Property settlement payment not deductible alimony.

• Author: Gamer, Lawrence R.

When they were married in July 1997, P and G purchased a residence as tenants by the entireties. P and G were divorced in March, 2000. On Feb. 22, 2000, they entered into a Marital Settlement Agreement (settlement agreement) that provided, in part, as follows:

10. Alimony. Each party does hereby waive alimony and does hereby totally, irrevocably and completely relieve the other party of all matters and charges whatsoever excepting as set forth in this instrument, each releasing the other of and from all claims and demands for anything whatsoever in the future, including, but not limited to, alimony and separate maintenance, regardless of the future income of the husband and wife.

14. Parties Bound. This Settlement Agreement shall be binding upon the heirs, legatees, devisees, administrators, and personal representatives of the parties hereto and, in the event of the death of either of the parties of this Settlement Agreement while said Settlement Agreement is in force and effect, the estate of said deceased parry shall be obligated and responsible for the performance of the obligations and conditions of this Settlement Agreement.

18. Marital Residence. The parties jointly own as tenants by the entireties a certain single family residence * * *. Within ten days of the execution of this Agreement, the husband shall pay to the wife in current cash funds the sum of $37,000 representing the wife's interest in this residence. Contemporaneous with the transfer of these funds, the wife shall execute a quit-claim deed conveying to the husband all of her right, title and interest in this property.

The provisions of the settlement agreement were incorporated into a final judgment of dissolution of marriage. On March 7, 2000, P issued a check payable to G for $37,000. P wrote "Settlement" on the memo section of the check.

On his 2000 return, P claimed a deduction of $37,000 for "alimony paid" to G. The IRS disallowed the deduction because "lump-sum cash paid as a property settlement is not deductible as alimony."

Discussion

Generally, a property settlement incident to a divorce is not a taxable event and does not give rise to a deduction; Sec. 1041. However, Sec. 215(a) allows a deduction for the payment of alimony during a tax year. Sec. 215(b) defines alimony as payment which is includible in the recipient's gross income under Sec. 71. Sec. 71(b)(1) provides a four-step inquiry for determining whether a cash payment is alimony; if the payment tails...