Does Cohabiting Jeopardize the Alimony Deduction?

Does Cohabiting Jeopardize the Alimony Deduction?

Spouses who are paying alimony must pay careful attention to the “7 Do’s” of alimony, or risk losing the alimony deduction**.  One of those seven requirement is characterized as “distance,” the requirement that spouses who are divorced or legally separated must live in separate households in order to qualify payments as alimony.  An opinion of the U.S. Tax Court illustrates this point, in Benham v. Comm’r., T.C. Memo 2000-165. In Benham, the husband filed for divorce from his wife and signed an agreement to pay alimony and certain other household expenses.  Husband and Wife soon decided to continuing living together in an attempt to reconcile their marriage.  They signed another agreement, this time acknowledging that they were still “separated,” and their cohabitation would not prejudice them if they could not reconcile the marriage. Under these terms, they continued to live together for eighteen months.

The reconciliation was eventful, with periods of harmony followed by estrangement.  At some points, Wife demanded that Husband move out. Throughout the reconciliation, Husband paid $2,700 per month toward his contractual alimony obligations.  Toward the end, the parties reached a divorce settlement agreement.  Husband withdrew his divorce action, and then Wife filed for divorce. Husband moved out.

Husband and Wife filed separate returns for the two calendar years in which they were separated while cohabiting.  On his returns, Husband declared $12,000 and $2,000 as alimony deductions. The IRS served a deficiency notice, disqualifying the alimony deductions because the parties were cohabiting at the time when payments were made.  Husband argued that cohabitation did not matter because Husband and Wife were not “legally separated under a decree of divorce or of separate maintenance” at the time.  See IRC § 71(b)(1)(C).

The Tax Court in its Opinion cited  1.71-1T(b), Q&A-9, Temporary Income Tax Regs., 49 Fed. Reg. 34451, 34455 (1984), which states:

If the spouses are not legally separated under a decree of divorce or separate maintenance, a payment under a written separation agreement or a decree described in section 71(b)(2)(C) may qualify as an alimony or separate maintenance payment notwithstanding that the payor and payee are members of the same household at the time the payment is made.

The Court held that Husband’s alimony deductions were proper because the parties were not divorced or legally separated while cohabiting.

For more information about alimony deductions, consult my book Frumkes & Vertz on Divorce Taxation. In Western Pennsylvania, call me (Brian C. Vertz 412-471-9000) for a family law consultation or visit my firm’s website, pollockbegg.com.

** The “Seven D’s” of alimony is a mnemonic device created by the late Melvyn B. Frumkes, the original author of the leading family law tax treatise, Frumkes & Vertz on Divorce Taxation (James Pub. 2016).