If a divorce decree says that a payment to an ex-spouse, does that mean that it is alimony the ex-spouse has to report as income for Federal income tax purposes? And if not, can the ex-spouse who receives the payment request a ruling from the IRS to say that the payment was not taxable to her and thereby cause the other ex-spouse to lose their alimony deduction? The IRS addresses this in Private Letter Ruling 200720007.
Facts & Procedural History
The ex-wife requested this ruling from the IRS. She requested a determination as to whether the payments she received were not “alimony.”
“Alimony” payments are generally taxable income to the recipient (in this case, the ex-wife) and tax deductible by the payor (in this case, the ex-husband).
Taxation of Alimony Payments
The Code sets out several requirements for payments to qualify as “alimony” for federal income tax purposes, including:
- such payment is received by, or on behalf of, a spouse under a divorce or separation instrument;
- the divorce or separation instrument does not designate such payment as a payment which is not includible in gross income under section 71 and not allowable as a deduction under section 215;
- in the case of an individual legally separated from his spouse under a decree of divorce or of separate maintenance, the payee and payor are not members of the same household at the time such payment is made; and
- there is no liability to make such payment for any period after the death of the payee and no liability to make any payment as a substitute for such payments after the death of the payee.
Payments must meet all of these elements to qualify as “alimony” for Federal income tax purposes.
The Divorce Decree & State Law
The divorce agreement in this case indicated that the amounts paid were to qualify as “alimony” for federal income tax purposes, but the divorce agreement failed to specify that the payments were to terminate upon the death of the payee. The question then is, are the payments “alimony” if the agreement fails to address this “death of the payee” issue?
As the IRS ruling sets out, where the agreement is silent on this issue, it is necessary to look to state law to see if the state law specifies that the requirement to make “alimony” payments terminates upon the death of the payee. The state law in this case (the state was not disclosed), did not specify that “alimony” payments were to terminate upon the payee’s death. As a result, the payments did not qualify as “alimony” for tax purposes, despite the express provision in the divorce decree.
Using the IRS Ruling Offensively
This is not new law. The interesting aspect of this ruling is that the ex-wife could request such a ruling after the fact. The result is that she is not subject to Federal income tax on the payments. The other result is that the ex-husband was not entitled to deduct the payments. It is easy to imagine feuding spouses may use this procedure to not only avoid their liability, but to cause the other spouse to lose a tax deduction. This differs from innocent spouse relief, as that only relieves the requesting spouse. It does not impact the non-innocent spouse.