I don't understand this case...

Discussion in 'Tax' started by MTW, May 19, 2004.

  1. MTW

    MTW Guest

    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
     
    MTW, May 19, 2004
    #1
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  2. I think the court merely used "alimony" as a term
    interchangeable with the phrase "alimony and separate
    maintenance payment".
    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"
    (ยง71(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.
    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
     
    Peter C. Gatto, CPA, May 20, 2004
    #2
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  3. Sec. 71 does not include termination of the marriage as a
    requirement for alimony. Separation agreements are
    specifically mentioned in Sec. 71.
    This may be a default of LA law that payments terminate at
    death unless otherwise agreed.
    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)
     
    Drew Edmundson, May 20, 2004
    #3
  4. MTW

    A.G. Kalman Guest

    This is not a requirement. The written separation agreement
    satisfies the alimony requirement.
    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.
    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.
     
    A.G. Kalman, May 20, 2004
    #4
  5. MTW

    MTW Guest

    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.
    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 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
     
    MTW, May 24, 2004
    #5
  6. MTW

    MTW Guest

    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
     
    MTW, May 24, 2004
    #6
  7. MTW

    Ashley K. Knowlton MBA

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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.
     
    Ashley K. Knowlton MBA, Apr 5, 2016
    #7
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