No alimony after death of payee spouse.

The Service recently issued Letter Ruling (TAM) 9542001, holding that a lump-sum payment made by a taxpayer to her ex-spouse's attorneys pursuant to a divorce decree did not qualify as alimony under Sec. 71, since the payment did not meet the termination requirement of Sec. 71 (b) (1) (D). This TAM highlights the importance of clearly indicating in a divorce or separation agreement that payments intended to qualify as alimony will terminate on the death of the payee spouse.

Payments of alimony or separate maintenance under Sec. 71(b) are included in the payee spouse's gross income under Sec. 71(a) and deductible by the payor spouse in computing adjusted gross income (i.e., "above the line") under Sec. 215(a). Alimony is a nonbusiness deduction regardless of the source of the payment and whether or not the payor has taxable income, although it cannot generate a net operating loss deduction. The parties can elect to treat payments otherwise qualifying as alimony as though they did not constitute alimony, effectively disregarding the transfer for tax purposes.

Sec. 71 (b) (1) defines alimony or separate maintenance payments as any payment in cash received by (or on behalf of) a spouse under a divorce or separation instrument that does not designate the payment as excludible from gross income under Sec. 71 and not allowable as a deduction under Sec. 215. In the case of couples legally separated under a decree of divorce or separate maintenance, the spouses may not be members of the same household at the time such payment is made (unless one spouse is temporarily living there while seeking alternate living arrangements). Lastly, there can be no obligation to make any such payment (or substitute for such payment) for any period after the death of the payee spouse. It is this last requirement that is the subject of three recent cases and the TAM.

The divorce agreement analyzed in the TAM provided that W was to pay H $2,000 per month for maintenance, to be reviewed after three years, and that petitions for attorneys' fees could be filed within 30 days. After H filed a motion to reconsider and a petition for attorneys' fees and costs, the court ordered an increase in W's maintenance obligation and for her to pay a portion of H's attorneys' fees. The court order did not state that the payment was for maintenance or alimony, or that the liability for payment would cease on the occurrence of a future event. However, a subsequent order modified H's maintenance and specified that it was to cease when H reached age 62 or on his death or remarriage. W claimed an alimony deduction under Sec. 215 for the amount she paid for attorneys' fees; H did not include the payment in income.

The IRS held that W's liability to pay did not terminate by operation of either specific language in the divorce decree or any provision of Illinois law. This position is consistent with that found in three recent Tax Court decisions. The cases focused on whether a liability was created that would have been enforceable by the payee spouse's estate if such spouse died before specified payments were made, by examining the terms of the agreements and the applicability of state law. In all three cases, the liability for payment continued even after the payee's death, and thus the payments were not alimony.

In Webb, TC Memo 1990-540, the I court ruled that a separation agreement created a liability on the husband's part to make payments which would have been enforceable by the wife's estate had she died after execution of the agreement but before the payments were made. The agreement provided for the husband to pay his ex-wife five annual maintenance payments of $40,000 that were to terminate on the death of either the husband or wife; $15,000 "for the purpose of enabling the Wife to secure a replacement automobile which shall be her sole and separate property"; and a $200,000 lump-sum payment on the signing of the agreement. Further, the agreement was to be binding not only between the spouses, but "their respective heirs, executors, administrators and assigns" as well. The husband deducted $215,000 as alimony, which the wife excluded from income as a transfer of property. The $40,000 maintenance payments were not at issue.

The husband argued that, because the $215,000 cash payments were made simultaneously with the signing of the agreement, no liability was created that would not have terminated at the wife's death, and thus the termination requirement of Sec. 71 (b) (1) (D) was met. The court applied the language of the agreement--"the Husband shall pay"--in reaching its decision that a liability was created that would have been enforceable by the wife's estate, and found it unnecessary to look to the intent of the parties or local law. Further, the paragraph providing for the $40,000 maintenance payments clearly stated that they were to terminate in the event of the "Death of the Wife," while no such language was contained in the paragraphs providing for the $15,000 and $200,000 payments. The fact that the payments were made simultaneously with the signing of the agreement was found to be irrelevant.

In Stokes, TC Memo 1994-456, the court looked to state law in determining that lump-sum alimony payable in installments could potentially be paid beyond the death of the payee spouse. Pursuant to an October 1985 temporary court order, the husband was to pay $4,800 monthly for the support and maintenance of his ex-wife and their child until further court order. A final divorce degree approved in May 1986 bound the parties to the terms of the temporary order through March 1987. The court denied the taxpayers alimony treatment, since the payments were to be made for a specific period of time and there was no provision or evident intent that the obligation would terminate before that time. Therefore, payments would continue in all events through March 1987, even if the wife died before then.

Absent specific language in the divorce decree, the finding that payments would continue after the payee spouse's death depends on whether Georgia law would so interpret the final divorce decree. An earlier Georgia case held that, by operation of state law, periodic (i.e., contingent) alimony payments terminate at the death of either party, while lump-sum alimony payable in installments does not. The latter is an obligation stating the exact number and amount of each payment, without other limitations, conditions or statements of intent. The Stokes court found the payments to be lump-sum alimony payable in installments rather than periodic alimony.

Further, the language contained in a survivorship clause of the settlement agreement providing for payments to the payee's heirs evidenced the parties' intent that the payments would continue after the death of the payee spouse, despite the husband's objection that it was mere "boilerplate language."

The settlement agreement in Cunningham, TC Memo 1994-474, required the husband to make 142 monthly payments of $2,500 each to his ex-wife for her "support and maintenance," without stipulating that these payments would cease if the wife remarried or died before all payments were made. The court found that the agreement did not clearly state whether the husband remained liable for making payments if his wife died before the expiration of the 142 months. Because the taxpayers chose not to submit the agreement to a state (North Carolina) court, the payments could not be considered alimony under state family law, since court action on an agreement is required "before payments under that agreement can be alimony." The court then looked to contract law and the intent of the parties, finding that the settlement agreement was not clear as to the husband's obligation to continue making payments if his wife should the. The court also noted that the payments would last for a specific time period, regardless of likely changes in the wife's needs, such as employment, remarriage or death.

In the TAM, the Service followed the analyses in Stokes, Webb and Cunningham, and found that the court documents did not indicate an intent that W's liability for attorneys' fees would cease on the occurrence of an event, and that no state law would impose such termination of liability. Consequently, it concluded that W's payments of H's attorneys' fees did not meet the termination requirement (since H's estate would be able to enforce the obligation), and the payments were thus not deductible as alimony under Sec. 215 (a).