligation and for her to pay a portion of H's attorneys' fees. The court order did not state that the payment was for maintenance or alimony, or that the liability for payment would cease on the occurrence of a future event. However, a subsequent order modified H's...