U.S. Tax Court has determined that Father cannot deduct as alimony the spousal maintenance payments he made to Mother because those payments were to terminate when their youngest child graduated from high school. In the case of Johnson v. Commissioner, Minnesota resident Father married Mother in 1989, and they later had three children. Those children were still minors when Mother and Father divorced in 2006. Their 2006 divorce judgment required Father to pay Mother spousal maintenance of $6,068 per month, plus 40% of his gross bonus, until their youngest child graduated from high school, Mother remarried, or either Mother or Father died. The judgment specified that the spousal maintenance payments would be deductible to Father and includible in Mother’s gross income. It also required Father to pay $500 per month for child support. In July 2008, Minnesota Trial Court reduced the spousal maintenance payments to $4,000 per month and the child support payments to $200 per month.
When Father got ready to file his 2008 federal income tax return, he gave his CPA a copy of the divorce judgment along with other documents. In the return that the CPA prepared, Father claimed alimony deduction of $54,788. On October 19, 2011, the IRS sent Father a deficiency notice, disallowing his alimony deduction and assessing a $15,532 deficiency, plus a penalty of $3,106. Father then petitioned the U.S. Tax Court for relief. While that petition was pending, Father’s CPA filed an amended 2008 return in which Father claimed an alimony deduction of $70,848, which included the portion of his bonus that he had paid to Mother. Meanwhile, Mother had reported all of Father’s spousal support payments as taxable income on her 2008 return.
Acting on Father’s petition, Tax Court rules in favor of IRS. Tax Court finds that (1) per U.S. Internal Revenue Code Section 71(b)(1), cash payments made to a spouse qualify as alimony if they are made under a divorce or separation instrument, while the spouses are not members of the same household, and the payments are to terminate on the death of the recipient spouse; (2) in addition, Internal Revenue Code Section 71(c)(2) provides that any payment that is subject to “contingencies involving child” are to be considered child support, regardless of whether there are separately allocated child support payments in the divorce judgment; (3) in this case, the divorce judgment provides that Father’s spousal maintenance payments will terminate when the youngest child graduates from high school (a contingency involving a child); and (4) because of this contingency, Father’s spousal maintenance payments do not qualify as alimony and are not deductible to Father. Tax Court holds that Father may not claim alimony deduction, but is not liable for the tax penalty because he reasonably relied on the professional advice of his CPA.