In a divorce situation, make sure you have an appropriate agreement in place. Otherwise, you will not be able to claim a deduction for any payments made to your former spouse.
The U.S. Tax Court recently made this clear in a case in which it denied Franklin Rex Milbourn a tax deduction for alimony payments he had made to his ex-wife (Franklin Rex Milbourn v. Commissioner, U.S. Tax Court, T.C. Memo 2015-13, Jan. 21, 2015).
Milbourn made payments to Brenda Ann Marshall, his ex-wife, totaling $37,000 in 2006. In June 2006, the family and probate court granted Marshall a decree of divorce. The court deferred on working out the other important details of the divorce, including the amount of alimony, until a later date.
In June 2007, the family and probate court issued an amended final decree of divorce. The amended decree spelled out in writing that the amount of alimony payments would be $4,500 per month. Both Milbourn and Marshall signed the amended decree.
Milbourn had filed his 2006 individual income tax return late, not sending it to the IRS until Sept. 19, 2011. On the return, Milbourn claimed an alimony deduction of $36,000. He listed Marshall as the person to whom the alimony was paid and included her Social Security number in the appropriate spot on his tax return.
Despite the fact that Milbourn had documented payments of $37,000 to his ex-wife, one of these payments was in dispute, so he claimed only $36,000 of payments as a deduction for alimony on his tax return.
The IRS subsequently sent him a notice of deficiency disallowing the $36,000 alimony deduction.
Milbourn responded in a timely fashion to the IRS’s letter, disputing the agency’s position. He claimed that the alimony payments were valid and paid under the terms of a marital dissolution agreement drafted by Marshall’s attorney. This draft was not signed by either party because they could not agree on a monthly amount of alimony.
An IRS code section spells out a four-part test that must be met for a payment to be considered alimony. One of the parts of the test states that “such payment is received by a spouse under a divorce or separation instrument.”
The problem in this case was that Milbourn was paying alimony based on an unsigned draft of a marital dissolution agreement and not a signed copy that specified the amount of alimony to be paid each month. The draft was not considered to be an official divorce decree.
In addition, Milbourn stated during testimony that no separate maintenance agreement existed between Marshall and him in 2007.
Because one of the four tests was not met, the payments were deemed by the Tax Court not to be alimony payments, and Milbourn’s deduction was denied.