US Tax Court on Alimony : Payment of Ex-Spouse’s Student Loans Deducible !
Alimony is taxable and the deduction for alimony is allowed from taxable income of the payer . However , the question whether a particular payment cn be considered as alimony is a matter of interpretation . IRS and tax payers are often at logger head on this aspect. One such case is that of JEREMY ADAM VANDERHAL, vs. COMMISSIONER OF INTERNAL REVENUE, TC Summary Opinion 2018-41
Mr Jeremy made payments on the other’s spouse Sallie Mae student loans and claimed an alimony deduction for them. The IRS said the payments didn’t fit the definition of alimony. But the Tax Court disagreed with the IRS (Jeremy Adam Vanderhal, TC Summary Opinion 2018-41).
The facts involved in the case of Jeremy Adam Vanderhal, was that he got divorced in Nevada in 2011. Mr Jeremy and his former spouse “entered into an equitable agreement settling all issues regarding the division and distribution of assets and debts. The said agreement provided for tax-free transfers of property as well as spousal support
Mr Jeremy filed his 2013 Federal income tax return, and claimed an alimony deduction for the payments he made for his ex-wife’s student loan. However , IRS did not allow the payment of spouse student loan as it held that the payment was not satisfying the definition of alimoney given under section 71(1) (b)(B) of the Internal Revenue Code. The rationale of the IRS was that the student loan payments were not alimony because they fell under the agreement’s paragraph on “Tax Free Transfers.”
Section 215(b) of IRC provides that the paying spouse may deduct a payment as alimony if the payment is “includible in the gross income of the recipient under section 71. The issues for decision before the tax court were
(1) whether payments petitioner made towards student loans incurred by his former spouse qualify for deduction as alimony and
(2) if not whether petitioner is liable for a section 6662(a) accuracy-related penalty.
The tax court held the payments of students loan fit the definition of alimony u/s 71 of IRC , so the petitioner is entitled to alimony deduction.
we construe the divorce decree and agreement, the reference to property in the “Tax Free Transfers” section of the agreement does not clearly encompass the division of community debt. Furthermore, in construing divorce or separation agreements, we can find no authority that suggests that the terms “property” and “debt” are interchangeable. The divorce decree and the agreement do not otherwise address or “specifically denote” the division of debts as tax-free transfers of property made pursuant to section 1041. That being so, we find that nothing in the divorce decree or the agreement clearly, explicitly, and expressly designates the Sallie Mae student loan payments as nonalimony payments. See Richardson v. Commissioner, 125 F.3d at 556. Consequently, the payments on the student loan account fit within the definition of alimony under section 71, and petitioner is entitled to an alimony deduction for those payments.It follows that petitioner is not liable for a section 6662(a) penalty.