March 1999 Volune 12 No3 - Utah State Bar

I"
I.
14
by David S. Dolowitz
INTODUCTION
Tax law impacting divorce was substantialy changed in 1984
and 1986. Modifcations to the changes were enacted in 1997
and 1998. Decisions under the revised provisions are now
reachig the Tax Court and the appellate courts so the effect of
the changes can be evaluated. This is a brief update on three
areas: Alony, Section 1041 Exchange, and Assignment of
Income.
ALIMONY
Section 71 (b) (1) (D) requires that liabilty to make almony
payments must end on the death of the payee spouse. Three
recent decisions make it clear that this must be in the decree.
In 1997, the Tax Court found that faiure to provide in the
decree that the obligation to pay mortgage payments on behal
of the payee would end on her death made the payments non-
deductible. Pettet v. United States, 97-2 USTC §50,948 (ED NC,
1997). A lump sum almony payment under a modied divorce
decree lost its ta deductible status because of a faiure to
include this provision. Barrett v. United States, 96-1 USTC
§50,084 (CA-5, 1996). This faiure was found to apply to equal-
ization payments for uneven division of community property and
a negligence penalty was imposed on the tapayer because the
faiure was so obvious. Croteau, TC Memo 1998-9 (1998).
In an interesting side-light, delinquent alony payments col-
lected by the mother's estate and passed on to the chidren were
found to be taable income to the chidren. Kitch v. Commis-
sioner, 97-1 U.S.T.C. §50,124 (CA-lO, 1996).
In a very recent decision, Thomas R Nelson v. DonnaJ Zullo
Nelson, TCM 1998-268, where payments ordered made by the
decree from the husband to the wie were held non-modifable
propert payments by the Ohio courts,' the effort of the Internal
Revenue Servce to disalow them as tax deductible § 71 pay-
ments by the husband was rejected by the Tax Court because the
decree provisions requiring the payments met every test of § 71.
Under the provisions of § 71 (c), payments which terminate
around attag of majority of a chid or other contingency
described in § 71 ( c) made otherwse deductible alony pay-
ments into non-deductible chid support. Consequently, the
alony tax transfer of § 215 was lost when the payments were
found to be in the nature of chid support, as defined in § 71 (c) .
Hammond, T.C. Memo 1998-53 (1998). On the other hand,
where the payor agreed to pay attorneys fees and auto loan
payments on behal of the ex-spouse, pursuant to a marital
settlement agreement, and it was prOYided that these would
terminate in the event of her death, they were considered
deductible as almony payments. (The legal termiation of these
payments on death occurred under Ohio law, not because of the
specifc provisions of the decree). Burkes, T.C. Memo 1998-61
(1998).
SECTION 1041 EXCHAGES
The issue of whether or not interest payments on §1041 prop-
ert transfers effected by a note would or would not be
considered as taxable income, is now being resolved.john L.
Seymour, 109 T.C. No. 279 (1997). John deducted al interest
he paid to his former wife as residential and investment interest.
The Internal Revenue Servce chalenged the deductions assert-
ing they were §1041 payments. The Tax Court ruled that when
the wife received a settement of approximately 4900,000.00
(one-third (1/3) in cash, two-thirds (213) in a note with inter-
est due on the unpaid balance) and the husband received stock,
real estate (business), the marita home, an automobile and
household furnishigs, §1041 did not require interest on the
indebtedness of one spouse to another under § 1041 to be non-
deductible personal interest and that the interest of the notes
L1aDid ST,