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Property settlement payment not deductible alimony.

When 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 alimony, in law, allowance for support that an individual pays to his or her former spouse, usually as part of a divorce settlement. It is based on the common law right of a wife to be supported by her husband, but in the United States, the Supreme Court in 1979 . Each party does hereby waive To intentionally or voluntarily relinquish a known right or engage in conduct warranting an inference that a right has been surrendered.

For example, an individual is said to waive the right to bring a tort action when he or she renounces the remedy provided by law for such
 alimony and does hereby totally, irrevocably ir·rev·o·ca·ble  
Impossible to retract or revoke: an irrevocable decision.

 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.

14. Parties Bound. This Settlement Agreement shall be binding upon the heirs, legatees, devisees, administrators, and personal representatives of the parties hereto here·to  
To this document, matter, or proposition.


Formal or law to this place, matter, or document

Adv. 1.
 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 deceased 1) adj. dead. 2) n. the person who has died, as used in the handling of his/her estate, probate of will and other proceedings after death, or in reference to the victim of a homicide (as: "The deceased had been shot three times.  parry shall be obligated ob·li·gate  
tr.v. ob·li·gat·ed, ob·li·gat·ing, ob·li·gates
1. To bind, compel, or constrain by a social, legal, or moral tie. See Synonyms at force.

2. To cause to be grateful or indebted; oblige.
 and responsible for the performance of the obligations and conditions of this Settlement Agreement.

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 wife's interest in this residence. Contemporaneous con·tem·po·ra·ne·ous  
Originating, existing, or happening during the same period of time: the contemporaneous reigns of two monarchs. See Synonyms at contemporary.
 with the transfer of these funds, the wife shall execute a quit-claim deed deed, in law, written document that is signed and delivered by which one person conveys land or other realty (see property) to another. A deed may assure the extent of the conveying party's ownership or, if the party is uncertain of the precise extent, he issues a  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 dissolution of marriage n. modern, gentler sounding, term for divorce, officially used in California since 1970 and symbolic of the no-fault, non-confrontational approach to dissolving a marriage. (See: divorce). . 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 An abbreviation for the Internal Revenue Service, a federal agency charged with the responsibility of administering and enforcing internal revenue laws.  disallowed the deduction because "lump-sum cash paid as a property settlement is not deductible That which may be taken away or subtracted. In taxation, an item that may be subtracted from gross income or adjusted gross income in determining taxable income (e.g., interest expenses, charitable contributions, certain taxes).  as alimony."


Generally, a property settlement incident to a divorce is not a taxable event Taxable event

An event or transaction that has a tax consequence, such as the sale of stock holding that is subject to capital gains taxes.
 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 recipient's 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 tails to meet any one of the four enumerated This term is often used in law as equivalent to mentioned specifically, designated, or expressly named or granted; as in speaking of enumerated governmental powers, items of property, or articles in a tariff schedule.  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 The person who is to receive the stated amount of money on a check, bill, or note.

payee n. the one named on a check or promissory note to receive payment.

PAYEE. The person in whose favor a bill of exchange is made payable.
 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 G's 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 G's interest in the marital residence. The terms of the settlement agreement do not state that P's liability to make the $37,000 payment would cease on G's 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 G's prior death, he would still be obligated to make the $37,000 payment to G's estate and the estate would still be obligated to transfer G's 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-wife's estate had she died after the execution of the separation agreement, but before payment by the husband. It was of no consequence that the husband's 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 G's 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 SUMM Semantic Unification Meta-Model . 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 taxpayer's obligation to make the payment would haw, 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 spouse's prior death and there were no reservations that would have allowed the parties to incorporate such a condition thereafter.
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Author:Gamer, Lawrence R.
Publication:The Tax Adviser
Date:Feb 1, 2004
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