Tax Court in Brief | Aragoni v. Comm’r | Disallowance of Deduction of Ex-Spouse’s Attorney Fees as Alimony

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The Tax Court in Brief – January 23rd – January 27th, 2023

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Tax Litigation:  The Week of January 23rd, 2022, through January 27th, 2023

Aragoni v. Comm’r, T.C. Summary Opinion 2023-3| January 25, 2023 | Panuthos, J. | Dkt. No. 20914-21S

Summary: In this non-precedential opinion (see section 7463(b)), the Tax Court addresses an alimony deduction claimed by taxpayer Terrence Aragoni. Aragoni divorced his wife. By court order, Aragoni was ordered to pay $9,146 in monthly alimony, and he was also ordered to pay—until paid in full— $15,000 on account of his ex-spouse’s attorney’s fees. Aragoni timely filed Form 1040, U.S. Individual Income Tax Return and was assisted by a certified public accountant. Aragoni claimed an alimony deduction, which included the $15,000 he paid to his ex-spouse’s attorney per court order.

Key Issues: Whether Aragoni’s payment of $15,000 to his ex-spouse’s attorney constitutes deductible “alimony” pursuant to section 71(b)?

Primary Holdings: No. One of the elements required for an alimony deduction is that there is no liability to make any such payment for any period after the death of the payee spouse. Aragoni’s liability to pay his ex-spouse’s attorney’s fees of $15,000 would survive her death, according to Tax Court’s interpretation of the state court order. Accordingly, Aragoni’s payment of attorney’s fees to his ex-spouse’s attorney was not a payment of alimony within the meaning of section 71(b)(1).

Key Points of Law:

Burden of Proof. In general, the IRS’s determination set forth in a notice of deficiency is presumed correct, and the taxpayer bears the burden of proving that the determination is in error. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933).3 Deductions are a matter of legislative grace, and the taxpayer bears the burden of proving that he is entitled to any deductions claimed. See Rule 142(a); Deputy v. du Pont, 308 U.S. 488, 493 (1940). This burden requires the taxpayer to demonstrate that the claimed deduction is allowable pursuant to some statutory provision and to substantiate the expense giving rise to the claimed deduction by maintaining and producing adequate records to enable the IRS to determine the taxpayer’s correct liability. 26 U.S.C. § 6001; Higbee v. Commissioner, 116 T.C. 438, 440 (2001).

Alimony Deductions. Section 215(a) generally allows a deduction for the payment of alimony as defined in section 71(b), which provides:

(1) In general.—The term “alimony or separate maintenance payment” means any payment in cash if—

(A) such payment is received by (or on behalf of) a spouse under a divorce or separation instrument,

(B) the divorce or separation instrument does not designate such payment as a payment which is not includible in gross income under this section and not allowable as a deduction under section 215,

(C) in the case of an individual legally separated from his spouse under a decree of divorce or of separate maintenance, the payee spouse and the payor spouse are not members of the same household at the time such payment is made, and

(D) there is no liability to make any such payment for any period after the death of the payee spouse and there is no liability to make any payment (in cash or property) as a substitute for such payments after the death of the payee spouse.

Element (D). Where the divorce instrument is silent as to the existence of a post-death liability, section 71(b)(1)(D) may still be satisfied if the payments terminate upon the payee spouse’s death by operation of state law. Johanson v. Commissioner, 541 F.3d 973, 976–77 (9th Cir. 2008), aff’g T.C. Memo. 2006-105. If state law is ambiguous in this regard, a federal court reviewing the matter will read the divorce instrument and make its own determination based on the language of the document. Id. at 977.  Payments of an ex-spouse’s attorney’s fees in connection with a divorce proceeding are not deductible alimony because the obligation to pay survives the death of the payee spouse. See Logue v. Commissioner, T.C. Memo. 2017-234; Stedman v. Commissioner, T.C. Memo. 2008-239.

Insights: Parties to a divorce decree for which alimony or an ex-spouse’s attorney fees are payable should consider consulting with a tax attorney to evaluate if additional language is appropriate for inclusion or exclusion from a divorce decree to increase chances of deductibility.