Lump Sum Cash Payment Did Not Qualify as Alimony
In Muñiz v. Commissioner, No. 15-14478, the Eleventh Circuit Court of Appeals concluded that lump sum payment made in cash did not qualify as alimony under Florida law.
The payment did not qualify because Florida law says that the obligation to pay the lump sum amount does not end with the payee’s death–regardless of whether the taxpayer made the lump sum payment in a single installment in at the time the divorce decree was final.
Facts and Procedural History
- Muñiz deducted $45,000 from his gross income as alimony paid in 2011.
- This amount was a “lump sum” cash payment, as defined by Florida state law, ordered in connection with his divorce proceedings.
- The IRS audited Muñiz’s tax return and disallowed the deduction because the payment did not qualify as alimony for Federal income tax purposes.
- Muñiz challenged the deficiency and the penalty in U.S. Tax Court, which ruled in IRS’s favor.
- Muñiz asked the Eleventh Circuit Court of Appeals to review the decision.
The disputed related to whether the lump sum cash payment was alimony for Federal income tax purposes and, as such, whether it was deductible by Muñiz.
Alimony is Deductible
Payments that are considered to be alimony for Federal income tax purposes are deductible by the payor and recognized as income for the payee. There are several requirements that must be met in order for a payment to be considered alimony. Specifically, Sec. 71(b)(1) defines the term “alimony or separate maintenance payment” as “any payment in cash” that meets the following four elements:
- such payment is received by (or on behalf of) a spouse under a divorce or separation instrument,
- 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 Sec. 215,
- 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, and
- 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.
The Muñiz case addressed the fourth element.
There is a two step process for determining whether the fourth element has been satisfied. The first step looks to the divorce decree. If that is silent on the issue, then stat law is to be considered to determine whether the payment(s) are to terminate on the death of the payee. The divorce decree at issue in Muñiz did not specify whether the obligation to pay terminates upon the death of his ex-wife.
Lump Sum Payment Under Florida Law
Muñiz argued that he had no liability to make any payments after his death, as he made a lump sum payment in cash to his spouse. Thus, the taxpayer’s argument was that he had no continuing liability beyond the lump sum payment he had already made to his ex-wife in a single installment. To the taxpayer, this showed that the payment qualified as alimony for Federal income tax purposes.
The appeals court described Florida law as follows:
Lump-sum alimony, by contrast, may be awarded “to ensure an equitable distribution of property acquired during the marriage,” and, critically, the entry of a final judgment of a lump sum award creates “a vested right which is neither terminable upon a spouse’s remarriage or death nor subject to modification.” Id. at 1201; see Newsome v. Newsome, 456 So.2d 520, 522 (Fla. Dist. Ct. App. 1984) (“Lump-sum alimony is essentially payment of a definite sum and is in the nature of a final property settlement; hence, an award of lump-sum alimony creates a vested right which survives death and is not terminable on the recipient party’s remarriage.”) (quoting another source with approval).
Given these rules, the appeals court concluded that:
… the liability to pay an award of lump-sum alimony under Florida state law does not terminate upon the death of the recipient spouse, [so] Muñiz’s payment pursuant to such an award did not meet the definition of “alimony” under federal tax law, see 26 U.S.C. § 71(b)(1)(D)
The appeals court reached this conclusion even though the taxpayer had extinguished his liability by making a lump sum cash payment.
As such, the inquiry is whether the liability to pay continues after death of the ex-spouse when viewed as a hypothetical as of the time of the divorce degree. It is not evaluated based on the actual facts as they played out during the tax year and from the vantage point of the last day of the tax year.