In Uncategorized on 07/29/2014 at 17:33

It’s been a many-times-told tale, but payments in a divorce case by way of property settlements, whether or not actually so denominated, aren’t deductible.

Of course, the record in today’s illustration doesn’t make clear whether it was the divorce lawyer who advised taking the disallowed deduction. I do hope it wasn’t; I’ve beaten up enough on the family law bar.

However, by whomever they were advised, Joseph Peery and Dawn Shannon Chapel come seriously unglued in 2014 T. C. Memo. 151, filed 7/29/14, as Judge Ruwe lands them with an $18K deficiency plus a substantial understatement 20% chop.

Simple facts. Joe casts away his loved-once, Katrina H. Peery, and marries Dawn Shannon. As part of the casting away, Joe signs on to a certain separation agreement, which is incorporated into the divorce decree.

Said sep agreement provides, in pertinent part: “Paragraph 1 of the separation agreement sets forth certain items of ‘property’ that Ms. Peery ‘shall have as her own, free and clear of all claims of * * * [petitioner].’ As part of her property rights, subparagraph 1(I) of the separation agreement assigns to Ms. Peery ‘[a]n award of property settlement in the sum of $63,500.00, which amount shall be paid within thirty (30) days’….” 2014 T. C. Memo. 151, at p. 3.

Joe pays and tries to take the alimony deduction.

Judge Ruwe: “Section 71(b)(1)(B) provides that, in order to be considered deductible
alimony, ‘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′. Generally, property settlements incident to a divorce are not taxable events and do not give rise to deductions or recognizable income.” 2014 T. C. Memo. 151, at pp. 8-9. (Citations omitted, but there’s a bushelbasketful.).

Joe does get a $3K payment, because IRS raises the objection late and can’t show that it wasn’t spousal support.

Even so, there’s a substantial understatement and a 20% chop, as soon as the Rule 151 beancount is over.

And check out page 4 for some interesting scrivener’s errors in the separation agreement.


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