Taxation of Alimony (Including Recapture)

As a result of their divorce, Fred agrees to pay alimony to Tammy of $20,000 per year. The payments are to cease in the event of Fred's or Tammy's death or in the event of Tammy's remarriage. In addition, Tammy is to receive their residence, which cost them $100,000 but is worth $140,000.

a. Does the fact that Tammy receives the residence at the time of the divorce mean that there is a reduction in alimony, which will lead to Fred having to recapture an amount in the subsequent year?

b. How will the $20,000 payments be treated by Fred and Tammy?

c. Would recapture of the payments be necessary if payment ceased because of Tammy's remarriage?

Under I.R.C. § 215, in the case of an individual, there shall be allowed as a deduction an amount equal to the alimony or separate maintenance payments paid during such individual's taxable years. I.R.C. § 215 (2001). However, in order for payments to be deductible, the eight requirements of I.R.C. § 71 must be met:

1. Payments must be made in cash;
2. Payments must be to a spouse or on behalf of the spouse;
3. Payments must be made pursuant to a divorce or separation instrument;
4. Payments may not be designated as non-qualifying for tax deductions by the payer or non-taxable to the recipient;
5. Spouses may not be members of the same household;
6. The payment must terminate at the recipient spouse's death;
7. Spouses may not file a joint return; and,
8. Payment can not constitute child support.

d. What is Tammy's basis in the residence?