The Tax Court has held that a taxpayer could not deduct a lump-sum payment to his former wife as alimony.
John and Alice Nye were divorced in Florida in 1990. Under the terms of a separation and property settlement agreement, John was to make alimony payments of $3,600 per month and a lump-sum alimony payment of $10,000 to his former wife. It also required John to obtain medical insurance for her or, if he couldn’t obtain such insurance, pay her an additional $150 per month.
In late 2006, Alice asked the divorce court to increase the alimony payable to her. Before the court acted on her request, the former spouses settled. John agreed to make a lump-sum payment of $350,000 to Alice, and Alice agreed to quit claim a residential property to John. After these transfers, no further amounts would be due from either party.
John made the $350,000 payment to Alice in January 2008. Thereafter, the divorce court modified the final judgment of dissolution of marriage to incorporate the new agreement.
John and his current wife deducted the $350,000 as alimony. The IRS disallowed all but $3,750, which represented the $3,600 monthly amount and the $150 amount for medical insurance for the month of January.
To qualify for the deduction:
- An alimony payment must be made under a divorce or separation instrument;
- The instrument must not designate the payment as not includable in the recipient spouse’s gross income and not deductible by the payor spouse;
- Legally separated spouses under a decree of divorce or separate maintenance must not be members of the same household when the payments are made; and
- The payor’s obligation to make the payment must end at the death of the payee spouse.
The Tax Court observed that the agreement was silent as to whether John’s obligation to make the $350,000 payment to Alice would have terminated if she had died prior to the payment being made. The court turned to Florida law for guidance and concluded that, under Florida contract law, John’s obligation to make the $350,000 payment to Alice would not have terminated if she had died. As a result, it held that John and his current wife were not entitled to deduct the payment as alimony (John D. Nye and Rose M. Nye v. Commissioner, TC Memo 2013-166, July 15, 2013).