Tax issues in divorce.

EXECUTIVE SUMMARY

* Because there is no clear pattern in the court decisions, taxpayers must arm themselves with expert tax advice.

* Knowledge of state law is critical to proper drafting or review of a divorce agreement.

* Alimony is includible by the recipient and deductible by the payer; child support is the exact opposite.

As if divorce were not traumatic enough, a host of tax issues accompanies the dissolution of marriage. This article examines alimony, child support and property settlement issues, and explains the critical rules tax advisers need to know when drafting or reviewing divorce documents.

Divorce is an intensely personal issue affecting more and more Americans; thus, it is important for tax advisers to understand both the legal and tax ramifications of specific types of transfers. In a divorce, a transfer between spouses can be a property settlement, alimony or child support, each with its own tax rules.

This article examines the tax effects of transfers intended to be alimony or property settlements under a divorce agreement, settlement or decree. The rulings illustrate that substance overrules form. Because there is no clear pattern in the court decisions, taxpayers must arm themselves with expert tax advice. The article also addresses pitfalls and identifies planning opportunities.

Alimony

Sec. 71(a) provides that gross income includes amounts received as alimony or separate maintenance payments. Sec. 215(a) allows an "above the line" deduction for alimony paid. Sec. 71(b) defines alimony as any payment in cash, if all of the following are met:

1. Payment is received by (or on behalf of) a spouse under a divorce or separation instrument (Sec. 71(b)(1)(A)).

2. The divorce agreement does not designate such payment as not being alimony (Sec. 71(b)(1)(B)).

3. The spouses are not members of the same household when the payment is made (Sec. 71(b)(1)(C)).

4. There is no liability to make the payment after the recipient's death (Sec. 71(b)(1)(D)).

A payment that fails to meet any of these requirements is not alimony and is excludible from the recipient's income and nondeductible by the payer.

Example: H and W's divorce decree provided for H to make payments to W for two years and to assume certain marital debts until paid in full. The debt assumption is labeled "additional alimony" in the decree. The debt assumption does not meet Sec. 71(b)(1)(D); thus, it is excludible by W and nondeductible by H.

Although in the example, the decree termed the debt assumption "alimony" it was really a property division. Courts have ruled that the term"alimony" in a divorce settlement does not determine whether a payment meets Sec. 71(b)(1)(1); all the requirements must be met. The decree's or agreement's wording makes all the difference to the tax result.

However, courts will sometimes allow minor variations in the decree's wording. For example, it can refer to monthly payments owed to the former spouse as part of a property settlement, in lieu of a specific designation as not being alimony.(2)

"On Behalf of a Spouse"

Sec. 71(b)(1)(A) requires that a payment be received by or on behalf of a spouse. A direct cash payment by one ex-spouse to the other is usually straightforward in nature. Payments made on behalf of a spouse can include loan payments on property received in the divorce or payment of the ex-spouse's insurance premiums, monthly bills or divorce-related legal fees.(3) In addition, payments made to an ex-spouse's agent have been deemed constructively received by the ex-spouse(4); thus, they qualified as alimony.

Written Agreement

A decree is the final decision issued by a judge in a divorce action. A divorce is generally effective after a judge signs a divorce judgment and it is recorded. Payments made under a temporary settlement (as opposed to a final divorce decree) are usually treated differently; only payments made after a final decree may be classified as alimony. Amounts paid under a temporary agreement are excludible by the recipient and nondeductible by the payer; they are part of the property settlement and reduce the amount received under the final agreement. This motivates a payer to settle a divorce as quickly as possible, so payments will qualify as deductible alimony.

Although payments made under a temporary agreement are not alimony, Sec. 71(b)(1)(A) and (2)(B) include in alimony payments made under a"written separation agreement" a term not defined in the Code, regulations or legislative history. The courts have interpreted the phrase to require a clear statement in written form memorializing the terms of support between the parties.(5) A valid separation agreement existed when one spouse assented in writing to a letter proposing support by the other spouse.(6) The keys to the existence of a written separation agreement are both parties' consent and clear and specific payment language.

Example: H and W are divorcing. H's attorney sends W's attorney a letter, setting forth that H is willing to pay expenses and support and offering to divide the marital property. The letter omits specific amounts for the expense and support payments; further, there is no space for W to sign her assent.

W's attorney sends a letter in reply that contains specific amounts of expenses and support acceptable to W, with space for H to sign his assent. Only W's letter is deemed a written separation agreement.(7) H's letter lacks specificity and consent. Thus, any payments H makes that are not covered by W's letter are not alimony.

All payments intended to be alimony need to be specifically stated in both a written separation agreement and the final written divorce agreement; further, both spouses must consent in writing.

Payments End at Recipient's Death

Sec. 71(b) (1) (D) was amended by Tax Reform Act of 1986 Section 1843(b) to delete the requirement that a divorce agreement specifically provide for termination of payments on the payee's death. Thus, the liability must terminate at the recipient's death, but the instrument does not have to specifically so state. The Tax Court has reasoned that the termination requirement is central to Congress's intended distinction between support and property settlements.(8) If a divorce agreement does not explicitly state that payments cease on the payee's death, state law controls. Whether a payment meets Sec. 71(b)(1)(D) depends on whether state law requires alimony payments to terminate on a payee's death. (State law does not control the Federal tax status of other payments.) Each state's rules on the termination of divorce payments differ. Many states provide that such payments will cease on the payee's death. If a state statute is silent or ambiguous on this issue, amounts paid by one spouse to another cannot be alimony, unless the agreement provides for termination at death.

Example: A state B divorce agreement specifies $1,000 monthly payments from W to H as spousal support. The divorce decree did not state that payments would cease on H's death. B law provides that support payments in a divorce decree cease on the recipient's death; thus, a court would rule that W's payments are alimony. However, if B's law were ambiguous as to this issue, the payments would be classified as part of the property settlement. Thus, knowledge of state law is critical to proper drafting or review of a divorce agreement.

A twist on the requirement that payments cease at the payee's death could occur if spouses die within a short period of time of one another. If a recipient dies shortly before a payer, what is the tax treatment of any alimony unpaid at the payer's death? In one case,(9) after both spouses died, the husband's estate paid the wife's estate back alimony in a lump sum. The court ruled that the payment was taxable income to the wife's estate under the conduit distributable net income rules. The ruling is based on the fact that the recipient's estate was a creditor, not a beneficiary, of the payer's estate. Lump-sum payments of alimony arrearages retain their original character as includible income.(10) The Service garners a double benefit in this situation: the lump-sum amount is taxable in the recipient's estate, but the payer cannot take a deduction on his final individual tax return, because he did not pay the lump sum. In addition, his estate gets no deduction unless it has sufficient income. Ex-spouses are separate taxpayers; thus, there is never a guarantee that a payer will benefit from a Sec. 215 deduction.

Lump-sum Payments

Normally, alimony is paid in equal amounts over a period of time. However, a lump-sum payment can be treated as alimony if it meets the Sec. 71(b) requirements. For example, a husband is paying his ex-wife support and maintenance; the payments under the original agreement meet the alimony definition. The husband retires and takes a lump-sum distribution from his retirement plan. From that amount, he pays a lump sum to his ex-wife to cover an increase she was entitled to under the agreement. Because the lump-sum payment covers present, not future, obligations, it qualities as alimony.(11)

What if a spouse is making periodic alimony payments, but the recipient's financial circumstances change for the better? In one case, a payer went to court to reduce his payments and was required to make two lump-sum payments as "lump sum alimony." Based on applicable state law (Mississippi), a "lump sum alimony" payment is a final settlement substituting for a division of property and cannot be modified; it is a traditional debt that does not end at the recipient's death. Thus, the lump-sum payments were not alimony.(12)

Child Support

Sec. 71(c)(1) provides that alimony does not include any part of any payment fixed by the terms of the divorce or separation agreement as child support. Such amount is excludible from the recipient's income and is nondeductible by the payer. Sec. 71(c)(2) states that a reduction in payment specified in the instrument will be treated as child support if it occurs (1) on the happening of a contingency specified in the divorce decree relating to a child or (2) at a time that can clearly be associated with such a contingency. The second part of the definition is used when the decree does not specifically include a contingency relating to a child, but has that effect (e.g., if the total alimony payment decreases under the instrument when a child reaches the age of majority). The difference between the amount paid before age 18 and after would most likely be deemed child support.

A problem can arise if a divorce settlement calls for family support, with no allocation between alimony and child support. Two recent rulings held that, if there are no contingencies related to children in the agreement, the payments are alimony.(13) This result obtains even if state law contains a formula to allocate between alimony and child support.

These rulings highlight the importance of separating amounts paid between alimony and child support; without an express allocation in the divorce settlement, the entire amount is includible in income. Further, the lack of a reduction in amount indicates that payments are alimony. Thus, if there is a decrease in the payments if a contingency related to a child occurs, the recipient should argue that part of the payment is child support, even though amounts are not so allocated in the divorce settlement.

Example: H and W's divorce decree states that H is to make $1,500 monthly payments of spousal and child support until their child turns 18. At that time, the payments are reduced to $1,000 per month. Under Sec. 71(c)(2), $500 of each payment would be deemed child support, because the reduction occurs as the result of a contingency relating to a child. The same result would occur if the decree stated that the payments would be reduced at a certain time that coincided with age 18 (e.g., college attendance), because the reduction is clearly associated with a contingency relating to a child.

Property Settlements

Sec. 1041 was enacted to overrule Davis,(14) which held that an exchange of appreciated property for a release of marital rights was a taxable exchange. Sec. 1041(a) provides that, generally, no gain or loss is recognized on transfers of property between spouses or former spouses incident to a divorce (unless the transferee is a nonresident alien). It is immaterial if the transfer is structured as a gift, sale or property division. Under Sec. 1041(b), a recipient spouse takes the transferor's carry-over basis, as if the property were received as a gift. An exception to gain or loss recognition exists under Sec. 1041(e) if property is transferred to a spouse in trust and the liabilities thereon exceed basis. As is discussed below, Sec. 1041(c) states that "incident to a divorce" means (1) within one year after cessation of marriage or (2) related to cessation of marriage.

Excess Liabilities

If property with excess liabilities is transferred in a divorce settlement to form a new business, the transaction is a nontaxable division of property, followed by a nontaxable business formation. For example, in Letter Ruling 9615026,(15) the IRS held that the creation of a partnership with property burdened with liabilities in excess of basis was nontaxable. Because no gain or loss is recognized, the recipient takes a carryover basis. When the excess liabilities are repaid, the recipient may have to report phantom income as a result of the Sec. 752 deemed-cash distribution; the gain is simply deferred and taxable to the recipient.

Thus, a tax adviser needs to determine the property or rights assigned to each spouse. If an ex-spouse is given joint ownership, a subsequent sale will cause both ex-spouses to report one-half the gain. If an ex-spouse is given one-half the proceeds from a mandated sale, the entire gain is reportable by the sole owner. It is immaterial whether the property is deemed marital property or the decree incorrectly refers to the spouses as joint owners--the sole owner bears the tax burden.(16) If a decree allocates part of the sales proceeds and the resulting tax liability to the ex-spouse, a court might divide the tax burden.(17) However, it is safer to create joint ownership to guarantee that tax liability is divided between spouses. Review of a decree should include analysis of the effect of the divorce on the ownership of marital property to correctly determine the parties' tax liabilities.

Assignment-of-Income Doctrine

Despite the Sec. 1041 nonrecognition provision, the assignment-of-income or clear-reflection-of-income doctrine may cause the transferor to report income on the transaction. A taxpayer cannot avoid taxation by assigning a right to collect income to another party, such as a former spouse. It is immaterial whether a divorce decree provides for such collection and the income is contingent at the time of the assignment. For example, an attorney was taxable on a contingent fee, even though he assigned one-half of it to his ex-wife before it had been earned and the fee was paid directly to her.(18)

The Service applies the same rule to a transfer of income-producing property. For example, the transfer of series E and EE bonds to a former spouse requires the transferor to report the interest accrued to the date of transfer.(19) The recipient increases the property's basis by the income reported by the transferor, eliminating the possibility of double taxation.

Clear-reflection-of-income doctrine: Although the Tax Court has refused to accept the IRS's application of the assignment-of-income doctrine in this context,(20) the clear-reflection-of-income doctrine might apply. Under this rule, the IRS may cause a taxpayer to change his accounting method immediately before the transfer to prevent income-shifting to a former spouse. For example, if a taxpayer is using the completed-contract method, he may be required to switch to the percentage-of-completion method before transferring property under construction.(21) This will cause the transferor to report all income earned until the property is transferred.

Both the assignment-of-income and clear-reflection-of-income doctrines have been used to prevent income-shifting. A tax adviser should review a decree to determine if either doctrine might apply.

Stock options: The transfer of stock options under a decree may trigger application of the assignment-of-income doctrine. Depending on the type of option (incentive (ISO) vs. nonqualified (NQSO)), the recipient is taxed either when the stock is sold (ISO) or when the option is exercised (NQSO). Recently, the IRS examined income recognition in this context. According to Letter Ruling 200005006,(22) the transferor of ISOs or NQSOs is taxed under Sec. 83; transferred ISOs become NQSOs in the transferee's hands. According to the IRS, Sec. 1041 does not apply,because (1) the income is ordinary compensation income, not "gain" and Sec. 1041 addresses only gain or loss, not compensation income; and (2) Sec. 1041 does not shield from recognition income ordinarily recognized under the assignment-of-income doctrine. Thus, on the transfer, the transferor reports the compensation income received (i.e., the fair market value (FMV) of the options transferred -- basis); the transferee is taxed on any gain on option exercise (sale price -- basis (i.e., the transferor's reported compensation income)).

"Incident to a Divorce"

For transfers to an ex-spouse to qualify under Sec. 1041, they must be "incident to a divorce." Temp. Kegs. Sec. 1.1041-IT(b), Q&A-6, defines this as a transfer (1) within one year of the cessation of the marriage or (2) related to cessation of the marriage. Under Q&A-7, the latter means under a divorce decree or separation agreement and within six years of the divorce. As is discussed below, transfers more than six years after cessation are rebuttably presumed not to be related to the divorce. In Letter Ruling 9644053,(23) a property settlement included, "for compelling business reasons," an annuity payable annually for the ex-spouse's life. The ruling concluded that the payments were part of a property settlement, even though some payments would probably occur more than six years after the divorce. The husband's marital assets were insufficient to pay the full annuity, nor would they generate sufficient cashflow to pay it within six years. Absent a valid business reason, the presumption that transfers more than six years after divorce are outside of the property settlement will most likely be enforced.

The scope of the phrase "incident to a divorce" has been at the core of numerous court cases. Two important issues involve property settlement disputes and third-party transfers.

Property settlement disputes: The settlement of these disputes may be deemed either incident to a divorce or completely unrelated. If the settlement is incident to divorce, any property transfers are governed by Sec. 1041 nontaxability; unrelated transactions are not so protected.

Under Temp. Regs. Sec. 1.1041-1T(b), Q&A-7, the presumption of unrelatedness after six years is rebuttable, by showing the transfer was made to effect a division of property owned by the former spouses at the time their marriage ceased.

For example, an ex-husband transferred property to his ex-wife in 1992 to pay off an installment note he had given her under their 1989 settlement agreement, but had defaulted on. According to the Fourth Circuit, the transfer was incident to the divorce, because a 1992 settlement agreement discussed the divorce.(24) This had a significant tax effect on the ex-spouses. Had the note been paid on time, the recipient would have received tax-free cash; instead, she received property with a carryover basis and has to recognize gain on an eventual sale. Had the settlement been treated as not incident to a divorce, a different outcome would have ensued. The husband would have been treated as having sold the property to his ex-wife at a gain; the ex-wife would have taken FMV basis and recognized only post-transfer appreciation on a sale. Treatment as incident to divorce shifted the tax liability to the recipient.

If a settlement agreement states that it replaces a prior agreement, a transfer thereunder will almost certainly be held incident to divorce. Thus, the receipt of corporate stock (instead of cash, as provided for in the original agreement) will be treated as incident to divorce if the new settlement agreement states that such consideration is in lieu of the prior agreement.(25) Any attempt to withdraw cash from the corporation after the transfer (even if included in the prior agreement as a nontaxable property settlement) will be treated as a separate, taxable transaction. Again, the tax outcome is drastically different--instead of tax-free cash, the taxpayer reports a taxable dividend. The agreement's language will significantly affect the "incident to a divorce" determination.

Third-party transfers: Temp. Regs. Sec. 1.1041-1T(c), Q&A-9, expands the scope of transfers "incident to a divorce" to include a transfer to a third party, if:

1. Required by the decree, or

2. Pursuant to a written request from the ex-spouse or

3. The transferor receives from the transferee written consent or ratification of the transfer as a Sec. 1041 transfer.

In Ingham,(26) a taxpayer sold property to generate funds she was required to transfer to her former spouse under a property settlement. She argued that the sale was on behalf of her former spouse (and, hence, governed by Sec. 1041) because the latter received a substantial benefit. The court rejected this expansive definition, holding that "on behalf of" means that the transfer fulfilled an obligation or liability of the former spouse. Applying this definition to stock redemptions has resulted in significant litigation.

Division of corporate ownership: When a divorcing couple owns a corporation, they often seek to separate ownership, so that only one of them owns it after the divorce. If there are Sufficient assets, the simplest method is to transfer to the spouse relinquishing stock other (noncorporate) assets with FMV equal to the stock's value. If insufficient assets exist, the corporation could redeem the stock. Traditionally, a divorce decree divides stock between spouses; the corporation would then redeem all the relinquishing spouse's stock. Because a redemption terminates ownership, it is a Sec. 302 sale; the gain equals the redemption price minus carryover basis. Sometimes a redeemed spouse will argue that the redemption was actually a transfer to a third party on behalf of the former spouse and, thus, nontaxable under Sec. 1041.

If a redemption is a qualified third-party transfer, the redeemed spouse is treated as never having received stock. The funds used for the redemption are treated as if constructively distributed to the former spouse, who then transfers them to the redeemed spouse in a nontaxable Sec. 1041 property division. Because no stock is owned by the redeemed spouse, the unredeemed spouse is deemed to have owned 100% of the stock at all times. The constructive distribution would be a taxable dividend to the unredeemed spouse, shifting the tax burden from the redeemed to the unredeemed spouse and converting capital gain into ordinary income.

Sometimes an unredeemed spouse argues that the transaction is not a Sec. 1041 third-party transfer, because the unredeemed spouse had no primary and unconditional obligation to purchase the stock. Initially, the courts used this test to determine whether a stock redemption from an unrelated party resulted in a constructive dividend to the remaining shareholder.

Example: H and W jointly owned 100% of the stock of M Corp. After a marital separation, they surrendered their jointly owned M stock certificates for individual certificates reflecting equal ownership. H, W and M agreed in a property settlement that M would redeem W's stock and H would guarantee M's obligation to pay W.

W paid tax on the transaction gain, then successfully sued for a refund, claiming Sec. 1041 treatment for the gain on the redemption.(27) In a separate action, the Tax Court held that H realized no constructive dividend on M's redemption, because H had no primary and unconditional obligation to buy W's stock.(28)

However, the Tax Court(29) and the Eleventh Circuit(30) later concluded that the use of the unconditional-obligation test is inappropriate in a divorce situation; instead, each side should be evaluated based on the Temp. Regs. Sec. 1.1041-1T(c), Q&A-9 requirements. Thus, a court should examine whether a redemption is required by the divorce decree, and if it is guaranteed by (and benefits) the former spouse. The "on behalf of" standard is met if the transfer by the redeeming spouse is made on the unredeeming spouse's behalf. If a redemption is either in the decree or guaranteed by the unredeeming spouse, it most likely will be held to be on the latter's behalf, resulting in dividend income to that spouse.

If Sec. 1041 treatment is not desired, the redemption should be contained in a separate agreement; the unredeeming spouse should not guarantee payment. Although omitting the redemption from the divorce or settlement agreement adds risk, the redemption agreement can be negotiated simultaneously, provided it is a separate document signed by the appropriate parties. The redeemed shareholder's gain will equal the redemption proceeds less basis, and will usually generate a significantly lower tax bill than a constructive dividend.

Retirement Plans

Another common issue is the division of spousal retirement benefits. Taxation of distributions from qualified plans to ex-spouses may hinge on the existence of a qualified domestic relations order (QDRO).

QDROs protect the interests of the divorced and widowed in their former spouses' pension plans. Under Sec. 414(p)(1)(A), a QDRO is a domestic relations order that creates or recognizes the existence of an alternate payee's (i.e., an ex-spouse's) right to receive all or a portion of qualified plan benefits. Sec. 414(p)(1)(B) defines a "domestic relations order" as any judgment, decree or order (including approval of a property settlement) that relates to the provision of child support, alimony or marital property rights and made under state domestic relations (or community property) law. Under Sec. 414(p)(2), a QDRO must clearly specify all of the following:

* The name and last-known address of each alternate payee.

* The amount or percentage of benefits (or formula for so determining) to be paid by the plan to the alternate payee.

* The number of payments or periods to which the order applies.

* Each plan to which the order applies.

If a QRDO exists, the spouses will be taxable on their individual shares of distributions from a qualified plan, even if the total distribution is received by one spouse, with a portion then paid to the other. However, according to Boudreau,(31) if the final decree does not qualify as a QDRO (because the spouse was not designated as an alternate payee), the plan participant will be subject to tax on the total distribution and have no deduction for the amount paid to the former spouse. Thus, the QDRO requirements should be strictly adhered to when crafting a settlement.

In community property states, each spouse is deemed to own one-half of the assets. Thus, the distribution of an ex-husband's retirement fund to his ex-wife is income to her, even though the payments were received from him.(32)

Under a QDRO, if a plan participant declares bankruptcy, the ex-spouse's share will be protected.(33)

IRAs: The allocation of IRA assets is governed by Sec. 408 and may differ from the qualified plan rules. The tax treatment depends on the allocation's structure. If a divorce settlement divides IRA assets between spouses, and the IRA owner withdraws the entire balance, then transfers a share to the ex-spouse, the IRA owner is taxed on the entire allocation,(34) even in community property states (Sec. 408(g) disregards community property law). In addition, because the distribution is part of a property settlement, the transferor has no alimony deduction on the transfer.

This result can be avoided by structuring the transaction differently. In Letter Ruling 200027060,(35) a husband transferred the required amount, in a trustee-to-trustee transfer, to a new IRA account to be owned by his ex-wife. The IRS ruled that, under Sec. 408(d), the transfer of the funds in this manner was not taxable. The two accounts were separate IRAs; further, although the husband had already started receiving annual IRA payments before the divorce, the wife did not have to continue taking distributions.

Thus, it may be preferable to leave the assets in a retirement plan, but segregate them between the two parties. If the assets are withdrawn, then paid to the ex-spouse, the transferor spouse will be taxable on 100% of the distribution, with no corresponding deduction for the transfer.

Income and Deductions

Many property settlements require payments that extend into future years. If the payments include stated interest, the recipient must report the interest as income.(36) The recipient is not required to report imputed interest, according to Regs. Sec. 1.1274-1 (b) (3) (iii). If interest is not specifically stated, it is not includible.

The interest payment may also yield a deduction. While Sec. 163(h)(1) denies a deduction for personal interest, an exception exists under Sec. 163(h)(3) for interest related to the acquisition of a qualified personal residence.(37)

The courts have approved an interest deduction to the extent allocated to investment property.(38) The deductible amount is calculated based on the relative FMV of the investment property over the total FMV of the property received. If the divorce decree permits identification of the specific asset(s) received in exchange for an interest-bearing note, the deduction can be calculated based solely on that exchange.(39) However, in most cases, the total property transferred will be used.

Interest is not the only issue. Frequently, a former spouse will institute suit to collect back alimony or interest and principal on a note in default. If the suit awards payment for these amounts (as well as legal fees and collection expenses), the amount collected for expenses will be taxed as income and a deduction permitted for the expense incurred. However, the amount deductible will be a percentage of the amount paid, based on the ratio of taxable income to the total collected.

In reviewing and planning settlements and litigation, a tax adviser should also consider the possibility of a taxable receipt. Any amount received in addition to property will usually not be protected by Sec. 1041. From the payer's side, certain allocable expenditures may be deductible.

Miscellaneous

A tax adviser should also review the last three joint returns for possible tax issues. In Murphy,(40) a joint return reported a sale of the family residence and deferred it under former Sec. 1034. The couple divorced; the ex-spouse failed to replace the residence. The taxpayer was held jointly liable for the additional tax due on the joint return. Although Sec. 1034 has been repealed, a similar issue could arise for property disposed of in a deferred Sec. 1031 transaction.

Other return issues could involve unreported income, nondeductible expenditures and innocent spouse relief, which are beyond the scope of this article.

Conclusion

This article has discussed some of the tax issues stemming from divorce. There is no dear pattern in the cases for taxpayers to rely on in determining the tax effects of a divorce-related transfer. However, a well-crafted divorce agreement will follow Sec. 71(b)(1); the divorce agreement's (or state law's) labeling of payments as alimony or a property settlement will not guarantee the IRS's or a court's treatment. This disparity emphasizes the need for an experienced tax adviser in the divorce process.

For more information about this article, contact Dr. Schnee at [phone] or [e-mail] or Dr. Burton at [e-mail].

(1) See, e.g., Christopher Murley, 104 F3d 361 (6th Cir. 1996).

(2) Est. of Monte H. Goldman, 112 TC 317 (1999).

(3) Eleanor A. Burkes, TC Memo 1998-61.

(4) Maryland Casualty Co., 312 US 270 (1920).

(5) See, e.g., Patience C. Jacklin, 79 TC 340 (1982).

(6) See Judith A. Azenaro, TC Memo 1989-224.

(7) See Hermine Leventhal, TC Memo 2000-92.

(8) Mary K. Heckaman, TC Memo 2000-85.

(9) Paul R. Kitch, 103 F3d 104 (10th Cir. 1996).

(10) Dorothy Olster, 751 F2d 1168 (11th Cir. 1985); Lilley Capodanno, 602 F2d 64 (3d Cir. 1979).

(11) See IRS Letter Ruling 9644071 (8/7/96).

(12) Pat M. Barrett, Jr., 74 F3d 661 (5th Cir. 1996).

(13) See Judith D. Lawton, TC Memo 1999-243; IRS Letter Ruling 9625050 (3/27/96); see also Temp. Regs. Sec. 1.71-1T(c).

(14) Thomas C. Davis, 370 US 65 (1962).

(15) IRS Letter Ruling 9615026 (1/2/96).

(16) See, e.g., Robert W. Suhr, TC Memo 2001-28.

(17) See Eugene K. Friscone, TC Memo 1996-193.

(18) Richard W. Kochansky, 92 F3d 957 (9th Cir. 1996).

(19) Rev. Rul. 87-112, 1987-2 CB 207.

(20) See, e.g., Alice Berger, TC Memo 1996-76, which details commentators' criticism of the application of the doctrine.

(21) Id.

(22) IRS Letter Kuling 200005006 (11/1/99).

(23) IRS Letter Ruling 9644053 (8/1/96).

(24) Louise F. Young, 240 F3d 369 (4th Cir. 2001),

(25) Dennis A. Praegitzer, TC Memo 1997-79.

(26) Marsha Hatch Ingham, 167 F3d 1240 (9th Cir. 1999).

(27) Joann C. Ames, 981 F2d 456 (9th Cir. 1992).

(28) John A. Ames, 102 TC 522 (1994).

(29) Carol M. Read, 114 TC 14 (2000).

(30) Linda K.B. Craven, 215 F3d 1201 (11th Cir. 2000).

(31) In re Michael D. Boudreau, MD FL, 1/9/95.

(32) See, e.g., Patricia Ann Eatinger, TC Memo 1990-310; Angela M. Graham, TC Memo 1996-512;.Jo Ann Porter, TC Memo 1996-475; and James Mess, TC Memo 2000-37.

(33) Williams v. Williams, 50 FSupp2d 951 (1999).

(34) Michael G. Bunney, 114 TC 259 (2000).

(35) IRS Letter Ruling 200027060 (4/12/00).

(36) Linda Gibbs, TC Memo 1997-196.

(37) Rev. Rul. 88-74, 1988-2 CB 385.

(38) John L. Seymour, 109 TC 279 (1997).

(39) Ronald Armacost, TC Memo 1998-150.

(40) William H. Murphy, 103 TC 111 (1994).

Edward J. Schnee, Ph.D., CPA
Professor of Accounting
Culverhouse School of Accountancy
University of Alabama
Tuscaloosa, AL

Hughlene A. Burton, Ph.D., CPA
Assistant Professor of Accounting
University of North Carolina--Charlotte
Charlotte, NC