When it comes to taxes, the formality and complexity of the Tax Code can lead some taxpayers to believe that compliance is always complicated. But sometimes it can be simple enough.
In a recent case in the tax court, taxpayers opted for a simple rule, but the Internal Revenue Service insisted on a more complicated one. However, the tax court ruled that the taxpayer only has to meet the basic requirements of the law and nothing more.
The taxpayer, who served on active duty with 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 taxpayer proposed support payments of $ 2,000 per month for 2015.
The manual states, “Preferably, the level of assistance given to family members should be determined by a written agreement between the parties or decided in civil courts.” The manual also requires Marines to have a court order, written agreement, or standards Comply with the preliminary financial assistance set out 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.
- Allowance for two family members, such as a spouse and child, is two-thirds of the Navy’s basic monthly housing allowance, or $ 572 per month.
Failure to comply with the orders constitutes a violation of the Uniform Code of Military Justice and has detrimental consequences.
The basic housing allowance in 2015 was $ 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 Allowance Directive as the basis for calculating these alimony payments.
When the taxpayer submitted his Form 1040, US Individual Income Tax Return, for 2015, he requested a deduction of $ 24,000 for alimony paid. The IRS denied the deduction, arguing that none of the amounts paid in 2015 qualify as alimony.
To qualify as alimony for 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 deed of divorce or separation and in cash or cash equivalent such as a check or money order;
- The maintenance obligation cannot be voluntary and you cannot have any obligation to pay after the death of your spouse or ex-spouse;
- The payments may not be child benefit; and
- The divorce or separation instrument must not say that the payments are not maintenance payments.
Pursuant to Section 71 (b) (2), the term “deed of divorce or separation” means a divorce decree or separation of alimony or a written deed relating to such judgment, a written separation agreement, or an order requiring a spouse to make payments for the maintenance of the other spouse.
Meeting of the 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 show a “meeting of minds”. From a legal point of view, a meeting of opinions means that both parties have reached the same agreement. The IRS wanted to see something more formal.
The challenge is that you will not find a definition of “written separation agreement” in the tax code, ordinances or legislative history. However, there is case law that provides guidance, including having a valid written separation agreement when one spouse agrees in writing to a written proposal in support of the other spouse. In addition, according to case law, “a clear, written statement by the parties specifying the terms 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 is sufficient to meet the criteria for deductible alimony. And, as the court found, the taxpayer followed suit, paying two-thirds of his basic housing allowance to his ex-spouse. The taxpayer did not need to submit anything more formal.
If the taxpayer had no children, he would have had to pay half of his basic housing allowance according to the formula. For 2015, that would be $ 1,485 per month ($ 17,820 per year).
That means, the court argued, the taxpayer paid $ 1,485 in maintenance every month, for a total of $ 17,820. In fact, he paid $ 24,000 – but that amount was based on the additional support allowance for his child under the formula; the surplus was a mixture of child support and voluntary payments.
Of course, that has changed since 2015. According to the Tax Act 2017, maintenance is not deductible for new contracts that were concluded on or after January 1st, 2019. This also means that it is not taxable for the recipient. However, if you have an older contract, the tax treatment will remain unchanged unless you change the contract after January 1, 2019 by explicit reference to the law.
The case was held 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, a small tax ruling under Section 7463 (b) cannot be reviewed by any other court, and the opinion cannot be treated as a precedent. However, the underlying cases and laws cited in the case remain important guidelines for determining the deductibility of alimony payments.
The case is Winslow v. Comm’r, TC, No. 2020-22, 08/03/20.
This is a weekly column by Kelly Phillips heir, the TaxGirl. Erb provides commentary on the latest tax law, tax law, and tax policy news. Every week, find Erb’s Bloomberg Tax column and follow her on Twitter at @taxgirl.