When It Comes to Alimony, Tax Doesn’t Have to Be Complicated

When it comes to taxes, the formality and complexity of the tax code can lead some taxpayers to believe that compliance is always complicated. But sometimes, simple can be enough.

In a recent Tax Court case, the taxpayers opted for simple, but the Internal Revenue Service insisted on a more complicated arrangement. The Tax Court, however, ruled that the taxpayers need only meet the basic requirements of the law, and nothing more.

The taxpayer, who served on active duty in the U.S. Marine Corps, was married to his former spouse on June 11, 2009. They had one child during their marriage and subsequently separated on Nov. 4, 2014.

After consulting with the Marine Corps Manual family support policy, the taxpayer proposed support payments of $2,000 per month throughout 2015.

The Manual notes, “Preferably, the amount of support provided to family members should be established by a written agreement between the parties, or be adjudicated in the civilian courts.” The Manual also requires that marines comply with a court order, a written agreement, or the interim financial Support standards of paragraph 15004.

That paragraph provides a formula for determining the amount of financial support a marine should pay:

• If the marine is supporting only one family member, the support is the greater of one-half of the housing allowance or $350 per month.
• Support for two family members, like a spouse and a child, is the greater of two-thirds of the marine’s basic housing allowance per month or $572 per month.

Failure to comply with the orders is a violation of the Uniform Code of Military Justice and carries adverse consequences.

The basic housing allowance during 2015 was $2,970 per month. Two-thirds of that amount is $1,980. According to the policy, the petitioner was required to pay $1,980 per month, which he rounded up to $2,000 for simplicity.

According to an email exchange between the taxpayer and his former spouse, they both accepted the family support policy as the basis for computing those support payments.

When the taxpayer filed his Form 1040, U.S. Individual Income Tax Return, for 2015, he claimed a $24,000 deduction for alimony paid. The IRS denied the deduction, arguing that none of the amounts paid in 2015 qualified as alimony.

To qualify as alimony for purposes of a federal income tax deduction, under Section 71 of the Tax Code:

• You must be divorced or under a separation order;
• Alimony payments must be to or for a spouse or former spouse under a divorce or separation instrument and in cash or cash equivalent, like a check or money order;
• The obligation to pay alimony must not be voluntary, and you must have no obligation to make any payment after the death of your spouse or former spouse;
• The payments must not be child support; and
• The divorce or separation instrument must not say that the payments are not alimony.

Under Section 71(b)(2), the term “divorce or separation instrument” means a decree of divorce or separate maintenance or a written instrument incident to such a decree, a written separation agreement, or a decree requiring a spouse to make payments for the support or maintenance of the other spouse.

Meeting of the Minds

The IRS argued that the taxpayer and his former spouse didn’t have a written separation agreement and that the exchange of emails didn’t show a “meeting of the minds.” For legal purposes, a meeting of the minds means that both parties have reached the same understanding. The IRS wanted to see something more formal.

The challenge is that you won’t find a definition of “written separation agreement” in the tax code, regulations, or legislative history. But, there is case law that offers guidance, including that a valid written separation agreement exists where one spouse consents in writing to a letter proposal of support by the other spouse. Additionally, under case law, a “clear, written statement by the parties stating the terms as agreed by the parties does not need to be approved by a court.”

The Tax Court found that the email exchange between the taxpayer and his former spouse was enough to satisfy the criteria for deductible alimony. And, the court noted, the taxpayer followed through, paying two-thirds of his basic housing allowance to his former spouse. The taxpayer didn’t need to show anything more formal.

Under the formula, if the taxpayer had no children, he would have been required to pay one-half of his basic housing allowance. For 2015, that would have been $1,485 per month ($17,820 per year).

That means, the court reasoned, that the taxpayer paid $1,485 in alimony each month, for a total of $17,820. He actually paid $24,000—but that amount was based on the additional support allowance for his child under the formula; the surplus was a mix of child support and voluntary payments.

Of course, things have changed since 2015. Under the 2017 tax law, alimony isn’t deductible under new agreements signed on or after Jan. 1, 2019. That also means that it won’t be taxable to the recipient. However, if you have an older agreement, the tax treatment stays as-is unless you modify the agreement after Jan. 1, 2019, by explicitly referencing the law.

The case was tried as a “small tax case,” which means a matter in which the amount in dispute is $50,000 or less. While the rules in Tax Court are the same for all taxpayers, under Section 7463(b) a small tax case decision isn’t reviewable by any other court, and the opinion may not be treated as precedent. However, the underlying cases and statutes cited in the case remain important guidelines for determining the deductibility of alimony.

The case is Winslow v. Comm’r, T.C., No. 2020-22, 8/3/20.

This is a weekly column from Kelly Phillips Erb, the TaxGirl. Erb offers commentary on the latest in tax news, tax law, and tax policy. Look for Erb’s column every week from Bloomberg Tax and follow her on Twitter at @taxgirl.