The Section 412(i) Retirement Alternative: Hedging against an Uncertain Future
Generally, whether a payment is alimony depends on IRC section 71(b). Alimony and separate maintenance payments (collectively referred to as alimony) are taxable to the recipient and deductible by the payor. When a taxpayer makes support payments under a court order issued pending a divorce, the parties may specify the amount of alimony in a separation agreement. If neither a divorce decree nor a separation agreement exists, payments made under court orders that don't specifically allocate a portion of the amount as alimony or child support but rather as household maintenance may be deemed alimony if they meet the requirements in section 71(b)(1). Section 71(b)(1) defines "alimony or separate maintenance payment" as any payment in cash if (A) Such payment is received by (or on behalf of) a spouse under a divorce or separation instrument. (B) The divorce or separation instrument does not designate such payment as a payment which is not includible in gross income under this section and not allowable as a deduction under section 215. (C) In the case of an individual legally separated from his spouse under a decree of divorce or of separate maintenance, the payee spouse and the payor spouse are not members of the same household at the time such payment is made. (D) There is no liability to make any such payment for any period after the death of the payee spouse and there is no liability to make any payment (in cash or property) as a substitute for such payments after the death of the payee spouse. Patricia Kean filed for divorce from Robert Kean in New Jersey in October 1991. The couple had three minor children. In April 1992 Robert received a court order requiring him to deposit no less than $6,000 each month into a joint checking account maintained in both their names. The court granted Patricia unlimited access to the joint account and ordered her to use the money to maintain herself, the children and the household. In March 1993 the court prevented Robert from using the joint account and granted Patricia exclusive use of the funds. In January 1995 the court ordered Robert to make future payments to Patricia through the state probation department. An April 1996 order reduced support to Patricia to $1,600 from $6,000 and required Robert to pay all the children's household bills and expenses. The court issued a final judgment of divorce in February 1997. Prior to that time, Robert and Patricia were not legally separated under a decree of divorce or a separation agreement. While the divorce was pending, they shared joint custody of the children. The two, along with the children, continued to reside in the marital residence during most of the time in question. For taxable years 1992 through 1996, the Keans filed separate tax returns and treated the court-ordered support payments as follows on their federal income tax returns: The IRS determined deficiencies on Patricia's 1992, 1993, 1994, 1995 and 1996 tax returns. It determined deficiencies for Robert in 1995 and 1996, but later "amended on brief" its inconsistent position that payments were includible in Patricia's gross income as alimony received and not deductible by Robert. …