Settling Alimony Obligations

Two recent cases suggest an important difference between the current tax treatment of alimony payments and the pre-1984 treatment of alimony payments. 'Alimony,' of course, is a defined term, and the definition can be structured to include whatever transfers seem appropriate from a tax policy perspective as distinct from the meaning of the term for state law purposes. Under current law, a cash payment from one former spouse to the other will be included in the income of the recipient and deductible by the payor if it meets four conditions: 1) the payment is made under a divorce or separation instrument; 2) it is not designated as not includable/nondeductible; 3) the former spouses do not live in the same household; and 4) the payor is not legally obligated to make the payment or a 'substitute' for the payment after the death of the recipient. I.R.C. ' 71(b)(1). Missing from this list are the requirements of prior law that cash payments be 'periodic' and that they be made to discharge the payor's obligation to support the payee. A lump sum cash payment that meets the statutory requirements could, therefore, be taxable alimony.