Rojas v. Comm’r, T.C. Memo 2022-77 | July 18, 2022 | Thorntan, J. | Dkt. No. 7453-19
Short Summary: The Rojas married in 95’, separated in 2010, and finally divorced in 2012. The L.A. Superior Court entered a judgment of dissolution containing child, spousal, and family support. The amounts were $0, $0, and $4,500 per month, respectively. The payments under family support provided that upon a child’s emancipation the payments shall cease. Mr. Rojas attempted to request relief in the payments, but the court rejected his request because no child support existed, and he provided no authority to modify a nonmodifiable family support provision. In 2016, Rojas paid $69,888 in alimony and claimed a deduction of $69,880, which the IRS disallowed.
Whether the taxpayers could deduct payments made to his ex-spouse made pursuant to a divorce decree as alimony under § 215?
The IRS disallowed the deduction because the taxpayer’s alimony payments were made as child support despite the label of family support. As such, child support payments are not includible in the recipient’s gross income. Therefore, the taxpayer may not take a corresponding deduction.
Key Points of Law:
- 215 Alimony Payments: Pursuant to §215(a), there shall be allowed as a deduction an amount equal to the alimony or separate maintenance payments paid during such individual’s taxable year. These payments are defined under § 71(b). § 215(b). Furthermore, the deductions are allowed to the extent the payments are includible in the recipient’s gross income. Id.
- 71 Alimony and Separation Maintenance Payments: The general rule is that alimony payments are includible in the recipient’s gross income. § 71(a). However, if payments are made for the children, then the payments fall outside the general rule of inclusion. § 71(c). Specifically, if the separation instrument provides for reductions in the payment schedule which are dependent upon a contingency related to the child attaining a certain age, marrying, dying, leaving school, or similar contingency, then the amount of the reduction is considered payments for child support. § 71(c)(2)(A)-(B).
Mixed Contingencies: As here, if the support payments mix contingent events which reduce the burden of the payment schedule, then § 71(c)(2)(A) still applies. Biddle v. Comm’r, T.C. Memo 2020-39; Hammond v. Comm’r, T.C. Memo. 1998-53; Fosberg v. Comm’r, T.C. Memo. 1992-713.
Full Faith and Credit Act: The taxpayer asserted, under 28 U.S.C. § 1738, that the Tax Court is precluded from declaring the payments as child support since the L.A. Superior Court stated no such payment existed. However, for federal tax purposes, federal law rather than state law governs the tax treatment of such payments. Bardwell v. Comm’r, 318 F.2d 786, 789 (10th Cir. 1963). Moreover, the court disagreed with the taxpayer’s characterization of California divorce law stating that the payments were declared “family support” which is merely a term to capture both spousal and child support under California law. The Tax Court expressly provided that its opinion does not rest on the labels within the divorce instrument or by another court, but rather the Internal Revenue Code.
Insights: Prior to TCJA, a taxpayer is generally allowed a deduction on alimony payments to the extent the receipt of such payment is includible in the gross income of the recipient. However, payments made for child support are tax neutral providing no recognition event for the recipient and no corresponding deduction for the payor. Child support payments, for federal tax purposes, is specifically defined as a payment contingent on an event related to the child. State law or other courts’ labeling will not rule the day. Nor will the presence of another contingency unrelated to the child in the separation instrument bear any effect on the tax treatment of such payments. A careful reading of the regulations of § 71 seem to provide that upon the execution of a ‘written separation agreement’ between the parties, the tax treatment of the payments is in accord with such agreement. This is consistent with idea that, for federal tax purposes, the federal law determines the tax status of the payments. Therefore, if spouses were to reach a separate agreement which has no bearing on any state obligation, but rather classifies the payments under a ‘written separation agreement,’ then a taxpayer may find relief for alimony payments that might otherwise provide none. See Treas. Reg. § 1.71-1(b)(2)(i)-(ii).
Have a question? Contact Jason Freeman, Freeman, Freeman Law.
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