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LJN NewslettersNewsSectionsThe Matrimonial Strategist

Settling Alimony Obligations

BY Thomas R. White, 3rd
August 01, 2006

Two recent cases suggest an important difference between the current tax treatment of alimony payments and the pre-1984 treatment of alimony payments. 'Alimony,' of course, is a defined term, and the definition can be structured to include whatever transfers seem appropriate from a tax policy perspective as distinct from the meaning of the term for state law purposes. Under current law, a cash payment from one former spouse to the other will be included in the income of the recipient and deductible by the payor if it meets four conditions: 1) the payment is made under a divorce or separation instrument; 2) it is not designated as not includable/nondeductible; 3) the former spouses do not live in the same household; and 4) the payor is not legally obligated to make the payment or a 'substitute' for the payment after the death of the recipient. I.R.C. ' 71(b)(1). Missing from this list are the requirements of prior law that cash payments be 'periodic' and that they be made to discharge the payor's obligation to support the payee. A lump sum cash payment that meets the statutory requirements could, therefore, be taxable alimony.

Lump Sum Payments

Suppose the payor has a large continuing obligation to make payments to his former spouse and is wealthy enough to contemplate settling this obligation by commuting it into a single, lump sum payment. Depending on how the settlement is structured, this payment could be taxable to the recipient and deductible by the payor. The obligation to make the payment would likely be contingent on the continued survival of the former spouse, which might be expected as the underlying obligation to make the continuing payments should similarly depend on the continued survival of the payee. This result may have been contemplated by the former husband in Johnson v.Commissioner, 441 F.3d 845 (9th Cir. 2006). H and W were divorced in 1976 by a divorce decree that required H to pay W alimony ranging up to $2400 per month. In 1993, H filed a motion in the divorce court to modify the divorce decree by terminating his alimony obligation, and W responded by requesting an increase in H's alimony obligation. The parties then negotiated a settlement under which H made a cash payment to W of $400,000 and the state court dismissed W's motion, stating that H had 'discharged any and all obligations to pay [W's] alimony.' The order did not refer to IRC ' 71.

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