IRS Disqualifies Tax Deduction for Alimony Paid Until Child Finishes College

In Doolittle v. Commissioner, T.C. Summary Opinion 2012-103 (2012), a NON-precedential opinion of the U.S. Tax Court, the taxpayer settled his divorce by entering into a marital settlement agreement, in which he agreed to pay $900 per month alimony until December 31, 2010. The alimony was intended to “help with college costs,” according to the 2003 settlement agreement. The child of the taxpayer and  his former wife would be 23 years old on December 18, 2010.

At the same time, by court order, the taxpayer agreed to pay child support through December 31, 2010. (It is unclear whether the college-aged child was the only child, or the taxpayer agreed to pay excess child support for the college-aged child and a younger child.) The child support order contained a deviation from the guidelines so that the child “can be covered by child support through college and help with college costs.”

When the parties finalized their divorce in 2003, they agreed that the outstanding child support would be prepaid by a distribution from the taxpayer’s 401K retirement plan. The parties entered into a Qualified Domestic Relations Order, agreeing to distribute a lump sum to the taxpayer’s ex-wife in satisfaction of the child support obligation through December 31, 2010. The ex-wife was responsible for the tax consequences of the QDRO distribution.

When the taxpayer filed his 2008 federal income tax return, he claimed an alimony deduction of $10,800, which was equal to the $900 per month alimony he paid to his ex-wife that year. The IRS issued a deficiency notice and assessed penalties against the taxpayer for inaccuracy.

Citing the Internal Revenue Code section 71(c), the Tax Court affirmed the IRS’s disqualification of the taxpayer’s alimony deduction. “If any amount in the [divorce settlement] instrument will be reduced on the happening of a contingency relating to a child, such as reaching a specified age or leaving school, or reduced at a time associated with such a contingency, the reduced amount will be treated as a fixed amount payable for child support.” The Tax Court was not persuaded by the fact that there was a separate obligation for child support. The Tax Court excused the taxpayer from paying the penalty, however, because his inaccuracy was less than 10% of the tax due.

How this inaccuracy came to the attention of the IRS is unclear. Yet, it is a good reminder to us all that the IRS does enforce the law by disqualifying alimony that is reduced or terminated upon a contingency related to a child.