Can Child Support Be Deducted As Alimony?

In the landmark case of J. Lester, the Supreme Court ruled that amounts paid to a spouse were not considered child support for tax purposes unless the divorce decree, instrument or agreement specifically designated that such amounts were payable only for child support. Many divorce instruments were “Lesterized” to provide that all support payments were treated as taxable alimony despite the fact that the payments also included an element of child support. In the Tax Reform Act of 1984, Congress overruled the Lester decision. Code Section 71(c) states that payments fixed by the divorce instrument (in terms of an amount of money or a part of the payment) as sums payable for the support of children of the payor spouse are not alimony.

Alimony payments will be deemed to be child support if the payments are to be reduced based on a contingency relating to a child. Examples of possible contingencies include attaining a specified age, marriage, death, leaving school, leaving the household, getting a job or attaining a certain income level. A reduction of payments at a time which is “clearly associated” with an aforementioned contingency will also cause the payments to be deemed child support.

The Regulations to Code Section 71 define two situations in which a reduction of alimony payments will be presumed to be “clearly associated” with a child contingency.

1) If the alimony payments are to be reduced not more than six months before or after a child is to attain the age of 18, 21 or the local age of majority, the reduction will be presumed to be “clearly associated” with a child contingency.

2) When alimony payments are scheduled to be reduced on two or more occasions which occur not more than one year before or after a different child attains a certain age between the ages of 18 and 24, inclusive, the reductions will also be presumed to be “clearly associated” with a child contingency.

The above presumptions can be rebutted by showing that the alimony reductions were done at times determined independently of any contingencies relating to the children of the payor spouse. The first presumption can be rebutted if the alimony reduction is a complete cessation of all alimony payments during the sixth post-separation year or at the end of a 72- month period. It may also be rebutted by showing that alimony payments are to be made for a period customarily provided in the local jurisdiction, such as a period equal to one-half of the duration of the marriage.

A Taxpayer Attempts (Unsuccessfully) to Reinstitute Lester

In Private Letter Ruling 9251033, a taxpayer attempted to reinstitute the Lester case based on the following facts:

H was to pay W “unallocated support” which was reduced to $533 per month on Date A, further reduced to $226 per month on Date B and ceased as of Date C. Dates A, B, and C correspond to the 18th birthdays of the children born during the marriage. The divorce instrument included statements that the unallocated support payments would be includable in the gross income of the wife and deductible as alimony under Code Section 71 by the husband.

The IRS ruled that the payment reductions were occurring on the happening of a contingency related to a child. The payments were treated as payable for child support rather than as alimony and, consequently, none of the payments was taxable to the wife, nor were they deductible by the husband. The language included in the divorce instrument which stated that the payments were to be alimony for tax purposes does not override Internal Revenue Code Section 71(c) which mandates that the payments be treated as child support.