English Law Used to Determine if Payments Would Cease on Death of Payee

The basic question the Court had to decide in the case of Wolens v. Commissioner, TC Memo 2017-236 seemed to be one often encountered in alimony court cases.  Did the payment stream in question stop upon the death of the recipient spouse?  Answering that question in the affirmative would satisfy one of four initial requirements for a payment stream to be treated as alimony for tax purposes.

As has often been true in previous cases, the divorce document did not specifically address whether these payments would continue after the death of the recipient.  And, as happens in those cases, the Court next looks to the relevant governing law (referred to in the cases as “state’ law) to determine if the underlying law would cause the payment stream to stop.

But in this case, while the marriage took place in the state of New York, the divorce was granted in England.  The taxpayer argued that because it was a New York marriage and he and his ex-wife remained domiciled in New York, that New York law should govern interpreting the agreement.  And, as well, the prior court cases referred to “state law” so that would mean England, not being a state of the United States, would be ignored as a potential source of governing law.

However, the Tax Court did not see things that way.

The Court first determined that New York law was not relevant in this case.  As the opinion notes:

  1. Although the parties dispute domicile, neither party is challenging the validity of the divorce. We, therefore, conclude that the law of the marital [*7] domicile is not the law that we must interpret.4 Section 71 requires us to interpret the divorce order. See Rood v. Commissioner, slip op. at 9-10. The divorce order was issued under English law, as petitioner acknowledged. We, therefore, will apply English law to determine the rights and obligations created by the English court's order. Kean v. Commissioner, 407 F.3d 186, 191 (3d Cir. 2005) (applying New Jersey law to conclude that “[a] support order issued pendente lite in a New Jersey divorce proceeding does not survive the death of the payee”), aff'g T.C. Memo. 2003-163; see also Lovejoy v. Commissioner, 293 F.3d 1208, 1210 (10th Cir. 2002) (applying Colorado law to payments made pursuant to a divorce made under Colorado law), aff'g Miller v. Commissioner, T.C. Memo. 1999-273; Hoover v. Commissioner, 102 F.3d at 847 (applying Ohio law to payments made pursuant to a divorce made under Ohio law); Muniz v. Commissioner, T.C. Memo. 2015-125 (applying Florida law to payments made pursuant to a divorce under Florida law), aff'd, 661 F. App'x 1027 (11th Cir. [*8] 2016); Hampers v. Commissioner, T.C. Memo. 2015-27 (applying New Hampshire law to payments made pursuant to a divorce under New Hampshire law); Leventhal v. Commissioner, T.C. Memo. 2000-92 (applying New York law to a separation agreement made pursuant to a divorce under New York law); Human v. Commissioner, T.C. Memo. 1998-106 (applying Georgia law to payments made pursuant to a divorce under Georgia law).

But what about the “state law” question—England is not a state of the United States, so doesn’t that remove English law as a possible source to resolve this matter?  The Tax Court pointed out this question has been answered before—and not in the way the taxpayer wishes.

We also reject petitioner's contention that the “State law” referred to in our analysis of section 71(b)(1)(D) means the law of one of the fifty States. We previously applied the law of a foreign country in determining the taxability of rights created by a divorce decree granted under the laws of that country. In Parsons v. Commissioner, 44 B.T.A. 1142, 1146, 1151 (1941), we applied Latvian law in determining whether trust income paid to the taxpayer's ex-wife discharged a legal obligation for the taxpayer to provide support for his ex-wife under a Latvian divorce decree. In Reighley v. Commissioner, 17 T.C. 344, 352-353 (1951), we applied German law in determining whether payments made pursuant to a German annulment were alimony. Because the divorce order was issued under English law, we must determine whether petitioner's obligation to make the 2009 payment would have terminated upon the death of petitioner's ex-wife under English law.

The Tax Court, looking at the agreement in question, found that English courts had ruled that the type of payment agreed to by the parties would not terminate upon the death of the recipient spouse.  Since that is one of the four initial requirements for a payment stream to be treated as tax alimony, the deduction claimed for alimony was disallowed.