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IV. TAX TREATMENT OF MAINTENANCE AND SEPARATE
MAINTENANCE PAYMENTS
Alimony is a payment to or for a spouse or former spouse under a divorce or separation instrument. It does not include voluntary payments that are not made under a divorce or separation agreement. Alimony is deductible by the payer and must be included in the spouse's or former spouse's income. To be alimony, a payment must meet certain requirements. Payments, which are not alimony, are child support, noncash property settlements, payments to keep up the payer's property, or use of property. 26 U.S.C.A. (I.R.C. 1954) § 71 of the Internal Revenue Code of 1986.
Payment must be received by the spouse or on behalf of the spouse. §71(b)(1)(A). Payments therefore could include cash payments for rent, mortgage, tax, or tuition on behalf of the spouse. There must be a satisfaction of liability of the dependent spouse. If the dependent spouse is the owner of a life insurance policy on the supporting spouse's life, it may be considered alimony if the supporting spouse pays the premium for term or whole life insurance.
North Carolina repealed its statutory section on tax consequences for spousal support in 1989; therefore, the IRS code alone is the controlling tax law for spousal support issues.
Although the consideration of tax consequences is not new for alimony determination, the 1995 statute codifies this consideration in factor fourteen (14) of the statute:
The federal, State, and local tax ramifications of the alimony award. N.C. Gen. Stat. § 50-16.3A (14)
Whenever tax questions arise, the services of an expert in that area is money well spent.
Not only will it prevent mal practice claims, but it will allow your client a level of comfort and understanding that tax ramifications have been considered and that there is an ability to calculate actual cash at hand.
Relevant Case Law
The North Carolina Supreme Court observed "to disregard the effect of taxation on an alimony award would be to flirt with an unrealistic, and potentially unjust, result. Clark v. Clark 301 N.C. 123, 271 S.E.2d 58 (1980). In Clark the Court refused to find error in the failing of the findings to mention the tax consequences when the record suggested that the court in fact considered them. 2 Suzanne Reynolds, Lee's North Carolina Family Law, § 8.2 (5th ed. 1999).
This consideration is codified in factor fourteen (14) of the enumerated factors of the 1995 law.
CALCULATING THE ACTUAL MAINTENANCE PAYMENT
The focus of the court since the 1995 statute is on economic, needs based issues, rather than fault and the court shall exercise its discretion in determining the amount, duration, and manner of payment of alimony, whether for a specified or for an indefinite term. The court weighs all the factors of the respective statutes, whether post separation support or alimony, when determining spousal support.
To determine the amount of an alimony award, the trial court must do three things: determine the needs of the dependent spouse and the ability of the spouses to address those needs, compare income and expenses of both spouses and consider all relevant factors, including those specifically enumerated in N.C. Gen. Stat. § 50-16-3A(b). Bryant v. Bryant, 139 N.C.App 615, 617, 534 S.E.2d 230-32 (2000) (citing 2 Suzanne Reynolds, Lee's North Carolina Family Law, § 9.22 (5th ed. 1999). That court considered the comparison of the spouses' income and expenses, which was at issue in Bryant case, one of the most important considerations necessary to setting the amount of the alimony award. Id. The court also reaffirmed that the marital standard of living is merely one of the factors the court takes into account when calculating the parties' reasonable expenses, and as such, income comparison and standard of living are separate and distinct considerations. Id.
Recent Case Law
The trial court may properly consider ex-husband's (supporting spouse) financial benefits, such as health insurance, vehicle and reimbursed expenses received through his company when calculating the amount of alimony owed to ex-wife. Walker v. Walker, 143 N.C.App 414, 546 S.E.2d 625 (2001).
When determining amount of post separation alimony, trial court was required to make finding as to existence of marital misconduct, based on evidence presented by wife tending to show that husband communicated with other women during marriage, met with another woman for about an hour on one or two occasions at an apartment he rented before he and wife separated, and hugged and kissed that woman on at least one occasion when he escorted her from apartment to her automobile. Friend-Novorska v. Novorska, 131 N.C.App 867, 509 S.E.2d 460 (1999) (relying on N.C. Gen. Stat. § 50-16.3A(c)).
The court in Alvarez found marital misconduct is only one factor to be considered when determining the amount and duration of a potential alimony award. Alvarez v. Alvarez, 134 N.C.App 321, 517 W.E.2d 420 (1999). The wife claimed that the trial court failed to consider all relevant statutory factors in denying her alimony. On appeal, the court found the record showed that the trial court considered other factors in making its decision. These factors included the marital misconduct of the plaintiff wife (factor 1), the relative earnings and earning capacities of the parties (factor 2), the ages and physical, mental and emotion condition of the parties (factor 3), the amount and sources of earned and unearned income of both spouses (factor 4), the duration of the marriage (factor 5), the standard of living of the parties established during the marriage (factor 8), the relative education of the spouses (factor 9) and the relative needs of the spouses (factor 13). The court therefore rejected Mrs. Alvarez's first assignment of error. The court did however remand the matter to the trial court due to erroneous findings of fact not supported by competent evidence. Id. at 327, 424.
Relevant Earlier Case Law
The
trial court properly considered effect of equitable distribution, the estates, earnings and accustomed standard of living of parties in setting husband's obligation of permanent alimony.
Lamb v. Lamb, 103 N.C.App
541, 406 S.E.2d 622 (1991). In 1998, the legislature added factor (16), concerning equitable distribution considerations relating to alimony, thus codifying case law.
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