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Biddle v. Commissioner (T.C. Memo. 2020-39)

On April 6, 2020, the Tax Court issued a Memorandum Opinion in the case of Biddle v. Commissioner (T.C. Memo. 2020-39). The issue before the court in Biddle was whether the petitioner’s payments to his former spouse, which, under the terms of a divorce decree, ended at his youngest child’s 18th birthday, were deductible alimony payments under IRC § 215 or whether the contingency related to his children transformed the “alimony” into nondeductible child support.

Background

The petitioner divorced his wife in 2010. The divorce decree included provisions pertaining to “child support” and “alimony.” The petitioner was ordered to pay his ex-spouse monthly child support and alimony. Under both the child support and alimony provisions the petitioner would be discharged from his payment obligation under certain conditions, one of which was each child reaching the age of majority. On his 2015 return, the petitioner claimed an alimony deduction of $28,000. He did not claim a deduction for the child support payments. In a notice of deficiency dated November 2017, the IRS disallowed the alimony deduction in full.

The Trap for the Unwary Spouse

The petitioner (reasonably, it would seem at first blush) argued that the deduction was proper because the payments were made pursuant to his obligation to pay “alimony” under the divorce decree and were separate from the payments he made regarding his obligation to pay child support. Not so, contended the IRS. Because one of the contingencies that would terminate the payments was the petitioner’s youngest child’s 18th birthday, all payments were nondeductible child support payments. The Tax Court was ultimately persuaded by the IRS, sending alimony-paying spouses scrambling to read the terms of their own payment obligations.

The Nature of Alimony

A payor alimony may take a deduction for an amount equal to the alimony paid during the taxable year to the extent it is includible in the recipient spouse’s gross income under IRC § 71(a). IRC § 215(a); IRC § 215(b). Alimony must be a cash payment, to a spouse under a divorce or separation agreement, which agreement does not state that the payment is neither includible in gross income nor allowable as a deduction, made while the spouses do not cohabitate, and the payment obligation ends upon the death of the payee spouse. IRC § 71(b)(1).

The Child Contingency Exception

Critically, the amount of any payment (otherwise qualifying as alimony), which payment is subject to “contingencies involving child” will be considered payment made for the support of the child, not alimony. IRC § 71(c)(2). The final nail in the petitioner’s coffin was the inclusion in IRC § 71(c)(2)(A) of the examples of such contingencies, which examples specifically lists a child attaining a specific age.

Neither was this the first instance that the Tax Court had interpreted a similar clause. In Hammond v. Commissioner, T.C. Memo. 1998-53, *5, the taxpayer made monthly child support and alimony payments pursuant to a divorce decree, which contained, inter alia, a clause that terminated the obligation on his child’s 18th birthday. Like the petitioner in Biddle, the taxpayer in Hammond cried foul, arguing that the court specifically separated his child support obligations from his alimony obligations. Relying on IRC § 71(c)(2), the court found against the taxpayer as it did in Biddle. Id. at *8-*10.

Bright Line Rule

Even if judicial decree of divorce or separation distinguishes and allocates payments between “alimony” and “child support” payments, the designation means nothing if the terms of the payments designated as “alimony” contain an explicit contingency related to a child. If such a child-based contingency exists, all payments thereunder will be treated (for purposes of Federal income tax) as child support under IRC § 71.

Original opinion: (T.C. Memo. 2020-39) Biddle v. Commissioner

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