IRS Tough When Child Support Upon Divorce Disguised as Alimony – Child Contingency Rule Steadfast

The US Tax Court, in the recent case of Johnson v. Commissioner, T.C. Memo 2014-67 (April 14, 2014) http://www.ustaxcourt.gov/InOpHistoric/johnsonmemo.buch.TCM.WPD.pdf, has cleared up some misunderstandings regarding the IRS’s Child Contingency Rule. The Child Contingency Rule refers to the IRS’s ability to go back in time and re-coop the tax benefits previously awarded a payer of alimony. This can happen when the cessation of that alimony award is contingent on a child-related event.

The Child Contingency Rule, under section 71(c)(2) of the IRC (Internal Revenue Code), provides that the amount of any alimony payment that is subject to “contingencies involving a child” must be considered payment made for the support of the child. The Code specifically lists a “child leaving school” as an example of such a contingency.

In the Johnson case, the judge in the trial court ordered that the husband pay spousal maintenance (alimony) until the soonest of (1) the parties’ youngest daughter’s graduation from high school; or (2) the wife’s remarriage; or (3) either parties’ death.

The judge also ordered that the husband pay child support in an amount which was below the statutory guidelines. The judge put into writing that the justifying factor for the deviation below guidelines was because the wife would be receiving enough alimony to cover the support of the child. The alimony award was modifiable (able to be changed by a court based on certain changes in circumstances of one/both parties) and, the judge ordered, the child support amount would also be reviewed during any future proceeding in which the spousal maintenance was being adjusted. The court further clarified that if the alimony award was ever lowered in the future, child support might need to be adjusted upward as a result.

The court also clarified that the spousal maintenance paid would have the default tax treatment: 100% of the alimony paid to the wife would be tax deductible by the husband (IRC §215) while all alimony received by the wife would be taxable to her as ordinary income (IRC §71).

A couple of years after the original court order was entered, the parties reached an agreement to decrease the spousal maintenance award. The parties further agreed, at that time, to also reduce the monthly child support award. Those agreements were entered by the judge as an agreed order.

Several years later, the husband became engaged in litigation with the IRS. The IRS sought to re-categorize as child support (which is not deductible) all of the alimony paid that was subject to the child-related contingency (that alimony would cease upon the parties’ youngest child graduating from high school). The IRS then ordered the husband to return the deficiency to the IRS. In other words, the husband owed the IRS the difference between the taxes that should have been paid to the IRS without the spousal maintenance payments being treated as deductible alimony less the taxes that the husband actually paid to the IRS when he was counting the spousal maintenance payments as deductible alimony (the deduction for alimony, as well as the line item for claiming alimony as income, is easily seen on page 1 of the IRS Form 1040).

Moral: Don’t monkey with the IRS’s Child Contingency Rule.


2 Comments

  1. Having been involved in mediating divorces for a number of years and being a qualified Life Coach I must agree with Robin on the benefits of a mediated divorce. At http://www.divorcedurban.com we follow the same principals as set out in Robin article, there is such a reduction of animosity in a mediated divorce that the parties often remain good friends long after the separation.

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