By David H. Lee
March 1,2012 was the effective date of the Act Reforming Alimony in the Commonwealth. The provisions are contained in Sections 48 through 55 of Chapter 208 of the General Laws of Massachusetts.
Four different types of alimony are identified under the new law: General Term Alimony. which may be terminated based on durational limitations relating to the length of the marriage, suspended, terminated or reduced based on recipient's cohabitation, and terminated when the payor reaches full retirement age; Rehabilitative Alimony, which may be terminated based on a durational limitation within five years; Reimbursement Alimony. which is intended for short marriages and may be terminated after either short term periodic payments or a one-time payment; and Transitional Alimony, which is also intended for short marriages and which may be terminated after either a one-time payment or short tern1 periodic payments lasting for no longer than three years.
All four types of alimony terminate under the statute upon the death of the recipient spouse. The significance of this is that all cash or cash equivalent payments in satisfaction of these obligations will likely qualify as alimony payments under section 71 of the Internal Revenue Code and be includable in the income of the recipient and deductible by the payor.
However, one needs to beware of two provisions of the Code which can impact that assumed income tax treatment: Recomputation and Alimony Being Fixed as Child Support.
Excess alimony payments
Recomputation rules address the issue of excess front-loading of alimony payments. These rules call for the inclusion in the payor's income in the third year post separation of any amount of "excess alimony payments" over the prior three years and for the allowance of a deduction from gross income for the recipient in the third post separation year for that same amount.
The three post separation years are not the 36 months from the commencement of alimony payments, but instead cover the three tax years that follow the commencement of alimony payments pursuant to a divorce judgment or separation agreement. This means that if alimony payments begin any time in 2012. the third post separation year would be 2014.
The effect of the recomputation formula is that while the alimony payments may be includable/deductible in the years paid, the excess alimony deduction for the recipient and inclusion for the payor will come in that third post separation year.
Under the new alimony law. a possible problem can arise when dealing with any type of alimony order of short duration. or where soon after the alimony order is entered there is a termination or suspension by reason of cohabitation or termination by reason of the payor reaching full retirement age.
The formula for calculating excess alimony in the third post separation year is A + B, where A = (year 2 payments) - (year 3 payments + $15,000) and B = (year 1 payments) - [(year 2 payments - A) + year 3 payments]/2 + $15,000.
As an example. in a situation where 12 months of Reimbursement or Transitional Alimony is set at $4,000 per month starting in May 2012, then A = $16,000 - ($0 + $ 15,000), B = $32,000 - [($ 16,000 - $ 1,000) + ($0)/2 + $ 15,000]
and A + B = $10,500 of excess alimony payments recomputed in 2014.
The recomputation rules do not come into play if payments end early because of the death of either party or the remarriage of the recipient. Recomputation is also not applicable in several other circumstances: Sec 71 (b )(2)( c) payments, which are temporary alimony order payments; alimony payments set as a fixed portion of income from business, property or compensation from employment that are to be paid over a 36 month period (rather than over 3 post separation years); and Sec. 682 alimony trust payments that are distinct from alimony payments between the parties.
If these exceptions do not apply, there are a few ways to deal with the issue of recomputation:
- Adjust payments to lower amounts and make them nonincludable/nondeductible.
- Factor in what the likely recomputation will be in the third post separation year and then make an equitable adjustment for the recomputation impact.
- Spread the payments out in smaller amounts over a long enough period of time to avoid any excess alimony recomputation.
- Provide that the recipient of a recomputation benefit has the obligation to reimburse the payor at the end of the recomputation period in the amount of the benefit to the recipient, loss to the payor or some amount in between with a payment designated as nonincludable/non-deductible.
- Consider making additional 71 (b)(2)(c) payments and set later amounts which would not result in "excess alimony".
You should consider the recomputation issue in negotiating agreements, and if no agreement results present the issue to the court in your proposed judgment so the court can make adjustments to avoid recomputation.
If you receive a judgment and recognize that there is a recomputation problem, submit the tax issue to the court post-judgment within the time pennitted by the Rules of Domestic Relations Procedure as addressed in Fechlor v. Fechlor , 26 Mass. App. Ct. 859 (1989) for possible amendment. But you will need to bring these issues to the court's attention and ask for what you want. Do not expect the court to do your work for you.
You should also keep in mind that the recomputation issue may arise with requests for modification or termination by reason of cohabitation or otherwise within the three post separation year period.
Alimony fixed as child support
If all the requirements for alimony payments under Internal Revenue Code Sec 71 are met, then in most cases the income tax treatment will be includable/deductible. However, if the alimony is treated as fixed as child support, this is not the case and the payments from inception will not be includable/deductible.
Alimony will be treated as fixed as child support if by its terms it is reduced (a) upon the happening of a contingency relating to a child of the payor or (b) at a time which can clearly be associated with such a contingency.
The explanation for this can be found in Temporary Regulations 1.71-1T Questions and Answers 17 and 18. A contingency relating to a child means a specific identifiable circumstance such as a child's reaching a particular age, dying, marrying, leaving school etc. A time which can clearly be associated with such a contingency is defined as a reduction not more than six months before or after the date the child is to attain age 18, 21 or the local age of majority.
The Q&A goes on to state emphatically that "'ALL OTHER SITUATIONS OF REDUCTION WILL NOT BE TREATED AS CLEARLY ASSOCIATED WITH THE HAPPENING OF A CONTINGENCY RELATED TO A CHILD."
This consideration of alimony being fixed as child support applies to alimony orders where you can compute the reduction date at the time of entry of the order. Fortunately, the presumption of an alimony payment being fixed as child support by reason of its being reduced at a time which can clearly be associated with a contingency related to a child is capable of being rebutted:
- The presumption may be rebutted if you can show that the time for reduction is determined independently of contingencies relating to a child.
- The presumption can be conclusively rebutted if there is a complete cessation of alimony during the 6th post separation year or at the expiration of 72 months.
- The presumption may be rebutted by showing that alimony is only for a period customarily provided for in the local jurisdiction (such as half the length of marriage).
While we do not presently have any history for the application of the new alimony laws nor do we have anything which could be clearly identified as custom in our jurisdiction with respect to its application, the alimony scheme of durational limits set forth in the statute suggests that the first and third examples are most likely to be used to rebut the presumption.
To make it easier to rebut the presumption, it is advisable that in separation agreements and judgments the statute be specifically referenced if the timing of termination or reduction would result in a presumption of an alimony payment being fixed as child support.
Citing specific wording of the statute by section or circumstances which led to setting the time for alimony termination or reduction would also support rebuttal.
For example. if the parties had been married for a length of time whereby the durational limit would result in a date of termination within six months before or after a child turning 18, wording might be advisable such as "The alimony termination date set forth in this judgment (agreement) was determined by reference to MOL c. 208 sec. 49(b)(#) which provides in relevant part that' ............... ' and is not based on any contingency related to a child" might be advisable.
David H. Lee practices/family law as a partner at Lee, Rivers & Corr LLP in Boston.
Previously published in the March 8, 2012 issue of Massachusetts Lawyers Weekly, reprinted here by permission of the author.