Most people are familiar with the term “alimony.” These are payments made to an ex-spouse after a divorce to maintain the marital standard of living (or before a divorce to ensure a spouse can maintain a reasonable standard of living pending the trial). In California, we call it “spousal support.”
Spousal support is includable in the recipients federally taxable income, and it is deductible from the income of the payor. The catch is that there must be a *written* agreement or order for spousal support to claim the deduction from taxes. A recent case in Tax Court affirmed this rule and made it clear that there was to be no creative interpretation of the term “written agreement.”
Nebraska residents James and Mary Faylor separated in 2007. That year, during the pendency of a temporary support order request, the parties dispatched settlement proposals back and forth. Mary wanted $6,000 a month, James wanted to give only $4000. Both parties started sending proposals for $5,000 a month, but James had conditions on the spending. In anticipation of a settlement, James deposited $5,000 a month in the joint checking account for Mary to withdraw for four months. Ultimately, no settlement was reached, and pursuant to the Divorce Decree entered in 2008, support was ordered at $2,500 for six months followed by $1,500 a month in perpetuity.
James tried to deduct $36,500 from his 2008 taxes, $20,000 of which was the money transferred to the joint checking account prior to the entry of the Divorce Decree. Mary contested (understandably, since such would have constituted $20,000 of income taxable to *her*). James’ argument was that the dueling settlement letters, since they had stabilized at a $5,000 a month support offer, this constituted a “meeting of the minds” tantamount to a written agreement.
The Tax Court disagreed. Mary had never signed any of the proposed agreements specifically because of the conditions placed upon the offer of support. There was no “meeting of the minds,” the Court determined. James was on the hook for the taxes he’d failed to pay for 2008.
James had a little bit of luck, however. The Court determined that since James had come forth with his request in good faith and with reason (even though the Court ultimately disagreed with his reasoning), James would not be hit with an “Accuracy-Related Penalty,” which could have been up to 20% of what he owed the IRS. You can find the whole decision [a href=”http://www.ustaxcourt.gov/InOpHistoric/Faylor.TCM.WPD.pdf]here.[/a]
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