In Uncategorized on 02/14/2019 at 16:47

Not Free, But Deductible

Jeffrey Siegel and Sandra Siegel, 2019 T. C. Memo. 11, filed 2/14/19, have a Valentine’s Day story in reverse, as Jeff’s payment to loved-once and daughter’s 529 plan both avoid the slammer for Jeff and give Jeff and Sandra a $242K tax deduction.

IRS claims it’s a money judgment, not back alimony, that Jeff paid loved-once Belinda.

Jeff’s business went broke, and so did he. He owed beaucoup alimony to Belinda, and she and her attorneys were nowise loath to pursue Jeff, getting a money judgment in Nassau County Supreme.

Jeff didn’t pay, so five (count ‘em, five) years later Belinda finally cornered Jeff in Supreme Nassau. The judge offered Jeff the option of writing the aforesaid couple checks (hi, Judge Holmes), or being adjudged in contempt of that august tribunal and doing 150 (count ‘em, 150) days in the Nassau County Correctional Facility.

Jeff takes the expected option, and coughs up. And cash-basis Jeff takes the deduction for the whole $247K he paid that year (the $225K back alimony plus another $17K in current alimony he paid that year). Of course, Jeff’s divorce decree is pre-12/31/18, so the 2017 TCJA cold-storage treatment of alimony deductions plays no part here.

IRS first raises the deficiency ante, and then says it’s a money judgment, and therefore not alimony. Burden of proof not an issue, as no facts in dispute.

Lump-sum alimony payments generally retain their character as alimony. The earlier money judgment Belinda got specifically granted her judgment for a sum certain, bringing in our old friend Section 71(b)(1)(D) liability-after-death-of-payee-spouse.

But this one was to enforce the decree of the Court.

And Judge Colvin lays out NY law to show how this works. NY lawyers, pay attention.

“Respondent contends that the [contempt] order was (or should be treated as) a money judgment because FCA [NY Family Court Act], sec. 454(2)(a) (McKinney 2018) provides that the judge, upon a finding of failure by a party to comply with a lawful support order, ‘shall’ enter a money judgment under FCA sec. 460.” 2019 T. C. Memo. 11, at pp. 9-10.

But NY law goes further. It gives our judges the power to order either or both fines or imprisonment for those who fail to do what they’re told when it comes to alimony and child support.

The judgment was a chop for contempt of court, not for recompense to Belinda. But she gets the money, and Jeff gets the deduction.

For family lawyers with decrees post-12/31/18, put this one in the cold storage file, and examine 12/31/25.

Edited to add, 2/15/19: Judge Colvin has given family lawyers a tax-planning move that really deserves to be remembered. Note that Belinda (the loved-once) had gotten a money judgment against Jeff five (count ’em, five) years prior to the contempt order at issue in this case. If Jeff had paid up at any time post-judgment during those five years, and tried to take a Section 215 alimony deduction, he’d have foundered on Section 71(b)(1)(D), as if Belinda dies, the judgment is not extinguished by her death, but belongs to her personal representative. And this is the case even if Belinda is alive and well when Jeff pays.

But if Jeff waits until he’s haled before the judge, who orders him incarcerated for contempt unless he pays up, and asks for his checkbook and a Mont Blanc as the Corrections officers are robing him in orange, he gets the deduction.

Do we really want a tax system that rewards the deadbeat dads with a deduction if they stall long enough, where the law-abiding ones get Section 6662 chops if they pay up?




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