Finance courtroom briefly | Ibrahim vs Commissioner | Deduction of Alimony or Separation Alimony – Tax Authorities
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Summary: dr Jihad Y. Ibrahim (“Ibrahim”) and his wife Cheryl Edington (“Edington”) separated in 2016 and eventually divorced in 2017. As part of the separation agreement, which was approved by a state court during the divorce proceedings, Ibrahim agreed to pay Edington $50,000 to help her with her move and legal fees. The amount was payable in monthly installments, but the balance was payable in full at the time a final order was made. The marriage contracts and judgment each contained statements indicating that neither Ibrahim nor Edington would pay the other alimony. Ibrahim paid Cheryl $1,200 in 2016 and $48,800 in 2017. On his 2017 Form 1040, and pursuant to 26 USC § 215(a) (repealed), Ibrahim requested a $50,000 deduction for “alimony paid.” After reviewing this tax refund, the IRS denied the claimed $50,000 in alimony or the separate alimony deduction and imposed an accuracy-related penalty. Ibrahim questioned that resolve.
- Was the $50,000 paid, or any portion thereof, deductible by Ibrahim under Section 215(a) of the Internal Revenue Code?
- Were the marksmanship penalties against Ibrahim correctly assessed?
- The marriage contracts and court orders in place stated that neither Ibrahim nor Edington would pay the other alimony and therefore Ibrahim could not deduct the $50,000 for relocation and legal fees as alimony as defined on IRC and Ibrahim could not prove the payments in A total of $50,000 was paid pursuant to an “obligation to pay future statutory child support payments” as defined by state law.
- The IRS showed that he satisfied the requirements of Section 6751(b) for determining accuracy-related penalties and that Ibrahim “did not act in good faith or in good faith in seeking a deduction for child support when the contract, the amended contract and The judgment clearly stated that neither party to the divorce was entitled to receive maintenance from the other.
Key data of the law:
- Repealed 26 USC §§ 62(a)(1), 71 and 215. Congress vacated Sections 62(a)(10), 71 and 215 for any divorce or separation agreement entered into or modified after December 31, 2018. See IRS Topic #452 Alimony and Separate Maintenance. The marriage contracts in Ibrahim were unaffected by the repeal by Congress.
- As a general rule, the IRS’s determination of a taxpayer’s liability in a notice of deficiency is assumed to be correct, and the taxpayer bears the burden of proving that the determination is incorrect. Rule 142(a); Which v. Helvering, 290 US 111 , 115 (1933). Deductions are a matter of legal clemency and the taxpayer bears the burden of proving entitlement to a claimed deduction. Rule 142(a); INDOPCO, Inc. v. Commissioner, 503 US 79 , 84 (1992); New Colonial Ice Co. v. Helvering, 292 US 435, 440 (1934). The burden of proof may be shifted to the IRS when the taxpayer has presented credible evidence regarding issues of fact relevant to determining the taxpayer’s tax liability. 26 USC § 7491(a)(1)-(2).
- maintenance deduction. In general, when a taxpayer pays alimony or separate alimony payments under section 71(b), the taxpayer can deduct those payments from gross income if the amounts can be included in the gross income of the recipient under section 71. IRC §§ 62(a)(10), 215(a) and (b).
- Definition of alimony for deduction purposes.
“Alimony or separate alimony” is defined as cash payments that meet each of the following four requirements: (A) the payment is received from a spouse pursuant to a certificate of divorce or separation; (B) the certificate of divorce or separation does not designate the payment as a payment not to be included in gross income under section 71 and not allowable as a deduction under section 215; (C) in the case of a person legally separated from their spouse by virtue of a divorce decree or a separate maintenance decree, the payee’s spouse and the payer’s spouse are not members of the same household at the time of the payment; and (D) there is no obligation to make the payment for any period after the death of the payee’s spouse and there is no obligation to make any payment (in cash or in kind) in lieu of such payments after the death of the payee spouse. IRC §§ 71(b), 215(b); Okerson v. Commissioner, 123 TC 258, 263-64 (2004).
- In order to satisfy requirement (B), it is not necessary for the divorce deed to use the precise statute text of Sections 71 and 215. Rather, these requirements are generally met when there is no “clear, express and express direction” in the divorce that the payment is not to be treated as alimony or separate alimony. Proctor v Commissioner, 129 TC 92, 96 (2007).
- In order to satisfy condition (D), the payer must not be obligated to make any such payment or any surrogate payment upon the death of the payee’s spouse. This is determined by evaluating the termination provisions in the applicable divorce deed or, if the deed does not address the issue, by evaluating state law. When state law is ambiguous regarding the termination of payments upon the death of the payee, the tax court will look solely to the divorce decree to determine whether the payments would cease upon the death of the payee. Logue vs. Commissioner, TC memo. 2017-234, at *8-9. A taxpayer may rely on state law to comply with Section 71(b)(1)(D). See Johanson v. Commissioner, 541 F.3d 973, 976-77 (9. Cir. 2008), ff’gC. Memo. 2006-105; Kean v. Commissioner, 407 F.3d 186, 191 (3. Cir. 2005), ff’g TC Memo. 2003-163.
- Accuracy Penalties and Burdens of Proof. Section 6662(a) and (b)(2) imposes a penalty of 20% of a portion of a tax underpayment that must be accounted for on a statement that results from a material income tax understatement. An understatement is “significant” if it exceeds the higher of 10% of the tax reported on the tax return for the tax year or $5,000. IRC § 6662(d)(1)(A). The IRS bears the burden of proof regarding penalties asserted against an individual. See ID. at § 7491(c); Higbee v. Commissioner, 116 TC 438, 446-47 (2001). The initial production burden of the IRS under Section 7491(c) includes providing evidence of compliance with the procedural requirements of Section 6751(b). Frost vs. Commissioner, 154 TC 23, 34 (2020). After the IRS satisfies this initial burden, the taxpayer must present evidence to the contrary. See alsoR.C. § 7491(c); Graev v. Commissioner, 149 TC 485, 492-93 (2017), supplementing and partially repealing 147 TC 460 (2016). Once the IRS meets its production burden, the taxpayer bears the burden of proving that the IRS’s finding is incorrect. Higbee, 116TC at 446-47.
- No penalty will be imposed unless “the initial decision” of the assessment was “approved personally (in writing) by the immediate supervisor of the person making that decision.” IRC § 6751(b)(1).
- Reasonable reason and good faith. A taxpayer can avoid a Section 6662(a) penalty by showing that there was a valid reason for the underpayment and that the taxpayer acted in good faith. 26 U.S.C. § 6664(c)(1). The determination of whether a taxpayer acted with good reason and in good faith is made on a case-by-case basis by considering all relevant facts and circumstances, including the taxpayer’s efforts to assess proper tax liability and the taxpayer’s knowledge, experience and education. Registration number. § 1.6664-4(b)(1). The taxpayer bears the burden of proving that the underpayment was due to a valid reason or that some other exception to the imposition of the penalty applies. Higbee, 116 TC at 446.
- Relying on the authority for the tax position. When a taxpayer relies on authority for a particular tax position, the taxpayer must demonstrate that the weight of the authorities supporting treatment of an item on the tax return is significant relative to the weight of the authorities supporting opposing treatment . Antonides v. Commissioner, 91 TC 686, 702 (1988), aff’d, 893 F.2d 656 (4th circle 1990); treasures. Registration number. § 1.6662-4(d)(3)(i).
Insights: Congress vacated Sections 62(a)(10), 71 and 215 for any divorce or separation agreement entered into or modified after December 31, 2018. For divorce or separation agreements not affected by the annulment, and before claiming a deduction on what is considered maintenance, a taxpayer should carefully review all applicable divorce decrees and separation agreements to ensure that all four requirements of IRC §§ 71 (b) and 215(b) are met.
The content of this article is intended to provide a general guide to the topic. In relation to your specific circumstances, you should seek advice from a specialist.
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