(b) ALIMONY OR SEPARATE MAINTENANCE PAYMENTS DEFINED.--For purposes of this section- (1) IN GENERAL.--The term "alimony or separate maintenance payment" means any payment in cash if- (A) such payment is received by (or on behalf of) a spouse under a divorce or separation instrument (B) the divorce or separation instrument does not designate such payment as a payment which is not includable in gross income under this section and not allowable as a deduction under section 215, (C) 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 (D) 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 (and the divorce or separate maintenance instrument states that there is no such liability). (2) DIVORCE OR SEPARATION INSTRUMENT.--The term "divorce or separation instrument" means- (A) a decree of divorce or separate maintenance or a written instrument incident to such a decree, (B) a written separation agreement, or (C) a decree (not described in subparagraph (A)) requiring a spouse to make payments for the support or maintenance of the other spouse. (c) PAYMENTS TO SUPPORT CHILDREN.- (1) IN GENERAL.--Subsection (a) shall not apply to that part of any payment which the terms of the divorce decree or separation instrument fix (in terms of an amount of money or a part of the payment) as a sum which is payable to the support of children of the payor spouse. (2) TREATMENT OF CERTAIN REDUCTIONS RELATED TO CONTINGENCIES INVOLVING CHILD.--For purposes of paragraph (1), if any payment specified in the instrument will be reduced- (A) on the happening of a contingency specified in the instrument relating to a child (such as attaining a specified age, marrying, dying, leaving school, or a similar contingency), or (B) at a time which can clearly be associated with a contingency of a kind specified in paragraph (1) an amount equal to the amount of such reduction will be treated as an amount fixed as payable for the support of children of the payor spouse. (3) SPECIAL RULE WHERE PAYMENT IS LESS THAN AMOUNT SPECIFIED IN INSTRUMENT.-For purposes of this subsection, if any payment is less than the amounts specified in the instrument, then so much of such payment as does not exceed the sum payable for support shall be considered a payment for such support. (d) SPOUSE.--For purposes of this section, the term "spouse" includes a former spouse. (e) EXCEPTION FOR JOINT RETURNS.--This section and section 215 shall not apply if the spouses make a joint return with each other. (f) SPECIAL RULES TO PREVENT EXCESS FRONT-LOADING OF ALIMONY PAYMENTS.- (1) REQUIREMENT THAT PAYMENTS BE FOR MORE THAN 6 YEARS.--Alimony or separate maintenance payments (in excess of $10,000 during any calendar year) paid by the payor spouse to the payee spouse shall not be treated as alimony or separate maintenance payments unless such payments are to be made by the payor spouse to the payee spouse in each of the 6 postseparation years (not taking into account any termination contingent on the death of the either spouse or the remarriage of the payee spouse). (2) RECOMPUTATION WHERE PAYMENTS DECREASE BY MORE THAN $10,000.--If there is an excess determined under paragraph (3) for any computation year- (A) the payor spouse shall include such excess amount in gross income for the payor spouse's taxable year beginning in the computation year, and (B) the payee spouse shall be allowed a deduction in computing adjusted gross income for such excess amount for the payee spouse's taxable year beginning in the compuation year. (3) DETERMINATION OF EXCESS AMOUNT.--The excess amount determined under this paragraph for any computation year is the sum of- (A) the excess (if any) of- (i) the amount of alimony or separate maintenance payments paid by the payor spouse during the immediately preceding post-separation year, over (ii) the amount of alimony of separate maintenance payments paid by the payor spouse during the computation year increased by $10,000 plus (B) a like excess for each of the other preceding post-separation years. In determining the amount of the alimony or separate maintenance payments paid by the payor spouse during any preceding post separation year, the amount paid during such year shall be reduced by any excess previously determined in respect of such year under this paragraph. (4) DEFINITIONS.--For purposes of this subsection- (A) POST-SEPARATION YEAR.--The term "post-separation year" means any calendar year in the 6 calendar year period beginning with the first calendar year in which the payor spouse paid to the payee spouse alimony or separate maintenance payments to which this section applies. (B) COMPUTATION YEAR.--The term "computation year" means the post-separation year for which the excess under paragraph (3) is being determined. (5) EXCEPTIONS.- (A) WHERE PAYMENTS CEASE BY REASON OF DEATH OR REMARRIAGE.--Paragraph (2) shall not apply to any post-separation year (and subsequent post-separation years) if-(i) either spouse dies before the close of such post-separation year or the payee spouse remarries before the close of such post-separation year, and (ii) the alimony or separate maintenance payments cease by reason of such death or remarriage. (B) Support Payments.--For purposes of this subsection, the term "alimony or separate maintenance payment" shall not include any payment received under a decree described in subsection (b)(2)(C). (C) Fluctuating Payments Not Within Control of Payor Spouse.--For purposes of this subsection, the term "alimony or separate maintenance payment" shall not include any payment to the extent it is made pursuant to a continuing liability (over a period of not less than 6 years) to pay a fixed portion of the income from a business or property or from compensation for employment or self-employment. I.R.C. § 71 (1985). 159 Section 215 continued to provide an alimony deduction for all payments that were includable under I.R.C. § 71 as “alimony." See I.R.C. § 215 (1985). 160 The Conference Committee Report gave the following example of how the recapture provisions would work. Thus, for example, if alimony payments of $25,000 are made in year 1 and payments of $12,000 are made in year 2, then $3,000 will be recaptured in year 2. If the payments further decline to $1,000 in year 3, then, in year 3, an addition $11,000 will be recaptured from year 1 161 The criticisms of the new alimony rules began almost immediately. The abandonment of the flexibility to create fully deductible unallocated "family support" payments that contained an element of child support was criticized. 162 This proposal, which first surfaced in the Conference Committee, came as a surprise to everyone. The flexibility inherent in the Lester Rule was supported by the Task Force's various reports and was never questioned either in the meetings between the Task Force and government officials throughout the process or in the formal hearings held by the Ways and Means 163 Committee. It seems that the revocation of Lester was used solely as a bargaining chip in conference by those who wished to repeal the alimony deduction entirely in the quest to at least narrow the "alimony" deduction. The required six-year payout period was also criticized as being inconsistent with the growing trend toward short-term "rehabilitative alimony" to provide the payee with support for a short period while she gained job training or attended college. Finally, the alimony recapture rules were also criticized as being complex and containing fundamental flaws. 164 State laws make court-ordered alimony payments subject to change under many circumstances. Recapture could occur if payments were reduced under these laws even though the payor was fulfilling his obligations under state law. Recapture resulting from modifications under state law could produce other anomalous results. For example, in most states a court must modify alimony if the parties' circumstances change. If a payor's obligation is so reduced because the payor's income has decreased, then the payor will be subject to recapture when he or she is already in adverse financial circumstances. Or, for example, an automatic termination of alimony payments occurs in many states when a court finds that the payee is cohabiting, without marriage, with another party of the opposite sex. Such termination could lead to significant recapture with a large deduction for the payee for whom state law intended no further accrual of financial benefits. In addition, a payee in most states may waive his or her right to support. If a and $1,000 will be recaptured from year 2. If, prior to the end of year 6, payments further decline, additional recapture will occur. At the ABA's annual meeting in Chicago on August 2, 1984, the Council of the Tax Section adopted a resolution at the task force's request. This resolution directed the officials of the Section to inform Congress that the new alimony rules create significant technical problems. The resolution further directed these officials to request from Congress either a technical correction in the alimony provisions by the end of 1984 or a one-year delay in the effective date of the provisions. The Tax Section made these requests, but abandoned its efforts on confronting adamant opposition from the Senate Finance Committee staff. payee did so at the end of the fifth year, recapture would occur in the sixth year.... [T]he resultant deduction to the payee could be more beneficial than receiving the sixth year of alimony would have been. However, the payor could be forced to include a far larger sum in income than the payor would have paid as deductible alimony. Finally, factors beyond the control of either party or of a court could cause recapture under circumstances where the recapture hardly seems fair. For example, payors often must bear the costs of their former spouse's post-divorce medical costs. If such costs are large during one year of the first five years after divorce, then a significant recapture amount could result in the following year when normal payments resume. Similarly, if a payor loses his job and misses a payment, recapture based on the earlier year's payment would occur. If the payor made up the arrearage in a later year, thus greatly increasing his payment that year, additional recapture would occur in the following year. Such results seem inequitable, particularly because the payors in both examples meet their obligations under local law and do so by the end of the sixyear period. 165 Perhaps due in part to such criticisms, the statute did not lie in repose for long. The Tax Reform Act of 1986166 amended the alimony definition yet again to eliminate the six-year payment period, to reduce the recapture period to three years, and to increase the recapture trigger amount from $10,000 to $15,000,167 exactly like the first compromise recapture rule (f) RECOMPUTATION WHERE EXCESS FRONT-LOADING OF ALIMONY PAYMENTS.- (1) IN GENERAL.--If there is excess alimony payments- (A) the payor spouse shall include the amount of such excess payment in gross income for the payor spouse's taxable year beginning in the 3rd post-separation year, and (B) the payee spouse shall be allowed a deduction in computing adjusted gross income for the amount of such excess payments for the payee's taxable year beginning in the 3rd post-separation year. (2) EXCESS ALIMONY PAYMENTS.--For purposes of this subsection, the term "excess alimony payments" means the sum of- (3) EXCESS PAYMENTS FOR 1ST POst-Separation YEAR.--For purposes of this subsection, the amount of the excess payments for the 1st post-separation year is the excess (if any) of- |