When it comes to taxes, the formality and complexity of tax laws can lead some taxpayers to believe that compliance is always complicated. But sometimes it can be simple enough.
In a recent Revenue Court case, taxpayers opted for a simple rule, but the Internal Revenue Service insisted on a more complicated one. However, the tax court ruled that taxpayers only need to meet the basic requirements of the law and nothing more.
The taxpayer, who served on active duty in the U.S. Marine Corps, was married to his ex-spouse on June 11, 2009. They had one child during their marriage and then separated on November 4, 2014.
After consulting with the Marine Corps Manual Family Support Policy, the 2015 taxpayer proposed support payments of $ 2,000 per month.
The manual states, “Preferably, the level of support for family members should be determined by a written agreement between the parties or decided in civil courts.” The manual also requires that Marines issue a court order, written agreement, or interim standards for the Comply with financial assistance in Section 15004.
This paragraph provides a formula for determining the amount of financial assistance a Marine should pay:
- If the Navy only supports one family member, the support is half the housing allowance, or $ 350 per month.
- Support for two family members, such as a spouse and child, is more than two-thirds of the Navy’s basic monthly housing allowance, or $ 572 per month.
Failure to follow instructions is a violation of the Uniform Code of Military Justice and has adverse consequences.
The basic housing allowance in 2015 was USD 2,970 per month. Two thirds of that amount is $ 1,980. Under the policy, the petitioner had to pay $ 1,980 per month, which he rounded up to $ 2,000 for simplicity.
According to an email exchange between the taxpayer and his ex-spouse, they both accepted the family support policy as the basis for calculating these support payments.
When the taxpayer filed his US Individual Income Tax Return (Form 1040) for 2015, he requested a deduction of $ 24,000 for alimony. The IRS denied the deduction on the grounds that none of the amounts paid in 2015 qualified as alimony.
To qualify as alimony for the purposes of a federal income tax deduction under Section 71 of the Tax Code:
- You must be divorced or under a separation order.
- Maintenance payments must be made to or on behalf of a spouse or ex-spouse under a divorce or separation instrument and in cash or cash equivalent such as a check or money order.
- The maintenance obligation cannot be voluntary and you cannot be required to pay after the death of your spouse or ex-spouse.
- The payments may not be child benefit; and
- The instrument of divorce or separation must not state that the payments are not maintenance payments.
According to Section 71 (b) (2), the term “instrument of divorce or separation” means a divorce or maintenance decree or a written instrument subject to such a decree, a written separation agreement or a decree obliging a spouse to pay for the Support or maintenance of the other spouse.
Meeting of heads
The IRS argued that the taxpayer and his ex-spouse did not have a written separation agreement and that the exchange of emails did not reveal a “meeting of the ghosts”. For legal reasons, a meeting of the spirits means that both parties have reached the same understanding. The IRS wanted to see something more formal.
The challenge is you won’t find a definition of “written separation agreement” in tax law, regulations, or legislative history. However, there is case law that offers guidance, including the fact that there is a valid written separation agreement in which one spouse agrees in writing to a written proposal for assistance from the other spouse. In addition, according to case law, “a clear written statement by the parties specifying the terms and conditions agreed by the parties does not need to be approved by a court”.
The tax court found that the email exchange between the taxpayer and his ex-spouse was sufficient to qualify for deductible alimony. And the court found that the taxpayer had paid two-thirds of his basic housing allowance to his ex-spouse. The taxpayer didn’t have to show anything more formal.
According to the formula, if the taxpayer had not had any children, he would have had to pay half of his basic housing allowance. For 2015 that would have been $ 1,485 per month ($ 17,820 per year).
The court justified this by saying that the taxpayer paid $ 1,485 per month in maintenance for a total of $ 17,820. He actually paid $ 24,000 – but that amount was based on the additional support allowance for his child according to the formula; The surplus was a mixture of child support and voluntary payments.
Of course, things have changed since 2015. Under the Tax Act 2017, maintenance is non-deductible under new agreements signed on or after January 1, 2019. This also means that it is not taxable for the recipient. However, if you have an older agreement, the tax treatment will remain unchanged unless you change the agreement after January 1, 2019 by explicitly referring to the law.
The case was negotiated as a “minor tax case,” which means the amount in dispute is $ 50,000 or less. While the rules of the tax court are the same for all taxpayers, under Section 7463 (b), a decision on a small tax case cannot be reviewed by any other court, and the opinion may not be treated as a precedent. However, the underlying cases and statutes cited in the present case remain important guidelines for determining the deductibility of maintenance.
The case is Winslow v Comm’r, TC, No. 2020-22, 8/3/20.
This is a weekly column by Kelly Phillips heir, the TaxGirl. Erb provides commentary on the latest tax news, tax law, and tax policy. Every week, find Erb’s Bloomberg Tax column and follow her on Twitter at @taxgirl.