Property Settlement Payment Not Deductible Alimony

W hen 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.

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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 party shall be obligated and responsible for the performance of the obligations and conditions of this Settlement Agreement.

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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 wifes 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 recipients 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 fails to meet any one of the four enumerated criteria, it is not alimony and is not deductible. Here, the dispute is whether the payment met Sec. 71(b)(1)(D):

(D) there is no liability to make any such payment for any period after the death of the payee spouse and there is no liability to make any payment (in cash or property) as a substitute for such payments after the death of the payee spouse.

The IRS contends that P was obligated under the terms of the settlement agreement to make the $37,000 payment to G in the event of her prior death. P primarily argues that, because the $37,000 payment was required to be made almost simultaneously with the execution of the settlement agreement (i.e., within 10 days of the date of the settlement agreement), there arose no liability that would not have terminated at Gs death. Whether an obligation to make payments survives the death of the payee spouse may be determined by the terms of the applicable instrument, or if the instrument is silent on the matter, by looking to State law; see Kean, TC Memo 2003-163.

The language of the settlement agreement itself (paragraph 10) provides that both P and G waive alimony. Paragraph 18, however, provides that P shall pay G the sum of $37,000 in exchange for Gs interest in the marital residence. The terms of the settlement agreement do not state that Ps liability to make the $37,000 payment would cease on Gs prior death. Additionally, paragraph 14 of the settlement agreement provides that P and G remain bound to all of its obligations on the death of either individual. P also admitted at trial that he understood that under the terms of the settlement agreement, in the event of Gs prior death, he would still be obligated to make the $37,000 payment to Gs estate and the estate would still be obligated to transfer Gs interest in the marital residence to P.

The fact that petitioner was required to make the $37,000 payment within 10 days of the execution of the settlement agreement is irrelevant. In Webb, TC Memo 1990-540, the separation agreement provided, in part, that The Husband shall pay, simultaneously with the execution of this Agreement, to the Wife, the sum of [$15,000]. This language was sufficient to create a liability that would have been enforceable by the ex-wifes estate had she died after the execution of the separation agreement, but before payment by the husband. It was of no consequence that the husbands payment was made simultaneously with the execution of the separation agreement.

The settlement agreement provided that P would still be required to make the $37,000 payment in the event of Gs prior death. Accordingly, the $37,000 payment from petitioner to G fails to satisfy the Sec. 71(b)(1)(D) requirements and, thus, does not qualify as deductible alimony.

Lawrence R. Gamer, TC Summ. Op. 2003-66

REFLECTIONS: In Charles W. Smith, TC Summ. Op. 2003-167, a lump-sum payment was not alimony because, under state law, the taxpayers obligation to make the payment would have continued if his former spouse died prior to payment. The fact that the payment was described in the agreements as alimony was not controlling. The separation agreement and the divorce decree did not provide that the payment obligation would cease on the spouses prior death and there were no reservations that would have allowed the parties to incorporate such a condition thereafter.