English law applies in dispute over lump-sum alimony payment

The Tax Court found that in determining the deductibility of a lump-sum alimony payment, the laws of England applied where a taxpayer had married in New York but divorced in England.

Background

Gary Wolens and his now ex-wife married in 1986 in New York. Soon thereafter, the couple moved to the United Kingdom. Twenty years later, in January 2006, they were divorced pursuant to a divorce order issued under English law. Under the terms of the divorce order, Wolens was required to make a yearly payment of £441,666 on April 15 of 2007, 2008, and 2009. However, the order was silent as to whether Wolens would have been required to continue making the payments after the death of his ex-wife.

Wolens took a $650,088 deduction on his 2009 return for the £441,666 that he paid to his ex-wife in 2009. The IRS issued Wolens a notice of deficiency for 2009 in which it denied his deduction for alimony paid, resulting in a deficiency of $183,864. The IRS claimed that the payment was not a deductible alimony payment because it did not meet the requirement of Sec. 71(b)(1)(D) that “there is no liability to make any such payment for any period after the death of the payee spouse and there is no liability to make any payment (in cash or property) as a substitute for such payments after the death of the payee spouse.”

Wolens filed a petition in Tax Court disputing the IRS’s conclusion.

The Tax Court’s decision

The Tax Court held that Wolens’s obligation to make the 2009 payment under the divorce order would not have terminated upon the death of his ex-wife, so the payment was not a deductible alimony payment. In making its determination, the Tax Court applied English law.

The Tax Court explained that in determining whether a post-death obligation exists, a court will look to the terms of the divorce order. If it is silent, the payments will meet the requirement if they terminate upon the payee’s death by operation of state law. If the applicable state law is ambiguous, the court will read the divorce order and make its own determination based on the language of the divorce order.

Both Wolens and the IRS agreed that the divorce order was silent on the issue of a post-death obligation, so the Tax Court was obliged to determine if the applicable state law answered the question. Wolens argued that the applicable state law was the law of marital domicile, which he claimed was the law of New York. The IRS argued that it was the law of the United Kingdom, where the divorce had been issued. The Tax Court found that because neither party was disputing the validity of the divorce, the law under which the divorce order was issued, not the law of marital domicile, controlled.

The court therefore referred to the Matrimonial Causes Act 1973, c. 18 (Eng.), which governs divorce orders and related orders for financial provisions in England and Wales. The Act specifically allows for periodical payments, secured periodical payments, or lump-sum payments in a financial provision. Section 28 of the Act expressly provides that periodical payments and secured periodical payments terminate on the death of one of the parties to the marriage. However, the Act is silent on this point with respect to lump-sum payments. The Tax Court concluded that the omission of lump-sum payments from the list of payments terminating upon death was intentional, and, under the laws of England, it was unambiguous that lump-sum payments under a financial provision would not end upon the death of one of the parties to the marriage.

Because it found that the law was not ambiguous on this point, the court concluded it did not need to review the Wolenses’ divorce order to make its decision. However, the court stated that even if it concluded that English law was ambiguous, it had found nothing in the divorce order that indicated that Wolens’s obligation to make the payments would have ended upon the death of his ex-wife.

Reflections

Under the recently passed tax bill, for any divorce or separation instrument executed after Dec. 31, 2018, alimony payments will no longer be deductible by the payer or includible in income by the payee. This delayed effective date for the provision is likely to cause confusion, so practitioners should make sure that clients who are going through a divorce over the next year understand that different rules may apply to them based on when they execute a divorce or separation agreement.

Wolens, T.C. Memo. 2017-236