In Uncategorized on 01/23/2014 at 20:42

See my blogpost “The Fix Isn’t In”, 3/11/13. One way to make alimony not to be includible gross income to the payee is to have the divorce decree or separation agreement fix (in terms of an amount of money or a part of the payment) as a sum which is payable for the support or children of the payor spouse. That’s straight out of Section 71(c)(1), and it’s what saved Brendon James DeLong in my blogpost abovecited.

And it torpedoes Wendy P. Trebat F.K.A. Wendy P. Pellegrini, in an off-the-bench opinion from Judge Kerrigan, Docket No. 28736-12S, filed 1/23/14.

Although this is a small-claimer and can’t be cited, the reasoning may be useful to the practitioner.

When Wendy cut the tie that bound her to Edward, the Marital Settlement provided Edward would pay Wendy “‘unallocated maintenance’ of $4,500 per month, which would be reduced to $2,250…, and would cease [on a date certain]…. These payments would cease upon the death or remarriage of petitioner or upon petitioner’s cohabitation with another person. The Marital Settlement Agreement further stated: ‘The sums paid by Edward to [petitioner] pursuant to this paragraph *** are acknowledged to be paid incident to Edward’s legal obligation to support Wendy. Said sums shall be includable in the gross income of Wendy and deductible from the gross income of Edward for the purpose of federal *** taxation within the meaning and intendment of Sections 71 and 215 of the 20 United States Internal Revenue Code’.” Order, at p. 5.

Edward’s attorney was on the ball, but about a year later, the deal was modified. The original deal was “set aside and held for naught”. Order, at pp. 5-6. The new deal was a straight unallocated $4,500 per month for seven years, no phaseouts and no fixing, and no word about tax consequences or incidents.

Wendy went to a preparer recommended to her, who worked for “a national firm”, Order, at p. 6. No word about the preparer’s qualifications, whether Wendy told the preparer the whole story, and whether Wendy thought the whole thing was too good to be true. In any case, she reported none of the cash Edward gave her in either of the two years at issue.

IRS hits Wendy with a SNOD, claiming the 20% accuracy hit for both years, but concedes one of them.

Wendy claims it was all child support (she and Edward had two little Pellegrinis). But the cutoff of payments isn’t related to either child coming of age, leaving school or anything else. And the payments remained unallocated.

Judge Kerrigan slides over the termination-at-death provision of Section 71(a), but Edward’s deduction isn’t at issue. Whether or not Edward gets the deduction, it’s still gross income to Wendy.

No fix, no exclusion.

But Wendy’s paid preparer rescues her from the second of the 20% chops IRS wants to give her. “Petitioner contends that the payments were for support of her minor children. She did not believe the payments were alimony; and she believed that the payments were related to her children graduating from high school. Petitioner hired a tax preparer who had a good reputation in the community. Petitioner had reasonable cause and acted in good faith. We hold that petitioner is not liable for the accuracy-related penalty….” Order, at p. 11.

Compare and contrast Judge Kerrigan giving Wendy a bye with STJ Daniel A. (“Yuda”) Guy laying a blast on Mark Anthony Rael, who likewise used a preparer from a national firm, but got the chop. See my blogpost “It Depends”, 10/22/13.

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