In reviewing Paul T. Banach v. Commissioner – TC Memo 2010-33 – I learned that payments may be claimed as alimony under §215 if all four requirements of §71(b)(12) are met. Payment in cash will be considered alimony only if the:
(1) payment is received by (or on behalf of) a spouse under a divorce or separation agreement;
(2) agreement does not designate the payment as a payment which is not included in gross income or allowable as a deduction under §215;
(3) payor and the payee are not members of the same household at the time the payment is made; and
(4) liability to make the payment ends for any period after the death of the payee.
All of the above requirements except the fourth were met in this particular case. As a result the Tax Court looked to Florida state (taxpayer’s home state) law which basically says a lump sum alimony payment does not terminate with the death of the recipient. Subsequently Paul was denied a deduction for the lump sum alimony payments he made to Deborah in 2006, but the accuracy related penalty was abated.