our attorneys at Owenby Law, P.A. advocate retaining legal counsel for all family law
matters, the following case illustrates how important it is to have a
divorce lawyer who is familiar and experienced with all the unique aspects
of this legal field. The U.S. Tax Court released a memo outlining a 2008
alimony-related case involving John and Rose Nye who divorced in 1990.
The timeline of the Nye case is as follows:
- Rose was awarded alimony from John in the monthly amount of $3,600, a $10,000
lump sum payment, and $150 per month stipend for health insurance if he
was unable to secure a policy for her.
- In 2006, Rose's attorney filed a petition for modification with the
courts to increase the monthly spousal support payments.
- Before the court could grant the modification, the divorced parties settled.
John would make a lump sum payment of $350,000 to Rose, who would in turn
quit claim a house over to John.
- Both parties deducted the $350,000 from their joint taxes.
- The Internal Revenue Service disallowed most of the deduction. Only $3,750-or
a month of alimony and the health insurance was allowed to be deducted.
The Nyes appealed to the Tax Court.
The Decision of the Tax Court
In determining whether or not the remainder of the $350,000 lump sum payment
was tax deductible, the court examined Florida law. The court determined
that the settlement reached by the Nyes and their lawyers went into effect
while there was still a pending action-the modification petition filed
by Rose and her attorney.
If either John or Rose had died, the mediation agreement would still be
in effect and the $350,000 lump sum payment would go forward. Because
the payment would still be required if John or Rose died, it did not meet
the criteria to be considered
alimony, which requires there to be termination of payment upon death. It was,
therefore, non-deductible as an alimony payment.
The Value of Experience in Choosing a Lawyer
Naturally, most individuals who are neither accountants nor attorneys would
not have necessarily caught this mistake. The Nyes, however, should have
been informed by their lawyers that this would be the outcome if they
tried to deduct the entire amount of the
lump sum payment. If the attorneys had incorporated language into the agreement that would
have made the lump sum compliant with the legal definition of “alimony,”
the Nyes would have been able to deduct the entirety of the payment.
If you live in Nassau, St. Johns, Clay, or Duval County and you are considering
a divorce or have a family legal issue,
contact Owenby Law, P.A. to speak with an attorney!