Tax stuff I think is interesting. It is either copied from my primary blog on forbes.com http://www.forbes.com/sites/peterjreilly/ or stuff that I did not put there because being on forbes is a good gig and they have, you know, standards. Also some guest posts.
Saturday, September 6, 2014
IRS Strikes Out Retired Pitcher Dave LaPoint - Alimony Not For The Dead
Originally Published on forbes.com on April 6th,2012
Dave LaPoint was a major league pitcher in the eighties and into the nineties. He pitched for the Yankees and for numerous lesser teams and then moved on to minor league coaching. He was recently in Tax Court over alimony deductions in 2002 and 2004. The deductions were rather hefty $294,749 and $385,964. He should have had Newt Gingrich’s divorce attorney. As it turns out the Tax Court ruled the payments were not deductible.
LaPoint married Laura Jean Clear in 1990 and entered into a post-nuptial agreement in 1991. Under the terms of the agreement he was required to deposit $50,000 per year into a bank account in her name as long as he was playing major league baseball. He also assigned to her his interest in “collusion moneys”. At the time there was an arbitration going on between the players and the owners alleging that the owners had conspired to hold down salaries. The post-nuptial agreement included an important clause - Binding on Heirs. This post-nuptial agreement shall inure to the benefit of, and be binding upon, the parties hereto, their heirs, executors, legal representatives and assigns.
Ms. Clear filed for divorce in 2002 and argued that the post-nuptial agreement should be binding. She won on that point and the divorce was fianlized in 2005. As the divorce was proceeding the collusion money ship finally came in:
On his Federal income tax returns for 2002 and 2004 petitioner reported payments of MLB proceeds of $294,749 and $385,964, respectively, as gross income and deducted corresponding amounts as alimony paid. The returns were prepared by Milton Shaiman, a certified public accountant and member of the Tax Court bar, who advised petitioner that the payments were deductible as alimony. Respondent[IRS] subsequently disallowed the alimony deductions in a statutory notice of deficiency.
There are four requirements that have to be met for a payment to be alimony. The payment has to be under a divorce or separation agreement. There has to not be an agreement that the payment is not alimony. The couple has to be living apart. The fourth requirement is:
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
The Court noted that:
The plain terms of the postnuptial agreement assign petitioner’s interest in the MLB proceeds to Ms. Clear. Because by its terms the postnuptial agreement inures to the benefit of her “heirs, executors, legal representatives and assigns,” Ms. Clear’s right to receive the MLB proceeds would survive her death.
Mr. LaPoint’s attorney argued that since under the agreement Ms. Clear had waived support the payments were a substitute for alimony. The Court pointed out, however, that she also waived a property settlement and that the definitions in Code Section 71 were put into place to avoid that kind of guesswork about intent.
The 20% accuracy penalty was not upheld on the alimony disallowance because Mr. LaPoint, a baseball player, as the Court noted, had relied on a CPA/tax attorney, to whom he had provided all relevant information. Possibly a hockey player would have been held to a higher standard, but they did not get into that. He was hit with the penalty on $158,615 in unreported interest income, for which he had no explanation.