Contingency Involving Taxpayer's Child Precludes Alimony from Being Deductible

(Parker Tax Publishing April 2020)

The Tax Court held that a taxpayer could not deduct alimony payments that were subject to a contingency involving a child. Because one of the contingencies for which the alimony payments would end involved a child turning 18, the payments labeled as alimony in the divorce decree were treated as nondeductible child support for tax purposes. Biddle v. Comm'r, T.C. Memo. 2020-39.

Background

Timothy Biddle and his former spouse were married for 14 years and had four children together before they officially dissolved their marriage in 2010. The divorce decree included provisions pertaining to "child support" and "alimony." Under the heading "child support," the decree ordered Biddle to pay his ex-spouse monthly child support of $1,795 starting April 19, 2010, and continuing each month until the happening of one of the following events: each child (1) reaches 18 years of age, (2) dies, (3) marries, (4) enters military school, or (5) becomes self-sufficient. Additionally, under the heading "alimony," the decree ordered Biddle to pay monthly "permanent periodic alimony" of $1,592 for at least five years beginning on the date of the final judgment and continuing until the occurrence of one of the following events: (1) the youngest child's 18th birthday, (2) the wife or husband's death, (3) the wife's remarriage at the five-year point or anytime thereafter, or (4) the wife becomes self-supporting.

On November 7, 2011, a circuit court issued an "Order Modifying Child Custody, Child Support, and Alimony" (modified decree). Because Biddle took custody of an additional child, the modified decree reduced his monthly child support payment from $1,795 to $408. Despite its title, the modified decree did not change the monthly designated alimony payment or the contingencies that would terminate those payments. Thus, as of November 7, 2011, Biddle's monthly payment to his ex-spouse totaled $2,000, $408 of which was designated as child support and $1,592 of which was designated as alimony.

On his 2015 federal income tax return, Biddle claimed an alimony deduction of $28,000, which the IRS disallowed. Biddle took his case to the Tax Court, where he argued that the deduction was proper because the payments were made pursuant to his obligation to pay "alimony" under the decree. He further contended that the amounts designated as alimony under the decree were deductible because the decree differentiated between alimony and child support.

Conversely, the IRS argued that Biddle's designated alimony payments were nondeductible child support payments because one of the contingencies that would terminate his alimony payments was his youngest child's 18th birthday.

Alimony Deduction

With respect to divorce instruments executed before January 1, 2019, Code Sec. 215(a) and (b) provides that taxpayers can deduct alimony paid during the tax year to the extent it is includible in the recipient spouse's gross income under Code Sec. 71(a). Whether a payment constitutes alimony is determined by reference to Code Sec. 71(b)(1), which defines "alimony" as any cash payment if: (1) the payment is received by a spouse under a divorce or separation instrument; (2) the divorce or separation instrument does not state that the payment is neither includible in gross income nor allowable as a deduction; (3) the payor and payee spouses are not members of the same household when the payment is made; and (4) the payment obligation terminates at the death of the payee spouse and there is no liability to make either a cash or a property payment as a substitute for the payment after the death of the payee spouse.

Code Sec. 71(c)(2), however, provides that the amount of any payment that is subject to contingencies involving a child must be considered payment made for the support of the child. Code Sec. 71(c)(2)(A) specifically lists a child attaining a specified age as an example of such a contingency.

Tax Court's Analysis

The court agreed with the IRS and held that Biddle could not deduct the alimony payments. In doing so, the court cited Code Sec. 71(c)(2) and its provision that the amount of any payment that is subject to "contingencies involving a child" must be considered payment made for the support of a child and the Code specifically lists a child attaining a specified age as an example of such a contingency.

In its decision in Hammond v. Commissioner, T.C. Memo. 1998-53, the court noted, it had previously decided that even if there are separately allocated child support payments, other monthly payments made pursuant to a judicial decree will still qualify as child support under Code Sec. 71 if the judicial decree contains an explicit contingency related to a child. In Hammond, the taxpayer made monthly payments pursuant to a divorce decree that stated that the payments would terminate on the earlier of the taxpayer's child's 18th birthday or the remarriage of the taxpayer's ex-wife. In addition to these monthly payments the taxpayer was obligated to make separately allocated, fixed payments for child support. The taxpayer in Hammond argued that because there was separately allocated child support, the monthly payments at issue were alimony. The Tax Court found no authority in support of the taxpayer's proposition and held that the amount of any payment that "will be reduced on the happening of a contingency relating to a child" is child support and not alimony regardless of the existence of a separate child support payment.

As in Hammond, the court said, the decree in Biddle's case clearly stated that the designated alimony payments would terminate on the contingency that Biddle's youngest child turns 18. The court observed that this was the exact contingency relating to a child that is listed as an example in Code Sec. 71(c)(2)(A) that would qualify a payment as child support. With this contingency, the court was compelled to characterize Biddle's designated alimony payments as child support.

Finally, the court rejected Biddle's argument that he and his ex-spouse never intended to make their youngest child's 18th birthday a contingency for the termination of the designated alimony payment. In defining alimony, the court noted, Code Sec. 71(b) does not list the parties' intent as a factor. Thus, the Tax Court said it could not rely on the intent of the parties in determining whether a payment should be characterized as alimony for federal income tax purposes.

For a discussion of the deductibility of alimony payments for divorce or separation instruments executed before 2019, see Parker Tax ¶14,220.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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