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Friday, June 08, 2007

ALIMONY ALLOWED WITH LEGAL OBLIGATION TO PAY

Ex-spouses making payments to their former spouse like to have them characterized for tax purposes as "alimony." If qualified as alimony, the payor gets to deduct the payment, and the recipient has to include the payment in income.

Under prior law, to be qualified as alimony, a payment had to be paid pursuant to a legally enforceable obligation. In a recent Tax Court case, Daniel Webb was subject to a court order that any payments he made would be includible in the income of his former spouse, but he was not obligated to make any payments under the order. Daniel did make payments, and deducted them as alimony. The IRS objected, claiming that since the payments were not a legally enforceable obligation, they did not qualify as alimony and he could not deduct them.

The Tax Court sided with Daniel and found the payments to be alimony. The Court noted that the "legally enforceable obligation" requirement had been removed from the law in 1984. Further, that requirement was also removed from the regulations issued by the Treasury Department. Thus, there no longer is any requirement for a legally enforceable obligation.

Note that another prerequisite for alimony treatment is that the payment is made under a divorce or separation instrument. The Tax Court found that the order described above qualified as this instrument, presumably since it referred to payments that might be made. Therefore, purely voluntary payments from one ex-spouse to the other that are not referenced at all in such an order or agreement may not be able to take advantage of the Tax Court's pronouncement in this case. Also, since the case is only a summary opinion, it has limited precedential value.

Webb, TC Summary Opinion 2007-91

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