This post was originally published on Forbes Jul 24, 2015
When Christina Mehriary entered into a marital settlement agreement with Bradley Williams, the agreement included language that advised the parties to seek the opinion of a tax professional as to the tax ramifications of the agreement. Talk about closing the barn door after the horse has left. At any rate the $4,000 per month for 60 months that Ms. Mehriary was required to pay Mr. Williams as non-modifiable alimony, does appear to pass muster as deductible to the payor and taxable to the payee and lasts long enough to not trigger the alimony recapture rule.
Petitioner's argument that the transfer of $80,000 (the fair market value of the Sweet Briar property) was deductible as an alimony payment fails because it was not a payment in cash. Instead the transfer was a transfer of property and therefore does not constitute an alimony payment. Although petitioner and Mr. Williams agreed that petitioner's transfer of the Sweet Briar property would replace $80,000 of petitioner's alimony obligation, the intent of the parties does not determine the deductibility of a payment as alimony under section 71. See Okerson v. Commissioner, 123 T.C. 258, 264-265 (2004). Instead the test for [*7] whether a payment is deductible as alimony is a straightforward, objective test that rests entirely on the fulfillment of explicit requirements set forth in section 71, including that the payment be made in cash or a cash equivalent.
Petitioner set forth no specific facts to show that she acted with reasonable cause and in good faith. Petitioner was advised to seek the opinion of a tax professional when she signed her marital settlement agreement, but she did not offer any testimony or other evidence to show that she relied on professional tax advice. See sec. 1.6664-4(b)(1), Income Tax Regs. Petitioner merely testified that [*9] she relied on her insurance company's characterization of the Sweet Briar property as investment property. The insurance company did not provide tax advice, and the record does not reflect that it ever represented itself as a competent professional.
On the other hand, a nice round $80,000 deduction on Schedule A sticks out like a sore thumb. Ms. Merhriary represented herself in Tax Court, which makes me suspect that she prepared her own return. I think that almost any preparer, even one who is technically weak, would not have gone with Schedule A. I have to admit that I'm not sure where I would have ended up. I do think the Tax Court has it right, but I am curious as to how another preparer might have handled this situation if Ms. Mehriary had plopped it on his or her desk.