By Donald Paris, CPA MST CDFA
Today we look at the Tax Court Memo decision 2015-163 in Crabtree. This is yet another case where the Tax Court did not agree with the IRS. In this case, the Court held that the series of payments received by the taxpayer, from her ex-husband pursuant to a divorce agreement, were not considered alimony and thus, did not have to be included in income. Even though the payments were laid out in the Marital Settlement Agreement (MSA) to be paid for a period of 8-years, the MSA did not indicate that the payments would terminate if the ex-wife were to die before that period ended.
Now for some background understanding of Internal Revenue Code (IRC) Section 71. IRC Section 71 tells us that gross income includes amounts received as alimony or separate maintenance agreements where:
- The payments must be made under a divorce or separation instrument;
- The instrument must not designate the payment as not includable in the recipient spouse’s gross income under IRC Section 71 and not deductible by the payor spouse under IRC Section 215;
- Legally separated spouses under a decree of divorce or separate maintenance must not be members of the same household when the payments are made; and
- The payor’s obligation to make the payment must end at the death of the payee spouse.
Now to the facts of the case. Esther Crabtree was married to Donald Girard MD until late 2006. In December of 2006, they entered into a divorce agreement that was entered as an order of the Delaware Family Court. That agreement contained a provision that “Dr. Girard will continue to tender unallocated alimony/child support in the monthly sum of $5,232 for a continued 8-year period with the provision as long as Mrs. Girard should not remarry or cohabitate”. Note here that the last provision of IRC Section 71 was not dealt with, i.e. the agreement was silent to the issue that the payments must end on the death of Ms. Crabtree.
The Tax Court noted that, even if the agreement is silent or unclear on the existence of a post-death obligation, the payments may still be alimony if the payment obligation automatically terminates on the death of the payee spouse by operation of State law, which happens under Delaware law. Interestingly, the Court went further to say that this provision only applies to judicially decreed alimony agreements, and not to the agreement at hand. In our case, the parties came to the agreement and the Family Court merely entered it into the record as part of the case, rather than the Family Court ruling on the issue.
The Tax Court made what appears to be a very interesting distinction, i.e. even though Delaware law may state that, in the absence of language in the MSA dealing with the issue of death and alimony payments, state law only applies where the Family Court is ruling on the issue, and thus, the agreement between the parties takes precedence. That is a remarkable concept. It further affirms our conviction that we must make sure that the Marital Settlement Agreement spells out all the tax issues, because it is that agreement that may operate.