Finance court docket in short | Rojas vs Commissioner | Deduction of Alimony and Child Support below IRC Section 215 | Freeman’s legislation
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Tax Disputes: The week of July 18, 2022 to July 22, 2022
- Pettennude v. Come on, TC Memo. 2022-79 | July 18, 2022 | Buch, J. | DR. no. 636-21L
- Gonzalez v. Comm’r, TC Summary Opinion 2022-13 | July 18, 2022 | Panuthos, J. | dct. no 1548-19S
- Soler v. Comm’r, TC Memo. 2022-78 | July 18, 2022 | Miracle, J. | dct. No. 18639-19
- Thompson v. Commissioner, TC memo. 2022-80 | July 20, 2022 | Lauber | DR. 8792-20.
Rojas vs. Comm’r, TC Memo 2022-77 | July 18, 2022 | Thorntan, J. | dct. No. 7453-19
Short Summary: The Rojas married in ’95, separated in 2010 and finally divorced in 2012. The LA Superior Court issued a dissolution ruling that included child, spousal and family support. The amounts were $0, $0, and $4,500 per month, respectively. The benefits in the context of family maintenance with the proviso that the benefits are discontinued when a child is emancipated. Mr Rojas tried to apply for a reduction in payments, but the court denied his application because there was no child support and he did not grant power of attorney to amend an unamendable family support provision. In 2016, Rojas paid $69,888 in child support and sought a $69,880 deduction that the IRS would not allow.
Key Issues:
Whether the taxpayer can deduct payments made to his ex-spouse as alimony under Section 215 on the basis of a divorce decree?
Primary stocks:
The IRS denied the deduction because the taxpayer’s alimony was paid as child support despite the designation of family alimony. Child support payments are therefore not included in the gross income of the recipient. Therefore, the taxpayer may not make a corresponding deduction.
Key data of the law:
- 215 maintenance payments: Section 215(a) allows a deduction equal to any alimony or separate alimony paid during that individual’s tax year. These payments are defined in Section 71(b). § 215(b). In addition, deductions are permitted to the extent that the payments are attributable to the gross income of the recipient. ID.
- Section 71 Maintenance and Separation Maintenance Payments: In principle, maintenance payments are added to the gross income of the recipient. § 71(a). However, when payments are made for the children, the payments do not fall under the general inclusion rule. § 71(c). Specifically, if the Separation Instrument provides for reductions in the payment schedule that are contingent on an eventuality related to the child reaching a certain age, marriage, death, leaving school, or similar contingency, then the amount of the reduction will be deemed payments for the child support. § 71(c)(2)(A)-(B).
Mixed contingencies: When support payments are mixed with contingent events that reduce the burden of the payment plan, as here, Section 71(c)(2)(A) still applies. Biddle v. Comm’r, TC Memo 2020-39; Hammond v. Comm’r, TC memo. 1998-53; Fosberg v. Comm’r, TC memo. 1992-713.
Full Law of Faith and Credit: The taxpayer contended under 28 USC § 1738 that the tax court was barred from declaring the payments as child support because the LA Supreme Court had determined that such a payment did not exist. However, for federal tax purposes, federal law, not state law, governs the tax treatment of such payments. Bardwell v. Comm’r, 318 F.2d 786, 789 (10. Cir. 1963). Additionally, the court disagreed with the taxpayer’s characterization of California divorce law that the payments were declared as “support,” which is merely a term encompassing both spousal and child support under California law. The Finance Court expressly stated that its view was not based on the markings within the divorce certificate or any other court, but on the tax legislation.
Insights: Prior to TCJA, a taxpayer was generally allowed a deduction from alimony to the extent that receipt of such a payment is included in the recipient’s gross income. However, child support payments are tax neutral as there is no recognition event for the recipient and no corresponding deduction for the payer. Child support is specifically defined for federal tax purposes as a payment that is contingent on an event related to the child. State laws or labeling by other courts will not determine the day. Nor does the existence of any other unrelated contingency in the separation instrument affect the tax treatment of such payments. A careful reading of the provisions of Section 71 appears to indicate that if the parties enter into a ‘written separation agreement’, the tax treatment of the payments will be in accordance with that agreement. This is consistent with the notion that for federal tax purposes, federal law determines the tax status of payments. Thus, when spouses enter into a separate arrangement that does not affect government obligations but classifies the payments under a “written separation agreement,” a taxpayer can find relief on alimony payments that otherwise might not be granted. See treasures. Registration number. § 1.71-1(b)(2)(i)-(ii).
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