The requirements of IRC Section 215 for the deduction of payments for alimony or spousal support seem straightforward and not very complicated. Based on the number of cases reaching the Tax Court where the taxpayer loses the deduction, however, the requirements are clearly too complex for many. In order to be deductible as spousal support under IRC Section 215, these criteria must be satisfied: (1) the payment must be received by or on behalf of the payee spouse under a divorce or separation agreement, including a court order; (2) the payment must not be designated as a payment not includible in the gross income of the recipient spouse; (3) if the spouses are legally separated, the payor spouse and payee spouse cannot be members of the same household; and (4) there cannot be any obligation on the payor spouse to make any payment for any period after the death of the payee spouse. In other words, alimony or spousal support must terminate on the death of the payee spouse, or the payment is not deductible. If state law provides that the support payments terminate on death of the recipient, the agreement need not provide for termination – although the best course is to have the agreement or court order so stipulate.
This final requirement that support payments terminate on death that taxpayers (or their advisors) continually seem to forget. A recent example is Muniz v. Commissioner (Tax Court, July 9, 2015), where the issue centered on a single payment of $45,000 the taxpayer was ordered by the court to pay to his ex-wife. The IRS argued, and the Tax Court agreed, that this payment appeared to be more in the nature of a property settlement payment than a payment of spousal support. The court noted, however, that the payment satisfied the first three requirements of IRC Section 215 and turned to evaluate whether the payment was terminable on the death of the wife.
Florida law was applicable to the divorce in question, and Florida law contains a concept known as “lump sum alimony,” which the taxpayer argued applied to the payment. Unfortunately for the taxpayer, under Florida law, lump-sum alimony created a vested right in the payee spouse that did not terminate upon the death of the payee spouse. Therefore the payment, even if viewed as support, did not satisfy the fourth requirement for deductibility.
Taxpayers are often tripped up by one-time support payments that are paid within a very short time. The time within which the payment is required to be made is totally irrelevant. The payment obligation must be terminated if the payee dies before the payment is made in order for the payment to be deductible by the payor. A taxpayer could sign an agreement requiring a payment of support the next day; however, the agreement (or state law) must nevertheless provide that if the intended recipient dies before receiving the payment, the taxpayer is relieved of the obligation to make the payment.