One of the bitter little side battles that often accompanies a divorce involves the Internal Revenue Service. The issue is whether payments from one member of the dissolved partnership to the other are classified as alimony or child support. The difference is that alimony is deductible by the payer and is taxable as ordinary income to the recipient, while child support is neither taxable nor deductible, although the payer can claim the children as dependents.
In a 1974 settlement in Kentucky, the husband was ordered to pay "$500 per month toward the support of the family," which he did for three years. He treated the money as child support and did not claim the deduction for alimony. Then his ace accountant read the decree and asked the IRS whether the language meant the money was alimony or child support. Alimony, said the IRS. So the former husband amended his filings to take advantage of his improved tax status.
The former wife's tax situation was subsequently audited, and the IRS found she had treated the alimony as child support and thus she owed back taxes. She went into divorce court and, armed with the testimony of the original judge that child support was his intention, got a retroactive amendment to the divorce decree that classified the money as child support. No way, said the Tax Court in a ruling last week. Under Kentucky law, the court said, the retroactive amendment could not correct a judicial error; only an appellate court could do that. The former wife owes the back taxes, the court said (Graham v. Commissioner).