In Johnson v. Commissioner of Internal Revenue, an interesting new decision from the United States Tax Court, a former husband was held unable to deduct the payments to his ex-wife as alimony because the amount of such payment was subject to a "child-related contingency." Specifically, the parties' divorce settlement agreement provided that "spousal maintenance" payments to the former wife would end upon the occurrence of one of three events including "the graduation from high school of the youngest child." Thus, the issue became whether the payments, in the eyes of the Internal Revenue Service, were alimony or child support.
Section 215(a) of the Internal Revenue Code (IRC) allows a deduction to the payor for an amount equal to the alimony paid during the taxable year to the extent that it is includible in the recipient spouse's gross income, as defined by the IRC. Alimony is defined by the IRC as any cash payment:
- Received by a spouse under a divorce or separation instrument;
- The divorce or separation instrument does not state that the payment is neither includible in gross income nor allowable as a deduction;
- The payor and payee spouses are not members of the same household when the payment is made; and
- The payment obligation terminates at the death of the payee spouse and there is no liability to make either a cash or a property payment as a substitute for the payment after the death of the payee spouse.
The IRC provides, however, that if the payment is subject to any "contingencies involving child", then the payment is considered payment made for the child and is not deductible by the payor. "[Child] leaving school" is an example expressly provided in the IRC as one such form of payment – even if there is a specifically defined, separately allocated child support payment delineated in the agreement and being made by the payor.
Here, the settlement agreement not only provided for such a separate child support payment, but it also expressly stated that spousal maintenance payments would be tax deductible by the husband and taxable to the wife. The parties abided by such language in completing their respective tax returns post-divorce. Logically, the husband argued that the graduation date was "intended as a mere reference point for the termination of spousal support". The Tax Court held, however, that such intent "holds no value." As a result, the Tax Court concluded that the payments were really a form of child support, rather than spousal support, for the purpose of claiming the tax deduction. Thus, the husband was not entitled to an alimony deduction.
This case is a cautionary tale for both litigants and matrimonial attorneys – do not use language like that set forth above when defining the alimony term, or else the payor spouse may suffer the same consequence as that of the husband in this matter. Many settlement agreements often use a child's achievement of a milestone – whether it be graduation from school, attainment of a certain age, and the like, as a termination date for alimony. The risk of losing the tax deduction by use of such language, however, can prove disastrous. Be safe and define the term through the use of specific dates.
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