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Lump Sum Alimony Payment Declared Non-Deductible by the Tax Court

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While 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!