I don't understand this case...


M

MTW

Just when I thought I understood how divorces and alimony
were supposed to work, along came the case of Dato-Nodurft
vs. Commish, TC Memo 2004-119.

Things I don't get:

1) This case required support payments to be treated as
"alimony" for tax purposes even though the related written
agreement did NOT appear to terminate the marriage.

2) The quoted portions of the written agreement did NOT
explicitly state that the payments were to stop in the event
of death.

3) The wife in this case "filed a separate return for 2000,
claiming single rates," even though the divorce wasn't final
until 2001. SINGLE rates???

Can anyone explain this ??? <g>

MTW
 
P

Peter C. Gatto, CPA

MTW said:
Just when I thought I understood how divorces and alimony
were supposed to work, along came the case of Dato-Nodurft
vs. Commish, TC Memo 2004-119.

Things I don't get:

1) This case required support payments to be treated as
"alimony" for tax purposes even though the related written
agreement did NOT appear to terminate the marriage.
I think the court merely used "alimony" as a term
interchangeable with the phrase "alimony and separate
maintenance payment".
2) The quoted portions of the written agreement did NOT
explicitly state that the payments were to stop in the event
of death.
The quoted portion states that "The Husband shall pay to the
Wife . . ." If the wife died, all that would be left is the
estate of the wife. I'm no lawyer, but it seems to me that
since the estate would be a legal entity separate and
distinct from the wife and since the quoted portion does not
explicitly state that payments would continue upon the death
of the wife, that "no liability to make any such payment for
any period after the death of the payee spouse"
(§71(b)(1)(D)) was created.

On the other hand, the non-quoted portion could have
explicitly stated that payments would stop in the event of
the death of the wife.
3) The wife in this case "filed a separate return for 2000,
claiming single rates," even though the divorce wasn't final
until 2001. SINGLE rates???

Can anyone explain this ??? <g>
First I thought that this may be a wrinke under the
Napoleonic Code of Louisianna (where they were married).
But then I note that it seems the separation agreement may
have been written while the husband was stationed in Hawaii.
So here's my thought:

The opinion notes that all facts have been stipulated by
both parties. I believe that one of the stipulated facts,
the 2001 divorce decree, clealry demonstrated that the wife
could not file with single rates in 2000. She would have
already lost that issue during the IRS' examination of her
return. The instant issue before the TC, then, is merely
whether the support payments were includible in income or
not. Thus, the Court was silent as to the single v. MFS
rate issue.

Peter C. Gatto, CPA
 
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D

Drew Edmundson

MTW said:
Just when I thought I understood how divorces and alimony
were supposed to work, along came the case of Dato-Nodurft
vs. Commish, TC Memo 2004-119.

Things I don't get:

1) This case required support payments to be treated as
"alimony" for tax purposes even though the related written
agreement did NOT appear to terminate the marriage.
Sec. 71 does not include termination of the marriage as a
requirement for alimony. Separation agreements are
specifically mentioned in Sec. 71.
2) The quoted portions of the written agreement did NOT
explicitly state that the payments were to stop in the event
of death.
This may be a default of LA law that payments terminate at
death unless otherwise agreed.
3) The wife in this case "filed a separate return for 2000,
claiming single rates," even though the divorce wasn't final
until 2001. SINGLE rates???
In some states certain legal separations are equivalent to
divorce for federal tax purposes. Perhaps LA is one of
these states. See Sec. 7703(a)(2). The IRS does not appear
to have litigated this issue or perhaps the parties had
already agreed she owed as MFS.

Drew Edmundson, CPA (NC)
 
A

A.G. Kalman

MTW said:
Just when I thought I understood how divorces and alimony
were supposed to work, along came the case of Dato-Nodurft
vs. Commish, TC Memo 2004-119.

Things I don't get:

1) This case required support payments to be treated as
"alimony" for tax purposes even though the related written
agreement did NOT appear to terminate the marriage.
This is not a requirement. The written separation agreement
satisfies the alimony requirement.
2) The quoted portions of the written agreement did NOT
explicitly state that the payments were to stop in the event
of death.
There is no requirement for an explicit statement that
alimony ceases at death if under state law liability for
payments cease.

In addition, the entire separation agreement is not appended
to the decision and therefore we do not know whether there
was an explicit statement.
3) The wife in this case "filed a separate return for 2000,
claiming single rates," even though the divorce wasn't final
until 2001. SINGLE rates???
I'm also stumped on this one unless the State of Alabama
(her state of residence in 2000) recognized that she was
unmarried for 2000 based on the written agreement and their
living separate lives.
 
M

MTW

A.G. Kalman said:
This is not a requirement. The written separation agreement
satisfies the alimony requirement.
I stand corrected on that point. I recall several
discussions on this issue where the consensus seemed to be
that doubt could be cast on the efficacy of said agreement
if it wasn't recognized under applicable state law as
effectively terminating the marriage. But after doing a bit
of research, it does appear that there is a bit more
flexibility here.
There is no requirement for an explicit statement that
alimony ceases at death if under state law liability for
payments cease.

In addition, the entire separation agreement is not appended
to the decision and therefore we do not know whether there
was an explicit statement.
Still, this is such a critical element to the tax treatment
of alimony that I think the court was EXTREMELY sloppy in
not stating how the requirement was met (either by terms of
the agreement or by underlying law or by...).
I'm also stumped on this one unless the State of Alabama
(her state of residence in 2000) recognized that she was
unmarried for 2000 based on the written agreement and their
living separate lives.
I suspect that this was another example of sloppy drafting
in this opinion. Perhaps "single" was simply used in the
sense of "not joint." Note that if applicable state law DID
consider her unmarried, then this dovetails back to my first
comment about the efficacy of the agreement.

MTW
 
M

MTW

The opinion notes that all facts have been stipulated by
both parties. I believe that one of the stipulated facts,
the 2001 divorce decree, clealry demonstrated that the wife
could not file with single rates in 2000. She would have
already lost that issue during the IRS' examination of her
return. The instant issue before the TC, then, is merely
whether the support payments were includible in income or
not. Thus, the Court was silent as to the single v. MFS
rate issue.
Further, it appears that this case was decided without trial
(Rule 122). So, your observation is probably right on track
(or, at least, it ties together the loose ends <g>).

MTW
 
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Under federal tax law you can file as single (or head of household, if such applies) if you were separated and living apart for the last six months of the year. Presumably many states do the same thing as their filing status requirements typically mirror the federal definitions.
 

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