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will be alimony, will be deductible by Mr. Christoph, and includable in Ms.

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[Duse's] income.' ... In exchange for this amount of money, Ms. Duse agreed to
release Mr. Christoph from future alimony payments....

At the hearing, Ms. Duse testified that she agreed to the terms and conditions of
the settlement agreement.... Ms. Duse conceded that the payment would be
income to her and that she would declare it as income.... With that

understanding, the parties concluded that they had reached an agreement settling
the case.

Judge Cheatham subsequently entered an order on June 1, 1989, adopting the oral
settlement agreement as the order of the court.... Soon after Judge Cheatham
adopted the oral settlement agreement, Mr. Christoph transferred the agreed-upon
$250,000 to Ms. Duse.

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The $250,000 figure was described as the present, discounted value of the future stream of payments under the original agreement.

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The government disallowed Mr. Christoph's tax deduction for the $250,000 payment. Mr. Christoph paid the deficiency and sued for a refund. The government moved for summary judgment on several grounds, and Mr. Christoph similarly moved for summary judgment in his favor. Quite surprisingly, there was no discussion of whether Mr. Christoph's payment obligation would have disappeared if Ms. Duse had died prior to receipt of the payment, as occurs routinely in denying alimony status for lump-sum payments of the payee's attorneys' fees and costs relating to the divorce or medical expenses. Rather, the court ruled in favor of Mr. Christoph when it found out that Ms. Duse had (unsurprisingly, in my view) excluded the receipt from her gross income (likely on the ground that the stop-at-death requirement was not satisfied) and that the IRS had challenged her exclusion as improper. The government settled the case with Ms. Duse under an agreement that they, essentially, split the difference, with Ms. Duse increasing her gross income by $125,000.

This information demonstrates to this Court that the IRS essentially agreed with Mr. Christoph's position regarding who was supposed to the claim the $250,000 as taxable income. It is true that the IRS reached a compromise settlement and, in so doing, only recovered from Ms. Duse half of what she owed. The IRS did this at its own peril. Mr. Christoph cannot be penalized simply because the IRS compromised with Ms. Duse.224

What an odd case! I think it likely that, even though the lump-sum payment was intended to replace a stream of payments that evidently satisfied the tax definition of "alimony,"

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the lump-sum payment itself failed the stop-at-death requirement. That is to say, I would bet that if Ms. Duse had died prior to receipt of the payment, her estate could nevertheless probably have successfully sued to receive the lump-sum amount. As we have seen, the parties have no power to opt into alimony treatment under the statute, as they clearly attempted to do here; they have only the power to opt out of the includable/deductible system under current law.

I think that this case also illustrates that large, lump-sum payments are not always property settlements, contrary to the Code's presumptions. They often, as here, intend to replace an ongoing relationship that is required with periodic payments with a lump-sum payment that represents the present, discounted value of the future payment stream. Such a payment can allow the parties to go their separate ways sooner.

Moreover, even if the court order did specify that the payment obligation would disappear if Ms. Duse died before receipt, wouldn't this have been nothing short of a formal "technicality" in the pejorative sense of the term in view of the fact that Mr. Christoph had to and did—pay the amount as soon as the court entered its order? That Ms. Duse might have died in the few days (or perhaps even hours, for all I know) between the entering of the court's order and the payment is so unlikely an event that to turn the answer to the question of who should be taxed on such lump-sum payments on such an inquiry seems nothing short of ridiculous.

In short, I think there is a good chance that this payment did not qualify as tax alimony, even though it was allowed to stand as tax alimony. I find it ironic that the bargaining and agreement between the parties recounted in the quotation above, with the parties themselves deciding who should be responsible for the tax due on these payments, was just the kind of system that I advocate but which is not currently available in all instances (this case notwithstanding).

Another case that demonstrates the depth of misunderstanding on the part of divorcing couples (as well as their family lawyers) is Rosenthal v. Commissioner,225 where the parties provided in their agreement that the spousal support payments were intended to be taxable to the wife and deductible by the husband but that the payments would not terminate if the payee wife should die during the 48-month payment period. Needless to say, the stipulation that the payments would not stop if the payee should die prevented these payments from qualifying as "alimony." The parties apparently believed that they could opt "into" as well as "out of" includable/deductible alimony treatment by private agreement. The result, though mandated by the current Code, upsets the parties' original bargain. "If these payments are not taxed in accordance with the original expectations of the parties, ... then, in essence, the terms of the settlement have been changed. The party who escapes taxation obtains a windfall at the expense of the party who is unexpectedly taxed."226

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70 T.C.M. (CCH) 1614 (1995).

Stanley M. Grossbard, Note, Taxation of Divorce Settlements and the Property/Support Distinction, 55 S. CAL. L. REV. 939 (1982).

On a similar note, the Tax Court held that a $10,000 "lump sum alimony" payment was excludable/nondeductible because the stop-at-death requirement was not satisfied, even though the divorced spouses "stipulated" to the Tax Court during the litigation that it should be includable/deductible.

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The stop-at-death rule surely triggered what should have been unnecessary litigation (in my world) in Ryan v. Commissioner. A 1989 divorce court order required Gregory Ryan to pay his ex-wife, Frances Ryan, $700 per month for January, February, March, and April of 1990 and $250 per week thereafter until her death or substantial changed circumstances or until a further court order. In 1991, Gregory appealed the alimony order, claiming that the trial court awarded an amount of alimony in excess of what Frances had requested, since she had requested alimony for a term of only eight years. The appeals court entered a per curiam opinion instructing the trial court to change the lifetime alimony award to an award of “$250 a week for eight years. Frances treated this amendment as removing the stop-at-death provision contained in the original judgment and thus excluded the payments received, while Ryan deducted them, claiming that the amendment meant only that Frances was entitled to the alimony payments for eight years or until her earlier death. The court agreed with Ryan. "[W]e find that the termination upon death provision contained in the Judgment of Divorce was not modified by the higher court's opinion. The issue raised in the appeal was the length of the alimony payments, not whether the payments were in fact alimony."230 Gregory Ryan asked the Tax Court to force the government to pay the $15,000 in attorneys' fees and costs that he had to incur to secure his right to his alimony deduction. The Tax Court directed him to the proper procedural means for making such a request and thus declined to rule on it.

I could go on to describe many other similar cases cited in footnote 173, but I fear that I am becoming repetitious. I nevertheless felt that it was necessary to describe a healthy chunk of real-world cases, since I think that all too often academic discussions of how "best" to tax transfers in divorce occur in a vacuum in which unrealistic assumptions are made regarding what the terms of real-world divorce agreements look like. They do not order payment streams that fit nicely into the boxes created in I.R.C. § 71. What cases like the ones discussed here show is that the current rules, which were the result of political compromise rather than grand theory, were drafted by people who really had no idea of what real-world divorce agreements and court orders look like. They certainly could not have envisioned the kind of litigation described here as a natural and right consequence of the rules that they drafted. What they show, in fact, is that the rules are broken. Neither divorcing parties nor the government should have to undertake so much litigation in order to determine which, between two parties, shoulders the tax burden on cash payments in divorce. Divorce, already a stressful and expensive experience, should not be

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McMahon v. Comm'r, T.C. Summary Op. 2001-6, No. 12148-99S (Jan. 24, 2001).

76 T.C.M. (CCH) 453 (1998).

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made more stressful and more expensive by the unanticipated intrusion of so many Federal tax controversies.

In sum, the House Report leading to the 1984 changes to the definition of alimony complained of the impact of state law on federal tax consequences, the inability to predict with certainty the tax consequences of transfers in divorce, and the high degree of administrative difficulties and resulting litigation in this area involving many, many individuals (and family law attorneys) who are not well-versed in tax law.

The committee believes that the present law definition of alimony is not sufficiently objective. Differences in State laws create differences in Federal tax consequences and administrative difficulties for the IRS.... The committee bill attempts to define alimony in a way that would conform to general notions of what type of payments constitute alimony as distinguished from property settlements and to prevent the deduction of large, one-time lumpsum property settlements."

Things have not changed as much as anticipated because the underlying assumptions informing current law were not necessarily accurate. As Professor Berman put it:

The attempts at reform failed because Congress predicated its efforts on false
premises. First, there do not exist "general notions of what type of payments
constitute alimony as distinguished from property settlements." True, a single
lump sum payment of $1,000,000 appears distinguishable from annual payments
of $20,000 "for the life of the payee until she remarries." But the bulk of
payments between divorced spouses do not fit into these neat categories. If they
did, much of the reform encompassed in the 1984 Act would have been
unnecessary-Tax Court judges could have treated the distinction between
alimony and property settlements the way Justice Stewart treated pornography-
they would know it when they saw it.

Even if there were general notions of the distinction between alimony and
property settlements, state court judges do not rigidly adhere to the distinctions.
Some judges order extended installment payments as a means of giving the wife
an interest in the husband's property which cannot be divided while others
fabricate an interest in a professional degree because alimony laws do not
adequately compensate the wife."

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2. Discussion and Recommendations

With respect to support payments (as opposed to property settlements), there are two fundamentally different perspectives one can take, as briefly described earlier, and they

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232

Donald H. Berman, The Alimony Deduction: Time to Slaughter a Sacred Cow, 5 AM. J. TAX POL'Y 49, 70-71 (1986), supra note 173 (footnotes omitted).

233 See supra notes 16-24 and accompanying text.

provide different starting points (and thus different likely ending points) for the discussion. One examines each party, the payor and payee, and queries whether the payment (or receipt) should be deductible (or includable) under traditional notions of what constitutes "income" for tax purposes. Under this view, each party is considered independently of the other. The recipient would have to include the amounts in income-at least under Glenshaw Glass notions of the term-since the receipt would constitute an undeniable accession to wealth of the recipient, clearly realized, over which she has complete dominion. Under this perspective, the payor might also remain taxable on the amounts paid out to the recipient if one defines nondeductible "personal consumption" as any outlay not in pursuance of income creation—as is generally the case under current law-rather than an outlay that does, in fact, purchase personal consumption enjoyed by the payor. This approach, in other words, could very possibly result in taxation of amounts paid out as alimony or child support to both parties.

This seems to be the perspective taken by the Finance Committee staff members in 1984 in arguing for nondeductibility of all payments by the payor, since their argument focused on whether the payor's payment, viewed solely from the payor's perspective, contributed to earning includable income. As reported by Ms. Mattei as a result of her telephone interview, "Senate Finance committee staff counsel Graham questioned the validity of continuing this major exception to the general rule that only business expenses (in contrast to personal expenses) are deductible Although it was not clear whether the Finance Committee staff members also

....

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234 Mattei, supra note 40, at 193 n.120; see also Berman, supra note 232 (also advocating repeal of the alimony deduction, in conjunction with repeal of I.R.C. § 71). One of Berman's chief arguments is that, since the precipitating event causing enactment of the inclusion/deduction system was the high marginal rates then in effect, the inclusion/deduction system is no longer needed with the significantly lower marginal rates in effect today and thus should be repealed. I would respond that such an argument presumes that the only justification for an inclusion/deduction system is the presence of high marginal rates of the payor. But it is often true that a provision enacted for one reason can continue to be justified for other reasons even after the conditions originally prompting enactment are no longer present. For example, I.R.C. § 162(a)(1) explicitly allows a deduction for a “reasonable” salary.

The provision was originally adopted in 1918 to allow a reasonable salary to be deducted for purposes of an excess profits tax, even though no salary was actually paid because the profits were being plowed back into the business. The provision's original purpose was entirely protaxpayer.

Today, it is a provision raised by the Commissioner against taxpayers to disallow deductions for what are in fact disguised dividends or disguised payments for property. The purpose of the provision has thus evolved over time so that now its purpose is chiefly seen as protecting the double tax in our classical corporate tax structure.

Deborah A. Geier, Interpreting Tax Legislation: The Role of Purpose, 2 FLA. TAX REV. 492, 507 (1995 (citing Erwin N. Griswold, New Light on “A Reasonable Allowance" for Services, 59 HARV. L. Rev. 286 (1945); Treas. Reg. § 1.162-7). In other words, Berman's argument is persuasive only if there is no sound justification for the inclusion/deduction system apart from high marginal tax rates. For the reasons discussed in the text, I believe that there are

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