Tax Court: No ‘meeting of the minds’ in divorce case


Once again, a decision by the Tax Court serves as a reminder that both parties to a divorce should secure competent tax counsel.

James and Mary Faylor separated in May 2007. On July 20, 2007, Mary filed a motion for temporary support in divorce court. Subsequently, the Faylors’ attorneys began negotiating the terms of a temporary support agreement.

On Sept. 1, 2007, while the parties were still discussing the terms of a temporary support order, James Faylor began making monthly transfers of $5,000 to a joint checking account he shared with his wife. After that, two proposed temporary support orders were exchanged between the parties but were never finalized. Even though there was no temporary support order in place, James continued making the monthly $5,000 transfers into the joint account through April 2008.

On May 23, 2008, the divorce court entered a final decree dissolving the marriage. The divorce decree awarded alimony to Mary of $2,500 a month for six months and then $1,500 a month for 66 months thereafter.

On his 2008 return, James claimed a deduction of $36,500 for alimony paid. Of that amount, $16,500 represented payments he made to Mary pursuant to the divorce decree. The remaining $20,000, which the IRS disallowed, represented the transfers to the joint account that James made before the divorce decree.

The IRS argued that the $20,000 did not qualify as alimony because it was not paid under a divorce or separation instrument. James conceded that the deposits he made to the joint account were not paid under a decree. He argued, however, that the letters between the attorneys constituted a “meeting of the minds,” forming the basis of a written separation agreement between him and his then-wife.

The court found that the letters between the attorneys did not establish the existence of a written separation agreement. The letters showed there was no meeting of the minds between the spouses.

Furthermore, both Mary and her attorney testified at trial that the spouses did not come to an agreement. Mary testified that she did not sign either of the proposed temporary support orders because she did not agree to all of the terms. Her attorney testified that he had discussed with James’ attorney the amount and terms of the temporary support, but a complete agreement was not reached.

The court found that Mary did not receive the $20,000 under a divorce or separation instrument. Accordingly, it held that James could not deduct the $20,000 as alimony (James J. Faylor v. Commissioner, T.C. Memo 2013-143, June 5, 2013).