Winter 2016, Issue 1

Alimony is Alimony?

One would assume that if a marital settlement agreement describes a payment from one former spouse to another as “alimony” or “spousal support,” the payments would be taxable to the recipient and deductible by the payor. However, as discussed below, there are many instances where the designated payments may or may not comply with the Internal Revenue Service (IRS) definition/requirements for spousal support.

Basic IRS Requirements for Spousal Support/Alimony

Let’s review the basics. Spousal support or alimony is generally, but not always, intended to be tax deductible by the paying spouse and included in income of the recipient spouse. Child support is not. Unallocated family support may be tax deductible by the paying spouse and included in the income of the recipient spouse even though a portion of the support is obviously for the children. Deductibility for family support follows the same rules as spousal support.

Under Internal Revenue Code § 71 and Regulation § 1-71-1T, any payment between spouses or former spouses will qualify as alimony or separate maintenance, if all of the following requirements are met:

  1. The payments must be made in cash—not a debt instrument or property.
  2. The payments must be made to or on behalf of a spouse or former spouse. The recipient spouse must approve the payment to be made on his or her behalf.
  3. The payments must be made pursuant to a judgment of dissolution, legal separation, written agreement incident to dissolution, written separation/support agreement, or temporary support order.
  4. The instrument does not state that the payments will not be taxable/deductible.
  5. Except for temporary support orders, the parties must not be members of the same household when payment is made.
  6. The duration of the payment obligation is limited by the recipient’s death.
  7. The payments may not be fixed as child support or subject to a contingency related to a minor child.
  8. A joint return is not filed.

The IRS takes the position that if the payments meet these requirements, they will be treated as “alimony”; if they don’t meet the requirements, they won’t. These rules are intended to prevent the IRS from having to look beyond the support orders and agreements, something most taxpayers want. These rules seem pretty clear, don’t they? Upon further examination, as detailed in the following sections, this is not always the case.

Payment Must Be Made Pursuant to a Divorce Decree or Written Separation Agreement

Looking at Requirement #3, what constitutes a written support agreement? Contrary to popular belief, this does not have to be a court order. The parties can enter into a written agreement as long as the terms are clear and the recipient has signed or acknowledged the agreement in writing. However, a paying spouse’s letter alone to the recipient spouse does not qualify as a written agreement for support, even though the recipient spouse accepted the payments specified in the letter.1 Similarly, a draft unsigned marital settlement agreement does not constitute a valid support agreement since it was not a “meeting of the minds.”2 Finally, support payments made while a temporary order is being drafted also do not qualify as alimony3This particular requirement can be rather Draconian when it comes to voluntary payments during the pendency of the divorce proceedings. Unfortunately, the IRS has consistently ruled against the paying spouses in these situations.4 They always comment that while the voluntary payments are admirable, they are, nonetheless, not deductible. While high-earning spouses should be encouraged to do the right thing by offering support, it should be clear that they should either enter into a written agreement with their soon-to-be-ex-spouse, or pay a lower amount under the assumption it will not be deductible.

Also pertaining to Requirement #3, the term “made pursuant to” cannot be over-emphasized. The IRS has historically taken a hard-line position that, for the payments to be deductible, they must occur after the parties have entered into the agreement or court order.5 The only exception is a nunc pro tunc order correcting an error in the original order.

The payments cannot be retroactively classified/designated as deductible spousal support, even by the court. In Ali v. Commissioner,6 the IRS denied a deduction despite the family court retroactively deeming the payments as spousal support. This is an important case for family law attorneys and judges to read.

Liability for Payment Must Terminate Upon Death of the Recipient Spouse

Let’s turn to Requirement #6–the liability for the payments must terminate at the death of the recipient spouse. This is one of the mechanisms that the IRS uses to prevent non-taxable property settlements from being disguised as deductible alimony.
If alimony terminates at the death of the recipient by operation of state law, the agreement or order may be silent on this requirement. California Family Code section 4337 automatically terminates alimony upon the death of the recipient. Relying on this rule, however, could create a circular argument. That being, if payments are alimony, they automatically terminate upon the recipient’s death; but to meet the definition of alimony, the liability for the payment must terminate upon the recipient’s death. To avoid any such possible debate with the IRS, the agreement should specifically state that the payments terminate at the recipient’s death.

The Crabtree7 case recently emphasized that the IRS will not engage in complex evaluations of state law in this area and emphasizes the need to include a clause that terminates support upon the death of the recipient.

Under the Kean8 and Berry9 cases, family support will automatically terminate upon the death of the recipient spouse if custody of the children automatically reverts to the paying spouse. However, it is still best to specifically state the payments pursuant to alimony and family support orders will terminate at the death of the recipient spouse to avoid potential problems with the IRS.

If the instrument requires continued payment after the payee’s death, none of the payments are deductible—before or after the payee’s death.10 Furthermore, the recipient does not have to actually die to cause the support payments to be deemed non-deductible. A court ordered payment of attorney fees is generally not deductible spousal support because the fee order would remain even if the recipient died.11

The LaPoint12 case involved a baseball player paying his former wife certain amounts and assigning his rights under an MLB arbitration claim. The agreement indicated the payments were to be used for his ex-wife’s “support, maintenance and education,” but also stated that the agreement was binding on the parties’ heirs. Since the payments would have survived his ex-wife’s death, the IRS ruled these were not alimony.

In the last few years, there have been some interesting and important rulings addressing when payments will not terminate upon the death of the recipient spouse and therefore will not be classified as alimony.

The first is Rood v. Commissioner,13 which ruled that non-modifiable support as to duration does not qualify as deductible alimony since the payments would survive the recipient’s death. Thus, while non-modifiable spousal support can still be negotiated, there must be an exception that the payments terminate upon the death of the recipient.

Most recently, the Iglicki14 case is both interesting and somewhat unnerving. In Iglicki, the husband was ordered to pay child support under a Maryland marital settlement agreement. Under the terms of the agreement, if the husband defaulted on this obligation, he was immediately liable for additional spousal support payments which terminated in the event of his ex-wife’s death. The husband defaulted on everything and his ex-wife filed suit in Colorado where he was then living. She filed a “verified entry of judgment” for all the arrearages including the spousal support arrearages.

The ex-husband made payments per the judgment and claimed a certain portion as alimony. The ex-wife also reported some of the payments as taxable alimony. Nonetheless, the IRS denied him the deduction for all of his payments arguing they do not terminate upon the ex-wife’s death. Given that the payments were being made pursuant to a separate judgment (not the original marital settlement agreement), we can assume that there was no language terminating the payments in the event of the ex-wife’s death. This would make sense and, had this been the end of the case, it would not be so notable.

Unfortunately, the Tax Court continued by adding a rather disturbing discussion that Colorado law treats payments of future spousal support differently than arrearages. Under Colorado law, future payments of spousal support would automatically terminate upon an ex-wife’s death. However, an “order enforcing spousal support arrears” becomes a final money judgment and does not terminate upon the death of the recipient.

Why do we care? California law also makes the distinction between future and past due support. The death of the support recipient terminates the obligation to pay future spousal support, but does not extinguish any past due support.

Does this mean that any late payment of spousal support is no longer deductible? Are year-end reconciliations and payments of additional support no longer deductible? Does a late payment cause all of the support payments to be non-deductible? While these all may seem like ridiculous conclusions that could possibly affect many spousal support situations, this case raises these very questions. Iglicki may just be a poorly argued, isolated ruling … but we should all be aware of this case.

The final issue pertaining to Requirement #6 concerns substitute payments. If the agreement states that spousal support payments terminate on the recipient’s death, but they are replaced with substitute payments, none of the original or substitute payments are deductible as alimony.15

Child Support
There are three ways payments will be considered child support.

  1. Payments fixed or treated as child support in the instrument.
  2. Contingency relating to a child. If payment is reduced on the happening of an event related to the child. Examples include the child reaching a certain age, attaining a specified level of income, death, marriage, graduation, leaving the household, or becoming employed.
  3. Reduction associated with contingency relating to a child of the payor.

a. If payments terminate within six months of a child turning eighteen, twenty-one, or local age of majority, they will be presumed to be child support.

b. Multiple reduction rule. A reduction is “clearly associated” with a contingency relating to a child if payments are to be reduced on two or more occasions which occur not more than one year before or after a different child attains a certain age between eighteen and twenty-four, inclusive. This certain age must be the same for each child.

The contingency tests and child support presumptions outlined in #2 and #3, above, are rebuttable by either the IRS or a taxpayer by showing a different reason for the reduction. It should be noted that if the payor returns to court after a contingency related to a child occurs, the support payments could be reduced without triggering reclassification to child support. The contingency rules only apply to provisions built into an order ahead of time.

Attorneys must be creative and careful in drafting family support provisions to provide reductions that do not trigger any of the child support presumptions.

The following are a few relevant cases discussing deductible alimony versus non-deductible child support in cases involving un-allocated family support:

In Baur v. Commissioner,16 the husband was ordered to pay his ex-wife monthly family support in the Marital Settlement Agreement (MSA). Unfortunately, the MSA contained a provision that decreased the family support payments when the child was emancipated. The rest of the language in the MSA supported deductibility for the family support including termination upon the ex-wife’s death. After an IRS audit began, the husband obtained a revised order from the Family Court indicating the scheduled decrease was a “scrivener” error. The Tax Court rejected his argument and the Family Court’s statement that the decrease was not intended to be part of the original agreement. The Tax Court pointed to the section of the agreement where the parties acknowledged that they understood all of the terms of the agreement. The husband lost and the amount of the scheduled decrease was reclassified as non-deductible child support.

Delong v. Commissioner17 is a 2013 ruling in which the IRS argued that a family support award naturally contained child support and, therefore, fixes an amount related to the child. The Tax Court ruled that there was no specific amount “fixed” as child support and, further, no provision for a decrease upon a contingency related to a child described above. Fortunately, this appears to be an isolated case of the IRS trying to make this argument.

Excessive Front-Loading of Spousal Support (“Recapture”)

“Recapture” is another mechanism the IRS uses to prevent otherwise non-taxable property settlements from being disguised as deductible alimony. Recapture requires the payor of support to report as ordinary income an amount equal to the “excess payments” in the third post-separation year. Recapture, if applicable, occurs in the third calendar year of a permanent support order and has nothing to do with when separation occurred.

The recapture rules apply only to the first three full-calendar years of spousal support payments. Any support award less than three years in duration will most likely trigger recapture. Spousal support buy-outs may still be made as deductible by spreading them over the three-year recapture period. After the third calendar year, the payments may be lowered without concern for the recapture rules.

Recapture does not apply if the recipient spouse dies or remarries within the first three years, but will apply if support terminates due to the recipient cohabitating. Even more harsh, if the support decreases due to the paying spouse’s unemployment or decreased income during the first three years, recapture will still apply.

Recapture does not apply if payments are a percentage of income so long as the paying spouse has no control over the income and the percentage remains the same. This prevents Ostler/Smith18 bonus or stock option payments from triggering recapture.

Recapture does not apply to temporary support orders, only to permanent awards pursuant to the divorce judgment.

The amount that must be recaptured in the third post-separation year is the sum of the excess payments made in the first post-separation year plus the excess payments made in the second post-separation year. If deductible payments in the first post-separation year exceed the average of payments in the second and third years by more than $15,000, the excess over $15,000 is recaptured in the third year. If payments in the second year exceed payments in the third year by more than $15,000, the excess over $15,000 is recaptured in the third year.

An easier guide—there is no recapture if Year 2 is greater than Year 1 minus $7,500 and Year 3 is greater than Year 2 minus $15,000.

Because individuals report income and deductions according to the cash basis, recapture may cause problems for a paying spouse who is delinquent in his or her obligation. For example, if the payments are delayed in the first year, brought current in the second, and then back to normal in the third, the decrease between the second and third year may trigger recapture.

If recapture applies, the recipient will be entitled to a deduction from gross income in the third year. If the deduction exceeds the recipient spouse’s third-year income (i.e., causes negative income), the excess deduction will be lost. There is no provision in the tax code indicating the recipient may carryover the excess deduction. Thus, recapture can be disappointing for both parties.


Deductible spousal or family support must meet the various requirements outlined in Internal Revenue Code § 71 and the associated regulations. Special attention to these rules is critical to both the paying spouse and the recipient. As the IRS will likely audit both parties in a support-related dispute, ambiguity in this area will not serve either party.

1 Keegan v. Comm’r, T.C.M. 1997-359.

2 Milbourn v. Comm’r, T.C. Summary Op. 2015-11.

3 Faylor v. Comm’r, T.C.M. 2013-143.

4 Martin v. Comm’r, T.C. Summary Op. 2013-31; Larievy v. Comm’r, T.C.M. 2012-247; Rafferty v. U.S., 102 AFTR 2d 2008-5153.

5 Larievy, T.C.M. 2012-247; Rafferty, 102 AFTR 2d 2008-5153.

6 T.C.M. 2004-284. See also Mercurio v. Comm’r, T.C.M. 1995-312; Larievy, T.C.M. 2012-247.

7 Crabtree v. Comm’r, T.C.M. 2015-163.

8 Kean v. Comm’r, 407 F.3d 186 (3rd Cir. 2005).

9 Berry v. Comm’r, T.C.M. 2005-91.

10 Reg. § 1.71-1T , Q&A 10 & 11.

11 Ribera v. Comm’r, T.C.M. 1997-38 (aff’d 9th); Hampers v. Comm’r, T.C.M. 2015-27.

12 LaPoint v. Comm’r, T.C.M. 2012-107.

13 T.C.M. 2012-122.

14 Iglicki v. Comm’r, T.C.M. 2015-80.

15 Reg. § 1.71-1T, Q&A 13 & 14. See also Okerson v. Comm’r, 123 T.C. No. 14.

16 T.C.M. 2014-117.

17 T.C.M. 2013-70.

18 In re Marriage of Ostler and Smith, 223 Cal. App. 4th 114 (1990).