TO FileFROM Stuart Student RE Ben (tax year 2016)

TO: File
FROM: Stuart Student
RE: Ben (tax year 2016)
Facts
Ben, a single taxpayer, divorced his wife, Jennifer. Through a
court settlement between Ben and
his former spouse, Ben paid Jennifer for alimony and child
support. The separation decree
included monthly payments made to Jennifer, where Ben pays
$500 in alimony and $600 in child
support.
Moreover, Ben was unemployed for 3 months of the year and
received a total of $3,000 in
unemployment benefits. During the 9 months of Ben’s
employment, he paid his former spouse
$9,900 and stated that $4,500 was for alimony payments and
$5,400 was for child support. As a
result of his unemployment and lack of sufficient payment, Ben
gave Jennifer his home theatre
equipment to compromise for the missed payments during 3
months of his unemployment. The
theatre equipment has a basis of $6,000 and a market value of
$3,300. Furthermore, Ben made
$72,000 in earned income during the 9 months of his
employment.
Issue and C onclusion 1

Can Ben deduct the alimony payments of $500 a month from his
income? Can Ben deduct the
$600 of child support payments from his income?
Yes, Ben is allowed to deduct the $500 of monthl y alimony
payments that he makes to his
former spouse.
No, Ben cannot deduct the $600 of monthly child support
payments.
Analysis 1
Alimony payments are fully deductible towards the total income
of the individual making the
payments and are included in the income of the individual
receiving the payments. According to
Sec.2 15(a), alimony payments are deductible towards Ben’s
income. Ben can deduce the $500 of
monthly alimony payments made to his former spouse in the
same year in which he makes the
payments. Alimony is strictly defined in Sec.71 of the Internal
Revenue Code. In order for the
payments to be considered alimony, such payments have to be
arranged under a formal divorce
agreement. Ben’s cash payments to Jennifer were ordered by the
court. Second, Ben and his
former spouse cannot reside under the same house, meaning that
they cannot file a joint tax
return. Also, Ben is not liable for any payments after the
spouse’s point of death. After analysis,
Ben’s cash payments of $500 are considered alimony and
completely deductible. Alimony is
considered a For AG I deduction, therefore it is subtracted from
gross income. The former spouse

would have to give Ben her identification number (S.S number)
in order for Ben to insert her S.S
number in his tax return for the year the payments were made
Sec.215(c)(1) and Sec.2 15(c)(2).
This will allow the IRS to confirm the alimony payments by
concluding that the former spouse
did indeed receive alimony payments, which is included in her
gross income. This means that
Ben would have a lower Adjusted Gross Income (AGI), if
everything else is held equal. The fact
that his AGI is lower provides a tax benefit for Ben because
most itemized deductions are off of
AGI floor limits.
The child support that Ben pays his former spouse during the
tax year is not deductible.
Payments made towards the care and support of a child are not
part of alimony Sec.71(c)(1) and
as a result, not allowed to be deduced during any year.
Is the $3,000 of unemployment compensation that Ben received
for the quarter, taxable?
The $3,000 of unemployment compensation is fully taxable.
Analysis 2
Ben is required to include unemployment benefits into his gross
income Sec.85(a). Any amount
of compensation that Ben received during his three months of
unemployment, relating to his

unemployment, is considered unemployment compensation
under law Sec.85(b). Therefore, the
$3,000 of compensation Ben received for his unemployment
during the quarter is subject to
taxation. However, Reg. Sec 1.85-1 stipulates that Ben could be
entitled to limitations that could
benefit him. Under this regulation, effective after Dec. 31,
1978, Ben’s modified adjusted gross
income would have to exceed the base amount of $20,000. Ben
earns $72,000 plus the additional
$3,000 in unemployment giving him a total of $75,000 in
modified adjusted gross income. The
difference between the modified AGI and the base is then
divided by two, which will equal to
$27,500. The rule states that Ben has to include in gross income
the lesser of the $27,500 and the
unemployment compensation. In the case of Ben, he would have
to include the entire $3,000 of
unemployment benefit. In summary, the unemployment
compensation of $3,000 is fully taxable
for Ben.
Does the theater equipment that Ben gave his former spouse as a
means of settling the three
months of not paying alimony qualify as valid alimony? If it
doesn’t qualify, should Ben
recognize a gain or loss from the transfer?
No, the transfer of theater equipment does not qualify as an
alimony payment, therefore it cannot
be treated as an alimony payment for deductibility purposes.
Ben would have to treat the transfer of property as a gift.

Analysis 3
One of the characteristics of alimony is that it is a cash payment
made to the spouse under a
separation decree Sec. 7 1(b)(1). The key word here for Ben is
cash. The transfer of the equipment
is not a cash payment, instead, it is a disbursement of property.
Only cash or cash equivalents,
such as checks or money orders, are considered a valid form of
alimony. A transfer of property is
not a valid form of alimony Temp. Reg. Sec 1.71-lT(b).
Furthermore, Ben has made a transfer of property to his former
spouse. Under Sec. 1041(a)(2), no
gain or loss is reported if the transfer was made to a former
spouse. The transfer, however, must
have occurred because of the divorce. A transfer of property is
determined as being caused by
the divorce if the transfer occurred within one year of the
separation or if the transfer is related to
the termination of the marriage Sec. 1041(a)(2). Since Ben has
been divorced for over two years
he doesn’t meet the one-year limit. Therefore, the transfer must
be related to the termination of
the marriage in order for Ben not to recognize a gain or loss. In
order to be related to the
“cessation of the marriage”, the transfer must satisfy the two
following requirements: (1) the
transfer is made in accordance with a separation decree (2) and
the transfer occurred within six
years of the divorce Temp. Reg. 1.1041-1T, A-7.
The transfer was executed within six years of the divorce and
Ben’s reason for the transfer of the

music theater property was because of the alimony and child
support payments stated in the
separation decree. Based on these facts, the transfer resulted
from the divorce, therefore,
considered a gift.
Instead of Ben transferring the property to his former spouse, he
could have sold the property
himself and then forfeit the cash value to the spouse as alimony
and child support.
Since Ben fell short of the payments he was required to make
under the separation decree, how
should the total payments he made throughout the year be
divided between the alimony and the
child support?
First, Ben would have to fulfill the required child support
payments and whatever remains can be
carried over to alimony.
Analysis 4
Ben was required to make $500 monthly alimony payments and
$600 child support payments to
his former spouse. In total Ben would have to pay $6,000 in
alimony throughout the year and
$7200 in child support throughout the year. Ben only made 9
out of the 12 monthly payments,
falling short of the required amount. Ben forfeited to his former
spouse a total of $9,900 in
alimony and child support. Under Sec.7(c)(3), Ben would have
to allocate alimony payments to
child support first and then report the remaining amount under

alimony. Like in Adrio M. Baur,
TC Memo 2014-117, Ben is not entitled to deduct $4,500 in
alimony. He would first report
$7200 in child support and the remaining $2,700 he would
report as alimony. Similarly, In
GUTHRIE v. U.S., 19 AFTR 2d 1018 (264 F. Supp. 840)
(1967), the court affirmed that alimony
should be reduced to satisfy child support payments. The law
views the portion of payments
towards a minor child as the priority. Whatever remains can be
given, as alimony, to the wife.
Ben would owe Jennifer $3300 in alimony payments. This
revision of Ben’s tax liability would
cause Ben to report less alimony, which will inevitably reduce
his deductions and increase his
Adjusted Gross Income. With a higher AGI, Ben would have to
accumulate more miscellaneous
itemized deductions to overcome the 2% floor, as explained in
Sec 67(a). Most importantly for
Ben, he will have to pay more taxes, similar to what happened
to Adrio M. Baur in the TC Memo
2014-117. In the court ruling, Baur was not given clearance to
report the excess alimony
payments under Section 215. The defendant argued that under
Section 71, a fraction of the
payments must be allocated towards the support of the child.
Is the $72,000 of earned income that Ben received during the
year taxable, if so at what rate?
The $72,000 of earned income is fully taxable and the income is

taxed at the ordinary rate.
Analysis 5
Gross income is calculated by adding all of the income received
by an individual. In other words,
it is income from whatever origin Code Sec.61(a). The
definition of gross income is intentionally
broadened to include income from anywhere, from any activity.
Sources of income include
salary compensation, fringe benefits, fees, awards, winnings,
income from business, income
from investment, trade, illegal activities and many other
sources. Ben’s salary of $72,000 fits in
this category and should be included in gross income. Salary
compensation is classified as
earned income Code Sec.32(c)(2)(A)(i). Earned income or
income from services is taxed at the
ordinary rate; Ben would have to calculate the tax liability of
his salary compensation using his
current marginal tax rate. He would have to use the tax rate
schedule for Single fillers assuming
Ben doesn’t remarry or file as head of household.
Issue and Conclusion 6
How would the transfer of property (the musical theater
equipment) from Ben to his former
spouse affect Ben’s income tax.
Sec. 1041(b) explains that the transfer of the equipment must be
treated as a gift. Ben does not
recognize a gain or loss from the transfer. Moreover, Ben does
not pay any additional estate or
gift tax.

Analysis 6
Ben, the transferor, does not recognize a gain or loss from the
transfer of equipment. For a
transfer to be called a gift, the transferor must not expect
anything in return from his actions. Ben
cannot expect the transfer of equipment to supplant the alimony
and child support. Also, the
transferee, Jennifer, does not recognize any gain or loss when
receiving the property. The basis
for the property is the basis of $6000 when the transferor, Ben
controlled the musical theater
equipment.
According to Sec. 2503(b)(1), Ben does not include in the
year’s total gifts the first $10,000.
This means that Ben has a tax exemption for the gift of $10,000
that would cover the entire basis
of the transferred property. Consequentially, Ben is not subject
to pay any additional gift or
estate taxes from the transferred equipment.
TO: File
FROM: Stuart Student
RE: Ben (tax year 2016)
Facts
Ben, a single taxpayer, divorced his wife, Jennifer. Through a

court settlement between Ben and
his former spouse, Ben paid Jennifer for alimony and child
support. The separation decree
included monthly payments made to Jennifer, where Ben pays
$500 in alimony and $600 in child
support.
Moreover, Ben was unemployed for 3 months of the year and
received a total of $3,000 in
unemployment benefits. During the 9 months of Ben’s
employment, he paid his former spouse
$9,900 and stated that $4,500 was for alimony payments and
$5,400 was for child support. As a
result of his unemployment and lack of sufficient payment, Ben
gave Jennifer his home theatre
equipment to compromise for the missed payments during 3
months of his unemployment. The
theatre equipment has a basis of $6,000 and a market value of
$3,300. Furthermore, Ben made
$72,000 in earned income during the 9 months of his
employment.
Can Ben deduct the alimony payments of $500 a month from his
income? Can Ben deduct the
$600 of child support payments from his income?
Yes, Ben is allowed to deduct the $500 of monthly alimony
payments that he makes to his
former spouse.
No, Ben cannot deduct the $600 of monthly child support
payments.
Analysis 1

Alimony payments are fully deductible towards the total income
of the individual making the
payments and are included in the income of the individual
receiving the payments. According to
Sec.215(a), alimony payments are deductible towards Ben’s
income. Ben can deduce the $500 of
monthly alimony payments made to his former spouse in the
same year in which he makes the
payments. Alimony is strictly defined in Sec.71 of the Internal
Revenue Code. In order for the
payments to be considered alimony, such payments have to be
arranged under a formal divorce
agreement. Ben’s cash payments to Jennifer were ordered by the
court. Second, Ben and his
former spouse cannot reside under the same house, meaning that
they cannot file a joint tax
return. Also, Ben is not liable for any payments after the
spouse’s point of death. After analysis,
Ben’s cash payments of $500 are considered alimony and
completely deductible. Alimony is
considered a For AGI deduction, therefore it is subtracted from
gross income. The former spouse
would have to give Ben her identification number (S.S number)
in order for Ben to insert her S.S
number in his tax return for the year the payments were made
Sec.215(c)(1) and Sec.215(c)(2).
This will allow the IRS to confirm the alimony payments by
concluding that the former spouse
did indeed receive alimony payments, which is included in her
gross income. This means that
Ben would have a lower Adjusted Gross Income (AGI), if
everything else is held equal. The fact

that his AGI is lower provides a tax benefit for Ben because
most itemized deductions are off of
AGI floor limits.
The child support that Ben pays his former spouse during the
tax year is not deductible.
Payments made towards the care and support of a child are not
part of alimony Sec.71(c)(1) and
as a result, not allowed to be deduced during any year.
Is the $3,000 of unemployment compensation that Ben received
for the quarter, taxable?
The $3,000 of unemployment compensation is fully taxable.
Analysis 2
Ben is required to include unemployment benefits into his gross
income Sec.85(a). Any amount
of compensation that Ben received during his three months of
unemployment, relating to his
unemployment, is considered unemployment compensation
under law Sec.85(b). Therefore, the
$3,000 of compensation Ben received for his unemployment
during the quarter is subject to
taxation. However, Reg. Sec 1.85-1 stipulates that Ben could be
entitled to limitations that could
benefit him. Under this regulation, effective after Dec. 31,
1978, Ben’s modified adjusted gross
income would have to exceed the base amount of $20,000. Ben
earns $72,000 plus the additional
$3,000 in unemployment giving him a total of $75,000 in
modified adjusted gross income. The
difference between the modified AGI and the base is then
divided by two, which will equal to

$27,500. The rule states that Ben has to include in gross income
the lesser of the $27,500 and the
unemployment compensation. In the case of Ben, he would have
to include the entire $3,000 of
unemployment benefit. In summary, the unemployment
compensation of $3,000 is fully taxable
for Ben.
Does the theater equipment that Ben gave his former spouse as a
means of settling the three
months of not paying alimony qualify as valid alimony? If it
doesn’t qualify, should Ben
recognize a gain or loss from the transfer?
No, the transfer of theater equipment does not qualify as an
alimony payment, therefore it cannot
be treated as an alimony payment for deductibility purposes.
Ben would have to treat the transfer of property as a gift.
Analysis 3
One of the characteristics of alimony is that it is a cash payment
made to the spouse under a
separation decree Sec.71(b)(1). The key word here for Ben is
cash. The transfer of the equipment
is not a cash payment, instead, it is a disbursement of property.
Only cash or cash equivalents,
such as checks or money orders, are considered a valid form of
alimony. A transfer of property is
not a valid form of alimony Temp. Reg. Sec 1.71-1T(b).

Furthermore, Ben has made a transfer of property to his former
spouse. Under Sec.1041(a)(2), no
gain or loss is reported if the transfer was made to a former
spouse. The transfer, however, must
have occurred because of the divorce. A transfer of property is
determined as being caused by
the divorce if the transfer occurred within one year of the
separation or if the transfer is related to
the termination of the marriage Sec.1041(a)(2). Since Ben has
been divorced for over two years
he doesn’t meet the one-year limit. Therefore, the transfer must
be related to the termination of
the marriage in order for Ben not to recognize a gain or loss. In
order to be related to the
“cessation of the marriage”, the transfer must satisfy the two
following requirements: (1) the
transfer is made in accordance with a separation decree (2) and
the transfer occurred within six
years of the divorce Temp. Reg. 1.1041-1T, A-7.
The transfer was executed within six years of the divorce and
Ben’s reason for the transfer of the
music theater property was because of the alimony and child
support payments stated in the
separation decree. Based on these facts, the transfer resulted
from the divorce, therefore,
considered a gift.
Instead of Ben transferring the property to his former spouse, he
could have sold the property
himself and then forfeit the cash value to the spouse as alimony
and child support.
Since Ben fell short of the payments he was required to make
under the separation decree, how

should the total payments he made throughout the year be
divided between the alimony and the
child support?
First, Ben would have to fulfill the required child support
payments and whatever remains can be
carried over to alimony.
Analysis 4
Ben was required to make $500 monthly alimony payments and
$600 child support payments to
his former spouse. In total Ben would have to pay $6,000 in
alimony throughout the year and
$7200 in child support throughout the year. Ben only made 9
out of the 12 monthly payments,
falling short of the required amount. Ben forfeited to his former
spouse a total of $9,900 in
alimony and child support. Under Sec.7(c)(3), Ben would have
to allocate alimony payments to
child support first and then report the remaining amount under
alimony. Like in Adrio M. Baur,
TC Memo 2014-117, Ben is not entitled to deduct $4,500 in
alimony. He would first report
$7200 in child support and the remaining $2,700 he would
report as alimony. Similarly, In
GUTHRIE v. U.S., 19 AFTR 2d 1018 (264 F. Supp. 840)
(1967), the court affirmed that alimony
should be reduced to satisfy child support payments. The law
views the portion of payments
towards a minor child as the priority. Whatever remains can be
given, as alimony, to the wife.
Ben would owe Jennifer $3300 in alimony payments. This

revision of Ben’s tax liability would
cause Ben to report less alimony, which will inevitably reduce
his deductions and increase his
Adjusted Gross Income. With a higher AGI, Ben would have to
accumulate more miscellaneous
itemized deductions to overcome the 2% floor, as explained in
Sec 67(a). Most importantly for
Ben, he will have to pay more taxes, similar to what happened
to Adrio M. Baur in the TC Memo
2014-117. In the court ruling, Baur was not given clearance to
report the excess alimony
payments under Section 215. The defendant argued that under
Section 71, a fraction of the
payments must be allocated towards the support of the child.
Is the $72,000 of earned income that Ben received during the
year taxable, if so at what rate?
The $72,000 of earned income is fully taxable and the income is
taxed at the ordinary rate.
Analysis 5
Gross income is calculated by adding all of the income received
by an individual. In other words,
it is income from whatever origin Code Sec.61(a). The
definition of gross income is intentionally
broadened to include income from anywhere, from any activity.
Sources of income include
salary compensation, fringe benefits, fees, awards, winnings,
income from business, income
from investment, trade, illegal activities and many other
sources. Ben’s salary of $72,000 fits in
this category and should be included in gross income. Salary
compensation is classified as

earned income Code Sec.32(c)(2)(A)(i). Earned income or
income from services is taxed at the
ordinary rate; Ben would have to calculate the tax liability of
his salary compensation using his
current marginal tax rate. He would have to use the tax rate
schedule for Single fillers assuming
Ben doesn’t remarry or file as head of household.
How would the transfer of property (the musical theater
equipment) from Ben to his former
spouse affect Ben’s income tax.
Sec. 1041(b) explains that the transfer of the equipment must be
treated as a gift. Ben does not
recognize a gain or loss from the transfer. Moreover, Ben does
not pay any additional estate or
gift tax.
Analysis 6
Ben, the transferor, does not recognize a gain or loss from the
transfer of equipment. For a
transfer to be called a gift, the transferor must not expect
anything in return from his actions. Ben
cannot expect the transfer of equipment to supplant the alimony
and child support. Also, the
transferee, Jennifer, does not recognize any gain or loss when
receiving the property. The basis
for the property is the basis of $6000 when the transferor, Ben
controlled the musical theater
equipment.

According to Sec. 2503(b)(1), Ben does not include in the
year’s total gifts the first $10,000.
This means that Ben has a tax exemption for the gift of $10,000
that would cover the entire basis
of the transferred property. Consequentially, Ben is not subject
to pay any additional gift or
estate taxes from the transferred equipment.
M em o to file
T o : File
F ro m : Paul P a n th e r
C lie n t: Ben
S u b je c t: D iv o rc e d e c r e e
Facts
"Ben and Jennifer were divorced tw o years ago and the decree
stated th a t Ben was to make
m onthly payments to Jen. The court designated $500 a m onth
as alim ony and $600 per month
as child support. Ben was unemployed fo r a q u a rte r o f the
year and paid Jen $ 9,900 during the
tim e he was employed. He said $5,400 was fo r child support
and $4,500 was alimony. In

addition, Ben transferred home theatre equipm ent to Jen w ith
a FMW o f $ 3,300 and a basis o f
$6,000 in exchange fo r her promise not to pursue any claim
against him fo r unpaid child
support and alimony. During his three months o f unem ploym
ent Ben collected $3,000 o f
unem ploym ent benefits. He earned $72,000 in salary fo r the
nine-m onth period o f
em ploym ent."
Issue and Conclusion
Can Jennifer accept the home theatre equipm ent as paym ent fo
r the unpaid child support and
alimony?
Yes, if she agrees w ith the m ethod o f paym ent then it is
possible.
Analysis of conclusion
A fo rm e r spouse can agree to receive prope rty as a fo rm o f
alim ony paym ent over a w ritte n
agreement o f promise. If Jennifer is com fortable w ith the o
ffe r and does not plan to pursue any
claim, she can use the w ritte n agreement as p ro o f to the
IRS the m ethod o f payment.

Issue and conclusion
W hat if Jennifer were to disagree w ith th a t o ffe r and
decided th a t Ben made more than enough
money over the year to give her the remaining unpaid child
support and alimony. W ould it be
possible to pursue any claim against him?
Yes, because his income is above the threshold and being
unemployed fo r 3 months does not
give him the right to not pay.
Alim ony is calculated based on the spouse a b ility to pay and
the need o f the depending spouse.
Since Ben made $72,000 in salary fo r th a t year, he therefo re
qualify to pay the unpaid am ount.
Issue and conclusion
Can Ben decided w hat portion o f the money is child support
and w hat is alimony?
No
If paym ent are required fo r both alim ony and child support by
the court decree, then payments

are firs t applied to child support and the remaining is alimony.
The law says th a t when a m inor
child is involve in a divorce, the need o f the child come firs t
over all else. Therefore Ben did not
have the a u th o rity to decide w hat portion o f the money
goes to what.
Memo
to
file
To:
File
From:
Paul
Panther
Client:
Ben
Subject:
Divorce
decree

Facts
“Ben
and
Jennifer
were
divorced
two
years
ago
and
the
decree
stated
that
Ben
was
to
make
monthly
payments
to
Jen.
The
court
designated
$500
a
month
as
alimony
and

$600
per
month
as
child
support.
Ben
was
unemployed
for
a
quarter
of
the
year
and
paid
Jen
$
9,900
during
the
time
he
was
employed.
He
said
$5,400
was
for
child
support
and

$4,500
was
alimony.
In
addition,
Ben
transferred
home
theatre
equipment
to
Jen
with
a
FMW
of
$
3,300
and
a
basis
of
$6,000
in
exchange
for
her
promise
not
to
pursue
any
claim
against

him
for
unpaid
child
support
and
alimony.
During
his
three
months
of
unemployment
Ben
collected
$3,000
of
unemployment
benefits.
He
earned
$72,000
in
salary
for
the
nine--‐ month
period
of
employment.”

Issue
and
Conclusion
Can
Jennifer
accept
the
home
theatre
equipment
as
payment
for
the
unpaid
child
support
and
alimony?
Yes,
if
she
agrees
with
the
method
of
payment
then
it
is

possible.
Analysis
of
conclusion
A
former
spouse
can
agree
to
receive
property
as
a
form
of
alimony
payment
over
a
written
agreement
of
promise.
If
Jennifer
is
comfortable
with
the

offer
and
does
not
plan
to
pursue
any
claim,
she
can
use
the
written
agreement
as
proof
to
the
IRS
the
method
of
payment.

Issue
and
conclusion
What
if
Jennifer
were
to
disagree
with
that
offer
and
decided
that
Ben
made
more
than
enough
money
over
the
year
to
give
her
the
remaining
unpaid
child

support
and
alimony.
Would
it
be
possible
to
pursue
any
claim
against
him?
Yes,
because
his
income
is
above
the
threshold
and
being
unemployed
for
3
months
does
not
give
him
the

right
to
not
pay.
Analysis
of
conclusion
Alimony
is
calculated
based
on
the
spouse
ability
to
pay
and
the
need
of
the
depending
spouse.
Since
Ben
made
$72,000
in

salary
for
that
year,
he
therefore
qualify
to
pay
the
unpaid
amount.
Issue
and
conclusion
Can
Ben
decided
what
portion
of
the
money
is
child
support
and
what
is
alimony?

No
Analysis
of
conclusion
If
payment
are
required
for
both
alimony
and
child
support
by
the
court
decree,
then
payments
are
first
applied
to
child
support
and
the
remaining
is

alimony.
The
law
says
that
when
a
minor
child
is
involve
in
a
divorce,
the
need
of
the
child
come
first
over
all
else.
Therefore
Ben
did
not
have
the
authority
to
decide
what

portion
of
the
money
goes
to
what.

TO FileFROM Stuart Student RE Ben (tax year 2016)

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