Arizona folks who have been a part of a divorce that includes spousal maintenance know that in some instances the payments can result in an income tax deduction. The alimonypaid to an ex-spouse is one of the deductions that many look forward to each year, after 12 months of paying for spousal support. However, there are instances when a deduction is not permissible.
Arizona readers may be interested to hear about former MLB player Dave LaPoint, who was the subject of a U.S. Tax Court case recently after his attempts to deduct some of his alimony payments to his ex-wife were rejected by the IRS. The deductions were made in 2002 and 2004. The court ruled against LaPoint, holding that the deductions were not valid as made.
While married to his now ex-spouse, the couple executed a post-nuptial agreement that, among other things, provided for certain payments to be made to his wife while they were married. Part of the money involved was the future proceeds of a pending legal case between MLB and its players, loosely referred to as “collusion money.” This money was to be deposited for the benefit of the wife if and when the sums were received. The couple divorced before the “collusion money” was paid to LaPoint.
After the divorce, LaPoint received the money. He paid it to his wife as was the agreement in the post-nuptial agreement. However, he also claimed it as an alimony deduction on his income taxes. The Tax Court found that because of the language in his post-nuptial agreement, the “collusion money” was not alimony and thus not deductible. The reasoning was that for alimony payments to be deductible, they must meet certain requirements, including that no liability for the payments exists after the death of the payee.
In LaPoint’s case, the post-nuptial agreement expressly provided that the collusion money was to be paid to the wife’s heirs in the event of her death. LaPoint lost his case and now has a hefty tax payment due over and above the sums paid to his ex-wife. The case underscores the complexity of alimony issues when it comes to income tax matters. Those Arizona residents confronting similar issues would do well to assure themselves of the law as it applies to the facts and circumstances of their individual matter.
Source: Forbes, “IRS Strikes Out Retired Pitcher Dave LaPoint – Alimony Not For The Dead,” Peter J. Reilly, April 14, 2012