Contingency Found Related to Ex-Spouse and Not Child, Thus Payments Deductible as Tax Alimony

In the case of Wish v. Commissioner, TC Summary Opinion 2015-25 the taxpayer was paying funds to his former spouse as part of their divorce decree.  Not surprisingly the key question was how much of the payments made constituted deductible alimony under IRC §215 which, in turn, depends on whether the payments would be treated as alimony income by the recipient under IRC §71.

The payments in this case met the general requirement of IRC §71(b)(1) to be treated as alimony in that they:

·      The payments were made under a divorce or separation agreement;

·      The agreement did not provide that the payments were not to treated as gross income by the recipient spouse;

·      The parties were not members of the same household at the time the payments were made; and

·      The taxpayer had no liability to make any payments following the death of his ex-spouse.

Rather the issue revolved around the “deemed child support” provisions, specifically the requirements that a reduction related to a contingency related to a child will not be treated as alimony [IRC §71(c)(2)(A)]

In this case the taxpayer’s son, who had learning disabilities, had been homeschooled by the taxpayer’s ex-spouse while they were married.  The couple wanted the homeschooling to continue, but recognized that she would have to make certain financial sacrifices if she homeschooled their child since she would be unable to work full time.

In recognition of this the taxpayer agreed to pay his ex-spouse $3,800 a month through May of 2013.  However, should she stop homeschooling the child, the payment would be cut in half to $1,900 a month.  The taxpayer was also paying $1,200 a month that was specified to be child support.

While she began homeschooling the child, the taxpayer’s ex-spouse determined that she needed an increase in support if this was to continue and sought an increase in the payment.  When the taxpayer turned down the request and the court did not order increased payments, the taxpayer’s ex-spouse obtained full-time employment and the child was no longer home-schooled, but instead was sent to the local public school.

The IRS position was that the $1,900 potential reduction was not alimony, as it was subject to reduction for a contingency related to the child, a contingency the IRS pointed out had come to pass.

The Tax Court, however, agreed with the taxpayer that the contingency was not related to the child, but rather related to the ex-spouse’s willingness to continue the home-schooling program.  Her decision to cease the home schooling program and instead obtain full-time employment was thus a contingency related not to the child, but to the recipient spouse.

Since the payments otherwise met the requirements for alimony, the taxpayer was allowed the deduction for the amounts paid.