Daniel Rood, like half of married Americans, got divorced. As part of the divorce agreement, he was ordered to pay a “non-modifiable lump sum payment” of $300,000 to his former spouse, payable at the rate of $5,000 per month.
On his 2006 tax return, Rood deducted $60,000 in alimony payments. The IRS denied the deduction.
As a reminder, I.R.C. § 215 defines “alimony” through I.R.C. § 71 as any payment in cash if:
- Such payment is received by a spouse under a divorce or separation instrument;
- The divorce instrument doesn’t designate such payment as a payment which is not includible in gross income under I.R.C. § 71 and not allowable as a deduction under I.R.C. § 215;
- In the case of an individual legally separated from his spouse under a decree of divorce, the payee spouse and payor spouse cannot be 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.
In Rood, the first three factors were clearly satisfied; what remained, however, was the uncertainty surrounding the fourth factor. Was the non-modifiable nature of Rood’s required payments such that they would survive the death of his ex-wife and render the alimony payments nondeductible?
In holding that the alimony payments were nondeductible, the Tax Court looked to Florida state law and determined that the payments were intended to survive the death of Rood’s ex-wife:
Florida law is clear that the obligation to pay lump-sum alimony granted in a divorce decree does not terminate upon the death of the payee spouse. The MSA, the final judgment, and the income deduction order all order Mr. Rood to pay nonmodifiable lump-sum alimony to Ms. Wozniak. Accordingly, we find that the payments were for a definite sum and in the nature of a final property settlement and therefore were lump-sum alimony payments under Florida law–the payments would not terminate upon the death of Ms. Wozniak and are therefore nondeductible.
This reinforces the advice my father gave me on my wedding day. “Son, ” he said, “you’re making a huge mistake.” Smart guy, the old man is.