Tax Treatment of Ms.Katis - Case Study Example

In the tax year 2003, Ms. Katis filed a separate return claiming single tax status and failed to include in her income $18,000 of payments received under the agreement. The IRS assessed the additional amounts due on the return. IssuesMs. Katis contended that because she and Mr. Katis were not legally separated during the tax year 2003, the payments were not alimony. Further, she contended the separation agreement was not legally binding and therefore the payments made under it were not alimony. Can Ms. Katis avoid paying the IRS assessed taxesConclusionMs.

Katis cannot avoid paying the IRS assessed taxes. The $18,000 of payments received under the agreement will still be included in her gross income and will render her added taxes. Since both Mr. and Ms. Katis filed and signed a separation agreement-which is legally binding, contrary to what Ms. Katis contends-and did not specify that the payments are not alimony, then it goes to say that Ms. Katis should pay the IRS assessed taxes. LawSection 71(b)(2) defines a "divorce or separation instrument" as (A) a decree ofdivorce or separate maintenance or a written instrument incident to such decree, (B) aa written separation agreement, or (C) a decree requiring a spouse to make payment forthe support or maintenance of the other spouse.Section 1.71-1T(b), A-8, of the Temporary Income Tax Regulations provides thatspouses may designate that payments otherwise qualifying as alimony or separatemaintenance payments shall be nondeductible by the payor and includible from grossincome by the payee by so providing in the divorce or separation instrument, as definedin section 71(b)(2).

See also H.R. Rep. No. 98-432 at 1496 (1984), reprinted in 1984U.S.C.C.A.N. 697, 1138 ("The parties, by clearly designating in a written agreement,can provide that otherwise qualifying payment will not be treated as alimony for federalincome tax purposes and therefore will not be deductible or includible in income."); cf.