Michigan’s court of appeals decided in an unpublished opinion that the trial court committed error by not permitting Husband to amend a consent judgment of divorce to add language that the payments would terminate upon Wife’s death and would therefore qualify as deductible alimony.
In this case, as sometimes occurs, H was to make payments to W, taking advantage of Section 71(b) of the Internal Revenue Code. Often property settlements are paid out in installments, and it is advantageous to shift income from the party in a higher tax bracket to the party with a lower tax rate.
The language in the judgment clearly identified the payments as "Section 71(b) property," evidencing the parties’ intent that the payments would qualify as § 71(b) for IRS purposes. The judgment clearly stated the parties' agreement that the payments would be taxable to W and deductible to H. In the event of H's death, W would have a claim against his estate. The obligation, since it was characterized as spousal support could not be discharged in bankruptcy. Further, the judgment stated the parties' clear waiver of any future right to modification of the provision because of changed circumstances.
W’s accountant advised her not to declare the payments as income, saying that they didn’t qualify, presumably because they did not terminate at her death. H deducted them from his income. When H was audited by the IRS, the payments were disallowed because the judgment did not make them terminable upon W’s death as required by the IRC. H then filed a motion under Michigan Court Rule 2.612(A)(1), which Allows amendment to correct clerical error arising from oversight or omission. The trial court denied the motion.
The COA found that the judgment was very clear about the parties’ intentions that the payments were to qualify as Section 71(b) property, and remanded for entry of an amended judgment nunc pro tunc [effective as of the date of the original judgment]. Hmmm. I guess the IRS will be giving W a call.
You may read Daiek v Daiek here. Docket No. 275569 (decided April 8, 2008)