At first glance the payments made by the taxpayer in the case of Quintal v. Commissioner, TC Summary Opinion 2017-3 would appear to be deductible alimony—but last minute changes made to the divorce documents would end up changing the nature of the payments in the view of the Court.
To be deductible alimony a series of cash payments must meet the following initial criteria:
- Such payment is received by (or on behalf of) a spouse under a divorce or separation instrument,
- The divorce or separation instrument does not designate such payment as a payment which is not includible in gross income under this section and not allowable as a deduction under section 215,
- In the case of an individual legally separated from his spouse under a decree of divorce or of separate maintenance, the payee spouse and the payor spouse are not members of the same household at the time such payment is made, and
- There is no liability to make any such payment for any period after the death of the payee spouse and there is no liability to make any payment (in cash or property) as a substitute for such payments after the death of the payee spouse. [IRC §71(b)(1)]
If the payments meet this criteria they must also not be found to be child support, either by explicitly providing amounts payable for the support of the child/children [IRC §71(c)(1)] or having the payments reduced on the happening of:
- A contingency specified in the instrument relating to a child (such as attaining a specified age, marrying, dying, leaving school, or a similar contingency), or
- At a time which can clearly be associated with a contingency of a kind specified above. [IRC §71(c)(2)]
Mr. Quintal and his former spouse had entered into last minute negotiations in their divorce just before the agreement was signed, making major changes to many exhibits. In one case entire paragraphs of an exhibit were lined through with handwritten statements replacing the deleted items.
The resulting document was, to say the least, not a model of consistency and the rushed nature of the document showed in various ways—including a statement in one exhibit that directed the reader to a special definition of “unemancipated” to be found in the exhibit—except that there was no such definition (it did pop in a totally different exhibit).
Exhibit B was originally titled “Alimony” but was revised to be titled “Unallocated Support.” Despite that change the text continue to indicate that the payments were designed to be deductible alimony to Mr. Quintal.
As the opinion notes:
Exhibit B stated in part that petitioner would “pay to * * * [Ms. Gramlich-Quintal] the sum of $900.00 per week commencing forthwith by implemented wage assignment. (See Exhibit J)” and that “[a]ny alimony payments shall terminate” upon the earlier of the death of petitioner or Ms. Gramlich-Quintal or the latter’s remarriage. Exhibit B further stated that the parties “acknowledge that husband anticipates that the above payment is deductible to him and includable to wife”.
Changes were also made to the section of the agreement dealing with child support. The Court continues:
Exhibit J was titled “CUSTODY, SUPPORT, VISITATION”. Although exhibit J originally referred to petitioner’s obligation to make child support payments, that statement was lined through and was replaced with the phrase “See Exhibit B implemented wage assignment forthwith.” Exhibit J included a statement acknowledging that, as a result of disabilities, two of the couple’s children might never become self-sufficient or emancipated and defined the term “emancipation” of the minor children generally as occurring on the child’s death, marriage, entering into military service, or graduation from high school or a four-year college program.
Exhibit J also contained the following statement:
In accordance with Section 71(b)(1)(B) of the Code, the Husband and Wife expressly agree to designate and hereby do designate all payments required in this Exhibit as excludable and non-deductible payments for purposes of Sections 71 and 215 of the Code, respectively.
The IRS pointed to the above statement, arguing that a proper reading of the revised agreement finds that Exhibit J refers to the payments specified in Exhibit B, and that Exhibit J’s language makes the payments not deductible as alimony.
The taxpayer disagrees, as the Court summarized:
Petitioner relies on exhibit B of the separation agreement, which expressly provides for “unallocated support” payments, as opposed to alimony or child support payments. Noting that exhibit J does not expressly require any form of payment, petitioner avers that the statement in exhibit J that respondent relies upon is not relevant to the question whether the disputed payments constitute alimony. Petitioner further asserts that the parties’ last-minute negotiations and revisions to the separation agreement were intended to ensure that the disputed payments would be treated as alimony for purposes of sections 71 and 215.
The Tax Court first holds that the issue of the parties intent is no longer relevant, noting:
As an initial matter, we reject petitioner’s contention that we should evaluate his and Ms. Gramlich-Quintal’s intent regarding the characterization of the disputed payments. As we have explained in the past: “Congress eliminated any consideration of intent in determining the deductibility of a payment as alimony in favor of a more straightforward, objective test that rests entirely on the fulfillment of explicit requirements set forth in section 71.” See Okerson v. Commissioner, 123 T.C. 258, 264-265 (2004) (citing Hoover v. Commissioner, 102 F.3d 842, 844-845 (6th Cir. 1996), aff’g T.C. Memo. 1995-183).
Rather the decision rests on interpreting the document as written:
Under the circumstances, we focus on the requirement in section 71(b)(1)(B) that the settlement agreement not state that the payment is neither includible in gross income nor allowable as a deduction. We acknowledge, as petitioner contends, that exhibit J does not expressly require any payment or otherwise fix an amount to be paid as alimony or child support. Petitioner’s narrow focus on this aspect of exhibit J, however, gives no effect to the cross-references in exhibits B and J. As we see it, a proper consideration of the separation agreement requires a construction of the document as a whole, including the exhibits and the cross-references within the exhibits. “Where a separation agreement sets the parties’ support obligations, the language of the contract, if plain and unambiguous, must be construed in accordance with its ordinary and usual sense.” Shaw v. Turcotte, 922 N.E.2d 179, 2010 WL 565388, at *2 (Mass. App. Ct. 2010) (quoting Larson v. Larson, 28 Mass. App. Ct. 338, 340 (1990)).
Reading the separation agreement as a whole, we conclude that exhibits B and J must be read in tandem and that the unallocated support payments prescribed in exhibit B are subject to the provisions of both that exhibit and exhibit J. In this regard, the handwritten revisions to the settlement agreement were poorly conceived. Specifically, although exhibit B was revised to state that the parties “acknowledge that husband anticipates that the above [unallocated support] payment is deductible to him and includable to wife” (emphasis added), exhibit J states more definitively: “In accordance with Section 71(b)(1)(B) of the Code, the Husband and Wife expressly agree to designate and hereby do designate all payments required in this Exhibit as excludable and non-deductible payments for purposes of Sections 71 and 215 of the Code, respectively.” We conclude that the latter, more definitive statement controls in this case. Because the settlement agreement provides that the unallocated support payments are excludable from income and not allowable as deductions, it follows that the payments do not satisfy the definition of alimony under section 71(b)(1)(B).