Page 63 - Family Law Services

• After the agreement (for permanent support) has been entered, the spouses or former spouses
may no longer be members of the same household.

• The payment must not be designated as child support.

Several different definitions of alimony exist, including the requirements described previously in the
IRC, state jurisdictional definitions, and even in the Bankruptcy Code.

The CPA should ensure that the provisions contained in the legal documents include the language re-
quired to achieve the parties desired tax result. Even when a document is silent regarding an issue, such
as termination of alimony upon the death of the recipient, the CPA should understand the provisions of
state law that may be imposed.

To resolve tax disputes between the IRS and the former spouses, the U.S. Tax Court and federal district
courts frequently look to the state’s family laws to determine the attributes of the payments and their de-
ductibility by the payor spouse and whether the payment should be included in the taxable income of the
recipient spouse.

Pendente lite, or temporary support, is another area of potential controversy between the parties and the
IRS. This is support ordered to be paid during the pendency of the litigation. Frequently, when children
are involved, the court will order "family support" or "unallocated support." Whether these payments are
deductible depends on the facts and circumstances of the case, state law, and the drafting of the order. If
the court does not specifically allocate the payments as either alimony or child support, the CPA and the
client’s counsel must determine the qualification of the payments as alimony or child support under state
law and the facts and circumstances of the case applied to the alimony requirements cited previously.
For reference, the CPA may consider reviewing prior federal court cases, including, among others, Mil-
ler v. Commissioner, T.C. Memo 1999-273; Kean v. Commissioner, 407 F.3d 186 (3d Cir. 2005); and
Lawton v. Commissioner, T.C. Memo 1999-243.

Recapture

Before the enactment of the Tax Reform Act of 1986 (the act), it was common for separation agreements
to significantly front-load alimony payments to achieve tax savings for what was really designed to be
equitable distribution (property division) payments. The higher top tax brackets and the number of inter-
vening brackets that existed prior to the act’s introduction enhanced the benefits that taxpayers received
from these disguised payments. To reduce these benefits, Congress included two specific provisions in
the act. The first requires deductible spousal support to terminate upon the recipient’s death. This provi-
sion is intended to prevent the recipient from bequeathing any property portion of support to his or her
heirs. The second implemented the alimony recapture rules.

Only payments made after a final divorce or separation agreement is entered into are considered subject
to recapture, meaning payments under temporary or pendente lite agreements are not considered. The
recapture rules require the payor of the alimony to include as income in the third postdivorce calendar
year an amount computed by applying a formula specified in the IRC. The alimony recipient receives an
offsetting deduction in the same year. The rules require the recapture to occur if the amount of spousal
support is reduced by more than $15,000 per year in any of the first three calendar years it is paid. Con-
sider the following:

• The first step in calculating any recapture is to subtract the sum of the third-year payments plus
$15,000 from the second-year payments. This amount cannot be less than zero for purposes of

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