Tax consequences for spousal support order
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The tax consequences of a spousla support order should be considered before entering into a stipulation for temporary spousal support. A review of the case of Theuerer v. Commissioner shows what happens when the parties to not pay attention to the proper characterization of a spousal support order
Transcript of Tax consequences for spousal support order
SUPPORT TAX
S UP P OR T TAX
Th e ure r v. Com m is s ione r
Theur v. Commissioner
H and W married for 21 years, with three children.
July 7, 1998: Disso court orders H to pay $20,000 a month to W, “until her remarriage, the death of either party, or further order of the court, whichever occurred first.”
“The payments will be characterized as spousal or child support, or some combination thereof, by either settlement or future court order.”
Theur v. Commissioner
1999: H pays W $240,000, per the court order.
January, 2000: Court issues a new order that amends the previous order.
The new order provides that H shall pay W $7,507, plus $26,850 for spousal support, retroactive to May 1,1998.
W does not report the $240,000 as income on her 1999 tax return.
Theur v. Commissioner
2000 tax return: W reports receipt of spousal support totaling $531,713, which included $240,000 from 1999, plus $291,713 received in 2000.
IRS sends deficiency notice to W, assessing a $73,524 deficiency on her 1999 return, plus a penalty.
W petitions the tax court for relief.
Theur v. Commissioner
W’s Contentions: The 7/7/98 was not a spousal support order,
because it required H to pay $20,000 a month to their kids after she died.
Since the 1/1/00 order established that part of the $240,000 was for child support, it should not be considered as income.
She should not be taxed twice by having them applied to her 1999 income.
Theur v. Commissioner
Tax Court Finds: Since the 7/7/98 order clearly provided that
the payments would cease at W’s death, they were alimony and includible in W’s income.
Nothing in the 1/1/00 order changed the character of the payments that W received in 1999.
As a “cash basis taxpayer,” W was required her to report her income in the year it was received.
Theur v. Commissioner
Important lessons: Do not ig nore th e ta xa b ility o f s upport
pa ym e nts re c e ive d by c lie nt be fore re c h a ra c te riz a tion
S upport orde rs s ub je c t to re c h a ra c te riz a tion s h ould inc lude a provis ion for ta x re im burs e m e nt
What about the tax consequences?
Theur v. Commissioner
