TAX DEDUCTION QUESTION: IS IT REALLY ALIMONY?

A recent Tax Court decision serves as a reminder that couples should carefully scrutinize tax considerations in connection with a divorce.

In this case, David LaPoint, a professional baseball player, entered into a postnuptial agreement (David LaPoint v. Commissioner, T.C. Memo 2012-107, April 12, 2012). The agreement provided, among other things, that:

  • He assigned to his wife his interest in any funds he might receive as the result of an arbitration settlement between the Major League Baseball Players Association (MLBPA) and the club owners.
  • He agreed to deposit $50,000 annually in a bank account owned by his wife for as long as he received compensation for professional baseball.
  • He agreed to maintain health insurance for his wife and any minor children.

The couple later divorced, and the postnuptial agreement became the terms of the divorce settlement. As a result, LaPoint paid his ex-wife approximately $680,000 from the MLBPA settlement. He deducted these payments as alimony.

One of the conditions specified in the tax law for a payment to be considered alimony is that the payments must, by their terms, cease at the recipient's death. The postnuptial agreement made no provision for the payments to cease at the ex-wife's death. In fact, the agreement specified that it inured to the benefit of her "heirs, executors, legal representatives, and assigns."

As a result, the court denied LaPoint's alimony deduction.

 
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