Breaking Up is Hard to Do: Identifying Alimony May Add Tax Tiffs

This article addresses many of the common tax issues encountered during divorce. Several tax cases will be discussed, examples presented, and planning opportunities covered. In addition, some recent statistical data related to payments pursuant to divorce will be presented. During divorce proceedings, the division of the marital assets will most certainly produce some tense discussions between the divorcing spouses and their attorneys. Payments pursuant to a divorce may not only involve intense negotiation but also will likely include a thorough consideration of the federal tax implications of those payments. The tax treatment of non-cash payments pursuant to divorce or legal separation, cash payments pursuant to divorce or legal separation, front-loading of payments, and planning opportunities should be considered as the divorce negotiations progress. One divorce case is sure to get more than its share of publicity. It appears that at least one father thinks that his estranged wife should be able to pay him millions in alimony because of the earnings of their daughter, a teenage movie starlet. Michael and Dina Lohan's daughter is teen superstar Lindsay Lohan, who reportedly has made millions for her roles in The Parent Trap, Freaky Friday, Mean Girls, and Confessions of a Teenage Drama Queen. It has also been reported that she will be cast as a star in the upcoming Lady Luck for $7 million. In another interesting divorce case, even the Florida judge seemed confused about an appropriate ruling. Michael and Beth Rice divorced in late 2001 after months of contentious negotiations. In the final agreement, Michael agreed to pay Beth $5,000 per month in alimony for five years unless one of them died or remarried. A few years later, Beth Rice and Stanley Blacker planned to marry in Las Vegas the weekend of June 10, 2004. In fact, they printed up programs and T-shirts that read: Vegas Wedding Weekend, June 10-13, 2004. They invited more than 50 friends and family members to Las Vegas. A video of the event shows a woman singing Going to the chapel and we're gonna get married .... In the video, Rice walks down the aisle carrying a bouquet. She and Blacker stand under a Jewish wedding canopy called a chuppah and exchange rings after a rabbi talks about formally consecrating their love. The rabbi asked them to repeat vows which began with  I betroth you to me always .... They went away to Europe, returning to settle into Blacker's home in Tampa, Florida where the bills are paid out of a joint bank account. Her children call Blacker stepfather. So, are Beth Rice and Stanley Blacker married? Beth's ex-husband Michael certainly thinks so and wanted to stop the alimony payments. Beth contends that she is not married because she never got a marriage license. Beth testified that she had intended to get married in every sense of the word during the June trip to Las Vegas. However, she indicated that in May she realized that her marriage could terminate the alimony payments. She filed a petition to force her ex-husband to increase his monthly child support payments. He filed a counter-petition asking to reduce the child support payments. Beth and Stanley decided not to get a marriage license. However, she didn't want to cancel the Las Vegas event because of all the time and money spent. Once in Las Vegas, they told their guests that despite what the program said, the event no longer was a wedding. It was a commitment ceremony. The rings they exchanged were commitment rings. The trip to Europe, was not a honeymoon but a commitment-moon they joked at the event. She testified that once back at home, she and Stanley decided not to put the other's name on any real property. She kept her last name and they told the children they were not married. Upon questioning by her ex-husband's attorney, she insisted that she and Blacker were not holding themselves out as husband and wife. She said he is not my husband. We are living together. We are co-habitating. We saw no reason we could not co-habitate. It came out in the testimony that the ex-husband, Michael, should have known what he was getting into by signing a non-modifiable alimony agreement. In addition, it was shown that Michael had originally sought to include a co-habitation clause in the agreement but had later dropped that request. The judge had everyone's attention as he began his ruling. Judge Foster started by stating if it walks like a duck and quacks like a duck, it is most certainly a duck. He then told Rice and Blacker that they are a family now. However, he said This was a ceremony. This was not a wedding. He went on to point out that Rice and Blacker cannot legally file a joint tax return, receive each other's Social Security benefits, or enjoy other common aspects of marriage. He concluded by stating I think a de facto marriage has occurred but that isn't sufficient under the law to terminate the alimony. Although an interesting case and a somewhat quirky ruling, the foregoing clearly emphasizes the need to identify as many contingent events as possible when stipulating when alimony will stop. Negotiating the contingency events is essential to the parties. The article also addresses the tax implications of payments to third-parties (i.e. indirect alimony), amounts fixed as child support (a three part test) and related contingencies (i.e. reductions at attainment of majority), front loading and payment of arrearages. Some of the most recent data from the U.S. Census Bureau indicates that payments pursuant to divorces have been on the rise. A Census Bureau report entitled Support Providers: 2002 indicates that payments for alimony or child support, after adjustment for inflation, increased by 18% from 1997 to 2002. The number of people making such payments also increased during the same time period from 7.2 million to 7.8 million. Therefore, it appears that this is an issue that is likely to continue to increase in importance for tax practitioners and their clients.