Tax Court Denies Petitioner Alimony Deduction, Implications for Family Law Practitioners – Los Angeles Income Tax Planning & Income Tax Litigation Attorney Bruce Givner

by Bruce Givner on July 12, 2014

In the case of Roscoe Jerome McNealy and Leanna Yvonne McNealy v. Commissioner of Internal Revenue, the US Tax Court recently issued a summary opinion which granted the commissioner’s motion for summary judgment and denied the McNealy’s alimony deduction claimed on their 2009 federal income tax return.

The case involves the McNealys who, when filing their 2009 taxes, claimed a $40,000 alimony deduction under Internal Revenue Code 215 for an equalization payment made by Roscoe to Leanna under the provisions of their marital settlement agreement. The equalization payment was made to effect the equitable division of marital assets, and the agreement was then incorporated into the final judgment of dissolution of marriage and entered by the court.

After the commissioner disallowed the McNealys alimony deduction, the couple challenged the decision. However, the court held that the equalization payment was not deductible due to the fact that property settlement transfers, such as the McNealy’s equalization payment, are not taxed under IRC Section 1041. For the paying spouse to qualify for the deduction, the payment must be “includible in the gross income of the recipient under section 71.” To be includible, the payment must meet all four of the requirements listed in Section 71.

The four requirements listed in Section 71 are: (A) the payment is received by (or on behalf of) a spouse under a divorce or separation agreement; (B) the divorce or separation agreement does not designate the payment as a payment which is not includible in gross income and not allowable as a deduction under section 215; (C) the payee and payor spouses are not members of the same household at the time such payment is made; and (D) there is no liability to make any payment for any period after the death of the payee.

According to the Court, the McNealy’s agreement failed to meet the criteria for deductibility as alimony. Although the agreement satisfied parts (A) and (C), it did not satisfy parts (B) and (D). Also, Roscoe’s obligation to make the equalization payment would still have been required in the event of Leanna’s death. Therefore, although the McNealy’s argued that they relied upon both the verbal advice of an IRS employee as well as the IRS Publication 504 “Divorced or Separated Individuals”, the Court was not persuaded.

Family law practitioners should take special note of this case and its implications for drafting marital settlement agreements. Practitioners should review all their marital settlement agreement templates to make sure that spousal support and equalization payment provisions which conform to the requirements at issue in McNealy are included.

Givner & Kaye focuses on sophisticated income tax planning and compliance, tax litigation and procedure, estate planning, and asset protection plans for individuals and businesses in Beverly Hills, Calabasas, West Los Angeles, Hollywood, and other areas of Los Angeles, Orange, Ventura, San Bernardino, Riverside and Santa Barbara Counties. Call Los Angeles Estate Planning and Asset Protection Plan Attorneys Givner & Kaye at (310) 207-8008 today.

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